<PAGE> 1
As filed with the Securities and Exchange Commission
on January 19, 1996
Registration Nos. 33-34423
811-06087
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /x/
Pre-Effective Amendment No. ___ / /
Post-Effective Amendment No. 17 /x/
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/x/
Amendment No. 19 /x/
SALOMON BROTHERS SERIES FUNDS INC
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(Exact Name of Registrant as Specified in Charter)
7 World Trade Center
New York, New York 10048
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(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (800) 725-6666
Lawrence H. Kaplan, Esq.
Salomon Brothers Asset Management Inc
7 World Trade Center
New York, New York 10048
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(Name and Address of Agent for Service)
Copies to:
Gary Schpero, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
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<PAGE> 2
2
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to Rule 485(b)
/ / on pursuant to Rule 485(b)
/ / 60 days after filing pursuant to Rule 485(a)
/x/ 75 days after filing pursuant to Rule 485(a)
/ / on _______ pursuant to Rule 485(a)
The Registrant has previously registered an indefinite number
of its shares under the Securities Act of 1933, as amended, pursuant to Rule
24f-2 under the Investment Company Act of 1940, as amended. The Registrant
filed its Rule 24f-2 Notice for the fiscal year ended December 31, 1994 on
February 28, 1995.
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<PAGE> 3
3
PRELIMINARY NOTE
The prospectus and statement of additional information for Salomon Brothers New
York Municipal Money Market Fund is incorporated by reference to Post-Effective
Amendment No. 13 as filed with the Securities and Exchange Commission on May 1,
1995.
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4
SALOMON BROTHERS SERIES FUNDS INC
Registration Statement on Form N-1A
CROSS REFERENCE SHEET APPLICABLE TO:
SALOMON BROTHERS CASH MANAGEMENT FUND, SALOMON BROTHERS NEW YORK MUNICIPAL BOND
FUND, SALOMON BROTHERS NATIONAL INTERMEDIATE MUNICIPAL FUND, SALOMON BROTHERS
U.S. GOVERNMENT INCOME FUND, SALOMON BROTHERS HIGH YIELD BOND FUND, SALOMON
BROTHERS STRATEGIC BOND FUND, SALOMON BROTHERS TOTAL RETURN FUND AND SALOMON
BROTHERS INVESTORS FUND INC
Pursuant to Rule 495(b)
under the Securities Act of 1933
<TABLE>
<CAPTION>
N-1A Item No. Location
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Part A Prospectus Caption
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<S> <C> <C>
Item 1. Cover Page Cover Page
Item 2. Synopsis Summary; Expense Information
Item 3. Condensed Financial
Information Financial Highlights;
Performance Information
Item 4. General Description of
Registrant Investment Objectives and Policies;
Additional Investment Activities and
Risk Factors; Investment Limitations;
Capital Stock
Item 5. Management of the Fund Summary; Expense Information; Management;
Purchase of Shares; Back Cover
Item 5A. Management's Discussion of
Performance Not Applicable
Item 6. Capital Stock and Other
Securities Multiple Pricing System; Dividends and
</TABLE>
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5
<TABLE>
<S> <C> <C>
Distributions; Taxation; Account
Services; Capital Stock
Item 7. Purchase of Securities
Being Offered Multiple
Pricing System; Purchase of Shares;
Determination of Net Asset Value;
Dividends and Distributions; Shareholder
Services
Item 8. Redemption or Repurchase Multiple Pricing System; Redemption
of Shares
Item 9. Pending Legal Proceedings Not Applicable
<CAPTION>
Statement of Additional
Part B Information Caption
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<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not applicable
Item 13. Investment Objectives and
Policies Additional Information on Portfolio
Instruments and Investment Policies;
Investment Limitations
Item 14. Management of the Fund Management
Item 15. Control Persons and
Principal Holders
of Securities Management; Capital Stock
Item 16. Investment Advisory and
Other Services Management; Custodian and
Transfer Agent; Independent
Accountants
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
Item 18. Capital Stock and Other
Securities Capital Stock
</TABLE>
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6
<TABLE>
<S> <C> <C>
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered Management; Net Asset Value;
Additional Purchase Information;
Additional Redemption Information
Item 20. Tax Status Additional Information Concerning Taxes
Item 21. Underwriters Management; Additional Purchase Information
Item 22. Calculation of Performance
Data Performance Data
Item 23. Financial Statements Financial Statements
</TABLE>
Part C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of this Registration Statement.
