<PAGE> 1
SALOMON BROTHERS
INVESTMENT SERIES
PROSPECTUS &
APPLICATION
APRIL 29, 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
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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 CERTAIN SECURITIES,
COMMONLY REFERRED TO AS JUNK BONDS, WHICH PRESENT A HIGH DEGREE OF RISK. SUCH
LOWER-QUALITY SECURITIES INVOLVE COMPARATIVELY GREATER RISKS, INCLUDING PRICE
VOLATILITY AND THE RISK OF DEFAULT IN THE TIMELY PAYMENT OF INTEREST AND
PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. THE HIGH YIELD BOND FUND AND THE
STRATEGIC BOND FUND ARE NOT LIMITED IN THE PERCENTAGE OF THEIR ASSETS WHICH MAY
BE INVESTED IN SUCH SECURITIES. EACH OF THE TOTAL RETURN FUND, THE ASIA GROWTH
FUND AND THE INVESTORS FUND MAY INVEST UP TO 20%, 10% AND 5%, RESPECTIVELY, OF
ITS TOTAL ASSETS IN NON-CONVERTIBLE SECURITIES OF THIS TYPE AND MAY INVEST
WITHOUT LIMIT IN CONVERTIBLE SECURITIES OF THIS TYPE. SEE "ADDITIONAL INVESTMENT
ACTIVITIES AND RISK FACTORS."
This Prospectus sets forth concisely the information a prospective investor
should know before investing in a Fund. This Prospectus should be read and
retained for ready reference to information about a Fund. A Statement of
Additional Information dated April 29, 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
APRIL 29, 1996
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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 94
Dividends and Distributions 95
Taxation 97
Shareholder Services 102
Account Services 105
Capital Stock 105
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.
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."
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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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."
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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>
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(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.
* Under certain circumstances, certain broker/dealers may impose transaction
fees on the purchase and/or sale of shares. See "Purchase of Shares."
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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>
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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>
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SALOMON BROTHERS INVESTMENT SERIES
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+ 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 (exclusive of taxes,
interest and extraordinary expenses such as litigation and
indemnification 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 (exclusive of taxes, interest and extraordinary expenses such
as litigation and indemnification 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 (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses)
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> 13
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> 14
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> 15
- --------------------------------------------------------------------------------
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> 16
(THIS PAGE INTENTIONALLY LEFT BLANK)
PAGE 15
<PAGE> 17
SALOMON BROTHERS INVESTMENT SERIES
CASH MANAGEMENT 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 $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
<S> <C> <C> <C>
----------------------------------
<CAPTION>
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> 18
SALOMON BROTHERS INVESTMENT SERIES
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS O
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------
<CAPTION>
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>
NEW YORK MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS O
<S> <C> <C> <C> <C> <C>
- -------------------------------
<CAPTION>
PERIOD
YEAR ENDED DECEMBER ENDED
31, DECEMBER
- ------------------- 31,
1995 1994 1993(A)
- -------------------------------
<S> <C> <C> <C> <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> 19
SALOMON BROTHERS INVESTMENT SERIES
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
<S> <C> <C> <C> <C>
---------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(A)
- ---------------------------------------------------
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
<S> <C> <C> <C> <C>
---------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(A)
- ---------------------------------------------------
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> 20
SALOMON BROTHERS INVESTMENT SERIES
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O
<S> <C> <C> <C> <C>
---------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(A)
- ---------------------------------------------------
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
<S> <C> <C> <C> <C>
---------------------------------------------
PERIOD ENDED DECEMBER 31, 1995(A)
- ---------------------------------------------------
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> 21
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> 22
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> 23
- --------------------------------------------------------------------------------
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> 24
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> 25
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 credit quality requirements and
be deemed to have a maturity of thirteen months or less in accordance with
applicable regulations. 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."
PAGE 24
<PAGE> 26
SALOMON BROTHERS INVESTMENT SERIES
The Cash Management Fund is not authorized to use any of the various investment
strategies referred to under "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
PAGE 25
<PAGE> 27
SALOMON BROTHERS INVESTMENT SERIES
have speculative characteristics as well. Municipal obligations rated BBB by S&P
are regarded as having an adequate 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.
PAGE 26
<PAGE> 28
SALOMON BROTHERS INVESTMENT SERIES
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 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
PAGE 27
<PAGE> 29
SALOMON BROTHERS INVESTMENT SERIES
foreign commercial banks in terms of total assets (including domestic branches
of such banks), and repurchase agreements with respect to such obligations.
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 Investment in New York Municipal Obligations" 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
PAGE 28
<PAGE> 30
SALOMON BROTHERS INVESTMENT SERIES
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 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
PAGE 29
<PAGE> 31
SALOMON BROTHERS INVESTMENT SERIES
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 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
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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 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.
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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.
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
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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 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
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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, 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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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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 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
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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 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
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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 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, commonly
known as "junk bonds." 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
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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 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
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SALOMON BROTHERS INVESTMENT SERIES
"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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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 normal 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
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SALOMON BROTHERS INVESTMENT SERIES
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.
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,
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SALOMON BROTHERS INVESTMENT SERIES
Malaysia, Pakistan, the Philippines, Singapore, Sri Lanka, Taiwan, Thailand or
any other country in the Asian region (other than Japan, Australia and New
Zealand) that currently or in the future permits foreign investment
(collectively, "Asian Countries") or (ii) regardless of where organized and as
determined by SBAM AP, (a) derive at least 50% of their revenues from goods
produced or sold, investments made, or services performed in or with one or more
of the Asian Countries, (b) maintain at least 50% of their assets in one or more
of the Asian Countries, or (c) have securities which are traded principally on a
stock exchange in an Asian Country. The Fund is non-diversified within the
meaning of the 1940 Act. See "Additional Investment Activities and Risk
Factors--Non-Diversification."
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity-linked debt securities, equity interests in trusts,
partnerships, joint ventures or similar enterprises, and American, Global or
other types of Depositary Receipts. Equity-linked debt securities are debt
instruments whose prices are indexed to the prices of equity securities or
securities indices. In other words, the value at maturity or coupon rate of
these equity-linked debt instruments is determined by reference to a specific
instrument or statistic. The performance of equity-linked debt instruments
depends to a great extent on the performance of the security or index to which
they are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, these instruments are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
instruments may be more volatile than the underlying instruments.
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
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SALOMON BROTHERS INVESTMENT SERIES
than that currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in an
attempt to identify and capture the relative value of such groups on a pan-
regional basis. SBAM AP will research individual companies in an effort to
identify the investment opportunities within these industry groups which will
provide long-term capital appreciation. In addition, SBAM AP intends to meet the
management of individual companies on a periodic basis. As part of the Asia
Growth Fund's risk management objective, SBAM AP will also concentrate on
macroeconomic issues and other variables influencing the direction of monetary
policies followed by Asian Central Banks.
The investment process to be implemented by SBAM AP will consist of the three
following principal (and potentially overlapping) types of approaches.
PAN REGIONAL INDUSTRY GROUP DECISIONS. SBAM AP will seek to identify the
pan-regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus on
industry cycles and competitiveness as well as the industrial characteristics of
the Asian economies. In addition, SBAM AP will review government regulations,
industrial policies, access to technology and industrial research reports
provided by industrial companies or associations and securities dealers in Asian
Countries. SBAM AP will focus on those industries which represent meaningful
weightings in the total market capitalization of the Asian Countries including,
but not limited to, telecommunications, consumer durables and nondurables, food
and beverage, electronics, hotels, power engineering and generation, basic
industries, public utilities, property and financial sectors. SBAM AP believes
that an investment process that places emphasis on industry groups is
appropriate given the current state of economic and financial integration being
achieved by the Asian Countries and the relatively significant concentration of
market capitalization in Asian Countries toward certain industrial sectors.
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
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SALOMON BROTHERS INVESTMENT SERIES
assets will be considered. SBAM AP believes that ROE and cash flow dynamics are
appropriate variables when analyzing companies which operate in high growth
markets, such as Asia, as the ability of such companies to capture this growth
by using the right allocation of resources and asset financing is of utmost
importance.
VALUATION PROCESS AND VOLATILITY ANALYSIS. The valuation process will focus on
Price Earnings Ratio ("PER") calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
RISK MANAGEMENT AND MACROECONOMIC/TOP-DOWN ANALYSIS. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity and
industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will monitor
and analyze includes, but is not limited to, gross domestic product growth,
balance of payments and current account balances, budget deficits or surpluses,
inflation and interest rates. SBAM AP intends to meet with central bankers,
regional economists and strategists on a regular basis to assess the present and
future direction of monetary policies and their likely impact on the markets of
the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt to
control the Fund's overall risk level and to obtain exposure to markets in the
Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities, commonly known as "junk bonds." There is no limit
on the amount of the Fund's assets that can be invested in convertible
securities rated below investment grade. For additional information on these
high yield debt securities, which may involve a high degree of risk, see
"Additional Investment Activities and Risk Factors--High Yield Securities."
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities
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SALOMON BROTHERS INVESTMENT SERIES
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, 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.
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.
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
risks, see "Additional Investment Activities and Risk Factors--Restricted
Securities and Securities with Limited Trading Markets."
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
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SALOMON BROTHERS INVESTMENT SERIES
which the investment manager believes, at the time of purchase, will be subject
to exchange controls or foreign withholding 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
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agreement, a Fund could experience losses and experience delays in connection
with the disposition of the underlying security. To the extent that, in the
meantime, the value of the securities that a Fund has purchased has decreased,
the Fund could experience a loss. Repurchase agreements with maturities of more
than seven days will be treated as illiquid securities 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
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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.
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
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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
(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 Participations 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
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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."
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.
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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 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
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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 obligations. 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.
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
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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 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
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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 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
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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 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,
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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.
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
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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.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Strategic Bond Fund may
invest without limitation in domestic and foreign "high yield" securities,
commonly known as "junk bonds." 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 to change and do not evaluate the market risk or liquidity of the
securities. Ratings of a non-U.S. debt instrument, to the extent that those
ratings are undertaken, are related to evaluations of the country in which the
issuer of the instrument is located. Ratings generally take into account the
currency in which a non-U.S. debt instrument is denominated. Instruments issued
by a foreign government in other than the local currency, for example, typically
have a lower rating than local currency instruments due to the existence of an
additional risk that the government will be unable to obtain the required
foreign currency to service its foreign currency-denominated debt. In general,
the ratings of debt securities or obligations issued by a non-U.S. public or
private entity will not be higher than the rating of the currency or the foreign
currency debt of the central government of the country in which the issuer is
located, regardless of the intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition,
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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 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
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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
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
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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 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
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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 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
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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, 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
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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'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-
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term gains realized from portfolio transactions are taxable to shareholders as
ordinary income. In addition, higher portfolio turnover rates can result in
corresponding increases in portfolio transaction costs for a Fund.
With respect to the 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 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.
- --------------------------------------------------------------------------------
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
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$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
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
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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
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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 "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
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SALOMON BROTHERS INVESTMENT SERIES
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;
(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
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SALOMON BROTHERS INVESTMENT SERIES
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 (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
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SALOMON BROTHERS INVESTMENT SERIES
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 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-
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SALOMON BROTHERS INVESTMENT SERIES
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
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
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SALOMON BROTHERS INVESTMENT SERIES
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
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 July 1995, Mr. Dahlberg was
employed by Massachusetts Financial Services Company since 1968. Mr. Dahlberg
had been primarily responsible for the day-to-day management of the MFS Total
Return Fund for ten years prior to joining SBAM.
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
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SALOMON BROTHERS INVESTMENT SERIES
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 (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification expenses) at the
amount of such Fund's total Fund 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.
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SALOMON BROTHERS INVESTMENT SERIES
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.
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
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SALOMON BROTHERS INVESTMENT SERIES
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 Combined
Asia Ex-Japan Index..... 18.45 98.80 (18.38 )
</TABLE>
<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 Combined
Asia Ex-Japan Index..... (3.01) 86.42 21.74
</TABLE>
<TABLE>
<CAPTION>
FOR THE MONTH ENDING:
----------------------------------------------
9/29/95 10/31/95 11/30/95 12/29/95
------- -------- -------- --------
<S> <C> <C> <C> <C>
Offshore Fund II......... 2.12% (1.16)% 0.21% 4.22%
Morgan Stanley Capital
International Combined
Asia Ex-Japan Index..... 1.04 (1.84) (2.40) 4.81
</TABLE>
<TABLE>
<CAPTION>
TOTAL
FOR THE MONTH ENDING: RETURN
------------------------------- SINCE
1/31/96 2/29/96 3/29/96 INCEPTION
------- ------- ------- ---------
<S> <C> <C> <C> <C>
Offshore Fund II......... 10.77% (0.61 )% (0.09 )% 16.17%
Morgan Stanley Capital
International Combined
Asia Ex-Japan Index..... 7.65 0.95 0.56 10.87
</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. In addition, 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
PAGE 80
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SALOMON BROTHERS INVESTMENT SERIES
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.
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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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.
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:
PAGE 83
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SALOMON BROTHERS INVESTMENT SERIES
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 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.
PAGE 84
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SALOMON BROTHERS INVESTMENT SERIES
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.
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>
- --------------------------------------------------------------------------
<CAPTION>
<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.
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SALOMON BROTHERS INVESTMENT SERIES
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.
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
PAGE 86
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SALOMON BROTHERS INVESTMENT SERIES
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 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,
any accounts established on behalf of registered investment advisers or their
clients by broker-dealers that charge a transaction fee and 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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% 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,
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SALOMON BROTHERS INVESTMENT SERIES
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 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.
- ---------------
Under certain circumstances, certain
broker/dealers may impose transaction fees on the purchase and/or sale of
shares.
- --------------------------------------------------------------------------------
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
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SALOMON BROTHERS INVESTMENT SERIES
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 THROUGH SELECTED DEALERS
Salomon Brothers will accept orders from dealers with whom it has sales
agreements for the repurchase of shares held by investors. With respect to each
Fund (other than the Cash Management Fund), repurchase orders received by the
dealer prior to the close of trading on the NYSE on any business day and
transmitted to Salomon Brothers prior to the close of its business day (normally
5:00 p.m., New York time) are effective that day. Otherwise, the shares will be
repurchased at the applicable net asset value next determined. With respect to
the Cash Management Fund, redemption requests received by the dealer and
transmitted to Salomon Brothers by 12:00 noon (New York time) on any business
day generally will be effected on that same day. It is the responsibility of the
dealer to transmit orders on a timely basis. The dealer may charge the investor
a fee for executing the order. This repurchase arrangement is discretionary and
may be withdrawn or modified at any time.
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 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.
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SALOMON BROTHERS INVESTMENT SERIES
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. 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
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SALOMON BROTHERS INVESTMENT SERIES
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
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:
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SALOMON BROTHERS INVESTMENT SERIES
(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
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).
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- --------------------------------------------------------------------------------
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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 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.
- --------------------------------------------------------------------------------
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
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SALOMON BROTHERS INVESTMENT SERIES
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 and the Total Return 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.
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
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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
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SALOMON BROTHERS INVESTMENT SERIES
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 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 (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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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SALOMON BROTHERS INVESTMENT SERIES
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 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
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
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SALOMON BROTHERS INVESTMENT SERIES
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
PAGE A-2
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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.
PAGE A-3
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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.
PAGE A-4
<PAGE> 112
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
PAGE A-5
<PAGE> 113
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.
For each Fund that invested more than an average of 5% of its total assets in
below investment grade securities during the period ended December 31, 1995, the
following tables indicate the percentage of assets of each such Fund invested in
the rating categories shown. The percentage corresponding to each category is
calculated using the dollar-weighted average of the month-end percentages during
the period from commencement of investment operations of each such Fund through
December 31, 1995. "Rating" reflects the rating of Standard & Poor's, or in the
case of certain U.S. and foreign government debt securities, the implicit rating
of the related government.
HIGH YIELD BOND FUND
(FOR THE PERIOD FROM COMMENCEMENT OF INVESTMENT OPERATIONS ON
FEBRUARY 22, 1995 THROUGH DECEMBER 31, 1995)
<TABLE>
<CAPTION>
RATING PERCENTAGE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT GRADE
Highest Quality AAA 1.03%
High Quality AA 0.00%
Repurchase Agreements Backed by the US Treasury Trsy 8.91%
Uppermedium grade A 0.00%
Medium grade BBB 2.72%
LOWER QUALITY
Moderately speculative BB 13.93%
Speculative B 54.63%
Highly speculative CCC 8.95%
Poor Quality CC 0.00%
Lowest quality C 0.40%
In default D 0.00%
NOT RATED N/R 9.44%
------------
100.00%
============
</TABLE>
PAGE A-6
<PAGE> 114
SALOMON BROTHERS INVESTMENT SERIES
STRATEGIC BOND FUND
(FOR THE PERIOD FROM COMMENCEMENT OF INVESTMENT OPERATIONS ON
FEBRUARY 22, 1995 THROUGH DECEMBER 31, 1995)
<TABLE>
<CAPTION>
RATING PERCENTAGE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT GRADE
Highest Quality AAA 23.43%
High Quality AA 0.17%
Repurchase Agreements Backed by the US Treasury Trsy 16.54%
Uppermedium grade A 1.58%
Medium grade BBB 3.59%
LOWER QUALITY
Moderately speculative BB 5.45%
Speculative B 32.21%
Highly speculative CCC 9.45%
Poor Quality CC 0.00%
Lowest quality C 0.00%
In default D 0.00%
NOT RATED N/R 7.59%
-------------
100.00%
=============
</TABLE>
TOTAL RETURN FUND
(FOR THE PERIOD FROM COMMENCEMENT OF INVESTMENT OPERATIONS ON
SEPTEMBER 11, 1995 THROUGH DECEMBER 31, 1995)
<TABLE>
<CAPTION>
RATING PERCENTAGE
------------------------------------------------------------------------------------------------------
<S> <C> <C>
INVESTMENT GRADE
Highest Quality AAA 14.45%
High Quality AA 0.12%
Repurchase Agreements Backed by the US Treasury Trsy 22.51%
Uppermedium grade A 5.98%
Medium grade BBB 2.33%
LOWER QUALITY
Moderately speculative BB 4.62%
Speculative B 10.77%
Highly speculative CCC 0.95%
Poor Quality CC 0.00%
Lowest quality C 0.00%
In default D 0.00%
NOT RATED N/R 0.70%
EQUITY SECURITIES 37.56%
-------------
100.00%
=============
</TABLE>
PAGE A-7
<PAGE> 115
- ----------------------------------------------------------------------------
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
PAGE B-1
<PAGE> 116
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
PAGE B-2
<PAGE> 117
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
PAGE B-3
<PAGE> 118
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
PAGE B-4
<PAGE> 119
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
PAGE B-5
<PAGE> 120
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.
PAGE B-6
<PAGE> 121
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
PAGE B-7
<PAGE> 122
SALOMON BROTHERS INVESTMENT SERIES
incurring transaction costs. Buyers and sellers of currency futures contracts
are subject to the same risks that apply to the use of futures contracts
generally. Further, settlement of a currency futures contract for the purchase
of most currencies must occur at a bank based in the issuing nation. Trading
options on currency futures contracts is relatively new, and the ability to
establish and close out positions on these options is subject to the maintenance
of a liquid market that may not always be available. Currency exchange rates may
fluctuate based on factors extrinsic to that country's economy.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
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
PAGE B-8
<PAGE> 123
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
<PAGE> 124
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> 125
- ------------------------------------------------------------------------
SALOMON BROTHERS INVESTMENT SERIES
ACCOUNT APPLICATION Please Note: A separate application must be used to open an
IRA account.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- - 1. TYPE OF ACCOUNT (Please print) (Account will not be opened without Taxpayer I.D. No. or Social Security No.)
<S> <C> <C>
/ / INDIVIDUAL / / JOINT Social Security No. or Taxpayer I.D. No.
Name
------------------------------------------------------------------- ---------------------------------------
Joint Registrant (if any)(1,2) Social Security No. or Taxpayer I.D. No.
Name
------------------------------------------------------------------- ---------------------------------------
</TABLE>
(1) Use only the Social Security Number or Taxpayer Identification Number of the
first listed joint tenant.
(2) For joint registrations, the account registrants will be joint tenants with
right of survivorship and not tenants in common unless tenants in common or
community property registrations are requested.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
/ / UNIFORM GIFT TO MINORS OR / / UNIFORM TRANSFER TO MINORS (where allowed by law)
Name of Adult Custodian (only one permitted)
<S> <C>
Name
-------------------------------------------------------------------
Minor's Date of Birth
------------------
Name of Minor (only one permitted) Minor's Social Security No.
Name
------------------------------------------------------------------- ---------------------------------------
(Account will not be opened without minor's Social Security No.)
under the Uniform Gifts/Transfers to Minors Act.
----------------------------------------
State of Residence of Minor
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
<S> <C>
/ / CORPORATION / / PARTNERSHIP Social Security No. or Taxpayer I.D. No.
/ / TRUST* / / OTHER ---------------------------------------
(Account will not be opened without Taxpayer I.D. No. or Social Security No.)
Name of Corporation, Partnership, or Other
--------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Name(s) of Trustee(s)
---------------------------------------------------------------------------------------------------
*If a Trust, include date of trust instrument and list trustees
if they are to be named in the registration. Date of the Trust Agreement
------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - 2. MAILING ADDRESS
<TABLE>
<S> <C> <C>
Street or P.O. Box
-------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------
City State Zip
---------------------------------------------- ------ -------------------------
Business Telephone Home Telephone
--------------------------------- ----------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
- - 3. INVESTMENT INFORMATION
METHOD OF INVESTMENT.
/ / I have enclosed a check for a minimum of $500 per Fund.
/ / I have enclosed a check for a minimum of $25 per Fund and completed the
Automatic Investment Plan information in Section 13.
/ / I purchased ____ shares of ________________ through my broker on ___/___/
___. Confirm #________________
/ / I will wire money from my bank account to Salomon Brothers Inc. Please
call me at (____) _________________to confirm my new account number.
PLEASE MAKE MY INVESTMENT IN THE FUNDS DESIGNATED BELOW:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C SALOMON BROTHERS INVESTMENT SERIES INVESTMENT
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
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 $
---------------------
- ------ ------ ------
Investors Fund $
---------------------
- ------ ------ ------
Asia Growth Fund $
---------------------
- ------ ------ ------
TOTAL INVESTMENT AMOUNT $
---------------------
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 126
- --------------------------------------------------------------------------------
- - 4. REDUCED SALES CHARGE (Available for CLASS A Shares Only)
METHOD OF INVESTMENT.
Are you a shareholder in another Salomon Brothers Investment Series Fund?
/ / Yes / / No
/ / I apply for Right of Accumulation reduced sales charges based on the
following Salomon Brothers Investment Series Fund accounts (excluding
Class B and Class C Shares).
Fund Account No. or Social Security No.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LETTER OF INTENT.
/ / I agree to the Letter of Intent provisions in the Fund's current prospectus.
During a 13-month period, I plan to invest a dollar amount of at least:
<TABLE>
<S> <C> <C> <C> <C>
/ / $50,000 / / $100,000 / / $250,000 / / $500,000 / / $1,000,000
</TABLE>
- --------------------------------------------------------------------------------
- - 5. DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
Dividends and capital gains will be reinvested in the same Fund if no other
option is selected.
<TABLE>
<CAPTION>
DIVIDENDS CAPITAL GAINS
<S> <C>
/ / I wish to reinvest dividends in the same Fund. / / I wish to reinvest capital gains in the same Fund.
/ / I wish to have dividends paid in cash. / / I wish to have capital gains paid in cash.
</TABLE>
The AUTOMATIC DIVIDEND DIVERSIFICATION PROGRAM allows an investor to have
dividends and any other distributions from a Fund automatically used to purchase
shares of the same class of any other Fund. The receiving account must be in the
same name as your existing account.
/ / Please reinvest dividends and capital gains from the ____________________
Fund to the ____________________ Fund.
OPTIONAL FEATURES
- --------------------------------------------------------------------------------
- - 6. AUTOMATIC WITHDRAWAL PLAN
I would like to receive payments of _______________ :
<TABLE>
<S> <C> <C> <C> <C>
/ / Monthly / / Quarterly / / Semiannually / / Annually / / Startup Month .
------------------------------
</TABLE>
Payments will be made on or near the 10th or the 25th of the month. / / 10th of
the month OR / / 25th of the month
A minimum account value of $10,000 in a single account is required to establish
a monthly withdrawal plan. For quarterly, semi-annual and annual withdrawal
plans a minimum of $5,000 in a single account is required.
For the New York Municipal Bond Fund and the Investors Fund, shareholders are
required to have a minimum value of $7,500 in a single account. A shareholder
can arrange for automatic distributions to be made monthly or quarterly for
amounts not less than $250 and $50 from the New York Municipal Bond Fund and
Investors Fund, respectively.
<TABLE>
<S> <C>
Please mail checks to: Wire transfers to:
/ / Address of Record (named in Section 2) / / Bank of Record (named in Section 10)
Name
-------------------------------------------------------------------------------------------------------
Address
----------------------------------------------------------------------------------------------------
City State Zip
-------------------------------------------------------- ------ -------------------------
</TABLE>
- --------------------------------------------------------------------------------
- - 7. SYSTEMATIC INVESTMENT PLAN
I would like to exchange shares in my __________________ Fund account, for
which no certificates have been issued, to:
<TABLE>
<S> <C> <C>
$ into the Fund, Account #
--------------- --------------------------------------- ------------------------
$50 Minimum
$ into the Fund, Account #
--------------- --------------------------------------- ------------------------
$50 Minimum
$ into the Fund, Account #
--------------- --------------------------------------- ------------------------
$50 Minimum
</TABLE>
The exchange will occur on or about the 15th of each month, beginning in the
month of
- --------------------------------------------------------------------------------
- - 8. TELEPHONE EXCHANGE PRIVILEGE
Unless indicated below, I authorize the Transfer Agent to accept instructions
from any person to exchange shares in my account(s) by telephone, in accordance
with the procedures and conditions set forth in the Funds' current prospectus.
/ / I DO NOT want the Telephone Exchange Privilege.
<PAGE> 127
- --------------------------------------------------------------------------------
- - 9. TELEPHONE REDEMPTION PRIVILEGE
Unless indicated below, I authorize the Transfer Agent to accept instructions
from any person to redeem shares in my account(s) by telephone, in accordance
with the procedures and conditions set forth in the Fund's current prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail to the
address of record, unless the information in Section 10 is completed for
redemption by wire of $500 or more.
/ / I DO NOT want the Telephone Redemption Privilege.
- --------------------------------------------------------------------------------
- - 10. BANK OF RECORD
<TABLE>
<CAPTION>
Please attach a voided check in the space provided in Section 13.
<S> <C> <C>
Bank Name
---------------------------------------------------------------------------------------------------
Address
------------------------------------------------------------------------------------------------------
City State Zip
----------------------------------------------------------- ------ -----------------
Bank ABA No.
-----------------------------------
Bank Account No.
-------------------------------
Account Name
-------------------------------------------------------------------------------------------------
</TABLE>
SIGNATURE AND DEALER INFORMATION
- --------------------------------------------------------------------------------
- - 11. SIGNATURE AND TAXPAYER CERTIFICATION
The undersigned warrants that I (we) have full authority and, if a natural
person, I (we) am (are) of legal age to purchase shares pursuant to this
Application, and have received a current prospectus for the Salomon Brothers
Investment Series Fund(s) in which I (we) am (are) investing. THE UNDERSIGNED
ACKNOWLEDGES THAT THE TELEPHONE EXCHANGE PRIVILEGE IS AUTOMATIC AND THAT I (WE)
MAY BEAR THE RISK OF LOSS IN THE EVENT OF FRAUDULENT USE OF THE PRIVILEGE. If I
(we) do not want the Telephone Exchange Privilege, I (we) have so indicated on
this Application.
Under the Interest and Dividend Tax Compliance Act of 1983, the Fund is required
to have the following certification:
Under penalty of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because (a) I am exempt from backup
withholding or (b) I have not been notified by the Internal Revenue Service that
I am subject to backup withholding as a result of a failure to report all
interest or dividends or (c) the IRS has notified me that I am no longer subject
to backup withholding.
Certification Instructions -- You must cross out item (2) above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting of interest or dividends on your tax return. For real estate
transactions, item (2) does not apply. For mortgage interest paid, the
acquisition or abandonment of secured property, contributions to an individual
retirement account (IRA), and generally payments other than interest and
dividends, you are not required to sign the Certification, but you must provide
your correct Taxpayer Identification Number.
<TABLE>
/ / Exempt from Backup Withholding (i.e., exempt entity as described in Application Instructions)
<S> <C>
/ / Nonresident alien [form W-8 attached] / / Country of Citizenship
-------------------------
Authorized signature Title Date
---------------------------------------------- --------------------- ------------
Authorized signature Title Date
---------------------------------------------- --------------------- ------------
</TABLE>
- --------------------------------------------------------------------------------
- - 12. FOR DEALER USE ONLY (Please print)
We hereby authorize Salomon Brothers Inc to act as our agent in connection with
transactions authorized by the Application and agree to notify Salomon Brothers
Inc of any purchases made under a Letter of Intent or Right of Accumulation. If
this Application includes a Telephone Exchange Privilege authorization, a
Telephone Redemption Privilege authorization or an Automatic Withdrawal Plan
request, we guarantee the signature(s) above.
<TABLE>
<S> <C> <C> <C>
Dealer's Name
----------------------------------------------------------------------------
Main Office Address
----------------------------------------------------------------------------
Dealer Number Branch # Rep #
------------------ ------------------------------ --------------
Representative's Name
--------------------------------------------------------------------------
Branch Address Telephone No.
------------------------------------------ -------------------
Authorized Signature of Dealer Title
-------------------------------- --------------------------
</TABLE>
If desired, I elect to have third party statements sent to the following
address:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 128
- --------------------------------------------------------------------------------
- - 13. AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan, which is available to shareholders of the Salomon
Brothers Investment Series Funds, makes possible regular monthly purchases of
Fund shares to allow dollar-cost averaging. The Funds' transfer agent can
arrange for an amount of money selected by you ($25 minimum) to be deducted from
your checking account and used to purchase shares of a specified Salomon
Brothers Investment Series Fund.
Please withdraw $ ____________ from my checking account (named in Section 10)
on or about the 10th of the month for investment:
<TABLE>
<S> <C> <C>
/ / Monthly / / Every alternate month / / Other
/ / Quarterly / / Semiannually ----------------------------
</TABLE>
No more than one investment will be processed per month.
<TABLE>
<S> <C> <C>
$ into the Fund
--------------- ------------------------------------------------------------------
$25 Minimum
$ into the Fund
--------------- ------------------------------------------------------------------
$25 Minimum
$ into the Fund
--------------- ------------------------------------------------------------------
$25 Minimum
</TABLE>
If you are applying for the Telephone Redemption Privilege or Automatic
Investment Plan, please tape your voided check on top of our sample below.
- --------------------------------------------------------------------------------
JOHN DOE 000
123 Main Street
Anywhere, USA 12345
-----------
-----------
----------------------------------------------------- $
------------------------------------------------------------------
-------------------------- ------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SERVICE ASSISTANCE
Our knowledgeable Client Services Representatives are available to assist you
between 9:00 a.m. and 5:00 p.m. Eastern Time at:
1-800-SALOMON
7256666
- --------------------------------------------------------------------------------
MAILING INSTRUCTIONS
<TABLE>
<S> <C>
Mail your completed account application and check to: OR (for overnight and express mail delivery)
SALOMON BROTHERS INVESTMENT SERIES SALOMON BROTHERS INVESTMENT SERIES
C/O THE SHAREHOLDERS SERVICE GROUP, INC. C/O THE SHAREHOLDERS SERVICE GROUP, INC.
P.O. BOX 9109 53 STATE STREET, SEVENTH FLOOR
BOSTON, MA 02205 - 9109 BOSTON, MA 02109
</TABLE>
Salomon Brothers Inc SBAPP - 9/95
<PAGE> 129
VOID
<PAGE> 130
-------------------------------------------------------------------------------
THE PAYMENT OF FUNDS IS AUTHORIZED BY THE SIGNATURE(S) APPEARING ON REVERSE
SIDE.
By signing this signature card, I (we) hereby authorize Boston Safe Deposit
and Trust Company ("Bank") to honor checks drawn by me (us) on my (our)
Account in the Investment Company ("Fund") indicated on the reverse side of
this form with payment therefore to be made by redeeming sufficient full
and fractional shares in that Account without a signature guarantee.
If this card is signed by more than one person, all checks will require
only one of the signatures appearing on the reverse side unless the
requirement of more than one signature is indicated.
Checks may not be for less than $500 or such other minimum or maximum as
may from time to time be established by the Fund. Shares for which
certificates have been issued may not be redeemed by check. No redemption
of shares purchased by check will be permitted pursuant to this Check
Redemption Service until 15 days after such shares were credited to the
shareholder's account. The Bank has the right not to honor checks amounts
exceeding the value of the shareholder's account at the time the check is
presented for payment.
Neither the Bank nor the Fund shall honor any liability to me (us) or
honoring my (our) redemption checks, for effecting redemption pursuant to
the Check Redemption Service or for returning checks which have not been
honored. The Bank and the Fund shall be liable only for their own
negligence.
I (we) understand and agree that this Check Redemption Service is in all
respects subject to the procedures, and regulations of the Bank governing
checking accounts, and also to the terms and conditions in the Fund's
current Prospectus and Statement of Additional Information, and that the
Bank and the Fund reserve the right change, modify or terminate the Service
at any time upon notification in writing mailed to my (our) address of
record.
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<PAGE> 131
SIGNATURE CARD
CASH MANAGEMENT FUND
Boston Safe Deposit and Trust Company
ACCOUNT NUMBER
- --------------------------------------------------------------------------------
ACCOUNT NAME(S) AS REGISTERED
- --------------------------------------------------------------------------------
AUTHORIZED SIGNATURE(S) -- Individuals must sign as their names appear in
account registration
1
- --------------------------------------------------------------------------------
2
- --------------------------------------------------------------------------------
3
- --------------------------------------------------------------------------------
4
- --------------------------------------------------------------------------------
/ / Check if all signatures are required
/ / Check if only one signature is required Date
-------------------
/ / Check if combination of signatures is required and specify number and/or
individual(s)
SUBJECT TO CONDITION ON REVERSE SIDE
- --------------------------------------------------------------------------------
<PAGE> 132
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
April 29, 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.
April 29, 1996
<PAGE> 133
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> 134
FOREIGN SECURITIES. As discussed in the Prospectus, investing in the
securities of foreign issuers generally, and particularly in emerging market
issuers, involves special considerations which are not typically associated
with investing in securities of U.S. issuers. The following discussion
supplements the discussion contained in the Prospectus under "Additional
Investment Activities and Risk Factors--Foreign Securities" and "--High Yield
Securities--High Yield Foreign Sovereign Debt Securities." See also "--Brady
Bonds" below.
Certain of the risks associated with international investments and
investing in smaller capital markets are heightened for investments in emerging
market countries. For example, some of the currencies of emerging market
countries have experienced devaluations relative to the U.S. dollar, and major
adjustments have been made periodically in certain of such currencies. Certain
of such countries face serious exchange constraints. In addition, governments
of many emerging market countries have exercised and continue to exercise
substantial influence over many aspects of the private sector. In certain
cases, the government owns or controls many companies, including the largest in
the country. Accordingly, government actions in the future could have a
significant effect on economic conditions in developing countries which could
affect private sector companies and a Fund, as well as the value of securities
in the Fund.
Certain markets are in only the earliest stages of development. There is
also a high concentration of market capitalization and trading volume in a
small number of issuers representing a limited number of industries, as well as
a high concentration of investors and financial intermediaries. Many of such
markets also may be affected by developments with respect to more established
markets in the region. Brokers in emerging market countries typically are fewer
in number and less capitalized than brokers in the United States. These
factors, combined with the U.S. regulatory requirements for open-end investment
companies and the restrictions on foreign investment, result in potentially
fewer investment opportunities for a Fund and may have an adverse impact on the
investment performance of a Fund.
There generally is less governmental supervision and regulation of
exchanges, brokers and issuers in foreign countries than there is in the United
States. For example, there may be no comparable provisions under certain
foreign laws to insider trading and similar investor protection securities laws
that apply with respect to securities transactions consummated in the United
States. Further, brokerage commissions and other transaction costs on foreign
securities exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, archaic
legal systems may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act of 1940 (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> 135
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> 136
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, such a demand instrument will be characterized as "not
readily marketable" for such purpose.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or 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.
<PAGE> 137
6
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
<PAGE> 138
7
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.
<PAGE> 139
8
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
<PAGE> 140
9
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
<PAGE> 141
10
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
Collateralized Mortgage Obligations ("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 or
gain, certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside in a segregated account with its
custodian, cash, cash equivalents or high
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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 or gain, certain Funds may purchase
put and call options or write "covered" put and call options on futures
contracts on stock indices, interest rates and currencies. In addition, in
order to hedge against adverse market shifts or to increase its income, a Fund
may purchase put and call options and write "covered" put and call options on
stocks, stock indices and currencies. A Fund may utilize options on currencies
in order to hedge against currency exchange rate risks. A call option is
"covered" if, so long as the Fund is obligated as the writer of the option, it
will own (i) the underlying investment subject to the option; (ii) securities
convertible or exchangeable without the payment of any consideration into the
securities subject to the option or (iii) a call option on the relevant
security or currency with an exercise price no higher than the exercise price
on the call option written. A put option is "covered" if, to support its
obligation to purchase the underlying investment if a put option that a Fund
writes is exercised, the Fund will either (a) deposit with its custodian in a
segregated account cash, 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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15
"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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16
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 or gain to the Fund. In addition, the Fund may purchase options on
stocks that are traded over-the-counter. Options on stock indices are similar
to options on specific securities. However, because options on stock indices
do not involve the delivery of an underlying security, the option represents the
holder's right to obtain from the writer cash in an amount equal to a fixed
multiple of the amount by which the exercise price exceeds (in the case of a
put) or is less than (in the case of a call) the closing value of the
underlying stock index on the exercise date. Currently, options traded include
the Standard & Poor's 100 Index of Composite Stocks, Standard & Poor's 500
Index of Composite Stocks (the "S&P 500 Index"), the New York Stock Exchange
("NYSE") Composite Index, the American Stock Exchange ("AMEX") Market Value
Index, the National Over-the-Counter Index and other standard broadly based
stock market indices. Options are also traded in certain industry or market
segment indices such as the Oil Index, the Computer Technology Index and the
Transportation Index. Stock index options are subject to position and exercise
limits and other regulations imposed by the exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a
Fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If in fact the stock index does rise,
the price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the
value of the Fund's index option or futures contract resulting from the
increase in the index. If, on the other hand, the investment manager expects
general stock market prices to decline, it might purchase a put option or sell
a futures contract on the index. If that index does in fact decline, the value
of some or all of the equity securities in a Fund's portfolio may also be
expected to decline, but that decrease would be offset in part by the increase
in the value of the Fund's position in such put option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income or gain, as described above
in "Forward Currency Exchange Contracts."
(c) Options on Futures Contracts. A Fund may purchase put and call
options and write covered put and call options on futures contracts on stock
indices, interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion of
its investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). While the price of the option is fixed at the point of
sale, the value of the
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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 or gain. Interest rate and equity swaps involve the
exchange by a Fund with another party of their respective commitments to make
or receive payments based on a notional principal amount. The purchase of an
interest rate or equity cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined level, to receive payments on a
contractually-based principal amount from the party selling the interest rate
or equity cap. The purchase of an interest rate or equity floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of
a cap and a floor which preserve a certain return within a predetermined range
of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams
are netted out), with the Fund receiving or paying, as the case may be, only
the net amount of the two payments. The net amount of the excess, if any, of a
Fund's obligations over its entitlements with respect to each interest rate or
equity swap will be accrued on a daily basis, and an amount of cash and/or
liquid high grade debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If a Fund enters into an interest rate or equity 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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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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("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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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 1995.
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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, and subsequently amended it. 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.
The 1996-1997 Executive Budget was not adopted by the State Legislature by the
statutory deadline of April 1, 1996. 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. On April 3, 1996, the State
announced that the General Fund for the State's 1996 Fiscal Year is expected to
be balanced on a cash basis, with an operating surplus of $445 million. There
can be no assurance that the General Fund will yield such a surplus.
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 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 1995, which end on June 30, show a General Fund surplus reported in
accordance with generally accepted accounting principles ("GAAP"). The City
was required to close substantial budget gaps in recent years in order to
maintain balanced operating results. For fiscal year 1995, the City adopted a
budget which halted the trend in recent years of substantial increases in
City-funded spending from one year to the next. There can be no assurance that
the City will continue to maintain a balanced budget as required by State law
without additional tax or other revenue increases or additional economic
reductions in City services or entitlement programs, which could adversely
affect the City's economic base.
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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 is
reviewed and revised on a quarterly basis and which includes the City's capital
revenue and expense projections and outlines proposed gap-closing programs for
years with projected budget gaps. The City's current four-year financial plan
projects substantial budget gaps for each of the 1997 through 1999 fiscal years,
before implementation of the proposed gap-closing program contained in the
current financial plan. The City is required to submit its financial plans to
review bodies, including the New York State Financial Control Board.
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. It is likely that the Financial Plan will be
changed significantly in connection with the preparation of the Executive
Budget for the 1997 fiscal year as a result of the status of State and Federal
budget proposals and other factors. The City expects to submit the Executive
Budget to the City Council in early May 1996.
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 City and MAC have reached an agreement in principle under which MAC
will develop and implement a debt restructuring program which will provide the
City with $125 million in budget relief in fiscal year 1996, in addition to the
$20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in cash of the four fiscal years starting in
fiscal year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions. The proposed sale of the
City's television station is subject to Federal regulatory approval, and 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.
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 is expected to 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, on December 15,
1995. The 1996-1997 Executive Budget was not adopted by the State Legislature
by the statutory deadline of April 1, 1996. 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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43
The City's financial plans have been the subject of extensive public
comment and criticism. The City Comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the General
Reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the Financial Plan assumes the
implementation for highly uncertain State and Federal actions, most of which
are unlikely to be implemented, that would provide between $1.2 billion and
$1.4 billion in relief to the City, and identified additional risks, including
risks attributable to BOE which total $415 million, without taking into account
potential reductions that will likely take place upon adoption of the Federal
and State budgets. The report concluded that the magnitude of the budget risk
for the 1997 fiscal year, after two years of large agency cutbacks and
workforce 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. In addition, the staff of the OSDC and the staff
of the Control Board have issued reports on the Financial Plan.
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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44
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 United Probation Officer's
Association which represents approximately 1,000 probation officers recently
ratified a contract with the City which conforms to the pattern established by
the civilian coalition. 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. 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.
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. In a subsequent report, the City Comptroller
increased the risks for the 1996 fiscal year by $32 million. The report also
noted that the city may be required to implement additional cash management
actions and delay payments to vendors if the Federal budget impasse continues
and the state budget process is delayed. In addition, the report noted that
tax revenues between July 1995 and February 1996 were $82.1 million below the
Financial Plan projections and that tax revenues were $10.8 million below the
Financial Plan projections for the month of February 1996, due principally to
lower than forecast general property tax receipts, which were partially offset
by greater than forecast personal income tax revenues.
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 March 15, 1996, the staff of the Control Board issued a report on the
Financial Plan. The report identified risks totaling $384 million for the 1996
fiscal year, including $109 million in uncertain State aid to be received by
BOE and $130 million of the projected $150 million in budget relief from MAC
which had not yet been agreed to by MAC. In addition to these risks, the
report noted that the City must successfully implement major initiatives,
including the sale of the City's television station, which requires regulatory
approval, and the proposed property tax lien sale and the sale of a pool of
mortgages. With respect to the 1997 fiscal year, the report projects that the
City must resolve budget problems of $1.7 billion in the 1997 fiscal year and
over $2.8 billion in the 1998 fiscal year, $3.5 billion in the 1999 fiscal year
and $4.6 billion is fiscal year 2000. The projected gaps for the 1997 and
subsequent fiscal years result primarily from uncertainties concerning the
ability of BOE to implement actions necessary to achieve a balanced budget;
proposed sales of assets in the 1997 fiscal year, including the City's parking
meters; projected Medicaid entitlement reductions from the State's assumption
of certain Medicaid costs, to be funded by a change in the Federal Medicaid
matching rate formula; the projected receipt of retroactive and increased lease
payments for the City's two airports; and the possibility of larger than
forecast overtime costs. In addition, the report noted that BOE has estimated
that it could lose additional funding of up to $453 million in the 1997 fiscal
year due to reductions in Federal and State aid.
With respect to the economy, the report noted that only 80,000 of the
310,000 private sector jobs during 1990 and 1992 have been regained, and that
the growth in private sector employment has been substantially offset by the
continuing contraction of Federal, State and local government jobs in the City.
The report further noted that most of the growth in local output is the result
of a substantial increase in financial sector salaries and bonus payments,
rather than growth in jobs, and that such rapid compensation growth could
evaporate when stock market growth slows. The report stated that it is
unlikely that the growth in nonproperty taxes projected in the Financial Plan
can be sustained if either the securities industry or the national economy were
to experience a substantial setback at any time over the next four years.
The report concluded that, in spite of the large gap-closing efforts of
the past several years, the City's finances have continued to deteriorate,
that revenue growth is insufficient to support planned expenditures over the
term of the Financial Plan, and that the City continues to rely heavily on
non-recurring actions to balance its budget. The report identified several
factors underlying the City's fiscal problems, including sluggish revenue
growth, which is projected to be below the rate of inflation, a decline in the
real value of Federal and State aid relative to the size of the City's budget,
and the projected growth rate of expenditures, which exceeds the rate of
inflation after the 1997 fiscal year due to the impact of recent labor
settlements, the cost of fringe benefits and growth in Medicaid and debt
service costs. The report stated that the City is at a significant crossroads,
facing a growing gap between revenues and expenditures and approaching its
constitutional borrowing limit, with prospects of receiving additional State
and Federal assistance uncertain.
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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49
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 April 3, 1996, the State announced that the General Fund for the
State's 1996 fiscal year is expected to be balanced on a cash basis, with an
operating surplus of $445 million. There can be no assurance that the General
Fund will yield such a surplus.
<PAGE> 181
The Governor presented his 1996-1997 Executive Budget to the Legislature
on December 15, 1995 and subsequently amended it. 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.