<PAGE> 7
7
SALOMON BROTHERS SERIES FUNDS INC
Registration Statement on Form N-1A
CROSS REFERENCE SHEET APPLICABLE TO:
SALOMON BROTHERS INSTITUTIONAL MONEY MARKET FUND
(formerly known as Salomon Brothers U.S. Treasury Securities
Money Market Fund)
Pursuant to Rule 495(b)
under the Securities Act of 1933
<TABLE>
<CAPTION>
N-1A Item No. Location Prospectus Caption
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<S> <C> <C>
Part A
Item 1. Cover Page Cover Page
Item 2. Synopsis Fee Table
Item 3. Condensed Financial
Information Financial Highlights; Performance
Information
Item 4. General Description of
Registrant Highlights; Investment Objective
and Policies; Additional Investment
Activities and Risk Factors; Investment
Limitations
Item 5. Management of the Fund Highlights; Fee Table; Management;
Purchase and Redemption of Shares
Item 5A. Management's Discussion of
Performance Not Applicable
Item 6. Capital Stock and Other
Securities Highlights; Dividends, Distributions
and Taxes; Capital Stock; Account Services
Item 7. Purchase of Securities
</TABLE>
<PAGE> 8
8
<TABLE>
<S> <C> <C>
Being Offered Highlights; Purchase and Redemption
of Shares; Management; Dividends,
Distributions and Taxes
Item 8. Redemption or Repurchase Highlights; Dividends, Distributions
and Taxes; Purchase and Redemption
of Shares; Management
Item 9. Pending Legal Proceedings Not Applicable
<CAPTION>
Statement of Additional Information
Part B Caption
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<S> <C> <C>
Item 10. Cover Page Cover Page
Item 11. Table of Contents Table of Contents
Item 12. General Information and
History Not applicable.
Item 13. Investment Objectives and
Policies Additional Information on
Portfolio Instruments and
Investment Policies; Investment
Limitations
Item 14. Management of the Fund Management
Item 15. Control Persons and Principal
Holders of Securities Management
Item 16. Investment Advisory and
Other Services Management; Custodian and Transfer
Agent; Independent Accountants
Item 17. Brokerage Allocation and
Other Practices Portfolio Transactions
Item 18. Capital Stock and Other
Securities Capital Stock
</TABLE>
<PAGE> 9
9
<TABLE>
<S> <C> <C>
Item 19. Purchase, Redemption and
Pricing of Securities
Being Offered Management; Net Asset Value;
Additional Purchase and Redemption
Information
Item 20. Tax Status Additional Information Concerning Taxes
Item 21. Underwriters Management; Additional Purchase and
Redemption Information
Item 22. Calculation of Performance
Data Performance Data
Item 23. Financial Statements Financial Statements
</TABLE>
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C of the Registration Statement
<PAGE> 10
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL
PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF SUCH
JURISDICTION.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED JANUARY 19, 1996
SALOMON BROTHERS
INVESTMENT SERIES
PROSPECTUS &
APPLICATION
_________, 1996
- CASH MANAGEMENT FUND
- NEW YORK MUNICIPAL BOND FUND
- NATIONAL INTERMEDIATE MUNICIPAL
FUND
- U.S. GOVERNMENT INCOME FUND
- HIGH YIELD BOND FUND
- STRATEGIC BOND FUND
- TOTAL RETURN FUND
- ASIA GROWTH FUND
- INVESTORS FUND
For Information About Salomon Brothers Investment Series Consult The Following
Prospectus
<PAGE> 11
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SALOMON BROTHERS
INVESTMENT SERIES
7 WORLD TRADE CENTER - NEW YORK, NEW YORK 10048 - (800) SALOMON OR
(800) 725-6666
SALOMON BROTHERS INVESTMENT SERIES CONSISTS OF SALOMON BROTHERS CASH MANAGEMENT
FUND (THE "CASH MANAGEMENT FUND"), SALOMON BROTHERS NEW YORK MUNICIPAL BOND
FUND (THE "NEW YORK MUNICIPAL BOND FUND"), SALOMON BROTHERS NATIONAL