<PAGE> 182
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. Specifically, the assumption
of $1.3 billion in savings in the State fiscal year 1996-97 from a reduced
State General Fund share of Medicaid is contingent upon anticipated changes to
Federal provisions, including an increase in the Federal share of Medicaid from
50 to 60 percent. Other 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. 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 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.
On March 15, 1996, the Governor announced that additional projected
resources had been identified for the State fiscal year 1996-97, which could be
used for additional program needs if the Federal government enacts welfare and
Medicaid reform in the near future, or which could be used as part of a
contingency plan, if such reform is not enacted in the State fiscal year
1996-97, to offset the loss of welfare and Medicaid reform benefits to the
State assumed in the 1996-97 Executive Budget. 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. The State budget for the
State's 1997 fiscal year was not adopted by the statutory deadline of April 1,
1996. However, temporary spending measures are being considered by the State,
which would maintain State spending until April 30, 1996. A prolonged 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. In addition, there can
be no assurance that State budgets in future fiscal years will be adopted by
the April 1 statutory deadline.
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.
<PAGE> 183
53
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 stated that the City's Baa1 general obligation bond remains 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.
<PAGE> 184
54
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 Investment Company Act
(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);
<PAGE> 185
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, the special
purpose entity issuing the receivables-backed obligations and/or one or more of
the issuers of the underlying receivables will be considered an issuer in
accordance with applicable regulations.
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
<PAGE> 186
56
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;
<PAGE> 187
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;
<PAGE> 188
58
(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 with respect to 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) except with respect to the Asia Growth Fund 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> 189
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 may be considered a separate security and
treated as an issue of such government or entity in accordance with applicable
regulations.
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> 190
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> 191
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> 192
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> 193
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> 194
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> 195
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> 196
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> 197
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 $9,000 $105,475(12) $114,475(13)
Andrew L. Breech, Director $8,250 $ 17,750(2) $ 26,000(3)
Carol L. Colman, Director $9,000 $ 23,666(3) $ 32,666(4)
William R. Dill, Director $8,250 $ 17,000(2) $ 25,250(3)
Clifford M. Kirtland, Jr., Director $7,500 $ 15,500(2) $ 23,000(3)
Robert W. Lawless, Director $9,000 $ 18,500(2) $ 27,500(3)
Louis P. Mattis, Director $6,000 $ 14,750(2) $ 20,750(3)
Thomas F. Schlafly $8,250 $ 19,250(2) $ 27,500(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.
Certain of the officers and directors of the Investors Fund and Series
Funds are also officers and directors of one or more other investment companies
for which SBAM, the Fund's investment manager, acts as investment adviser.
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> 198
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> 199
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
(the "Subadvisory Agreement"). 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> 200
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 (the
"Subadministration Agreement").
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 $0, $0 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
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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 (exclusive of taxes, interest and
extraordinary expenses such as litigation and indemnification 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
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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 April 29, 1996. With respect to the Investors Fund,
the
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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 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
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
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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 $10,216 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
$3,500 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
$6,901 from the National Intermediate Bond Fund, $6,898 from the U.S.
Government Income Fund, $11,137 from the High Yield Bond Fund and $7,297
from the Strategic Bond Fund and for the period from September 11, 1995
(commencement of investment operations) through December 31, 1995, Investors
Bank received $1,841 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.
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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
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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 aggregate amount spent by the various classes of
each Fund under the applicable Rule 12b-1 Plan was as follows: for the New York
Municipal Bond Fund, $98,562 was spent on advertising, $10,076 was spent on
printing and mailing of prospectuses, $40,887 was spent on interest, carrying
or other financial charges and $12,501 was spent on miscellaneous expenses, for
a total of $162,026, for the National Intermediate Fund, $98,562 was spent on
advertising, $10,076 was spent on printing and mailing of prospectuses, $40,887
was spent on interest, carrying or other financial charges and $12,501 was
spent on miscellaneous expenses, for a total of $162,026; for the U.S.
Government Income Fund, $98,562 was spent on advertising, $10,076 was spent on
printing and mailing of prospectuses, $40,887 was spent on interest, carrying
or other financial charges and $12,501 was spent on miscellaneous expenses, for
a total of $162,026, for the High Yield Bond Fund, $98,562 was spent on
advertising, $10,075 was spent on printing and mailing of prospectuses,
$40,887 was spent on interest, carrying or other financial charges and $12,501
was spent on miscellaneous expenses, for a total of $162,025; for the Strategic
Bond Fund, $98,562 was spent on advertising, $10,075 was spent on printing and
mailing of prospectuses, $40,887 was spent on interest, carrying or other
financial charges and $12,501 was spent on miscellaneous expenses, for a total
of $162,025; for the Total Return Fund, $14,205 was spent on interest, carrying
or other financial charges; and for the Investors Fund, $98,562 was spent on
advertising, $24,355 was spent on printing and mailing of prospectuses, $40,716
was spent on interest, carrying or other financial charges and $12,501 was
spent on miscellaneous expenses, for a total of $176,134.
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. References in this section to
investment manager include SBAM Limited with respect to the portion, if any, of
the portfolio of the Strategic Bond Fund managed by SBAM Limited.
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's
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77
generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged
is reasonable in relation to the brokerage and research services provided to
the investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange
for a certain volume of brokerage transactions to be executed by such broker.
While the payment of higher commissions increases a Fund's costs, the
investment manager does not believe that the receipt of such brokerage and
research services significantly reduces its expenses as a Fund's investment
manager. Arrangements for the receipt of research services from brokers may
create conflicts of interest.
Research services furnished to the investment manager by brokers who
effect securities transactions for a Fund may be used by the investment manager
in servicing other investment companies and accounts which it manages.
Similarly, research services furnished to the investment manager by brokers who
effect securities transactions for other investment companies and accounts
which the investment manager manages may be used by the investment manager in
servicing a Fund. Not all of these research services are used by the
investment manager in managing any particular account, including the Funds.
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.
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78
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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79
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
<PAGE> 212
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 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 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
<PAGE> 213
83
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
<PAGE> 214
84
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
<PAGE> 215
85
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
<PAGE> 216
86
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
<PAGE> 217
87
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.
<PAGE> 218
88
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 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.
<PAGE> 219
89
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> 220
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> 221
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:
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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> 223
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> 224
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 purchase for
federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
fund into which shares are exchanged will be the new cost basis for tax
purposes.
<PAGE> 225
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. The Funds offer 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.
Investors Bank has agreed to serve as custodian and furnish the
services provided for in the plan and the related custody agreement. Investors
Bank 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> 226
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.
Investors Bank has agreed to serve as custodian of the IRA and furnish
the services provided for in the custody agreement. Investors Bank 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> 227
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> 228
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 (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.
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> 229
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
A No-Load Mutual Fund
7 WORLD TRADE CENTER, NEW YORK, NEW YORK 10048
(800) SALOMON OR (800) 725-6666
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND (the "Fund") is a non-
diversified investment portfolio of Salomon Brothers Series Funds Inc (the
"Company"), a professionally managed open-end investment company. The 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 Fund invests primarily in high-
quality, short-term municipal obligations issued by or on behalf of the State of
New York or by its instrumentalities or political subdivisions, the interest on
which is exempt from federal, New York State and New York City personal income
taxes. The Fund 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 UNITED
STATES GOVERNMENT.
This Prospectus sets forth concisely the information a prospective investor
should know before investing in the Fund. This Prospectus should be read and
retained for ready reference to information about the Fund. A Statement of
Additional Information dated April 29, 1996, containing additional information
about the 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 the Fund at the address and telephone number
printed above.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary 2
The Fund's Expenses 3
Financial Highlights 4
Yield Information 4
Investment Objective and Policies 5
Additional Investment Activities 8
Investment Limitations 9
Investment Manager and Administrator 10
Determination of Net Asset Value 11
Purchase of Shares 11
Redemption of Shares 13
Dividends and Distributions 15
Taxation 15
Shareholder Services 16
Account Services 17
Capital Stock 17
Appendix A 19
</TABLE>
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
APRIL 29, 1996
<PAGE> 230
SUMMARY
THE FUND
Salomon Brothers New York Municipal Money Market Fund (the "Fund") is a
non-diversified investment portfolio of Salomon Brothers Series Funds Inc (the
"Company"), a professionally managed open-end investment company incorporated in
Maryland on April 17, 1990.
THE FUND'S OBJECTIVE AND POLICIES
The 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 Fund seeks to maintain a
stable net asset value of $1.00 per share.
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc ("SBAM"), an affiliate of Salomon Brothers
Inc ("Salomon Brothers"), is the Fund's investment manager. SBAM also serves as
investment adviser to other investment companies and numerous individuals and
institutions. For its services as investment manager, the Fund pays SBAM a
monthly fee at an annual rate of .20% of the Fund's average daily net assets.
PURCHASE OF SHARES
Shares of the Fund may be purchased without a sales charge at their next
determined net asset value through First Data Investor Services Group, Inc.
("FDISG"), a subsidiary of First Data Corporation, the Fund's transfer agent.
The minimum initial investment is $5,000. Additional investments require a
minimum of $500. See "Purchase of Shares."
SALE OF SHARES
The Fund redeems shares at the next determined net asset value. There is no
redemption fee. See "Redemption of Shares."
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income of the Fund will be declared as a
daily dividend. Shareholders of the Fund will receive such dividends monthly in
additional shares of the Fund or may elect to receive cash. See "Dividends and
Distributions."
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in the Fund. In particular, because the Fund significantly invests 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 Objective and Policies" and
"Additional Investment Activities."
2
<PAGE> 231
THE FUND'S EXPENSES
The following expense table is provided to assist investors in understanding the
various costs and expenses that an investor will incur either directly or
indirectly as a shareholder in the Fund, based upon the Fund's actual operating
expenses for its most recent fiscal year which are calculated as a percentage of
average daily net assets.
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load Imposed on Purchases None
Sales Load Imposed on Reinvested
Dividends None
Redemption Fees None
Exchange Fee None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average daily
net assets)
Management Fees (after waiver)* .18%
Administrative Fees .08
Other Expenses .17
------
Total Fund Operating Expenses
(after waiver)* .43%
======
</TABLE>
- ------------
* Reflects the voluntary waiver of management fees by SBAM for the period ended
December 31, 1995. Absent such waivers, the ratio of management fees and total
Fund operating expenses to the average daily net assets would have been .20%
and .45%, respectively.
"Other Expenses" includes fees for shareholder services, custodial and transfer
agency fees, legal and accounting fees, printing costs and registration fees.
For additional information with respect to the expenses identified in the table
above, see "Investment Manager and Administrator" in the Prospectus and
"Management of the Fund" in the Statement of Additional Information.
EXAMPLE: The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of operating expenses at the levels set forth in the table above, and
are also based upon the following assumptions:
You 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:
<TABLE>
<S> <C>
After 1 year $ 4
After 3 years $ 14
After 5 years $ 24
After 10 years $ 54
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Moreover,
while the example assumes a 5% annual return, the Fund's performance will vary
and may result in a return greater or less than 5%.
3
<PAGE> 232
FINANCIAL HIGHLIGHTS
The following data per share of capital stock outstanding throughout each period
and ratios should be read in conjunction with the financial statements included
in the Fund's Statement of Additional Information. The financial statements and
financial highlights for each of the years ended December 31, 1995 and for the
period from October 2, 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.
<TABLE>
<CAPTION>
PERIOD
ENDED
YEAR ENDED DECEMBER 31, DECEMBER
------------------------------------------------------------- 31,
PER SHARE OPERATING PERFORMANCE 1995 1994 1993 1992 1991 1990*
- ---------------------------------------- --------- --------- --------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------- --------- --------- --------- --------- --------
Net investment income................... .037+ .027 .023 .031 .047 .014+
Dividends from net investment income.... (.037) (.027) (.023) (.031) (.047) (.014)
--------- --------- --------- --------- --------- --------
Net asset value, end of period.......... $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
--------- --------- --------- --------- --------- --------
Net assets end of period (thousands).... $ 226,549 $ 269,788 $ 262,413 $ 263,685 $ 154,782 $ 34,529
TOTAL INVESTMENT RETURN................. +3.7% +2.7% +2.3% +3.1% +4.8% +1.4%
RATIOS TO AVERAGE NET ASSETS:
Expenses............................ .43%+ .41% .41% .42% .60% .64%**+
Net investment income............... 3.67% 2.63% 2.31% 3.07% 4.63% 5.79%**
</TABLE>
- ------------
* October 2, 1990, commencement of operations, through December 31, 1990.
** Annualized.
+ Net investment income per share would have been $0.037 and the expense ratio
to average net assets would have been .45% for the year ended December 31,
1995 before waiver of management fee and credits earned on custodian cash
balances. Net investment income per share would have been $0.012 and the
expense ratio to average net assets would have been 1.23% for the period
ended December 31, 1990 before waiver of management fee and reimbursement of
certain expenses.
YIELD INFORMATION
From time to time the 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 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. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
In addition, the Fund may make available information as to its "tax equivalent
yield." The "tax equivalent yield" refers to the yield on a taxable investment
necessary to produce an after-tax yield equal to the Fund's tax-exempt yield,
and is calculated by increasing the yield shown for the Fund to the extent
necessary to reflect the pay-
4
<PAGE> 233
ment of taxes at specified rates. Thus, the tax equivalent yield for the Fund
will always exceed the Fund's yield.
The yield of the Fund may be quoted and compared to those of other mutual funds
with a similar investment objective and to other relevant indices or to rankings
prepared by independent services or other financial or industry publications
that monitor the performance of mutual funds. For example, the yield of the Fund
may be compared to performance information from Lipper Analytical Services,
Inc., IBC/Donoghue's Money Fund Report or Bank Rate Monitor. Performance and
yield data as reported in various national and local financial publications may
also be used in comparing the performance and yield of the Fund.
INVESTMENT OBJECTIVE
AND POLICIES
The investment objective of the Fund is to seek as high a level of current
income exempt from federal income tax and New York State and New York City
personal income taxes as is consistent with liquidity and the stability of
principal. The Fund invests primarily in a non-diversified portfolio of
high-quality, short-term municipal 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 federal income tax and from the personal income
taxes of New York State and New York City.
The Fund invests exclusively in high-quality, United States dollar-denominated
securities which are deemed to mature in thirteen months or less and is managed
so that the average maturity of all portfolio instruments (on a dollar-weighted
basis) will not exceed 90 days. The Fund seeks to maintain a stable net asset
value of $1.00 per share. The Fund's investment objective is a fundamental
policy and may not be changed without the affirmative vote of a majority of its
outstanding shares, as defined under "Capital Stock" in the Statement of
Additional Information. Of course, achievement of this objective cannot be
guaranteed. All or a portion of the Fund's dividends paid in respect of its
shares may be a preference or an adjustment for purposes of the federal
alternative minimum tax. See "Taxation".
The types of obligations in which the Fund may invest include the following (see
"Description of Ratings" in Appendix A):
(1) Municipal commercial paper that is rated "P-1" or "P-2" by Moody's Investors
Service, Inc. ("Moody's") or "A-1" or "A-2" by Standard & Poor's Corporation
("S&P") or, if not rated, is, in the opinion of the investment manager based on
guidelines established by the Company's Board of Directors, of investment
quality comparable to rated municipal commercial paper in which the Fund may
invest (see "Description of Ratings" in Appendix A);
(2) Municipal notes that are rated "MIG 1," "MIG 2" (or "VMIG 1" or "VMIG 2" in
the case of variable rate demand notes), "P-1", "P-2" or "Aa" or better by
Moody's or "SP-1", "SP-2", "A-1", "A-2" or "AA" or better by S&P or, if not
rated, are, in the opinion of the investment manager based on guidelines
established by the Company's Board of Directors, of investment quality
comparable to rated municipal notes in which the Fund may invest; and
(3) Municipal bonds which are rated "Aa" or better by Moody's or "AA" or better
by S&P or, if not rated, are, in the opinion of the investment manager based on
guidelines established by the Company's Board of Directors, of investment
quality comparable to rated municipal bonds in which the Fund may invest.
Municipal obligations are debt obligations issued by or on behalf of states,
cities, municipalities and other public authorities. The two principal classifi
5
<PAGE> 234
cations of municipal obligations that may be held by the 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 such 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 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 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.
The Fund currently intends to invest substantially all of its assets in
obligations that are exempt from federal income tax and from the personal income
taxes of the State of New York and its cities. 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 and instrumentalities. Under normal market conditions, however, the
Fund will invest at least 65% of its total assets in obligations that are exempt
from federal income tax and from the personal income taxes of the State of New
York and its cities, as described above. In addition, it is a fundamental policy
of the Fund to invest, under normal market conditions, at least 80% of its total
assets in obligations that are exempt from federal income tax. To the extent not
so invested, the remaining 20% of the Fund's assets may be invested in high
quality, short-term money market instruments, the income from which is subject
to federal income tax. Taxable money market instruments that may be purchased by
the Fund include securities issued or guaranteed as to principal and interest by
the United States government or by agencies or instrumentalities thereof;
obligations issued or guaranteed by United States 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; high
quality commercial paper and other high quality short-term debt obligations; and
obligations of the International Bank for Reconstruction and Development, other
supranational organizations and foreign governments and their agencies and
instrumentalities. The Fund may also enter into repurchase agreements with
respect to the taxable obligations identified above. Dividends paid by the Fund
that are attributable to interest derived from taxable money market instruments
will be taxable to investors.
If at some future date, in the opinion of the investment manager, adverse
conditions prevail in the market for obligations exempt from federal income tax
and from the personal income taxes of the State of New York and its cities, the
Fund may, for temporary defensive purposes, invest more than 35% of its assets
in municipal obligations issued by other states, their agencies or
instrumentalities or in taxable money market in-
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struments. Moreover, if at some future date, in the opinion of the investment
manager, adverse conditions in the market for municipal securities generally
should prevail, the Fund may temporarily invest more than 20% of its assets in
cash reserves or in taxable 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
temporary defensive purposes, its investment objective of seeking income exempt
from federal income tax and the personal income taxes of New York State and its
cities may not be achieved.
RISK FACTORS
The Fund's classification as "non-diversified" means that the proportion of the
Fund's assets that may be invested in the securities of a single issuer is not
limited by the Investment Company Act of 1940, as amended (the "1940 Act").
However, as a fundamental investment limitation, the Fund limits its investments
so that with regard to 50% of total assets, no more than 5% of assets are
invested in the securities of a single issuer, and with respect to the remaining
50% of total assets, no more than 25% of total assets are invested in the
securities of a single issuer. Effective October 3, 1996, the Fund will limit
its investments so that with regard to 75% of its total assets, no more than 5%
of its assets are invested in the securities of a single issuer. Because the
Fund has the ability, like many other single-state tax-free money market funds,
to invest a significant percentage of its assets in the securities of a single
issuer, an investment in the Fund may be riskier than an investment in other
types of money market funds.
Because the 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 public subdivisions, the interest
on which is exempt from federal income tax and from the 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 have recently 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 most recent national recession, the State was more heavily
impacted than the nation as a whole and was 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 income derived by the Fund and its ability to
preserve capital and liquidity could be adversely affected. See "Special Factors
Affecting The Fund's Investment in New York Municipal Obligations" in the
Statement of Additional Information for further information.
In addition, from time to time the Fund may invest 25% or more of its assets in
municipal obligations that are related in other ways such 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. In
addition, from time to time, the Fund may invest 25% or more of its assets in
industrial development bonds, which, although issued by industrial development
authorities, may be backed only by those assets and revenues of non-governmental
users.
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Opinions relating to the validity of municipal obligations and to the 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 Fund nor the investment manager will review
the proceedings relating to the issuance of municipal obligations or the basis
for such opinions.
The Fund may invest without limitation in obligations that are guaranteed or
have other credit support provided by a foreign bank. The Fund's ability to
receive payment with respect to any such guarantee or other credit support may
involve certain risks, such as future political, social and economic
developments, less governmental supervision and regulation, market liquidity
differences, the possible establishment of laws or restrictions that might
adversely affect the payment of the bank's obligations under the guarantee or
other credit support and the difficulty of obtaining or enforcing a judgment
against the bank.
The investment manager seeks to enhance the yield of the Fund by taking
advantage of yield disparities or other factors that occur in the market. For
example, market conditions frequently result in similar securities trading at
different prices. The 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
Fund should continue to hold the security. The Fund's policy regarding
dispositions of portfolio securities and its policy of investing in securities
deemed to have maturities of 13 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.
ADDITIONAL INVESTMENT ACTIVITIES
Certain of the obligations that the Fund may purchase have a floating or
variable rate of interest. 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 of the underlying instrument or to a third party at par value prior to
maturity. Such obligations include variable rate demand notes, which are
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 investment manager will monitor on an
ongoing basis the ability of an issuer of a demand instrument or of the entity
providing credit support for the demand feature to pay principal and interest on
demand.
The instruments that may be purchased by the Fund include participation
certificates issued by a bank, insurance company or other financial institution
in obligations that may otherwise be purchased by the Fund. A participation
certificate gives the Fund an undivided interest in the underlying obligations
in the proportion that the 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.
Among the municipal obligations in which the Fund may invest are participation
certificates in a lease, an installment purchase contract or a conditional sales
contract (hereinafter collectively called "lease obligations") entered into by a
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State or a political subdivision to finance the acquisition or construction of
equipment, land or facilities. 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. 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 SBAM, 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 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. The Fund will only make commitments to purchase securities on a firm
commitment basis with the intention of actually acquiring the securities but may
sell them before the settlement date if it is deemed advisable.
The Fund may enter into standby commitments with respect to securities held in
its portfolio. Such transactions entitle the Fund to "put" its securities at an
agreed upon price within a specified period prior to their maturity date.
For more detailed descriptions of certain of the Fund's investment activities,
see "Additional Investment Activities" in the Statement of Additional
Information.
Except with respect to investment by the Fund of at least 80% of its assets in
tax-exempt obligations, as described above, the foregoing investment policies
and activities are not fundamental and may be changed by the Board of Directors
of the Company without the approval of shareholders.
INVESTMENT LIMITATIONS
The Fund may not:
(1) 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 and securities that would be illiquid by
virtue of legal or contractual restrictions on resale;
(2) purchase any securities which would cause more than 25% of the value of its
total assets 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 (a) obligations issued or guaranteed
by the United States Government, its agencies or instrumentalities or by any
state or territory, any possessions of the United States, or
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any of their authorities, agencies, instrumentalities or political subdivisions,
(b) bank obligations, or (c) repurchase agreements with respect to any such
obligations;
(3) 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
United States Government, its agencies or instrumentalities; however, up to 50%
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;
(4) 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
(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 (4) above.
The foregoing investment restrictions and those described in the Statement of
Additional Information are fundamental policies of the Fund which may be changed
only when permitted by law and approved by the holders of a majority of the
Fund's outstanding voting securities, as defined under "Capital Stock" in the
Statement of the Additional Information.
As a non-fundamental operating policy, effective October 3, 1996, the Fund will
apply the percentage limitation of (3) above with respect to 75% of the value of
its total assets.
For purposes of the investment limitations applicable to the 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 may be considered a separate security and may be treated as an
issue of such government or entity in accordance with applicable regulations.