INTERMEDIATE MUNICIPAL FUND (THE "NATIONAL INTERMEDIATE MUNICIPAL FUND"),
SALOMON BROTHERS U.S. GOVERNMENT INCOME FUND (THE "U.S. GOVERNMENT INCOME
FUND"), SALOMON BROTHERS HIGH YIELD BOND FUND (THE "HIGH YIELD BOND FUND"),
SALOMON BROTHERS STRATEGIC BOND FUND (THE "STRATEGIC BOND FUND"), SALOMON
BROTHERS TOTAL RETURN FUND (THE "TOTAL RETURN FUND"), SALOMON BROTHERS ASIA
GROWTH FUND (THE "ASIA GROWTH FUND") AND SALOMON BROTHERS INVESTORS FUND INC
(THE "INVESTORS FUND") (EACH A "FUND" AND COLLECTIVELY, THE "FUNDS"). EACH OF
THE FUNDS, EXCEPT FOR THE INVESTORS FUND, IS AN INVESTMENT PORTFOLIO OF SALOMON
BROTHERS SERIES FUNDS INC, AN OPEN-END MANAGEMENT INVESTMENT COMPANY. THE
INVESTORS FUND IS AN OPEN-END MANAGEMENT INVESTMENT COMPANY. EACH OF THE FUNDS
HAS A SPECIFIC INVESTMENT OBJECTIVE.
continued on next page
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THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE(S)
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. CERTAIN FUNDS MAY INVEST IN HIGH YIELD SECURITIES
WHICH PRESENT A HIGH DEGREE OF RISK. HIGH-YIELDING, LOWER-QUALITY SECURITIES
INVOLVE COMPARATIVELY GREATER RISKS, INCLUDING PRICE VOLATILITY AND THE RISK
OF DEFAULT IN THE TIMELY PAYMENT OF INTEREST AND PRINCIPAL, THAN HIGHER-
QUALITY SECURITIES. SEE "ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS."
This Prospectus sets forth concisely the information a prospective investor
should know before investing in a Fund. This Prospectus should be read and
retained for ready reference to information about a Fund. A Statement of
Additional Information dated , 1996, containing additional
information about each Fund (the "Statement of Additional Information") has been
filed with the Securities and Exchange Commission (the "SEC") and is hereby
incorporated by reference into this Prospectus. It is available without charge
and can be obtained by writing or calling at the address and telephone number
printed above.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC--INVESTMENT MANAGER
SALOMON BROTHERS INC--DISTRIBUTOR
, 1996
PAGE 1
<PAGE> 12
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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<PAGE> 13
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Summary 4
Expense Information 9
Financial Highlights 13
Investment Objectives and Policies 20
Additional Investment Activities and Risk Factors 44
Multiple Pricing System 58
Investment Limitations 63
Management 65
Determination of Net Asset Value 70
Purchase of Shares 71
Redemption of Shares 78
Performance Information 83
Dividends and Distributions 84
Taxation 86
Shareholder Services 90
Account Services 93
Capital Stock 93
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, 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 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
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<PAGE> 15
SALOMON BROTHERS INVESTMENT SERIES
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
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 .___% 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
PAGE 5
<PAGE> 16
SALOMON BROTHERS INVESTMENT SERIES
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 Brother Asset Management
Limited ("SBAM Limited") pursuant to which SBAM Limited will provide certain
advisory services to SBAM relating to currency transactions and investments in
non-dollar denominated debt securities for the benefit of the Fund. Subject to
the supervision of SBAM, Salomon Brothers Asia Pacific Limited ("SBAM AP")
will serve as a sub-adviser to the Asia Growth Fund. SBAM Limited and SBAM AP
are compensated by SBAM at no additional cost to the Funds.