If a percentage restriction on investment or use of assets set forth above is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
INVESTMENT MANAGER AND
ADMINISTRATOR
The 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 dated as of September 28, 1990
(the "Management Contract"). SBAM was incorporated in 1987 and, together with
affiliates in London, Frankfurt, Tokyo and Hong Kong, provides a broad range of
fixed income and equity investment advisory services to various individuals and
institutional clients located throughout the world, and serves as investment
adviser to various investment companies. As of February 29, 1996, SBAM had
approximately $14 billion of assets under management. Michael S. Hyland is
President of SBAM. The business address of SBAM is 7 World Trade Center, New
York, New York 10048.
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Subject to policies established by the Company's Board of Directors, which has
overall responsibility for the business and affairs of the Fund, SBAM manages
the investment and reinvestment of the Fund's assets pursuant to the Management
Contract. SBAM also furnishes office space, personnel and certain facilities
required for the performance by SBAM of certain additional services provided by
it to the Fund under the Management Contract, including SEC compliance,
supervision of Fund operations, certain administrative and clerical services and
certain services to the Fund's shareholders, and pays the compensation of the
Company's officers, employees and directors affiliated with SBAM. SBAM or the
Fund's distributor will also pay any expenses incurred in distributing shares of
the Fund. Except for the expenses paid by SBAM that are described herein, the
Fund bears all costs of its operations.
As compensation for its services, the Fund pays SBAM a management fee each month
at an annual rate of .20% of the average daily net assets of the Fund. SBAM may
waive all or part of its fee from time to time in order to increase the Fund's
net investment income available for distribution to shareholders. The Fund will
not be required to reimburse SBAM for any advisory fees waived.
The Company employs Investors Bank & Trust Company ("Investors Bank"), under an
Administration Agreement dated as of December 1, 1994 (the "Administration
Agreement"), to provide certain administrative services to the Fund. The
administrator is not involved in the investment decisions made with respect to
the Fund. The services provided by Investors Bank under the 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 of reports to shareholders and the SEC. For its
services as administrator to the Fund, the Company pays Investors Bank a fee,
calculated daily and payable monthly, at an annual rate of .08% of the Fund's
aggregate average daily net assets.
DETERMINATION OF NET
ASSET VALUE
The Fund's net asset value per share for the purpose of pricing purchase and
redemption orders is determined at 12:00 noon (New York time) on each Business
Day. As used in this Prospectus, the term "Business Day" refers to those days
when the New York Stock Exchange (the "NYSE") is open for business, which is
Monday through Friday except for holidays. These holidays include 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.
The Fund determines its net asset value per share by subtracting the Fund's
liabilities (including accrued expenses and dividends payable) from the total
value of the Fund's investments and other assets and dividing the result by the
total outstanding shares of the Fund.
The 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. 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 "Net Asset
Value" in the Statement of Additional Information for a more complete
description of the amortized cost method.
PURCHASE OF SHARES
The minimum initial investment in the Fund is $5,000, and the minimum subsequent
investment is $500. The Company and the investment manager reserve the right at
any time to reject any
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purchase order, to suspend the offering of shares for a period of time or to
waive or lower the minimum investment requirements. There is no sales charge or
commission in connection with the purchase of shares.
Fund shares may be purchased through FDISG, the Company's transfer agent.
Purchase orders 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 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. Orders for Fund shares will be executed at the net asset
value per share next determined after an order has become effective. See
"Determination of Net Asset Value".
Funds transmitted by a wire system other than the Federal Reserve Wire System
are generally converted into federal funds on the next Business Day. 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.
PURCHASE BY MAIL
Shares may be purchased initially by completing a Purchase Application and
mailing it, together with a check, payable to FDISG, to:
Salomon Brothers Funds
c/o FDISG
P.O. Box 9109
Boston, MA 02205-9109
Subsequent investments may be made at any time by mailing a check in an amount
of $500 or more 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.
PURCHASE BY WIRE
Subsequent investments can be made by wire at any time in an amount of $500 or
more by wiring federal funds to FDISG as set forth below.
The investor should instruct the wiring bank to transmit the specified amount in
federal funds to:
Boston Safe Deposit and Trust Company
Boston, MA
ABA # 011001234
Account # 142743
Attn: Salomon Brothers New York Municipal Money Market Fund
Name of Account:
Account # (As assigned):
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York 10048,
serves as a distributor of the Fund's shares. 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
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connection with processing and other services that it provides for certain
shareholder accounts.
REDEMPTION OF SHARES
Shareholders may redeem their shares without charge on any Business Day.
Shareholders should submit their redemption requests to FDISG.
For the shareholder's convenience, the Fund has established several different
redemption procedures. No redemption of shares purchased by check will be
permitted until all checks in payment for the purchase of the shares to be
redeemed have been collected, which may take up to 10 days or more.
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;
(2) 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 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 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
(3) In the case of shares of record held in the name of a corporation, trust,
fiduciary or partnership, FDISG 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. Checks for redemption proceeds will be sent to the shareholder's
address of record, unless other instructions are given in proper form. 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.
REDEMPTION BY CHECK
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 Company.
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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:
(800) 446-1013
(800) SALOMON or
(800) 725-6666
or
Mail the request to FDISG at the following address:
Salomon Brothers
New York Municipal Money Market 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. 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.
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 above 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. The Fund reserves the right to refuse a
telephone request for redemption if it is believed advisable to do so.
Procedures for redeeming Fund shares by telephone may be modified or terminated
at any time by the Fund. None of the Fund 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. The Fund and FDISG may employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. The Fund and/or FDISG may be liable for any losses due to unauthorized
or fraudulent instructions in the absence of following these procedures. When
requesting a redemption by telephone, shareholders should have available the
correct account registration and account numbers or tax identification number.
SMALL ACCOUNTS
An account that is reduced by a shareholder to a value of $500 or less is
subject to redemption by the Company, but only after the shareholder has
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been given at least 30 days to increase the account balance to more than $500.
DIVIDENDS AND DISTRIBUTIONS
The Company intends to declare as a dividend on the outstanding shares of the
Fund 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. Shares purchased will begin accruing dividends on the day the
purchase order is executed and shares redeemed will accrue dividends through the
day prior to redemption. The Fund's net investment income for a Saturday, Sunday
or holiday will be declared as a dividend on the previous Business Day.
For the purpose of calculating dividends, net investment income shall consist of
interest earned, which includes any discount accreted or premium amortized to
the date of maturity, minus estimated expenses of the Fund. Dividends will be
declared and accrued throughout the month and paid on the last Business Day of
each month. Dividends will be reinvested in additional shares of the Fund at net
asset value and credited to the shareholder's account on the payment date or, at
the shareholder's election, paid in cash.
Net realized short-term capital gains of the 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. The Company
does not expect the Fund to realize any long-term capital gains. Should any such
gains be realized, they will be distributed annually. In determining amounts of
gains to be distributed, any capital loss carryovers from prior years may be
offset against 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, the
Fund reserves the right to reinvest the dividend and/or distribution in a
shareholder's account at the then-current net asset value and to convert the
shareholder's election to automatic reinvestment in shares of the Fund.
TAXATION
The 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 so qualified, the Fund intends to satisfy conditions which will
enable interest from municipal obligations that is exempt from federal income
tax in the hands of the Fund to qualify as exempt-interest dividends when
distributed to shareholders of the Fund. If in any year the Fund should fail to
qualify for tax treatment as a regulated investment company, the Fund would
incur a regular corporate federal income tax upon its taxable income for that
year, and distributions to shareholders would be taxable to such shareholders as
ordinary income to the extent of the earnings and profits of the Fund.
Except as discussed below, exempt interest dividends will be exempt from regular
federal income tax. In addition, such dividends will not be subject to New York
State and New York City personal income taxes to the extent attributable to
federally tax-exempt obligations of the State of New York and its political
subdivisions. Dividends and distributions from the Fund may be taxable to
shareholders who are subject to state and local taxation outside New York State
and New York City.
Dividends derived from taxable investments, together with distributions from any
net realized short-term securities gains, are subject to federal income tax at
the rates applicable to ordinary income. Distributions from net realized
long-term gains, if any, of the Fund generally are subject to regular federal
income tax as long-term capital gains. Such distributions from taxable invest-
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ments and any net realized short or long-term capital gains will be taxable to
shareholders whether reinvested in additional shares or paid in cash. Dividends
paid by the Fund will not qualify for the dividends received deduction generally
available to corporations. The maximum federal income tax rate imposed on
individuals with respect to long-term capital gains is limited to 28%, whereas
the maximum federal income tax rate imposed on individuals with respect to
ordinary income currently is 39.6%. With respect to corporate taxpayers,
long-term capital gains are taxed at the same federal income tax rates as
ordinary income.
All or a portion of the Fund's gain from the sale or redemption of tax-exempt
obligations 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.
Under the Code, interest on indebtedness incurred or continued to purchase or
carry Fund shares, which interest is deemed to relate to exempt-interest
dividends, is not deductible. Although all or a substantial portion of the
dividends paid by the Fund may be excluded by shareholders of the Fund from
their gross income for regular federal income tax purposes, under the Code all
or a portion of such exempt dividends may be (i) a preference item for purposes
of the alternative minimum tax, (ii) a component of the "ACE" adjustment for
purposes of determining the amount of corporate alternative minimum tax or (iii)
a factor in determining the extent to which a shareholder's Social Security
benefits are taxable, and may also affect the federal tax liability of certain
foreign corporations, S corporations and insurance companies.
A notice detailing the tax status of dividends and distributions in the Fund
will be mailed annually. The foregoing and the additional information on
taxation in the Statement of Additional Information is general in nature and
does not constitute tax advice. Potential investors should consult their tax
advisers regarding specific questions on federal, state or local taxes.
See "Additional Information Concerning Taxes" in the Statement of Additional
Information.
SHAREHOLDER SERVICES
The Fund offers the following shareholder services. See the Statement of
Additional Information for further details about these services or call or write
the Company.
EXCHANGE PRIVILEGE
Shareholders of the Fund may exchange all or part of their Fund shares for
shares of certain Funds in the Salomon Brothers Family of Funds without payment
of any exchange fee. The following Funds are currently eligible for exchange
privileges:
SALOMON BROTHERS OPPORTUNITY FUND INC. An equity fund which invests for
long-term capital appreciation. Current income is secondary. The fund may employ
speculative investment techniques to attain its goals.
SALOMON BROTHERS CAPITAL FUND INC. An equity fund, emphasizing capital
appreciation. The fund invests in securities believed to have above-average
appreciation possibilities which may involve above-average risks.
The exchange privilege is available to shareholders residing in any state in
which the shares of the Fund being acquired may be legally sold. SBAM reserves
the right to reject any exchange request. The exchange privilege may be modified
or terminated at any time after notice to shareholders. Procedures for
exchanging Fund shares by telephone may be modified or terminated at any time by
the Fund. Neither the Fund nor 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
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<PAGE> 245
of loss in the event of unauthorized or fraudulent telephone instructions. The
Fund and FDISG may employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Fund 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, New York State and New York City 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.
Shareholders exercising the exchange privilege with any of the funds listed
above should review the prospectus of that fund carefully prior to making an
exchange. Further information regarding the exchange privilege is contained in
the Statement of Additional Information. To obtain the prospectuses of funds in
the Salomon Brothers Family of Funds, shareholders should contact the Fund at
the number on the cover of this Prospectus.
ACCOUNT SERVICES
The Fund sends its shareholders annual and semi-annual reports. Annual reports
include audited financial statements. Shareholders 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 the Fund at the address and telephone number on the cover of this
Prospectus with any questions relating to their investment in Fund shares.
CAPITAL STOCK
The Company was incorporated in Maryland on April 17, 1990. The authorized
capital stock of the Company consists of 10,000,000,000 shares having a par
value of $.001 per share. Pursuant to the Company's Articles of Incorporation,
the Board of Directors has authorized ten series of shares, each representing
shares in one of ten separate portfolios. In addition to the Fund, the
portfolios of the Company include 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, the
Salomon Brothers Cash Management Fund, the Salomon Brothers Institutional Money
Market Fund (formerly called the Salomon Brothers U.S. Treasury Securities Money
Market Fund), the Salomon Brothers New York Municipal Bond Fund, the Salomon
Brothers Total Return Fund and the Salomon Brothers Asia Growth Fund. On
November 17, 1994, the Board of Directors of the Company, including each
Director who is not an "interested person" as such term is defined under the
1940 Act, unanimously approved implementation of a Multiple Pricing System with
respect to each portfolio of the Company other than the Fund and the Salomon
Brothers Institutional Money Market Fund. The Company's Board of Directors may,
in the future, authorize the issuance of additional classes of capital stock
representing shares of additional investment portfolios.
All shares of the Company 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 full and fractional shares held by such shareholder. All shares of the
Fund will, when issued, be fully paid and non-assessable. Under the corporate
law of Maryland,
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<PAGE> 246
the Company's state of incorporation, and the Company's By-Laws (except as
required under the 1940 Act), the Company is not required and does not currently
intend to hold annual meetings of shareholders for the election of directors.
Shareholders, however, will have the right to call for a special meeting of
shareholders if such a request is made, in writing, by the holders of at least
10% of the Company's outstanding voting securities. In such cases, the Company
will assist in calling the meeting as required under the 1940 Act and will pay
the expenses of calling and holding the meeting. A more complete statement of
the voting rights of shareholders is contained in the Statement of Additional
Information.
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<PAGE> 247
APPENDIX A
DESCRIPTION OF RATINGS
Municipal bonds rated "Aa" by Moody's Investors Service, Inc. ("Moody's") or
"AA" by Standard & Poor's Corporation ("S&P") are generally regarded as
high-grade bonds. Such ratings indicate a strong ability to pay principal and
interest. Municipal notes rated "MIG 1" (or "VMIG 1" in the case of variable
rate notes) by Moody's or "SP-I " by S&P are of the best quality, having a very
strong or strong capacity to pay principal and interest and enjoying strong
protection from established cash flows of funds for their servicing or from
established and broadbased access to the market for refinancing, or both.
Municipal notes rated "MIG 2" (or "VMIG 2" in the case of variable rate notes)
by Moody's or "SP-2" by S&P are of high quality, having a satisfactory capacity
to pay principal and interest and enjoying ample protection for their servicing.
Municipal commercial paper or municipal notes rated "P-l " by Moody's or "A-l "
by S&P are of the highest quality, with a degree of safety regarding timely
payment that is either overwhelming or very strong. Municipal commercial paper
or municipal notes rated "P-2" by Moody's or "A-2" by S&P are of high quality,
indicating a strong capacity for timely repayment.
After purchase by the Fund, a security may cease to be rated or its rating may
be reduced below the minimum required for purchase by the Fund. Neither event
will require a sale of such security by the Fund. However, the Fund's investment
manager will consider such event in its determination of whether the 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,
the 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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TELEPHONE
(800) SALOMON
(800) 725-6666
DISTRIBUTOR
Salomon Brothers Inc
7 World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
ADMINISTRATOR AND 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
PROSPECTUS
April 29, 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,
in connection with the offer contained in this Prospectus, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund, the distributor or the investment manager.
This Prospectus does not constitute an offering in any state in which such
offering may not lawfully be made.
LOGO
PROSPECTUS
APRIL 29, 1996
- ---------------------------
SALOMON BROTHERS
------------------------------------------
SALOMON BROTHERS ASSET MANAGEMENT INC
<PAGE> 249
SALOMON BROTHERS NEW YORK MUNICIPAL MONEY MARKET FUND
7 World Trade Center
New York, New York 10048
(800) SALOMON
(800)725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers New York Municipal Money Market Fund (the "Fund") is a
non-diversified investment portfolio of Salomon Brothers Series Funds Inc (the
"Company"), a professionally managed open-end investment company. The 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 Fund invests primarily in high
quality, short-term municipal obligations issued by or on behalf of the State
of New York or by its instrumentalities or political subdivisions, the interest
on which is exempt from federal, New York State and New York City personal
income taxes.
This Statement of Additional Information is not a Prospectus and is
only authorized for distribution when preceded or accompanied by the Fund's
Prospectus dated April 29, 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 Fund at the
address and telephone number printed above.
April 29, 1996
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Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
Additional Information on Portfolio Instruments ................................. 3
Additional Investment Activities ................................................ 5
Special Factors Affecting the Fund's Investment in New York Municipal
Obligations ..................................................................... 7
Investment Restrictions ......................................................... 39
Management of the Fund .......................................................... 40
Portfolio Transactions .......................................................... 47
Net Asset Value.................................................................. 48
Redemption In Kind .............................................................. 49
Additional Information Concerning Taxes ......................................... 49
Performance Data ................................................................ 52
Shareholder Services ............................................................ 53
Capital Stock.................................................................... 54
Custodian, Transfer Agent and Shareholder Servicing Agent ....................... 55
Validity of Shares .............................................................. 55
Independent Accountants ......................................................... 55
Other Information ............................................................... 55
Financial Statements ............................................................ 56
</TABLE>
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ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
MUNICIPAL OBLIGATIONS
Municipal Commercial Paper. Municipal commercial paper is a debt
obligation with a stated maturity of 270 days or less that is issued by a
municipality to finance seasonal working capital needs or as short-term
financing in anticipation of longer-term debt.
Municipal Notes. Municipal notes generally have maturities at the time
of issuance of three years or less.
Municipal Bonds. Municipal bonds generally have maturities at the time
of issuance of up to thirty years.
MUNICIPAL NOTES
Municipal notes that may be purchased by the Fund include, but are not
limited to:
Tax Anticipation Notes. Tax anticipation notes ("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.
Bond Anticipation Notes. Bond anticipation notes ("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.
Revenue Anticipation Notes. Revenue anticipation notes ("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.
Municipal notes also include construction loan notes and project notes.
TANs, BANs and RANs are usually general obligations of the issuer. Project notes
are issued by local housing authorities to finance urban renewal and public
housing projects and are secured by the full faith and credit of the United
States Government.
---------------
The taxable market is a broader and more liquid market with a greater
number of investors, issuers and market makers than the market for municipal
obligations. The more limited
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marketability of tax-exempt municipal obligations may make it difficult in
certain circumstances to dispose of large investments advantageously. In
general, tax-exempt municipal obligations are also subject to credit risks such
as the loss of credit ratings or possible default. In addition, interest on
certain tax-exempt municipal obligations might lose its tax-exempt status in the
event of a change in the tax laws.
TAXABLE MONEY MARKET INSTRUMENTS
Taxable money market instruments in which the Fund may invest include
the following:
United States Government Securities. Securities issued or guaranteed by
the United States government or by its agencies or instrumentalities include
obligations of several kinds. Such securities in general include a wide variety
of United States 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 United States government agencies
or instrumentalities include obligations which are supported by (a) the full
faith and credit of the United States Treasury (e.g., obligations of the
Government National Mortgage Association), (b) the limited authority of the
issuer or guarantor to borrow from the United States Treasury (e.g., obligations
of Federal Home Loan Banks), or (c) only the credit of the issuer (e.g.,
obligations of the Federal Home Loan Mortgage Corporation). No assurance can be
given that the United States government will provide financial support to United
States government agencies or instrumentalities as described in clauses (b) and
(c) above in the future, since it is not obligated to do so by law, rather
the agency issuing or guaranteeing the obligate is principally responsible for
ultimate repayment. Any guarantee of such securities runs only to the principal
and interest payments on the securities and not to the market value or, in the
case of mortgage-backed securities, to the principal and interest payments on
the underlying mortgages.
Bank Obligations. Such obligations include certificates of deposit,
commercial paper, banker's acceptances and fixed time deposits. 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.
Commercial Paper. The commercial paper that may be purchased by the
Fund consists of direct obligations of domestic and foreign issuers which are
(i) rated "P- 1" or "P-2" by Moody's Investors Service, Inc. ("Moody's") or "A-l
" or "A-2" by Standard & Poor's Corporation ("S&P") or (ii) if not rated, are
issued or guaranteed as to principal and interest by issuers having an existing
debt security rating of "Aa" or better by Moody's or "AA" or better by S&P or
are, in the opinion of the investment manager, of an investment quality
comparable to rated commercial paper in which the Fund may invest.
Corporate Debt Securities. Fund investments in these securities will
consist of non-convertible corporate debt securities such as bonds and
debentures which are rated "Aa" or better by Moody's or "AA" or better by S&P or
are, in the opinion of the investment manager, of an investment quality
comparable to rated debt securities in which the Fund may invest.
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<PAGE> 253
Securities of the World Bank/Other Supranational Organizations and
Foreign Governments. 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 Fund limits its investments in U.S. dollar-denominated obligations
of foreign governments and their agencies and instrumentalities to the
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, 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,
are of comparable quality to corporate obligations in which the Fund may invest.
Repurchase Agreements. Taxable securities held by the Fund may be
subject to repurchase agreements. 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. The Fund will enter into repurchase agreements only with respect to
obligations that could otherwise be purchased by the Fund. While the maturity of
the underlying securities in a repurchase agreement transaction may be more than
one year, the term of the repurchase agreement is always less than one year. The
Fund will enter into repurchase agreements only with dealers, domestic banks or
recognized financial institutions which, in the opinion of the investment
manager, present minimal credit risks. In the event of default by the seller
under the repurchase agreement, the Fund may incur costs and experience time
delays in connection with the disposition of the underlying securities. 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. The Fund requires
that additional securities be deposited if the value of the securities purchased
decreases below their resale price and does not bear the risk of a decline in
the value of the underlying security unless the seller defaults under the
repurchase obligation.
ADDITIONAL INVESTMENT ACTIVITIES
The discussion below supplements the information set forth in the
Prospectus under "Additional Investment Activities".
FLOATING AND VARIABLE RATE INSTRUMENTS
As stated in the Prospectus, 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. Some of the demand instruments purchased by the Fund are not traded in
a secondary market and derive their liquidity solely from
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the ability of the holder to demand repayment from the issuer. If a demand
instrument is not traded in a secondary market, the Fund will nonetheless treat
the instrument as "readily marketable" for the purpose of the first investment
restriction under "Investment Limitations" in the Prospectus 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.
The 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 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 the Fund's
custodian subject to a sub-custodian agreement approved by the Fund between that
bank and the Fund's custodian.
STAND-BY COMMITMENTS
The Fund may enter into "put" transactions sometimes referred to as
"stand-by commitments," which entitle the holder to same-day settlement and to
receive an exercise price equal to the amortized cost of the underlying security
plus accrued interest, if any, at the time of exercise. The Fund's right to
exercise a stand-by commitment will be unconditional and unqualified.
The Fund expects that stand-by commitments will generally be available
without the payment of any direct or indirect consideration. However, if
necessary or advisable, the Fund may pay for certain stand-by commitments either
separately in cash or by paying a higher price for portfolio securities which
are acquired subject to a stand-by commitment (thus reducing the yield to
maturity otherwise available for the same securities). The Fund intends to enter
into stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its rights thereunder for trading purposes. The acquisition
of a stand-by commitment will not affect the valuation of the underlying
security, which will continue to be valued in accordance with the amortized cost
method. The actual stand-by commitment will be valued at zero in determining net
asset value. Where the Fund pays any consideration directly or indirectly for a
stand-by commitment, its cost will be reflected as unrealized depreciation for
the period during which the stand-by commitment is held by the Fund and will be
reflected in realized gain or loss when the stand-by commitment is exercised or
expires.
In the event that the issuer of a stand-by commitment acquired by the
Fund defaults on its obligation to purchase the underlying security, the Fund
might be unable to recover all or a portion of any loss sustained from having to
sell the security elsewhere.
If the value of the underlying security increases, the potential for
unrealized or realized gain is reduced by the cost of the stand-by commitment.
The maturity of a portfolio security will not be considered shortened by a
stand-by commitment to which such obligation is subject. Therefore, stand-by
commitment transactions will not affect the average weighted maturity of the
Fund's portfolio.
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SPECIAL FACTORS AFFECTING THE FUND'S INVESTMENT
IN NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the
investments of the 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.
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
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<PAGE> 256
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 ("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 "Port
Authority"). 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 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
interested in acquiring operational equipment, or in certain cases, real
property.
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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.
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.
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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 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 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
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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
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 1995.
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 fiscal year that commenced on April 1, 1995, ended 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.
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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
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
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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.
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
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funds in excess of debt service requirements are transferred to the General Fund
and Special Revenue Funds, pursuant to law.
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 conjunction 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.
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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"). 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. Spending in
Governmental Funds were projected at $63.31 billion, an increase of $15 million
from the December 15 Update.
The Governor presented his 1996-97 Executive Budget to the Legislature
on December 15, 1995 and subsequently amended it. 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 and after the 30-day amendment period. Those amendments are reflected
in the discussion of the 1996-97 Executive Budget contained in this Statement of
Additional Information. The 1996-1997 Executive Budget was not adopted by the
State Legislature by the statutory deadline of April 1, 1996. 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. On April 3, 1996, the State
announced that the General Fund for the State's 1996 fiscal year is expected to
be balanced on a cash basis, with an operating surplus of $445 million. There
can be no assurance that the General Fund will yield such a surplus.
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
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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.
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 the State.
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 accommodate updated
projections of federal funding in certain categorical grant programs and reduced
for welfare as noted for the General Fund.
On March 15, 1996, two weeks before the start of the 1996-97 fiscal
year, the Governor presented additional 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.
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- 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, that the State's
adopted budget projections will not differ materially and adversely from the
projections set forth in this Statement of Additional Information, or that the
State's actions will be sufficient to maintain budgetary balance in 1996-97 or
future fiscal years. 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 unpredictability
of these 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.
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.
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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
the State'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.
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;
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- 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. |
The 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 the lingering economic slowdown
in the State 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.
The 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
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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.
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.
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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 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 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.
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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
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
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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, 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 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
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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 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
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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 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
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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: a) a
challenge to certain enhanced supplemental pension allowances for members of the
state and local retirement systems; b)several challenges to provisions of
Chapter 81 of the Laws of 1995 which alter the nursing home Medicaid
reimbursement methodology; c) 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; d) a challenge to State regulations which reduce base
prices for the direct and indirect component of Medicaid reimbursement for rate
years commencing 1989; e) 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; f) challenges
to the practice of reimbursing certain Office of Mental Health patient care
expenses from the client's Social Security benefits; g) alleged responsibility
of State officials to assist in remedying racial segregation in the City of
Yonkers; h) 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; i)
challenges to the promulgation of the State's proposed procedure to determine
the eligibility for and nature of home care services for Medicaid recipients; j)
a challenge to State implementation of a program which reduces Medicaid benefits
to certain home-relief recipients; k) a challenge to the constitutionality of
petroleum business tax assessments authorized by Tax Law Section 301; and l) two
cases by commercial insurers, employee welfare benefit plans, and health
maintenance organizations to provisions of Section 2807-c of
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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 1995, which end on June 30, show a General Fund surplus reported in
accordance with generally accepted accounting principles ("GAAP"). The City was
required to close substantial budget gaps in recent years in order to maintain
balanced operating results. For fiscal year 1995, the City adopted a budget
which halted the trend in recent years of substantial increases in City-funded
spending from one year to the next. There can be no assurance that the City
will continue to maintain a balanced budget as required by State law without
additional tax or other revenue increases or additional economic reductions
in City services or entitlement programs, which could adversely affect the
City's economic base.
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 is reviewed and revised on a quarterly
basis and which includes the City's capital revenue and expense projections and
outline proposed gap-closing programs for years with projected budget gaps.
The City's current four-year financial plan projects substantial budget gaps
for each of the 1997 through 1999 fiscal years, before implementation of the
proposed gap-closing program contained in the current financial plan. The City
is required to submit its financial plans to review bodies, including the New
York State Financial Control Board.
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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 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. It is likely that the
Financial Plan will be changed significantly in connection with the preparation
of the Executive Budget for the 1997 fiscal year as a result of the status of
State and Federal budget proposals and other factors. The City expects to
submit the Executive Budget to the City Council in early May 1996.
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 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
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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 City and MAC have reached an agreement in principle under which MAC
will develop and implement a debt restructuring program which will provide the
City with $125 million in budget relief in fiscal year 1996, in addition to the
$20 million of additional budget relief provided by MAC to the City since
January 1996. The City has agreed with MAC that it will reduce certain
expenditures by $125 million in cash of the four fiscal years starting in
fiscal year 1997. The proposed refinancing, which must satisfy MAC refinancing
criteria, is subject to market conditions. The proposed sale of the City's
television station is subject to Federal regulatory approval, and 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.
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, totaling 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 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.
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The Governor released the 1996-1997 Executive Budget on December 15,
1995. The 1996-1997 Executive Budget was not adopted by the State Legislature
by the statutory deadline of April 1, 1996. 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 the BOE will be able to identify actions to offset
possible substantial shortfalls in Federal, State and City revenues.
The City's financial plans have been the subject of extensive public
comment and criticism. The City Comptroller has issued reports identifying
risks ranging between $440 million and $560 million in the 1996 fiscal year
before taking into account the availability of $160 million in the General
Reserve, and between $2.05 billion and $2.15 billion in the 1997 fiscal year
after implementation of the City's proposed gap-closing actions. With respect
to the 1997 fiscal year, the report noted that the Financial Plan assumes the
implementation of highly uncertain State and Federal actions, most of which are
unlikely to be implemented, that would provide between $1.2 billion and $1.4
billion in relief to the City, and identified additional risks, including risks
attributable to BOE which total $415 million, without taking into account
potential reductions that will likely take place upon adoption of the Federal
and State budgets. The report concluded that the magnitude of the budget risk
for the 1997 fiscal year, after two years of large agency cutbacks and
workforce 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. In addition, the staff of the OSDC and the
staff of the Control Board have issued reports on the Financial Plan.
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 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 United Probation Officers' Association which represents
approximately 1,000 probation officers recently ratified a contract with the
City which conforms to the pattern established by the civilian coalition. 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
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UFT voted on the proposed settlement. 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.
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. In a subsequent report, the City Comptroller increased the risks
for the 1996 fiscal year by $32 million. The report also noted that the City
may be required to implement additional cash management actions and delay
payments to vendors if the Federal budget impasse continues and the state
budget process is delayed. In addition, the report noted that tax revenues
between July 1995 and February 1996 were $82.1 million below the Financial Plan
projections and that tax revenues were $10.8 million below the Financial Plan
projections for the month of February 1996, due principally to lower than
forecast general property tax receipts, which were partially offset by greater
than forecast personal income tax revenues.
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
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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 totaling $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.
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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.
On March 15, 1996, the staff of the Control Board issued a report on the
Financial Plan. The report identified risks totaling $384 million for the 1996
fiscal year, including $109 million in uncertain State aid to be received by
BOE and $130 million of the projected $150 million in budget relief from MAC
which had not yet been agreed to by MAC. In addition to these risks, the
report noted that the City must successfully implement major initiatives,
including the sale of the City's television station, which requires regulatory
approval, and the proposed property tax lien sale and the sale of a pool of
mortgages. With respect to the 1997 fiscal year, the report projects that the
City must resolve budget problems of $1.7 billion in the 1997 fiscal year and
over $2.8 billion in the 1998 fiscal year, $3.5 billion in the 1999 fiscal year
and $4.6 billion in fiscal year 2000. The projected gaps for the 1997 and
subsequent fiscal years result primarily from uncertainties concerning the
ability of BOE to implement actions necessary to achieve a balanced budget;
proposed sales of assets in the 1997 fiscal year, including the City's parking
meters; projected Medicaid entitlement reductions from the State's assumption
of certain Medicaid costs, to be funded by a change in the Federal Medicaid
matching rate formula; the projected receipt of retroactive and increased lease
payments for the City's two airports; and the possibility of larger than
forecast overtime costs. In addition, the report noted that BOE has estimated
that it could lose additional funding of up to $453 million in the 1997 fiscal
year due to reductions in Federal and State aid.
With respect to the economy, the report noted that only 80,000 of the
310,000 private sector jobs lost during 1990 and 1992 have been regained, and
that the growth in private sector employment has been substantially offset by
the continuing contraction of Federal, State and local government jobs in the
City. The report further noted that most of the growth in local output is the
result of a substantial increase in financial sector salaries and bonus
payments, rather than growth in jobs, and that such rapid compensation growth
could evaporate when stock market growth slows. The report stated that it is
unlikely that the growth in nonproperty taxes projected in the Financial Plan
can be sustained if either the securities industry or the national economy were
to experience a substantial setback at any time over the next four years.
The report concluded that, in spite of the large gap-closing efforts of the
past several years, the City's finances have continued to deteriorate, that
revenue growth is insufficient to support planned expenditures over the term of
the Financial Plan, and that the City continues to rely heavily on
non-recurring actions to balance its budget. The report identified several
factors underlying the City's fiscal problems, including sluggish revenue
growth, which is projected to be below the rate of inflation, a decline in the
real value of Federal and State aid relative to the size of the City's budget,
and the projected growth rate of expenditures, which exceeds the rate of
inflation after the 1997 fiscal year due to the impact of recent labor
settlements, the cost of fringe benefits and growth in Medicaid and debt
service costs. The report stated that the City is at a significant crossroads,
facing a growing gap between revenues and expenditures and approaching its
constitutional borrowing limit, with prospects of receiving additional State
and Federal assistance uncertain.
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.
On October 9, 1995, S & P 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 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.
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; the impact of conditions in
the real estate market on real estate tax revenues; approval by MAC of the
projected receipt of funds from MAC; 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
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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 April 3, 1996, the State announced that the General Fund for the State's
1996 fiscal year is expected to be balanced on a cash basis, with an operating
surplus of $445 million. There can be no assurance that the General Fund will
yield such a surplus.
The Governor presented his 1996-1997 Executive Budget to the Legislature on
December 15, 1995 and subsequently amended it. 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.
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
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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.
DOB 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 the 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. Specifically, the assumption of $1.3 billion in
savings in the State fiscal year 1996-97 from a reduced State General Fund share
of Medicaid is contingent upon anticipated changes to Federal provisions,
including an increase in the Federal share of Medicaid from 50 to 60 percent.
Other 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. 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 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.
On March 15, 1996, the Governor announced that additional projected
resources had been identified for the State fiscal year 1996-97, which could be
used for additional program needs if the Federal government enacts welfare and
Medicaid reform in the near future, or which could be used as part of a
contingency plan, if such reform is not enacted in the State fiscal year
1996-97, to offset the loss of welfare and Medicaid reform benefits to the
State assumed in the 1996-97 Executive Budget.
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. The State budget for the State's 1997 fiscal year was not adopted by the
statutory deadline of April 1, 1996. However, temporary spending measures are
being considered by the State, which would maintain State spending until April
30, 1996. A prolonged 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. In addition, there can be no assurance that State budgets in future
fiscal years will be adopted by the April 1 statutory deadline.
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
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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.
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's 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 stated that the rating for City general obligation bonds remains under
review for a possible downgrade 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. 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.
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
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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 RESTRICTIONS
In addition to the restrictions described under "Investment Limitations" in
the Prospectus, the Fund may not:
(1) own more than 10% of the outstanding voting stock or other securities,
or both, of any one issuer (other than securities of the United States
government or any agency or instrumentality thereof);
(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 (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;
(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;
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(9) 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);
(10) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases, or
(11) purchase warrants.
The investment restrictions described above and in the Prospectus
are fundamental policies of the Fund which may be changed only when permitted by
law and approved by the holders of a majority of the Fund's outstanding voting
securities, as described under "Capital Stock".
MANAGEMENT OF THE FUND
DIRECTORS AND OFFICERS
The principal occupations of the Directors and executive officers
of the Fund for the past five years are listed below. Certain of the Directors
and officers are also Directors and officers of one or more other investment
companies for which Salomon Brothers Asset Management Inc ("SBAM"), the Fund's
investment manager, acts as investment adviser.
<TABLE>
<CAPTION>
Position(s) Principal
Held With Occupation(s)
Name and Address The Company Past 5 Years
- ------------------------------------------------------------------------------------------
<S> <C> <C>
Charles F. Barber** Director Consultant; formerly Chairman
66 Glenwood Drive of the Board, ASARCO
Greenwich, CT 06830 Incorporated.
Age: 79
Michael S. Hyland* Director President, SBAM and
Salomon Brothers Asset and Managing Director, Salomon
Management Inc President Brothers Inc ("Salomon
7 World Trade Center Brothers") since 1989;
New York, NY 10048 formerly Managing Director,
Age: 50 First Boston Asset
Management Corp. and
Managing Director, First
Boston Corporation.
</TABLE>
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<PAGE> 289
<TABLE>
<S> <C> <C>
Carol L. Colman** Director President, Colman Consulting
Colman Consulting Co., Inc. Co., Inc; formerly Managing
P. O. Box 212 Partner of Inferential Focus
North Salem, NY 10560 Inc.
Age: 50
Daniel P. Cronin** Director Vice President and General
Pfizer, Inc. Counsel, Pfizer International
253 East 42nd Street Inc since 1987; Senior
New York, NY 10017 Assistant General Counsel,
Age: 50 Pfizer, Inc. since 1989.
Giampaolo G. Guarnieri Executive Vice President Vice President and Portfolio
Salomon Brothers Asset Manager, SBAM AP since
Management Asia Pacific April 1995; formerly Senior
Limited Portfolio Investment Manager,
Three Exchange Square, Hong Credit Agricole Asset
Kong Management (South East Asia)
Age: 32 Limited since 1992 and head of
direct investment activities
from 1990-1992.
Steven Guterman Executive Vice President Managing Director, SBAM
Salomon Brothers Asset and Salomon Brothers Inc
Management Inc since January 1996; formerly
7 World Trade Center Vice President, SBAM and
New York, NY 10048 Salomon Brothers Inc.
Age: 42
Nancy Noyes Vice President Director, SBAM and Salomon
Salomon Brothers Asset Brothers Inc; formerly Vice
Management Inc President, SBAM and Salomon
7 World Trade Center Brothers Inc.
New York, NY 10048
Age: 38
Peter J. Wilby Executive Vice President Managing Director, SBAM
Salomon Brothers Asset and Salomon Brothers Inc
Management Inc since January 1996; formerly
7 World Trade Center Vice President, SBAM and
New York, NY 10048 Salomon Brothers Inc.
Age: 37
</TABLE>
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<PAGE> 290
<TABLE>
<S> <C> <C>
Richard E. Dahlberg Executive Vice President Managing Director, SBAM
Salomon Brothers Asset and Salomon Brothers Inc
Management Inc since January 1996; formerly
7 World Trade Center Vice President, SBAM and
New York, NY 10048 Salomon Brothers Inc since
Age: 58 June 1995; prior to that
employed by Massachusetts
Financial Services Company.
Lawrence H. Kaplan Executive Vice President Vice President and Chief
Salomon Brothers Asset and General Counsel Counsel, SBAM and Vice
Management Inc President, Salomon Brothers
7 World Trade Center Inc since May 1995; formerly
New York, NY 10048 Senior Vice President,
Age: 39 Secretary, Director and
General Counsel, Kidder
Peabody Asset Management,
Inc. and Senior Vice President,
Kidder, Peabody & Co.
Incorporated since November
1990.
Alan Mandel Treasurer Vice President, SBAM since
Salomon Brothers Asset January 1995; formerly Chief
Management Inc Financial Officer, Hyperion
7 World Trade Center Capital Management since
New York, NY 10048 1991; prior to which he was
Age: 38 Vice President, Mitchell
Hutchins Asset Management,
Inc. (MHAM)
Tana E. Tselepis Secretary Compliance Officer, SBAM
Salomon Brothers Asset since 1993 and Senior
Management Inc Administrator since 1989;
7 World Trade Center Vice President, Salomon
New York, NY 10048 Brothers Inc since 1991;
Age: 60 formerly Vice President and
Senior Administrator, First
Boston Asset Management
Corporation, since 1985.
</TABLE>
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<PAGE> 291
<TABLE>
<S> <C> <C>
Eliza Lau Vice President Vice President, SBAM since
Salomon Brothers Asset 1995; previously research
Management Inc analyst, Salomon Brothers Inc.
7 World Trade Center
New York, NY 10048
Age: 33
Reji Paul Assistant Treasurer Investment Accounting
Salomon Brothers Asset Manager, SBAM since 1995;
Management Inc formerly Assistant Vice
7 World Trade Center President, MHAM since 1994;
New York, NY 10048 prior to which he was
Age: 33 Supervisor at MHAM.
Janet Tolchin Assistant Treasurer Investment Accounting
Salomon Brothers Asset Manager, SBAM.
Management Inc
7 World Trade Center
New York, NY 10048
Age: 37
Jennifer G. Muzzey Assistant Secretary Employee of SBAM since June
Salomon Brothers Asset 1994; formerly Assistant Vice
Management Inc President of SunAmerica Asset
7 World Trade Center Management Corporation.
New York, NY 10048
Age: 36
</TABLE>
- ---------------------------------
* "Interested person" as defined
in the Investment Company
Act of 1940 (the "1940 Act").
** Audit Committee Member.
- ---------------------------------
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<PAGE> 292
Compensation Table
The following table provides information concerning the compensation paid
during the fiscal year ended December 31, 1995 to each director of the Fund. The
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 Fund 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.
<TABLE>
<CAPTION>
Total Compensation from
Aggregate Compensation Other Funds Advised by
Name of Person, Position from the Fund SBAM(A) Total Compensation
- ------------------------ ------------- ------- ------------------
<S> <C> <C> <C>
Charles F. Barber
Director $4,326 $110,149 (12) $114,475 (13)
Carol L. Colman
Director $4,416 $ 28,250 (3) $ 32,666 (4)
Daniel P. Cronin
Director $3,544 $ 26,399 (3) $ 29,943 (4)
</TABLE>
- ---------------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
Directors of the Fund not affiliated with SBAM receive from the Fund 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 from the Fund
but are reimbursed for all out-of-pocket expenses relating to attendance at
meetings.
As of April 15, 1996, Directors and Officers of the Fund as a group
beneficially owned less than 1% of the outstanding shares of the Fund.
As of April 15, 1996, the following individuals or entities beneficially
owned more than 5% of the outstanding shares of the Fund:
<TABLE>
<CAPTION>
Name and Address of Owner Amount of Shares Owned Percent of Shares Owned
<S> <C> <C>
Sandra Atlas Bass 11,612,931.99 6.20%
185 Great Neck Road
Great Neck, NY 11021
Les J. Lieberman 18,335,801.58 9.79%
360 East 88th Street, Apt. 39A
New York, NY 10128
</TABLE>
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<PAGE> 293
INVESTMENT MANAGER
The 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 ("Management Contract") between SBAM and the Fund
provides that SBAM shall manage the operations of the Fund, subject to policy
established by the Board of Directors of the Fund. Pursuant to the Management
Contract, SBAM manages the Fund's investment portfolio, directs purchases and
sales of the Fund's portfolio securities and reports thereon to the Fund's
officers and directors regularly. SBAM also furnishes office space and certain
facilities reasonably necessary for the performance of its services under the
Management Contract, and provides the office space, facilities, equipment and
personnel necessary to perform the following services for the Fund: SEC
compliance, including record keeping, reporting requirements and registration
statements and proxies; supervision of Fund operations, including custodian,
accountants, counsel and other parties performing services or operational
functions for the 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 the 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 the
Fund's officers, employees and directors affiliated with SBAM. The Fund bears
all other costs of its operations, including the compensation of its directors
not affiliated with SBAM.
For its services under the Management Contract, SBAM receives from the Fund
a management fee payable monthly at an annual rate of .20% of the Fund's average
daily net assets. For the fiscal years ended December 31, 1993, December 31,
1994 and December 31, 1995, the Fund paid SBAM $442,512, $468,902 and $449,809,
respectively, for its services. For the fiscal year ended December 31, 1995,
SBAM voluntarily waived $31,455 of its fee.
The Management Contract was initially approved by the Company's Board of
Directors on September 26, 1990 and by the Fund's then sole shareholder, SBAM,
on September 27, 1990 and ratified by shareholders on September 20, 1991. The
Management Contract will continue automatically for successive annual periods
provided that such continuance is approved at least annually by the Company's
Board of Directors or by a vote of a majority (as defined under "Capital Stock")
of the outstanding shares of the Fund and, in either case, by a majority of the
directors who are not parties to the contract or interested persons (as defined
in the 1940 Act) of any party by votes cast in person at a meeting called for
such purpose. The continuation of the Management Agreement was approved through
December 7, 1996 by the Board of Directors on September 6, 1995. The Management
Contract may be terminated by the Company or SBAM on 60 days' written notice,
and will terminate automatically in the event of its assignment.
If expenses borne by the Fund in any fiscal year exceed expense limitations
imposed by applicable state securities regulations, SBAM, in its capacity as
investment manager,
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<PAGE> 294
will reimburse the Company 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.
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 Company 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 manager to the Fund, which policies serve as SBAM'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 also requires
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.
ADMINISTRATOR
The Company employs Investors Bank & Trust Company ("Investors Bank"),
under an Administration Agreement dated as of December 1, 1994 (the
"Administration Agreement"), to provide certain administrative services to the
Fund. The services provided by Investors Bank under the 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 Securities and
Exchange Commission. Investors Bank is located at 89 South Street, Boston, MA
02111.
For its services as administrator to the Fund, the Company pays Investors
Bank a fee, calculated daily and payable monthly, at an annual rate of .08% of
the Fund's aggregate average daily net assets. For the fiscal year ended
December 31, 1993, The Boston Company Advisors, Inc., the Fund's previous
administrator, received fees totaling $177,004 from the Fund. For the fiscal
year ended December 31, 1994, The Boston Company Advisors, Inc. received fees
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<PAGE> 295
totaling $174,144 and Investors Bank received fees totaling $15,878,
respectively. For the fiscal year ended December 31, 1995, Investors Bank
received fees totaling $180,146.
EXPENSES
The 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.
PORTFOLIO TRANSACTIONS
Subject to policy established by the Company's Board of Directors, SBAM is
primarily responsible for the Fund's portfolio decisions and the placing of the
Fund's portfolio transactions.
The Fund's policy of investing in securities with short maturities will
result in high portfolio turnover, as described in the Prospectus.
Portfolio securities 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. The
general policy of the Company in selecting dealers is to obtain the best results
taking into account factors such as the dealer's general execution and
operational facilities, the type and size of the transaction involved, the
creditworthiness of the dealer, the stability of the dealer, execution and
settlement capabilities, time required to negotiate and execute the trade,
overall performance and other factors such as the dealer's risk in positioning
the securities involved and the dealer's spread or mark-up. While SBAM generally
seeks the best price in placing its orders, the Fund may not necessarily be
paying the lowest price available.