PURCHASE OF SHARES
Shares of each Fund may be purchased at their next determined net asset value
plus, in the case of Class A shares, a front end sales charge, from a selected
dealer or as otherwise set forth under "Purchase of Shares." The minimum initial
investment in any class of shares in any Fund is $500 and the minimum subsequent
investment is $50. However, for Individual Retirement Accounts ("IRAs") and
Self-Employed Retirement Plans (formerly Keogh Plans), the minimum initial
investment in any class of shares of any Fund is $50. In addition, an account
can be established with a minimum of $50 if the account will be receiving
periodic, regular investments through programs such as Automatic Investment
Plans, Automatic Dividend Diversification and Systematic Investing. See
"Purchase of Shares" and "Shareholder Services."
REDEMPTION OF SHARES
Each Fund redeems shares at the applicable next determined net asset value, less
the applicable contingent deferred sales charge ("CDSC"), if any. The value of
shares at the time of redemption may be more or less than the shareholder's
cost, depending on the market value of the securities held by the Fund at such
time. See "Redemption of Shares."
CLASSES OF SHARES
Each Fund offers three classes of shares ("Class A" shares, "Class B" shares and
"Class C" shares) to the general public, with each class having different sales
charge structures and expense levels (the "Multiple Pricing System"). In
addition, each Fund has Class O shares which are offered only to existing Class
O shareholders. Each class has distinct advantages and disadvantages for
different investors, and investors may choose the class that best suits their
circumstances and objectives. See "Multiple Pricing System."
CLASS A SHARES. Class A shares are offered for sale at net asset value per share
plus a front end sales charge of up to 4.75% (with the exception of Class A
shares of the Cash Management Fund, which are offered without such a charge). In
addition, Class A shares are subject to an ongoing 12b-1 service fee at an
annual rate of .25% of their respective average 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
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<PAGE> 17
SALOMON BROTHERS INVESTMENT SERIES
no such fees). Class B shares (except for shares of the Cash Management Fund)
will automatically convert, based upon relative net asset value, to Class A
shares of the same Fund six years after purchase. Upon conversion, these shares
will no longer be subject to an annual distribution fee.
CLASS C SHARES. Class C shares are offered for sale for purchases of less than
$1,000,000, are offered at net asset value without a front end sales charge and
are subject to a CDSC of 1% of the dollar amount subject thereto on redemptions
made within one year of purchase (with the exception of Class C shares of the
Cash Management Fund, which are not subject to any CDSC upon redemption). The
CDSC is assessed on an amount equal to the lesser of the original purchase price
or the redemption price of the shares redeemed. Class C shares are subject to an
ongoing 12b-1 distribution fee at an annual rate of .75% of their respective
average daily net assets and an ongoing 12b-1 service fee at an annual rate of
.25% of their respective average daily net assets (with the exception of Class C
shares of the Cash Management Fund, which bear no such fees). Class C shares
(except for shares of the Cash Management Fund) will automatically convert,
based upon relative net asset value, to Class A shares of the same Fund ten
years after purchase. Upon conversion, these shares will no longer be subject to
an annual distribution fee.
CLASS O SHARES. Each Fund also offers Class O shares. However, only Class O
shareholders are permitted to purchase additional Class O shares. Class O shares
are not subject to any sales charges or 12b-1 fees.
For a discussion of factors to consider in selecting the most beneficial class
of shares for a particular investor, see "Multiple Pricing System--Factors for
Consideration."
DIVIDENDS AND DISTRIBUTIONS
Substantially all of the net investment income of the Cash Management Fund, the
New York Municipal Bond Fund, the National Intermediate Municipal Fund, the
U.S. Government Income Fund, the High Yield Bond Fund, the Strategic Bond Fund
and the Total Return Fund will be declared as a daily dividend, and
shareholders will receive such dividends monthly. The Asia Growth Fund will pay
dividends from net investment income 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."
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,
PAGE 7
<PAGE> 18
SALOMON BROTHERS INVESTMENT SERIES
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 hedging and derivatives
which involve special risks. Because the New York Municipal Bond Fund intends to
significantly invest in New York municipal obligations it is more susceptible
to factors adversely affecting issuers of such obligations than a comparable
municipal securities fund that is not so concentrated. See "Investment
Objectives and Policies" and "Additional Investment Activities and Risk
Factors."