Under the 1940 Act, persons affiliated with the Company are prohibited from
dealing with the Company as a principal in the purchase and sale of securities
unless an exemptive order allowing such transactions is obtained from the
Securities and Exchange Commission. However, the Fund may purchase securities
from underwriting syndicates of which SBAM or any of its affiliates (including
Salomon Brothers Inc) is a member under certain conditions, in accordance with
the provisions of a rule adopted under the 1940 Act.
Investment decisions for the Fund are made independently from those for
other funds and accounts advised or managed by SBAM. Such other funds and
accounts may also invest in the same securities as the Fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as the 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 the Fund or the price paid
or received by the Fund. In
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<PAGE> 296
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.
NET ASSET VALUE
As stated in the Prospectus, the Company 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 has established procedures reasonably designed,
taking into account current market conditions and the 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 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.
As stated in the Prospectus, the Fund's net asset value per share for the
purpose of pricing purchase and redemption orders is determined at 12:00 noon
(New York time) on each Business Day. As used in the Prospectus, "Business Day"
refers to those days when the investment manager, the administrator, the
transfer agent, the custodian, the New York Stock Exchange and the Federal
Reserve Bank of New York are all open for business, which is Monday through
Friday except for holidays. As of the date of this Statement of Additional
Information, such holidays are: New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas and the
preceding Friday or subsequent Monday when one of those holidays falls on a
Saturday or Sunday, respectively.
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<PAGE> 297
REDEMPTION IN KIND
If the Board of Directors determines that it is in the best interests of
the remaining shareholders of the Fund, the Fund may pay the redemption price,
in whole or in part, by a distribution in kind from the portfolio of the Fund.
Under the 1940 Act, the 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.
(The 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
The following discussion is a brief summary of certain additional tax
considerations affecting the Fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state and local tax concerns, and
the discussion set forth here and in the Prospectus is not intended as a
substitute for careful tax planning. Investors are urged to consult their own
tax advisers with specific questions relating to federal, state, local or
foreign taxes.
The 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"). To do so, among other things, the Fund must: (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 the 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 the 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 the 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). In meeting these
requirements, the Fund may be restricted in the selling of portfolio securities
held for less than three months and in the utilization of certain of the
investment techniques described under "Additional Investment Activities."
-49-
<PAGE> 298
As a regulated investment company, the Fund will not be subject to Federal
income tax on that portion of income and gains that is distributed to
shareholders, provided that the Fund distributes at least 90% of its net
investment income (which generally includes dividends, taxable interest, and net
short-term capital gains in excess of net long-term capital losses) and 90% of
its net tax-exempt interest income for the taxable year.
The Fund will be subject to a nondeductible 4% excise tax on certain
undistributed ordinary income and capital gains to the extent that the 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) the undistributed income and
gains from the preceding calendar year (if any) pursuant to the calculations in
(a) and (b).
The Fund 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. Except as discussed below,
exempt-interest dividends will be exempt from regular federal income tax and
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, 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 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.
-50-
<PAGE> 299
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. Taxpayers that may be subject to the alternative minimum tax should
consult their tax advisers before investing in the Fund.
Shares of the 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.
Such plans and accounts would not gain any additional benefit from the receipt
of exempt-interest dividends from the Fund because subsequent distributions of
such dividends to the beneficiaries will be taxable.
In addition, the 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 United States
Treasury Regulations to include non-exempt persons who regularly uses a part of
such facilities in their 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 Fund.
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 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 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 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 Fund intends that substantially all
dividends and distributions it pays to its shareholders will be designated as
exempt-interest dividends and as such will be exempt from regular federal
income taxes. However, to the extent the Fund 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. Generally, both
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<PAGE> 300
shareholders and the Fund treat taxable dividends as distributed in the year of
payment. However, dividends declared in October, November or December, payable
to shareholders of record on a specified date in one of those months, will be
treated as having been paid by the Fund and received by shareholders no later
than December 31, as long as actually paid during the following January.
Gain or loss, if any, recognized on the sale of shares of the Fund will
be taxed as capital gain or loss if such shares are capital assets in the
shareholder's hands. Generally, a shareholder's gain or loss will be long-term
gain or loss if the shares have been held for more than one year. The maximum
federal income tax rate imposed on individuals with respect to long-term
capital gains is limited to 28%, whereas the maximum federal income tax rate
imposed on individuals with respect to short-term capital gains (which are
taxed at the same rate as ordinary income) currently, is 39.6%. With respect to
corporate taxpayers, long-term capital gains are taxed at the same federal
income tax rates as short-term capital gain which is currently 35%. If a
shareholder receives an exempt-interest dividend with respect to any share, and
such share is held by the taxpayer for six months or less, then any loss on the
sale of such share will, to the extent of the amount of the dividend, be
disallowed. 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.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends (except 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, (ii) the Internal Revenue Service
notifies the Fund that the payee has failed to report properly certain interest
and dividend income to the Internal Revenue Service 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. Any amounts withheld under the backup
withholding rules from payments made to a shareholder may be credited against
such shareholder's federal income tax liability.
PERFORMANCE DATA
From time to time, the Fund may quote its yield and effective yield in
advertisements or in reports or other communications to shareholders. Yield
quotations are expressed in annualized terms and may be quoted on a compounded
basis.
-52-
<PAGE> 301
The current yield for the 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 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.
Current yield information is useful in reviewing the Fund's performance,
but because current yield will fluctuate, such information may not provide a
basis for comparing an investment in the Fund with bank deposits, savings
accounts or similar investment alternatives that pay a fixed return for a stated
period of time. Investors also should recognize that in periods of declining
interest rates the 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 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. An investor's principal is not guaranteed by the Fund.
For the seven-day period ended December 31, 1995, the annualized yield and
effective yield for the Fund were 4.55% and 4.65%, respectively. For the
seven-day period ended December 31, 1995, the tax equivalent yield for the Fund
was 8.52%, assuming an effective tax rate of 46.6%.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE
Shareholders may exchange all or part of their Fund shares for shares in
certain of the other Salomon Brothers Family of Funds listed in the Prospectus,
to the extent such shares are offered for sale in the shareholder's state of
residence, by contacting First Data Investor Services Group, Inc. ("FDISG"), a
subsidiary of First Data Corporation.
The exchange privilege enables shareholders in any of these funds 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. Prior to any exchange, the shareholder
should obtain and review a copy of the current prospectus of each fund into
which an exchange is to be made. Call or write the Fund at the telephone number
or address printed on the first page of the Statement of Additional Information
for such prospectus.
-53-
<PAGE> 302
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 an 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 may be modified or terminated at any time. The
privilege is not designed for investors trying to catch short-term swings in
market prices by making frequent exchanges. The Fund reserves the right to
impose a limit on the number of exchanges a shareholder may make. Call or write
the Fund for further details.
CAPITAL STOCK
All shares of the Company have equal voting rights and will be voted in the
aggregate, and not by class, except where voting by class is required by law. 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 general matters affecting the Fund and all additional investment
portfolios, means the vote of the lesser of (i) 67% of the Company's shares
represented at a meeting if the holders of more than 50% of the outstanding
shares are present in person or by proxy or (ii) more than 50% of the Company's
outstanding shares. The term "majority", when referring to the approvals to be
obtained from shareholders in connection with matters affecting the Fund or any
other single portfolio (e.g., approval of investment management contracts),
means the vote of the lesser of (i) 67% of the shares of the portfolio
represented at a meeting if the holders of more than 50% of the outstanding
shares of the portfolio are present in person or by proxy or (ii) more than 50%
of the outstanding shares of the portfolio. Shareholders are entitled to one
vote for each full share held and fractional votes for fractional shares held.
Each share of a portfolio of the Company is entitled to such dividends and
distributions out of the assets belonging to that portfolio as are declared in
the discretion of the Company's Board of Directors. In the event of the
liquidation or dissolution of the Company, shares of a portfolio are entitled to
receive the assets allocable to that portfolio which are available for
distribution, and a proportionate distribution, based upon the relative net
assets of the portfolios, of any general assets not belonging to a portfolio
which are available for distribution.
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<PAGE> 303
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, TRANSFER AGENT AND
SHAREHOLDER SERVICING AGENT
Investors Bank, which is located at 89 South Street, Boston, Massachusetts
02111, serves as custodian for the Fund. As the 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
the Fund, nor decide which securities the Fund will buy or sell. For its
services, the custodian receives a monthly fee based upon all Fund assets held
in custody and also receives securities transaction charges, including
out-of-pocket expenses. The assets of the Fund are held under bank custodianship
in compliance with the 1940 Act. The 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.
FDISG, which is located at One Exchange Place, Boston, Massachusetts 02109,
serves as transfer agent for the Fund. As the 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. For
these services, FDISG receives a monthly fee of the Fund's shares and is
reimbursed for out-of-pocket expenses.
VALIDITY OF SHARES
The validity of the shares will be passed upon for the Company by Piper &
Marbury L.L.P., Baltimore, Maryland.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP serves as the independent accountants for the Fund.
The financial statements included in this Statement of Additional Information
have been so included in reliance upon the report of Price Waterhouse LLP,
independent accountants, given on the authority of that firm as experts in
auditing and accounting. Price Waterhouse LLP is located at 1177 Avenue of the
Americas, New York, New York 10036.
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 Securities Act of 1933 with respect
to the securities offered by the Prospectus. Certain portions of the
Registration Statement have been omitted from the
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<PAGE> 304
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.
FINANCIAL STATEMENTS
The Financial Statements contained in the Fund's Annual Report to
Shareholders for the fiscal year ended December 31, 1995 accompany this
Statement of Additional Information. Copies of such Annual Report may be
obtained by calling or writing the Fund at the telephone number or address on
the first page of the Statement of Additional Information.
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<PAGE> 305
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)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Municipal Bonds and Notes--98.8%
New York--92.5%
$ 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 Chantaqua 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 Colonia, New York
Housing Development Corporation VR............... 3.900 01/03/96 730,000
3,525,000 Colonia, New York
Industrial Development Agency PUT................ 4.150 12/01/96 3,525,000
585,000 Colonia, New York
Industrial Development Agency VR................. 5.250 01/04/96 585,000
5,000,000 Connetquat 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
400,00 Erie County, New York
Industrial Development Agency VR................. 5.250 01/04/96 400,000
</TABLE>
See accompanying notes to financial statements.
<PAGE> 306
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)
- ---------------------------------------------------------------------------------------------
<S> <C> <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> 307
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)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <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> 308
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)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <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> 309
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)
- ---------------------------------------------------------------------------------------------
<S> <C> <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> 310
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)
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <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:
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
See accompanying notes to financial statements.
<PAGE> 311
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>
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> 312
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 $ 269,767,995
============= =============
</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> 313
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
Principal on Date of Maturity Value
Amount Description Purchase* Date (Note 1a)
- ---------------------------------------------------------------------------------------------
<S> <C> <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> 314
SALOMON BROTHERS MONEY MARKET FUNDS
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
SALOMON BROTHERS U.S. TREASURY SECURITIES MONEY MARKET FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
<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>
<CAPTION>
- --------------------------------------------------------------------------------
<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> 315
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 assets 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> 316
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> 317
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> 318
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> 319
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> 320
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> 321
SALOMON BROTHERS
INSTITUTIONAL
INVESTMENT SERIES
PROSPECTUS
APRIL 29, 1996
- MONEY MARKET FUND
- HIGH YIELD BOND FUND
- EMERGING MARKETS DEBT FUND
- ASIA GROWTH FUND
----------------------------------------
SALOMON BROTHERS ASSET MANAGEMENT
-----------------------------------------
<PAGE> 322
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).
------------------------------------------------------------------
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 CERTAIN SECURITIES,
COMMONLY REFERRED TO AS JUNK BONDS, WHICH PRESENT A HIGH DEGREE OF RISK. SUCH
LOWER-QUALITY SECURITIES INVOLVE COMPARATIVELY GREATER RISKS, INCLUDING PRICE
VOLATILITY AND THE RISK OF DEFAULT IN THE TIMELY PAYMENT OF INTEREST AND
PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. THE HIGH YIELD BOND FUND AND THE
EMERGING MARKETS DEBT FUND ARE NOT LIMITED IN THE PERCENTAGE OF THEIR ASSETS
WHICH MAY BE INVESTED IN SUCH SECURITIES. THE ASIA GROWTH FUND MAY INVEST UP TO
10% OF ITS TOTAL ASSETS IN NON-CONVERTIBLE SECURITIES OF THIS TYPE AND MAY
INVEST WITHOUT LIMIT IN CONVERTIBLE SECURITIES OF THIS TYPE. SEE "ADDITIONAL
INVESTMENT ACTIVITIES AND RISK FACTORS."
This Prospectus sets forth concisely the information a prospective investor
should know before investing 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 April 29, 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
APRIL 29, 1996
PAGE 1
<PAGE> 323
TABLE OF CONTENTS
- ----------------------------------------------
<TABLE>
<S> <C>
Fee Table 3
Highlights 4
Financial Highlights 5
Benefits of Investing in the Funds 6
Performance Information 7
Investment Objective and Policies 8
Additional Investment Activities and Risk Factors 20
Investment Limitations 30
Purchase and Redemption of Shares 31
Management 35
Dividends, Distributions and Taxes 39
Account Services 42
Capital Stock 42
Appendix A:
Description of Ratings A-1
Appendix B:
General Characteristics and Risks of Derivatives B-1
</TABLE>
PAGE 2
<PAGE> 324
FEE TABLE
------------------------------------
Information in the table below is given as a percentage of average daily net
assets. Shares of each Fund are sold without imposition by the Fund of any sales
charge, deferred sales charge or any other transaction fee.(a)
<TABLE>
<CAPTION>
HIGH EMERGING
MONEY YIELD MARKETS ASIA
MARKET BOND DEBT GROWTH
ANNUAL FUND OPERATING FUND** FUND*** 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++ $6 $18 N/A N/A
Emerging Markets Debt Fund++ $8 $24 N/A N/A
Asia Growth Fund++ $10 $32 N/A N/A
</TABLE>
- --------------------------------------------------------------------------------
(a) Under certain circumstances, certain broker/dealers may impose
transaction fees on the purchase and/or sale of shares. See "Purchase and
Redemption of Shares."
* 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 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.
**** 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 .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 caps of .18%, .55%, .75% and 1.00% discussed above
are in effect throughout the time period shown.
The purpose of the foregoing table is to assist an investor in understanding the
various costs and expenses that an investor in a Fund will incur either directly
or indirectly 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.
PAGE 3
<PAGE> 325
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.
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.
PAGE 4
<PAGE> 326
RISK FACTORS
Prospective investors should consider certain risks associated with an
investment in each Fund.
The medium and low rated and comparable unrated securities in which the High
Yield Bond Fund and the Emerging Markets Debt Fund will invest (commonly
referred to as "junk bonds") involve significantly greater risks than higher
rated securities, including price volatility and risk of default in payment of
interest and principal. The Emerging Markets Debt Fund's investments in
securities of emerging market countries involves certain considerations not
typically associated with investing in securities of U.S. issuers, including
restrictions on foreign investment and on repatriation of capital, currency
fluctuations, price volatility and lesser liquidity or lack of a secondary
trading market, and political and economic risks, including the risk of
nationalization or expropriation of assets. The Asia Growth Fund is subject to
these same risks and, concentration of the Fund's assets in one or a few of the
Asian countries and Asian currencies will subject the Fund, to a greater extent
than if the Fund's assets were less geographically concentrated, to the risks of
adverse changes in the securities and foreign exchange markets of such countries
and social, political or economic events which may occur in such countries.
Additionally, certain Funds may use various investment practices that involve
special considerations, including investing in illiquid securities, zero coupon
and deferred payment securities, loan participations and assignments and
warrants and engaging in repurchase and reverse repurchase agreements and
derivative transactions. See "Investment Objective and Policies" and "Additional
Investment Activities and Risk Factors."
FINANCIAL HIGHLIGHTS
------------------------------------
The following 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.
<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 5
<PAGE> 327
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 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."
PAGE 6
<PAGE> 328
PERFORMANCE INFORMATION
------------------------------------
From time to time, a Fund may advertise its "yield," "effective yield,"
"distribution rate" and/or standardized and nonstandardized "average annual
total return" over various periods of time. Total return figures show the
average annual percentage change in value of an investment in a Fund from the
beginning date of the measuring period to the end of the measuring period. These
figures reflect changes in the price of the shares and assume that any income
dividends and/or capital gains distributions made by a Fund during the period
were reinvested in the Fund.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and ten-year
periods, or the life of a Fund to the extent it has not been in existence for
any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering average total return figures for periods
longer than one year, it is important to note that the total return for any one
year in the period might have been greater or less than the average for the
entire period. "Aggregate total return" figures may be used for various periods,
representing the cumulative change in value of an investment in Fund shares for
the specific period (again reflecting changes in share prices and assuming
reinvestment of dividends and distributions). Aggregate total return may be
shown by means of schedules, charts or graphs and may indicate subtotals of the
various components of total return (i.e., change in the value of initial
investment, income dividends and capital gains distributions).
Yield is calculated in accordance with the SEC's formula. Yield differs from
total return in that it does not consider changes in net asset value.
From time to time, the Money Market Fund may make available information as to
its "yield" and "effective yield." Both yield figures are based on historical
earnings and are not intended to indicate future performance. The "yield" of the
Money Market Fund refers to income generated by an investment in the Fund over a
seven-day period, which period will be stated in the advertisement. This income
is then "annualized." That is, the amount of income generated by the investment
during that week is assumed to be generated each week over a 52-week period and
is shown as a percentage of the investment. The "effective yield" is calculated
similarly but, when annualized, the income earned by an investment in the Fund
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of this assumed reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such as
the S&P 500 Index or other industry or financial publications 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
PAGE 7
<PAGE> 329
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
- --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
PAGE 8
<PAGE> 330
instrumentalities are debt securities issued by agencies or instrumentalities
established or sponsored by the U.S. government and may be backed only by the
credit of the issuing agency or instrumentality. The Fund will invest in such
obligations only where SBAM is satisfied that the credit risk with respect to
the issuer is minimal.
Bank Obligations that may be purchased by the Money Market Fund include
certificates of deposit, commercial paper, bankers' acceptances and fixed time
deposits. Fixed time deposits are obligations of branches of U.S. banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. For a discussion of the risks associated with
investing in bank obligations, see "Additional Information on Portfolio
Instruments and Investment Policies--Bank Obligations" in the Statement of
Additional Information.
The Money Market Fund's investments in corporate debt securities consist of
non-convertible corporate debt securities such as bonds and debentures that have
thirteen months or less remaining to maturity.
The Fund may invest in U.S. dollar-denominated securities of non-U.S. issuers,
including obligations of non-U.S. banks or non-U.S. branches of U.S. banks and
commercial paper and other corporate debt securities of non-U.S. issuers, where
SBAM deems the instrument to present minimal credit risks. Investments in
non-U.S. banks and non-U.S. issuers present certain risks. See "Additional
Investment Activities--Foreign Securities."
The Money Market Fund may invest in floating and variable rate obligations with
stated maturities in excess of thirteen months upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which case
such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding thirteen months. Floating or variable rate obligations
bear interest at rates that are not fixed, but vary with changes in specified
market rates or indices, such as the prime rate, and at specified intervals.
Certain of the floating or variable rate obligations that may be purchased by
the Fund may carry a demand feature that would permit the holder to tender them
back to the issuer at par value prior to maturity. Such obligations include
variable rate master demand notes, which are unsecured instruments issued
pursuant to an agreement between the issuer and the holder that permit the
indebtedness thereunder to vary and provide for periodic adjustments in the
interest rate. The Fund will limit its purchases of floating and variable rate
obligations to those of the same quality as it otherwise is allowed to purchase.
SBAM will monitor on an ongoing basis the ability of an issuer of a demand
instrument to pay principal and interest on demand.
The Money Market Fund may also invest in variable amount master demand notes. A
variable amount master demand note differs from ordinary commercial paper in
that it is issued pursuant to a written agreement between the issuer and the
holder, its amount may from time to time be increased by the holder (subject to
an agreed maximum) or decreased by the holder or the issuer, it is payable on
demand, the rate of interest payable on it varies with an agreed formula and it
is not typically rated by a rating agency.
The Money Market Fund may enter into, or acquire participations in, short-term
borrowing arrangements with corporations, consisting of either a short-term
revolving credit facility or a master note agreement payable upon demand. Under
these arrangements, the borrower may reborrow funds during the term of the
facility. The Fund treats any commitments to provide such advances as a standby
commitment to purchase the borrower's notes.
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.
PAGE 9
<PAGE> 331
Alternatively, asset-backed securities may be issued as interests, generally in
the form of debt securities, in a special purpose entity organized solely for
the purpose of owning the underlying assets and issuing such securities. In the
latter case, such securities are secured by and payable from a stream of
payments generated by the underlying assets. The assets underlying asset-backed
securities are often a pool of assets similar to one another, such as motor
vehicle receivables or credit card receivables. Alternatively, the underlying
assets may be particular types of securities, various contractual rights to
receive payments and/or other types of assets. Asset-backed securities
frequently carry credit protection in the form of extra collateral, subordinated
certificates, cash reserve accounts, letters of credit or other enhancements.
Any asset-backed securities held by the Fund must comply with its credit quality
requirements and be deemed to have a maturity of thirteen months or less in
accordance with applicable regulations. See "Additional Information on Portfolio
Instruments and Investment Policies" in the Statement of Additional Information.
The Money Market Fund may also invest in high-quality, short-term municipal
obligations that carry yields that are competitive with those of other types of
money market instruments in which the Fund may invest. Dividends paid by the
Fund derived from interest on municipal obligations that may be purchased by it
will be taxable to shareholders for federal income tax purposes because the Fund
will not qualify as an entity that can pass through the tax-exempt character of
such interest.
The Money Market Fund may purchase securities on a firm commitment basis,
including when-issued securities and the Fund may invest in other investment
funds. See "Additional Investment Activities and Risk Factors" for a description
of such securities and their associated risks. The Fund is not currently
authorized to use any of the various investment strategies referred to under
"Additional Investment Activities and Risk Factors--Derivatives." The foregoing
investment policies 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 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
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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 and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. These will typically include the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of the issuer, and the experience and track record of the
issuer's management. SBAM will also review the ratings, if any, assigned to the
security by any recognized rating agencies, although SBAM's judgment as to the
quality of a debt security may differ from that suggested by the rating
published by a rating service. In addition to the foregoing credit analysis,
SBAM will evaluate the relative value of an investment compared with its
perceived credit risk. In selecting securities for the Fund, SBAM intends to
consider the correlation among securities represented in the Fund's portfolio in
an attempt to reduce the risk of exposure to market, industry and issuer
volatility. The High Yield Bond Fund's ability to achieve its investment
objective may be more dependent on SBAM's credit analysis than would be the case
if it invested in higher quality debt securities. A description of the ratings
used by Moody's and S&P is set forth in Appendix A to this Prospectus.
SBAM will be free to invest in high yield debt securities of any maturity and
may adjust the average maturity of the Fund's portfolio from time to time,
depending on SBAM's assessment of the relative yields available on securities of
different maturities and its expectations of future changes in interest rates.
Long-term debt securities generally provide a higher yield than short-term debt
securities, and therefore SBAM expects that, based upon current market
conditions, the Fund's high yield debt securities will initially have an average
maturity of 10 to 15 years.
The High Yield Bond Fund may invest in zero coupon securities, pay-in-kind bonds
and deferred payment securities, each which involve special risk considerations.
See "Additional Investment Activities and Risk Factors--Zero Coupon Securities,
Pay-in-Kind Bonds and Deferred Payment Securities."