PAGE 8
<PAGE> 19
- --------------------------------------------------------------------------------
EXPENSE INFORMATION
Each Fund offers multiple classes of shares. Each share of a Fund accrues income
in the same manner, but certain expenses differ based upon the class. The
following tables are intended to assist investors in understanding the various
costs and expenses applicable to each class of shares of each Fund:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C CLASS O(d)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
SHAREHOLDERS TRANSACTION EXPENSES
Maximum Sales Charge Imposed on
Purchases
of Shares (as a percentage of
offering price)
All Funds except Cash Management 4.75%(a) None None None
Fund
Cash Management Fund None None None None
Sales Charge Imposed on Reinvested
Dividends
All Funds None None None None
Contingent Deferred Sales Charge
(as a percentage of original
purchase price or redemption
price, whichever is lower)
All Funds except Cash Management 1% during the 5% first year, 1% during None
Fund first year for 5% second year, the first
purchases of 4% third year, year(c)
$1 million or 3% fourth year,
more(b) 2% fifth year,
1% sixth year, and
0% after sixth year(c)
Cash Management Fund None None None None
Redemption Fees
All Funds None None None None
Exchange Fee
All Funds None None None None
</TABLE>
------------------------------------------------------------------
(a) Reduced for purchases of $50,000 and over, decreasing to 0% for purchases
of $1,000,000 and over. See "Purchase of Shares--Class A Shares."
(b) See "Purchase of Shares--Class A Shares" and "Redemption of Shares--
Class A Shares."
(c) See "Purchase of Shares--Class B Shares" and "--Class C Shares" and
"Redemption of Shares--Class B Shares" and "--Class C Shares."
(d) Only Class O shareholders are permitted to purchase additional Class O
shares.
PAGE 9
<PAGE> 20
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. [To be updated with 1995 information]
<TABLE>
<CAPTION>
FUND CLASS A CLASS B CLASS C CLASS O
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH MANAGEMENT
Management fees (after waiver)* ___% ____% ____% ___%
Rule 12b-1 fees ___% ____% ____% ___%
Other expenses** ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses (after waiver)* ___% ____% ____% ___%
NEW YORK MUNICIPAL BOND
Management fees (after waiver)+ ___% ____% ____% ___%
Rule 12b-1 fees*** ___% ____% ____% ___%
Other expenses (after reimbursement)**+ ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses+ ___% ____% ____% ___%
NATIONAL INTERMEDIATE MUNICIPAL
Management fees (after waiver)**** ___% ____% ____% ___%
Rule 12b-1 fees*** ___% ____% ____% ___%
Other expenses (estimated)++ ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses ___% ____% ____% ___%
U.S. GOVERNMENT INCOME
Management fees (after waiver)**** ___% ____% ____% ___%
Rule 12b-1 fees*** ___% ____% ____% ___%
Other expenses (estimated)++ ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses ___% ____% ____% ___%
HIGH YIELD BOND
Management fees (after waiver)**** ___% ____% ____% ___%
Rule 12b-1 fees*** ___% ____% ____% ___%
Other expenses (estimated)++ ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses ___% ____% ____% ___%
STRATEGIC BOND
Management fees (after waiver)**** ___% ____% ____% ___%
Rule 12b-1 fees*** ___% ____% ____% ___%
Other expenses (estimated)++ ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses ___% ____% ____% ___%
TOTAL RETURN
Management fees (after waiver)+++ ___% ____% ____% ___%
Rule 12b-1 fees*** ___% ____% ____% ___%
Other expenses (estimated)++ ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses ___% ____% ____% ___%
ASIA GROWTH
Management fees (after waiver)***** ___% ____% ____% ___%
Rule 12b-1 fees(ooo) ___% ____% ____% ___%
Other Expenses++ ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses
INVESTORS
Management fees ___% ____% ____% ___%
Rule 12b-1 fees*** ___% ____% ____% ___%
Other expenses** ___% ____% ____% ___%
------- ------- ------- --------
Total fund operating expenses ___% ____% ____% ___%
</TABLE>
------------------------------------------------------------------
* Reflects the voluntary waiver of the management fees, which SBAM has
agreed to waive through _______________________. Absent such waiver,
the ratio of management fees and total Fund operating expenses to the
average daily net assets of the Cash Management Fund would be .__% and
.__%, respectively.
** 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.
PAGE 10
<PAGE> 21
SALOMON BROTHERS INVESTMENT SERIES
*** 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 waiver of the management fees, which SBAM has
agreed to waive through _____________________. Absent such waiver,
the ratio of management fees to the average daily net assets
for each class of shares of National Intermediate Municipal, U.S.
Government Income, High Yield Bond and Strategic Bond would be .__%, .__%,
.__% and .__%, respectively, and the ratio of Total Fund operating
expenses to the average daily net assets of (i) National Intermediate
Municipal would be ____%, ____%, ____% and .__% for Class A, Class B,
Class C and Class O, respectively, (ii) U.S. Government Income would be
____%, ____%, ____% and ____.% for Class A, Class B, Class C and Class O,
respectively, (iii) High Yield Bond would be ____%, ____%, ____% and
1.23.% for Class A, Class B, Class C and Class O, respectively, and (iv)
Strategic Bond would be ____%, ____%, ____% and ____.% for Class A, Class
B, Class C and Class O, respectively.
***** Reflects the voluntary waiver of the management fee, which SBAM has agreed
to waive through the fiscal year ended December 31, 1996. Absent such
waiver, the ratio of management fees to the expenses to the average daily
net assets would be .___% and the ratio of management fees to the average
daily net assets for each class would be .___%, .___%, .___% and .___% for
Class A, Class B, Class C and Class 0, respectively.
+ Reflects the voluntary waiver of the management fee which SBAM has agreed
to waive through ________________________. Absent such waiver and
reimbursement, the ratios of management fee and other expenses for each
class of shares to the average daily net assets would be .__% and
.__%, respectively, and the ratio of total Fund operating expenses to the
average daily net assets would be ____%, ____%, ____% and ____% for Class
A, Class B, Class C and Class O, respectively.
++ As of the date of this Prospectus, the Fund had only recently 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.
+++ Reflects the voluntary waiver of the management fee, which SBAM has agreed
to waive through ________________________. Absent such waiver, the
ratio of management fees to the average daily net assets for each class
would be .__% and the ratio of total Fund operating expenses to the
average daily net assets would be ____%, ____%, ____% and ____% for
Class A, Class B, Class C and Class O, respectively.
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> 22
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 table above
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 $ 20 $ 34 $ 76
Class B Shares $ 6 $ 20 $ 34 $ 76
Class C Shares $ 6 $ 20 $ 34 $ 76
Class O Shares $ 6 $ 20 $ 34 $ 76
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 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 $ 47 N/A N/A
Class O Shares $ 5 $ 16 N/A N/A
U.S. GOVERNMENT INCOME
Class A Shares* $56 $ 73 N/A N/A
Class B Shares** $66 $ 90 N/A N/A
Class B No redemption $16 $ 50 N/A N/A
Class C Shares $26 $ 50 N/A N/A
Class O Shares $ 6 $ 19 N/A N/A
HIGH YIELD BOND
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
STRATEGIC BOND
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
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 $47 N/A N/A
Class O Shares $ 5 $16 N/A N/A
ASIA GROWTH
Class A Shares(o) $__ $__ N/A N/A
Class B Shares(oo) $__ $__ N/A N/A
Class B No redemption $__ $__ N/A N/A
Class C Shares $__ $__ N/A N/A
Class O Shares $__ $__ N/A N/A
</TABLE>
PAGE 12
<PAGE> 23
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTORS
Class A Shares* $57 $ 76 $ 97 $158
Class B Shares** $67 $ 93 $112 $162***
Class B No redemption $17 $ 53 $ 92 $162***
Class C Shares $27 $ 53 $ 92 $200
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.