The High Yield Fund may also invest in fixed and floating rate loans ("Loans")
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ("Lenders"). The Fund
may invest in such Loans in the form of participations in Loans ("Loan
Participations") and assignments of all or a portion of Loans from third parties
("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
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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."
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.
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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:
Algeria
Argentina
Brazil
Bulgaria
Chile
China
Colombia
Costa Rica
Czech Republic
Dominican Republic
Ecuador
Egypt
Greece
Hungary
India
Indonesia
Ivory Coast
Jamaica
Jordan
Lebanon
Malaysia
Mexico
Morocco
Nicaragua
Nigeria
Pakistan
Panama
Paraguay
Peru
Philippines
Poland
Portugal
Russia
Slovakia
Slovenia
South Africa
Thailand
Trinidad & Tobago
Tunisia
Turkey
Uruguay
Venezuela
Vietnam
Zaire
In selecting emerging market country debt securities for investment, SBAM will
apply a market risk analysis contemplating assessment of factors such as
liquidity, volatility, tax implications, interest rate sensitivity, counterparty
risks and technical market considerations. Currently, investing in many emerging
market country securities is not feasible or may involve unacceptable 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
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mechanism for debtor nations to restructure their outstanding external
indebtedness. For a description of Brady Bonds, see "Additional Investment
Activities and Risk Factors--High Yield Securities" herein and "Additional
Information on Portfolio Instruments and Investment Policies--Brady Bonds" in
the Statement of Additional Information. For a description of Loan
Participations and Assignments, see "Additional Investment Activities and Risk
Factors--Loan Participations and Assignments."
Investments in securities of foreign issuers may involve risks arising from
differences between U.S. and foreign securities markets, including less volume,
much greater price volatility in and relative illiquidity of foreign securities
markets, different trading and settlement practices and less governmental
supervision and regulation, 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, commonly referred to as "junk bonds," involve significantly
greater risks, including price volatility and risk of default of payment of
interest and principal than higher rated securities. An investment in the
Emerging Markets Debt Fund should not be considered as a complete investment
program for all investors. See "Additional Investment Activities and Risk
Factors--Foreign Securities" and "--High Yield Securities." Moreover,
substantial investments in foreign securities may have adverse tax implications
as described under "Dividends, Distributions and Taxes."
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
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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, 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--
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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 more of the Asian Countries, (b) maintain at least
50% of their assets in one or more of the Asian Countries, or (c) have
securities which are traded principally on a stock exchange in an Asian Country.
The Fund is non-diversified within the meaning of the 1940 Act. See "Additional
Investment Activities and Risk Factors--Non-Diversification."
Equity securities in which the Asia Growth Fund may invest include common and
preferred stocks (including convertible preferred stock), bonds, notes and
debentures convertible into common and preferred stock, stock purchase warrants
and rights, equity-linked debt securities, equity interests in trusts,
partnerships, joint ventures or similar enterprises, and American, Global or
other types of Depositary Receipts. Equity-linked debt securities are debt
instruments whose prices are indexed to the prices of equity securities or
securities indices. In other words, the value at maturity or coupon rate of
these equity-linked debt instruments is determined by reference to a specific
instrument or statistic. The performance of equity-linked debt instruments
depends to a great extent on the performance of the security or index to which
they are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, these instruments are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
instruments may be more volatile than the underlying instruments.
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
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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 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.
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FINANCIAL ANALYSIS PROCESS. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ("ROE") and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such as
Asia, as the ability of such companies to capture this growth by using the right
allocation of resources and asset financing is of utmost importance.
VALUATION PROCESS AND VOLATILITY ANALYSIS. The valuation process will focus on
Price Earnings Ratio ("PER") calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
RISK MANAGEMENT AND MACROECONOMIC/TOP-DOWN ANALYSIS. SBAM AP will also consider
macroeconomic variables, such as liquidity and capital flows, foreign equity and
industrial investments and the direction of monetary policies in the Asian
Countries in an effort to capture individual market movements as well as attain
an optimal asset allocation mix and to identify the appropriate risk management
parameters for the Asia Growth Fund. The macroeconomic data SBAM AP will monitor
and analyze includes, but is not limited to, gross domestic product growth,
balance of payments and current account balances, budget deficits or surpluses,
inflation and interest rates. SBAM AP intends to meet with central bankers,
regional economists and strategists on a regular basis to assess the present and
future direction of monetary policies and their likely impact on the markets of
the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt to
control the Fund's overall risk level and to obtain exposure to markets in the
Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities (commonly referred to as "junk bonds"). There is
no limit on the amount of the Fund's assets that can be invested in convertible
securities rated below investment grade. For additional information on these
high yield debt securities, which may involve a high degree of risk, see
"Additional Investment Activities and Risk Factors--High Yield Securities."
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or in
another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government of
an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or
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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.
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.
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ADDITIONAL
INVESTMENT ACTIVITIES
AND RISK FACTORS
------------------------------------
REPURCHASE AGREEMENTS. Each Fund may enter into repurchase agreements for cash
management purposes. A repurchase agreement is a transaction in which the seller
of a security commits itself at the time of sale to repurchase that security
from the buyer at a mutually agreed upon time and price. Each Fund will enter
into repurchase agreements only with dealers, banks or recognized financial
institutions which, in the 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
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
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of interest rates. Purchasing a security on a firm commitment basis can involve
a risk that the market price at the time of delivery may be lower than the
agreed upon purchase price, in which case there could be an unrealized loss at
the time of delivery. A Fund will only make commitments to purchase securities
on a firm commitment basis with the intention of actually acquiring the
securities, but may sell them before the settlement date if it is deemed
advisable. A Fund will establish a segregated account in which it will maintain
liquid assets in an amount at least equal in value to the Fund's commitments to
purchase securities on a firm commitment basis. If the value of these assets
declines, the Fund will place additional liquid assets in the account on a daily
basis so that the value of the assets in the account is equal to the amount of
such commitments.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES. The
High Yield Bond Fund and the Emerging Markets Debt Fund may invest in zero
coupon securities, pay-in-kind bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Certain
zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. A Fund
also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of
their interest in the form of debt or equity securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
The value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, pay-in-kind bonds and deferred payment securities may be issued by a
wide variety of corporate and governmental issuers. Although these instruments
are generally not traded on a national securities exchange, they are widely
traded by brokers and dealers and, to such extent, will not 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
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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 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
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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.
WARRANTS. Certain of the Funds may invest in warrants, which are securities
permitting, but not obligating, their holder to subscribe for other securities.
Warrants do not carry the right to dividends or voting rights with respect to
their underlying securities, and they do not represent any rights in assets of
the issuer. An investment in warrants may be considered speculative. In
addition, the value of a warrant does not necessarily change with the value of
the underlying securities and a warrant ceases to have value if it is not
exercised prior to its expiration date.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers generally, and particularly in emerging market issuers,
involves special considerations which are not typically associated with
investing in securities of U.S. issuers. Investments in securities of foreign
issuers may involve risks arising from differences between U.S. and foreign
securities markets, including less volume, much greater price volatility in and
relative illiquidity of foreign securities markets, different trading and
settlement practices and less governmental supervision and regulation, from
changes in currency exchange rates, from high and volatile rates of inflation,
from economic, social and political conditions and, as with domestic
multinational corporations, from fluctuating interest rates.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase the costs and expenses of a Fund.
Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional taxes
on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund. In
addition, if a deterioration occurs in an emerging market country's balance of
payments, it could impose temporary restrictions on foreign capital remittances.
Investing in local markets in emerging market countries may require a Fund to
adopt special procedures, seek local government approvals or take other actions,
each of which may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign taxes on
certain amounts of a Fund's income which may reduce the net return on foreign
investments as compared to income received from a U.S. issuer, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a Fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a Fund to
recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may
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require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately reflect
the real condition of those issuers and securities markets. Finally, in the
event of a default of any such foreign obligations, it may be more difficult for
a Fund to obtain or enforce a judgment against the issuers of such obligations.
See "--High Yield Securities."
For a further discussion of certain risks involved in investing foreign
securities, particularly of emerging market issuers, see "Additional Information
on Portfolio Instruments and Investment Policies--Foreign Securities" in the
Statement of Additional Information.
FIXED-INCOME SECURITIES. Except to the extent that values are affected
independently by other factors such as developments relating to a specific
issuer, when interest rates decline, the value of a fixed-income portfolio can
generally be expected to rise. Conversely, when interest rates rise, the value
of a fixed-income portfolio can generally be expected to decline. Prices of
longer term securities generally increase or decrease more sharply than those of
shorter term securities in response to interest rate changes, particularly if
such securities were purchased at a discount. Because the High Yield Bond Fund
and the Emerging Markets Debt Fund will invest primarily in fixed-income
securities, the net asset value of these Funds' shares can be expected to change
as general levels of interest rates fluctuate. It should be noted that the
market values of securities rated below investment grade and comparable unrated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities.
In addition, many fixed-income securities contain call or buy-back features that
permit their issuers to call or repurchase the securities from their holders.
Such securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a "call option" and redeems the security during a time of
declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate of
return to the Fund.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Emerging Markets Debt
Fund may invest without limitation in high yield securities. The Asia Growth
Fund may invest without limitation in convertible non-U.S. high yield securities
and up to 10% of its total assets in non-convertible non-U.S. high yield
securities. Under rating agency guidelines, medium- and lower-rated securities
and comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest or
principal. Such securities are considered speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such ratings,
however, are relative and subjective, are not absolute standards of quality, are
subject to change and do not evaluate the market risk or liquidity of the
securities. Ratings of a non-U.S. debt instrument, to the extent that those
ratings are undertaken,
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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 these securities also tend to be more sensitive
to individual corporate developments and changes in economic conditions than
higher-rated securities. In addition, such securities present a higher degree of
credit risk. Issuers of these securities are often highly leveraged and may not
have more traditional methods of financing available to them, so that their
ability to service their debt obligations during an economic downturn or during
sustained periods of rising interest rates may be impaired. The risk of loss due
to default by such issuers is significantly greater than with investment grade
securities because such securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. A Fund also may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
The development of a market for high yield corporate securities generally, and
non-U.S. securities in particular, is relatively new and may undergo significant
changes in the future.
High yield corporate securities in which the applicable Funds may invest will
generally be unsecured. Most of the debt securities will bear interest at fixed
rates but a Fund may also invest in securities with variable rates of interest
or which involve equity features, such as contingent interest or participations
based on revenues, sales or profits (i.e., interest or other payments, often in
addition to a fixed rate of return, that are based on the borrower's attainment
of specified levels of revenues, sales or profits and thus enable the holder of
the security to share in the potential success of the venture).
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High Yield Foreign Sovereign Debt Securities. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose a Fund to the
direct or indirect consequences of political, social or economic changes in the
countries that issue the securities. See "--Foreign Securities" above. The
ability and willingness of sovereign obligors in developing and emerging market
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Countries
such as those in which a Fund may invest have historically experienced, and may
continue to experience, high rates of inflation, high interest rates, exchange
rate trade difficulties and extreme poverty and unemployment. Many of these
countries are also characterized by political uncertainty or instability.
Additional factors which may influence the ability or willingness to service
debt include, but are not limited to, a country's cash flow situation, the
availability of sufficient foreign exchange on the date a payment is due, the
relative size of its debt service burden to the economy as a whole, and 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 or other factors, a governmental obligor may
default on its obligations. If such an event occurs, a Fund may have limited
legal recourse against the issuer and/or guarantor. Remedies must, in some
cases, be pursued in the courts of the defaulting party itself, and the ability
of the holder of foreign sovereign debt securities to obtain recourse may be
subject to the political climate in the relevant country. In addition, no
assurance can be given that the holders of commercial bank debt will not contest
payments to the holders of other foreign sovereign debt obligations in the event
of default under their commercial bank loan agreements.
Certain debt obligations, customarily referred to as "Brady Bonds," are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the "Brady Plan").
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be fully or partially collateralized or
uncollateralized and issued in various currencies (although most are U.S. dollar
denominated) and they are actively traded in the over-the-counter secondary
market. U.S. dollar denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at
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maturity by U.S. Treasury zero coupon obligations which have the same maturity
as the Brady Bonds. Certain interest payments on these Brady Bonds may be
collateralized by cash or securities in an amount that, in the case of fixed
rate bonds, is typically equal to between 12 and 18 months of rolling interest
payments or, in the case of floating rate bonds, initially is typically equal to
between 12 and 18 months rolling interest payments based on the applicable
interest rate at that time and is adjusted at regular intervals thereafter with
the balance of interest accruals in each case being uncollateralized. Payment of
interest and (except in the case of principal collateralized Brady Bonds)
principal on Brady Bonds with no or limited collateral depends on the
willingness and ability of the foreign government to make payment. In the event
of a default on collateralized Brady Bonds for which obligations are
accelerated, the collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds distributed.
The collateral will be held by the collateral agent to the scheduled maturity of
the defaulted Brady Bonds, which will continue to be outstanding, at which time
the face amount of the collateral will equal the principal payments which would
have then been due on the Brady Bonds in the normal course. Based upon current
market conditions, a Fund would not intend to purchase Brady Bonds which, at the
time of investment, are in default as to payments. However, in light of the
residual risk of the Brady Bonds and, among other factors, the history of
default with respect to commercial bank loans by public and private entities of
countries issuing Brady Bonds, investments in Brady Bonds are to be viewed as
speculative. A substantial portion of the Brady Bonds and other sovereign debt
securities in which the High Yield Bond Fund and Emerging Markets Debt Fund
invest are likely to be acquired at a discount, which involves certain
considerations discussed below under "Dividends, Distributions and Taxes."
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the Funds may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect a Fund's holdings. Furthermore, certain participants
in the secondary market for such debt may be directly involved in negotiating
the terms of these arrangements and may therefore have access to information not
available to other market participants.
For a further discussion of certain risks involved in investing in foreign
securities, particularly of emerging market issuers, see "Additional Information
on Portfolio Instruments and Investment Policies--Foreign Securities" in the
Statement of Additional Information.
INVESTMENT FUNDS. Certain of the Funds may invest in unaffiliated investment
funds which invest principally in securities in which that Fund is authorized to
invest. Under the 1940 Act, the Fund may invest a maximum of 10% of its total
assets in the securities of other investment companies. In addition, under the
1940 Act, not more than 5% of the Fund's total assets may be invested in the
securities of any one investment company. The Money Market Fund will only invest
in other money market funds which are subject to the requirements of Rule 2a-7
under the 1940 Act and which are considered to present minimal credit risks. To
the extent a Fund invests in other investment funds, the Fund's shareholders
will incur certain duplicative fees and expenses, including investment advisory
fees. A Fund's investment in certain investment funds will result in special
U.S. Federal income tax consequences described below under "Dividends,
Distributions and Taxes."
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BORROWING. Each of the Funds may borrow in certain limited circumstances. See
"Investment Limitations." Borrowing creates an opportunity for increased return,
but, at the same time, creates special risks. For example, borrowing may
exaggerate changes in the net asset value of a Fund's shares and in the return
on the Fund's portfolio. Although the principal of any borrowing will be fixed,
a Fund's assets may change in value during the time the borrowing is
outstanding. A Fund may be required to liquidate portfolio securities at a time
when it would be disadvantageous to do so in order to make payments with respect
to any borrowing, which could affect SBAM's or SBAM AP's strategy and the
ability of the Fund to comply with certain provisions of the Internal Revenue
Code of 1986, as amended (the "Code") in order to provide "pass through" tax
treatment to shareholders. Furthermore, if a Fund were to engage in borrowing,
an increase in interest rates could reduce the value of the Fund's shares by
increasing the Fund's interest expense.
NON-DIVERSIFICATION. The Emerging Markets Debt Fund and the Asia Growth Fund are
classified as non-diversified 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
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
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strategy will dictate the use of one type of transaction rather than another, as
use of any authorized Derivative will be a function of numerous variables,
including market conditions. The ability of a Fund to utilize Derivatives
successfully will depend on, in addition to the factors described above, the
investment manager's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a Fund's
portfolio securities. None of the Funds is a "commodity pool" (i.e., a pooled
investment vehicle which trades in commodity futures contracts and options
thereon and the operator of which is registered with the CFTC), and Derivatives
involving futures contracts and options on futures contracts will be purchased,
sold or entered into only for bona fide hedging purposes, provided that a Fund
may enter into such transactions for purposes other than bona fide hedging if,
immediately thereafter, the sum of the amount of its initial margin and premiums
on open contracts and options would not exceed 5% of the liquidation value of
the Fund's portfolio, after taking into account unrealized profits and losses on
existing contracts provided, further, that, in the case of an option that is
in-the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of certain Derivatives in certain circumstances will require
that a Fund segregate cash, liquid high grade debt obligations or other assets
to the extent a Fund's obligations are not otherwise "covered" through ownership
of the underlying security, financial instrument or currency. Derivatives
involve special risks, including possible default by the other party to the
transaction, illiquidity and, to the extent the investment manager's view as to
certain market movements is incorrect, the risk that the use of Derivatives
could result in significantly greater losses than if it had not been used. Use
of put and call options could result in losses to a Fund, force the purchase or
sale of portfolio securities at inopportune times or for prices higher or lower
than current market values, or cause a Fund to hold a security it might
otherwise sell. The use of currency transactions could result in a Fund
incurring losses as a result of the imposition of exchange controls, suspension
of settlements, or the inability to deliver or receive a specified currency in
addition to exchange rate fluctuations. The use of options and futures
transactions entails certain special risks. In particular, the variable degree
of correlation between price movements of futures contracts and price movements
in the related portfolio position of a Fund could create the possibility that
losses on the Derivative will be greater than gains in the value of the Fund's
position. In addition, futures and options markets could be illiquid in some
circumstances and certain over-the-counter options could have no markets. A Fund
might not be able to close out certain positions without incurring substantial
losses. To the extent a Fund utilizes futures and options transactions for
hedging, such transactions should tend to minimize the risk of loss due to a
decline in the value of the hedged position and, at the same time, limit any
potential gain to the Fund that might result from an increase in value of the
position. Finally, the daily variation margin requirements for futures contracts
create a greater ongoing potential financial risk than would purchases of
options, in which case the exposure is limited to the cost of the initial
premium and transaction costs. Losses resulting from the use of Derivatives will
reduce a Fund's net asset value, and possibly income, and the losses may be
significantly greater than if Derivatives had not been used. Additional
information regarding the risks and special considerations associated with
Derivatives appears in Appendix B to this Prospectus and the Statement of
Additional Information.
The degree of a Fund's use of Derivatives may be limited by certain provisions
of the Code. See "Dividends, Distributions and Taxes."
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
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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 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
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are not considered borrowings (the Fund will not purchase any securities
at any time while such borrowings exceed 5% of the value of its total
assets); or
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in
excess of 20% of the value of its total assets, and then only to secure
borrowings permitted by (3) above.
With respect to investment limitation (1), the Fund intends (as a matter of
non-fundamental policy) to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities) to not more than 5% of the Fund's total assets at
the time of purchase, provided that the Fund may invest up to 25% of its total
assets in the securities of a single issuer for a period of up to three Business
Days.
HIGH YIELD BOND FUND, EMERGING MARKETS DEBT FUND AND
ASIA GROWTH FUND
The High Yield Bond Fund, Emerging Markets Debt Fund and Asia Growth Fund may
not:
(1) With respect to the High Yield Bond Fund only, invest more than 5% of
the current value of its total assets in the securities of any one issuer,
other than obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities; however, up to 25% of the value of the total
assets of the Fund may be invested without regard to this limitation, so
long as no more than 25% of its total assets are invested in the securities
of any one issuer;
(2) borrow money, except for temporary or emergency purposes and then not
in excess of 5% of the value of the total assets of the applicable Fund at
the time the borrowing is made, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (no Fund will purchase
additional securities at any time its borrowings exceed 5% of total
assets); or
(3) invest more than 25% of the total assets of each Fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased
by a Fund).
For purposes of investment limitations (1) and (3) above, both the borrower
under a Loan and the Lender selling a Participation will be considered an
"issuer." See "Additional Investment Activities and Risk Factors--Loan
Participations and Assignments."
PURCHASE AND
REDEMPTION OF SHARES
------------------------------------
NET ASSET VALUE
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each Fund is calculated separately and is determined 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,
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Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day,
and the preceding Friday or subsequent Monday when one of those holidays falls
on a Saturday or Sunday, respectively. Net asset value per share of each Fund is
calculated by dividing the value of the Fund's securities and other assets, less
liabilities, by the number of shares outstanding. In calculating net asset
value, all portfolio securities will be valued at market value when there is a
reliable market quotation available for the securities and otherwise pursuant to
procedures adopted by the applicable Fund's Board of Directors. Securities that
are primarily traded on foreign exchanges generally are valued at the preceding
closing values of such securities on their respective exchanges, except that
when an occurrence subsequent to the time a value was so established is likely
to have changed such value, then the fair value of those securities will be
determined by consideration of other factors by or under the direction of the
applicable Fund's Board of Directors. Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. In valuing a Fund's assets, any assets or
liabilities initially expressed in terms of a foreign currency are converted to
U.S. dollar equivalents at the then current exchange rate. Corporate actions by
issuers of foreign securities held by the Fund, such as payment of dividends or
distributions, are reflected in the net asset value on the ex-dividend date
therefor, except that such actions will be so reflected on the date the Fund is
actually advised of the corporate action if subsequent to the ex-dividend date.
Further information regarding the Funds' valuation policies is contained in the
Statement of Additional Information.
The Money Market Fund uses the amortized cost method to value its portfolio
securities and seeks to maintain a stable net asset value of $1.00 per share.
Each of the other Funds values short-term investments that mature in 60 days or
less at amortized cost. If a Fund acquires securities with more than sixty days
remaining to maturity, they will be valued at current market value until the
60th day prior to maturity, and will then be valued on an amortized cost basis
based upon the value on such date unless the Board determines during such 60-day
period that this amortized cost basis does not represent fair value. The
amortized cost method involves valuing a security at its cost and amortizing 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 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.
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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 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.
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<PAGE> 355
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. If the guarantor institution belongs
to one of the Medallion Signature Programs, it must use the specific Medallion
"Guaranteed" stamp. Notarized signatures are not sufficient. Further
documentation may be required when deemed appropriate by Investors Bank.
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
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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
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.
---------------
Under certain circumstances, certain broker/dealers may impose transaction fees
on the purchase and/or sale of shares.
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 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 $673 million is invested in
high yield securities and
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approximately $1.15 billion of which is invested in emerging market country 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 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
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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 (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>
AVERAGE
ANNUAL
TOTAL TOTAL
1/1/95- RETURN RETURN
1/1/92- 1/1/93- 1/1/94- 2/28/95 1/1/92- 1/1/92-
12/31/92 12/31/93 12/31/94 (ANNUALIZED) 2/28/95 2/28/95
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Offshore Fund I 29.50% 95.05% (13.55)% (5.47)% 106.42% 25.72%
Morgan Stanley Capital International
Combined Asia Ex-Japan Index 18.45 98.80 (18.38) (3.01) 86.42 21.74
</TABLE>
<TABLE>
<CAPTION>
TOTAL
FOR THE MONTH ENDING: RETURN
---------------------------------------------------------------------------- SINCE
9/29/95 10/31/95 11/30/95 12/29/95 1/31/96 2/29/96 3/29/96 INCEPTION
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Offshore Fund II 2.12% (1.16)% 0.21% 4.22% 10.77% (0.61)% 0.09% 16.17%
Morgan Stanley Capital
International
Combined Asia
Ex-Japan Index 1.04 (1.84) (2.40) 4.81 7.65 0.95 0.56 10.87
</TABLE>
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<PAGE> 359
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. In addition, 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, 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 to 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
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<PAGE> 360
distribution to existing shareholders, advisory and administration fees, charges
of the custodian, transfer agent and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each Fund also
pays for brokerage fees and commissions (if any) in connection with the purchase
and sale of portfolio securities.
DIVIDENDS, DISTRIBUTIONS
AND TAXES
------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Money Market Fund intends to declare as a dividend substantially all of its
net investment income at the close of each Business Day to the Fund's
shareholders of record at 12:00 noon (New York time) on that day, and will pay
such dividends monthly. The High Yield Bond Fund, the Emerging Markets Debt Fund
and the Asia Growth Fund will declare dividends from net investment income
annually and pay them annually.
Net investment income is a Fund's investment company taxable income, as that
term is defined in the Code, determined without regard to the deduction for
dividends paid and excluding any net realized capital gains. For the purpose of
calculating dividends, net investment income shall consist of interest earned,
which includes, where applicable, any discount accredited or premium amortized
to the date of maturity, minus estimated expenses.
Shares of a Fund (other than the Money Market Fund, as described below) are
entitled to dividends declared beginning on the day after the purchase order is
received in good order. Purchase orders for shares of the Money Market Fund for
which payment is received in or converted into federal funds by 12:00 noon (New
York time) on any Business Day will become effective that day and begin to earn
dividends on that day. Purchase orders for shares of the Money Market Fund for
which payment is received in or converted into federal funds after 12:00 noon
(New York time) on any Business Day will become effective that day and begin to
earn dividends on the following Business Day. With respect to the Money Market
Fund, shares redeemed by 12:00 noon (New York time) will accrue dividends
through the day prior to redemption, shares redeemed after 12:00 noon (New York
time) will accrue dividends on the day of redemption. Net investment income for
a Saturday, Sunday or holiday will be declared as a dividend on the previous
Business Day.
Net realized short-term capital gains of each Fund, if any, will be distributed
whenever the 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 gains, such distributions may have
the effect of decreasing the Fund's total assets, which may increase the Fund's
expense ratio.
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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.
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 realized long-term capital losses,
are taxable to shareholders as ordinary income.
Distributions of "net capital gains" designated by a Fund as "capital gain
dividends" will be taxable as long-term capital gains, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. A portion of a Fund's dividends may qualify for the
dividends received deduction available to corporations. In general, the maximum
federal income tax rate imposed on individuals with respect to 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
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shortly before the record date of a distribution because distributions will be
taxable even though the net asset value of shares of a Fund is reduced by the
distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of a Fund investing in foreign securities or currencies will be
reduced by these foreign taxes. Shareholders will bear the cost of any foreign
taxes but may not be able to claim a foreign tax credit or deduction for these
foreign taxes. In addition, a Fund investing in securities of passive foreign
investment companies may be subject to U.S. federal income taxes (and interest
on such taxes) as a result of such investments. The investment yield of a Fund
making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed as
capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares. A loss realized on a
sale or exchange of shares may be disallowed if other shares are acquired within
a 61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if a Fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the following January, it will be
deemed to have been received by the shareholders and paid by the Fund no later
than December 31 of the year in which the dividend or distribution is declared.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in Pay-In-Kind
bonds or in obligations such as certain Brady Bonds or zero coupon securities
having original issue discount (i.e., an amount equal to the excess of the
stated redemption price of the security at maturity over its issue price), or
market discount (i.e., an amount equal to the excess of the stated redemption
price of the security over the basis of such bond immediately after it was
acquired) if the Fund elects to accrue market discount on a current basis. In
addition, income may continue to accrue for federal income tax purposes with
respect to a non-performing investment. Any such income would be treated as
income earned by a Fund and therefore would be subject to the distribution
requirements of the Code. Because such income may not be matched by a
corresponding cash distribution to a Fund, such Fund may be required to borrow
money or dispose of other securities to be able to make distributions to its
investors. The extent to which a Fund may liquidate securities at a gain may be
limited by the requirement that less than 30% of its annual gross income be
derived from the sale or other disposition of securities and certain other
investments held for less than three months (the "short-short test"). In
addition, if an election is not made to currently accrue market discount with
respect to a market discount bond, all or a portion of any deduction or any
interest expense incurred to purchase or hold such bond may be deferred until
such bond is sold or otherwise disposed of.
Each Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to
noncorporate shareholders. This tax may be withheld from dividends if (i) the
payee fails to furnish the Fund with the payee's correct taxpayer identification
number (e.g., an individual's social security number), (ii) the Internal Revenue
Service ("IRS") notifies the Fund that the payee has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (iii) when required to do so, the payee
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fails to certify that he or she is not subject to backup withholding. Redemption
proceeds may be subject to withholding under the circumstances described in (i)
above. Backup withholding is not an additional tax and any amounts withheld may
be credited against the shareholder's federal income tax liability.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits tax
will not be payable in respect of profits from the sale of shares and other
securities transacted outside Hong Kong, interest arising or derived from
outside Hong Kong and profits in the nature of capital gains. The sale of
securities will not be treated as the sale of capital assets if the profit or
loss from such sale is regarded as attributable to a trade or business carried
on in Hong Kong. The Asia Growth Fund does not currently believe that it will be
subject to Hong Kong profits tax.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
------------------------
Depending on the residence of the shareholder for tax purposes, distributions
may also be subject to state and local taxes or withholding taxes. Statements
detailing the tax status of each shareholders' dividends and distributions will
be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a Fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding federal,
state, local and foreign tax consequences of ownership of shares in a Fund.
ACCOUNT SERVICES
- ----------------------------------------------
Shareholders of each Fund will be kept informed through semi-annual reports
showing diversification of investments and other financial data for such Fund.
Annual reports for all Funds will include audited financial statements.
Shareholders of each Fund will receive a Statement of Account following each
share transaction, except for shareholders of the Money Market Fund, who will
receive a Statement of Account at least monthly showing transactions in the
account, the total number of shares owned, and any dividends or distributions
paid. Shareholders can write or call a Fund at the address and telephone number
on the front cover of this Prospectus with any questions relating to their
investment in shares of such Fund.
CAPITAL STOCK
- ----------------------------------------------
The Institutional Series Funds was incorporated in Maryland on January 19, 1996.
The authorized capital stock of the Institutional Series Funds consists of
10,000,000,000 shares of common stock having a par value of $.001 per share.
Pursuant to the Institutional Series Funds' Articles of Incorporation, the Board
of Directors has authorized the issuance of three series of shares, each
representing shares in one of three separate funds. The High Yield Bond Fund,
the Emerging Markets Debt Fund and the Asia Growth Fund are the currently
existing portfolios of the Institutional Series Funds. The assets of each Fund
are segregated and separately managed. The Institutional Series Funds' Board of
Directors may, in the future, authorize the issuance of additional classes of
capital stock representing shares of additional investment portfolios.
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The Money Market Fund, a portfolio of the Series Funds, changed its name from
Salomon Brothers U.S. Treasury Securities Money Market Fund to its current name
on March 26, 1996. The Series Funds was incorporated in Maryland on April 17,
1990. On March 26, 1996, shareholders of the Money Market Fund approved a change
in the Fund's investment objective and policies and certain investment
restrictions to those described herein. The authorized capital stock of the
Series Funds consists of 10,000,000,000 shares of common stock having a par
value of $.001 per share. Pursuant to the Series Funds' Articles of
Incorporation and Articles Supplementary, the Board of Directors has authorized
the issuance of ten series of shares, each representing shares in one of ten
separate funds. In addition to the Money Market Fund, the portfolios of the
Series Funds include Salomon Brothers National Intermediate Municipal Fund,
Salomon Brothers U.S. Government Income Fund, Salomon Brothers High Yield Bond
Fund, Salomon Brothers Strategic Bond Fund, Salomon Brothers Total Return Fund,
Salomon Brothers Asia Growth Fund, Salomon Brothers Cash Management Fund,
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,
SBAM and Salomon Brothers Holding Company Inc, the parent company of SBAM, own
all of the outstanding shares of the High Yield Bond Fund, the Emerging Markets
Debt Fund and the Asia Growth Fund, and consequently are controlling persons 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.
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<PAGE> 365
APPENDIX A:
DESCRIPTION OF RATINGS
------------------------------------
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and carry
the service fees smallest degree of investment risk. Interest payments are
protected by a large or by an exceptionally stable margin, and principal is
secure. While the various protective elements are likely to change, such changes
as can be visualized are most unlikely to impair the fundamentally strong
position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks appear
somewhat larger than in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative to a
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1" "2" and "3" to certain of its ratings
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
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STANDARD & POOR'S 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.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
PRIME-1--Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratio, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
PRIME-3--Issuers (or related supporting institutions) rated "Prime-3" have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME--Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
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STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A--S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3--Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt Rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S INVESTORS SERVICE'S MUNICIPAL BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high-quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements pursuant which make
the long term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
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STANDARD & POOR'S 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.
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.
AA--Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
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Plus and minus signs are used by Fitch to indicate the relative position of a
credit within a rating category. Plus and minus signs, however, are not used in
the AAA category.
FITCH SHORT-TERM RATINGS
Fitch short-term ratings apply, to debt obligations that are payable on demand
or have original maturities of, generally, up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
FITCH'S SHORT-TERM RATINGS ARE AS FOLLOWS:
F-1+--Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, although near-term adverse changes
could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by a Fund. However, SBAM will consider such
event in its determination of whether such Fund should continue to hold the
security. To the extent the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, a Fund will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in this Prospectus and in the Statement
of Additional Information.
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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 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
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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, 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
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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 are generally bought and sold on
the commodities exchange on which they are listed with payment of initial and
variation margin as described below. The sale of a futures contract creates a
firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC. Maintaining a futures contract or selling
an option on a futures contract will typically require the Fund to deposit with
a financial intermediary, as security for its obligations, an amount of cash or
other specified asset ("initial margin") that initially is from 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon if, immediately
thereafter, the sum of the amount of its initial margin and premiums required to
maintain permissible non-bona fide hedging positions in futures contracts and
options thereon would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts; however in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are described
below under "Use of Segregated and Other Special Accounts."
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OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
A Fund may purchase and sell call and put options on securities indices and
other financial indices. In doing so, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, options on indices settle by cash settlement; that is, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
comprising the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
CURRENCY TRANSACTIONS
A Fund may engage in currency transactions with Counterparties to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value or to generate income or gain. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional difference among two or more currencies and operates similarly to
an interest rate swap, which is described below under "Swaps, Caps, Floors and
Collars." A Fund may enter into currency transactions only with Counterparties
that the investment manager deems to be creditworthy.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
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Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts."
COMBINED TRANSACTIONS
A Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions,
instead of a single Derivative, as part of a single or combined strategy when,
in the judgment of the investment manager, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions will normally be entered into by a Fund based on the investment
manager's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and equity swap, the purchase or
sale of related caps, floors and collars and other similar arrangements. A Fund
will enter into these transactions primarily to seek to preserve a return or
spread on a particular investment or portion of its portfolio, to protect
against currency fluctuations, as a duration management technique, to protect
against any increase in the price of securities the Fund anticipates purchasing
or selling at a later date or to generate income or gain. Interest rate swaps
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest (for example, an exchange of floating
rate payments for fixed rate payments with respect to a notional amount of
principal). An equity swap is an agreement to exchange cash flows on a national
principal amount based on changes in the values of the reference index. A
currency swap is an agreement to exchange cash flows on a notional amount based
on changes in the values of the currency exchange rates. The purchase of a cap
entitles the purchaser to receive payments on a notional principal amount from
the party selling the cap to the extent that a specified interest rate, currency
exchange rate or index exceeds a predetermined rate or amount. The purchase of a
floor entitles the purchaser to receive payments on a notional principal amount
from the party selling the floor to the extent that a specified interest rate
currency exchange rate or index falls below a predetermined rate or amount. A
collar is a combination of a cap and a floor that preserves a certain return
with a predetermined range of rates or values.
A Fund will usually enter into swaps on a net basis, that is, the two payment
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument with the Fund receiving or paying, as the case may
be, only the net amount of the two payments.
Inasmuch as these swaps, caps, floors, collars and other similar types of
instruments are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act, and,
thus, will not be treated as being subject to the Fund's applicable borrowing
restrictions. A Fund will not enter into any swap, cap, floor, collar or other
similar type of transaction unless the investment manager deems the Counterparty
to be creditworthy. If a Counterparty defaults, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
PAGE B-5
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The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 10% restriction on investment in securities that are not
readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess, if any,
of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If a Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement. See "Use of Segregated and Other Special Accounts" below.
RISK FACTORS
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the Derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gain in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when the investment manager deems
it desirable to do so. To the extent a Fund does not, or cannot, terminate such
a transaction in a timely manner, a Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of the
investment manager entering into the transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
PAGE B-6
<PAGE> 376
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
RISK OF DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Derivatives may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. In addition, the price of any foreign futures or foreign options
contract and, therefore, the potential profit and loss thereon, may be affected
by any variance in the foreign exchange rate between the time an order is placed
and the time it is liquidated, offset or exercised. The value of positions taken
as part of non-U.S. Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of dates on which to make trading decisions than in the United States, (3)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the United States, (4) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States and (5) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Derivatives by a Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with its
custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by a Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by a Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by a Fund
will require the Fund to segregate liquid high grade debt obligations equal to
the exercise price. Except when a Fund enters into a forward contract in
PAGE B-7
<PAGE> 377
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that currency equal to the Fund's obligations or to
segregate liquid high grade debt obligations equal to the amount of the Fund's
obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the Options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating 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-8
<PAGE> 378
TELEPHONES
(800) SALOMON
(800) 725-6666
DISTRIBUTOR
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
Seven World Trade Center
New York, New York 10048
CUSTODIAN, TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP
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 AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY A
FUND, THE DISTRIBUTOR OR THE INVESTMENT MANAGER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFERING IN ANY STATE IN WHICH SUCH OFFERING MAY NOT
LAWFULLY BE MADE.
- --------------------------------------------------------------------------------
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
- --------------------------------------------------------------------------------
SBII-5/96
<PAGE> 379
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 April 29, 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.
April 29, 1996
<PAGE> 380
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> 381
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> 382
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> 383
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, such a demand instrument will be characterized as "not readily marketable"
for such purpose.
A Fund's right to obtain payment at par on a demand instrument could
be affected by events occurring between the date such Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or a third party providing credit support to make payment
when due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than a Fund's custodian subject to a sub-custodian
agreement approved by the Fund between that bank and the Fund's custodian.
<PAGE> 384
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
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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 Standard &
Poor's Rating Services Group ("S&P") or "Ba" or "B" by Moody's or, in cases in
which a rating by S&P or Moody's Investors Services ("Moody's") has not been
assigned, are generally considered by the investment manager to be of
comparable quality.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by
a debtor nation with its creditors. As a result, the financial packages offered
by each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from the face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time and bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady Plan
have generally borne interest computed semiannually at a rate equal to 13/16 of
one percent above the then current six month LIBOR rate. Regardless of the
stated face amount and stated interest rate of the various types of Brady
Bonds, the applicable Funds will purchase Brady Bonds in secondary markets, as
described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Brady Bonds issued to date have traded at a
deep discount from their face value. Certain sovereign bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Certain
Brady Bonds have been collateralized as to principal due at maturity (typically
30 years from the date of issuance) by U.S. Treasury zero coupon bonds with a
maturity equal to the final maturity of such Brady Bonds, although the
collateral is not available to investors until the final maturity of the Brady
Bonds. Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain types of
Brady Bonds may be collateralized by cash or high-grade securities in amounts
that typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest 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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9
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 or
gain, certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside in a segregated account with its
custodian, cash, cash equivalents or high quality debt securities in an amount
equal to the amount of the contract, to be used to pay for the commitment. The
segregated account will be marked-to-market on a daily basis. In addition to
the circumstances set forth in the Prospectus, a Fund may enter into forward
currency exchange contracts when the investment manager believes that the
currency of a particular country may suffer a substantial decline against the
U.S. dollar. In those
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10
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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11
rate from that specified in the contract. In some (but not many) cases,
securities called for by a futures contract may have a shorter term than the
term of the futures contract and, consequently, may not in fact have been
issued when the futures contract was entered.
OPTIONS. As indicated in the Prospectus, in order to hedge against
adverse market shifts or to increase income or gain, certain Funds may purchase
put and call options or write "covered" put and call options on futures
contracts on stock indices, interest rates and currencies. In addition, in order
to hedge against adverse market shifts or to increase its income, a Fund may
purchase put and call options and write "covered" put and call options on
stocks, 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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12
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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13
underlying securities, significant price and rate movements can take place in
the underlying markets that cannot be reflected in the options markets.
(a) Options on Stocks and Stock Indices. A Fund may purchase put and
call options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded over-the-
counter. Options on stock indices are similar to options on specific securities.
However, because options on stock indices do not involve the delivery of an
underlying security, the option represents the holder's right to obtain from
the writer cash in an amount equal to a fixed multiple of the amount by which
the exercise price exceeds (in the case of a put) or is less than (in the case
of a call) the closing value of the underlying stock index on the exercise
date. Currently, options traded include the Standard & Poor's 100 Index of
Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the "S&P 500
Index"), the New York Stock Exchange ("NYSE") Composite Index, the American
Stock Exchange ("AMEX") Market Value Index, the National Over-the-Counter Index
and other standard broadly based stock market indices. Options are also traded
in certain industry or market segment indices such as the Oil Index, the
Computer Technology Index and the Transportation Index. Stock index options are
subject to position and exercise limits and other regulations imposed by the
exchange on which they are traded.
If the investment manager expects general stock market prices to rise,
a Fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If in fact the stock index does rise,
the price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the
value of the Fund's index option or futures contract resulting from the
increase in the index. If, on the other hand, the investment manager expects
general stock market prices to decline, it might purchase a put option or sell
a futures contract on the index. If that index does in fact decline, the value
of some or all of the equity securities in a Fund's portfolio may also be
expected to decline, but that decrease would be offset in part by the increase
in the value of the Fund's position in such put option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income or gain, as described above
in "Forward Currency Exchange Contracts."
(c) Options on Futures Contracts. A Fund may purchase put and call
options and write covered put and call options on futures contracts on stock
indices, interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion of
its investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). While the price of the option is fixed at the point of
sale, the value of the option does change daily and the change would be
reflected in the net asset value of the Fund.
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14
INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain Funds
may enter into interest rate and equity swaps and may purchase or sell (i.e.,
write) interest rate and equity caps, floors and collars. A Fund expects to
enter into these transactions in order to hedge against either a decline in the
value of the securities included in the Fund's portfolio, or against an
increase in the price of the securities which it plans to purchase, or in order
to preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash balances, or
in order to increase income or gain. Interest rate and equity swaps involve the
exchange by a Fund with another party of their respective commitments to make
or receive payments based on a notional principal amount. The purchase of an
interest rate or equity cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined level, to receive payments on a
contractually-based principal amount from the party selling the interest rate
or equity cap. The purchase of an interest rate or equity floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of a
cap and a floor which preserve a certain return within a predetermined range of
values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams
are netted out), with the Fund receiving or paying, as the case may be, only
the net amount of the two payments. The net amount of the excess, if any, of a
Fund's obligations over its entitlements with respect to each interest rate or
equity swap will be accrued on a daily basis, and an amount of cash and/or
liquid high grade debt securities having an aggregate net asset value at least
equal to the accrued excess will be maintained in a segregated account by the
Fund's custodian. If a Fund enters into an interest rate or equity 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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15
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> 394
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, the special purpose entity issuing the
receivables-backed obligations and/or one or more of the issuers of the
underlying receivables will be considered an issuer in accordance with
applicable regulations.
<PAGE> 395
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> 396
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) invest more than 5% of its total assets in securities of
unseasoned issuers (other than securities issued or guaranteed by U.S. federal
or state or foreign governments or agencies, instrumentalities or political
subdivisions thereof) which, including their predecessors, have been in
operation for less than three years;
(12) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets; or
(13) invest in warrants (other than warrants acquired by a Fund as
part of a unit or attached to securities at the time of purchase) if, as a
result, the investments (valued at the lower of cost or market) would exceed 5%
of the value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants that are not listed on AMEX or
NYSE.
Investment restrictions (1) through (5) described above are
fundamental policies of each of the High Yield Bond Fund, Emerging Markets Fund
and Asia Growth Fund. Restrictions (6) through (13) 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> 397
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 purchase
for federal income tax purposes and, depending on the circumstances, a short-
or long-term capital gain or loss may be realized. The price of the shares of
the Fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds immediately invested in shares of the Fund being
acquired at a price equal to the then current net asset value of such shares.
All accounts involved in a telephone or telegram exchange must have
the same registration. If a new account is to be established, the dollar amount
to be exchanged must be at least as much as the minimum initial investment of
the Fund whose shares are being
<PAGE> 398
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> 399
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.
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> 400
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> 401
23
[Directors of Institutional Series Funds to be named]
* Interested Person as defined in the 1940 Act.
<PAGE> 402
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> 403
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>
Certain of the officers and directors of both Institutional Series
Funds and Series Funds are also officers and directors of one or more other
investment companies for which SBAM, the Funds' investment manager, acts as
investment adviser.
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> 404
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> 405
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 Subadvisory 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> 406
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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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 Fund's net long-term capital
gains over net short-term capital losses), if any, that it distributes in each
taxable year to its shareholders, provided that the Fund distributes at least
90% of its net investment income for such taxable year. However, a Fund would
be subject to corporate income tax (currently at a maximum rate of 35%) on any
undistributed net investment income and net capital gains. Each Fund expects to
designate amounts retained as undistributed net capital gains in a notice to
its shareholders who (i) will be required to include in income for United
States federal income tax purposes, as long-term capital gains, their
proportionate shares of the undistributed amount, (ii) will be entitled to
credit their proportionate shares of the 35% tax paid by a Fund on the
undistributed amount, against their federal income tax liabilities and to claim
refunds to the extent such credits exceed their liabilities and (iii) will be
entitled to increase their tax basis, for federal income tax purposes, in their
shares by an amount equal to 65% of the amount of undistributed net capital
gains included in the shareholder's income.
A Fund will be subject to a nondeductible 4% excise tax to the extent that
it does not distribute by the end of each calendar year: (a) at least 98% of
its ordinary income for such calendar year; (b) at least 98% of the excess of
its capital gains over its capital losses for the one year period ending, as a
general rule, on October 31 of each year; and (c) 100% of the undistributed
income and gains from the preceding calendar year (if any) pursuant to the
calculations in (a) and (b). For this purpose any income or gain retained by a
Fund that is subject to corporate tax will be considered to have been
distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or 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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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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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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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 decide 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 transfers 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> 416
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> 417
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> 418
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> 419
Certain officers and/or directors of the Company are officers and/or
directors of the Investment Adviser.
<PAGE> 420
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> 421
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> 422
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> 423
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> 424
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> 425
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> 426
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> 427
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> 428
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> 429
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> 430
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
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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
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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
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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> 434
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> 435
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> 436
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