- --------------------------------------------------------------------------------
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 and the Investors Fund for each of the years
in the period ended December 31, 1994 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 for each of
the years in the period ended December 31, 1994 are not presented for Class A
shares, Class B shares or Class C shares or 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 13
<PAGE> 24
SALOMON BROTHERS INVESTMENT SERIES
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
------------------------------
PERIOD ENDED JUNE 30, 1995
PER SHARE OPERATING PERFORMANCE (UNAUDITED)
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD $ 1.000 $ 1.000 $ 1.000
------ ------ ------
Net investment income 0.017 0.016 0.015
Dividends from net investment
income (0.017) (0.016) (0.015)
------ ------ ------
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000
------ ------ ------
------ ------ ------
Net assets, end of period
(thousands) $ 1,163 $ 49 $ 20
TOTAL RETURN* +1.7% +1.6% +1.6%
RATIO TO AVERAGE NET ASSETS BEFORE
WAIVER OF MANAGEMENT FEE
AND/OR EXPENSES ABSORBED BY SBAM:
Net investment income per share $ 0.016 $ 0.015 $ 0.015
Expense ratio 0.75%** 0.75%** 0.75%**
RATIOS TO AVERAGE NET ASSETS AFTER
WAIVER OF MANAGEMENT FEE
AND/OR EXPENSES ABSORBED BY SBAM:
Expenses 0.55%** 0.55%** 0.55%**
Net investment income 6.22%** 5.6%** 5.59%**
</TABLE>
NEW YORK MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
CLASS CLASS CLASS
A B C
------------------------------
PERIOD ENDED JUNE 30, 1995
PER SHARE OPERATING PERFORMANCE (UNAUDITED)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 8.96 $ 8.96 $ 8.96
----- ----- -----
Net investment income 0.17 0.15 0.15
Net gain (loss) on securities and futures (both realized and
unrealized) 0.65 0.65 0.65
----- ----- -----
Total from investment operations 0.82 0.80 0.80
----- ----- -----
Less dividends and distributions:
Dividends from net investment income (0.17) (0.15) (0.15)
Distributions from net realized gain on securities and futures -- -- --
----- ----- -----
Total dividends and distributions (0.17) (0.15) (0.15)
----- ----- -----
NET ASSET VALUE, END OF PERIOD $ 9.61 $ 9.61 $ 9.61
----- ----- -----
----- ----- -----
Net assets, end of period (thousands) $ 276 $ 253 $ 253
TOTAL RETURN* +9.2% +8.9% +8.9%
RATIO TO AVERAGE NET ASSETS BEFORE WAIVER OF MANAGEMENT FEE
AND/OR EXPENSES ABSORBED BY SBAM:
Net investment income per share $ 0.09 $ 0.06 $ 0.06
Expense ratio 3.30%** 4.05%** 4.05%**
RATIOS TO AVERAGE NET ASSETS AFTER WAIVER OF MANAGEMENT FEE
AND/OR EXPENSES ABSORBED BY SBAM:
Expenses 0.75%** 1.5%** 1.5%**
Net investment income 5.27%** 4.54%** 4.54%**
Portfolio turnover rate 11% 11% 11%
</TABLE>
------------------------------------------------------------------
(a) October 2, 1990, commencement of investment operations, through December
31, 1990.
(b) February 1, 1993, commencement of investment operations, through December
31, 1993.
* Total return is calculated assuming a $1,000 investment on the first day
of each period reported, reinvestment of all dividends at the net asset
value on the payable date, and a sale at net asset value on the last day
of each period reported. Initial sales charge or contingent deferred sales
charge is not reflected in the calculation of total return. Total return
calculated for a period of less than one year is not annualized.
** Annualized.
Due to the recent commencement of their offering, the ratios for Class A, Class
B and Class C shares may not necessarily be comparable to that of the Class O
shares and are not necessarily indicative of future ratios.
PAGE 14
<PAGE> 25
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS O
------------------------------------------------------------------
SIX
MONTHS
ENDED PERIOD
JUNE ENDED
30, YEAR ENDED DECEMBER 31, DECEMBER
1995 ------------------------------------------- 31,
(UNAUDITED) 1994 1993 1992 1991 1990(a)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----- ------ ------ ------ ------ ------
0.027 0.038 0.027 0.033 0.055 0.019
(0.027) (0.038) (0.027) (0.033) (0.055) (0.019)
----- ------ ------ ------ ------ ------
$1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
----- ------ ------ ------ ------ ------
----- ------ ------ ------ ------ ------
$8,829 $19,127 $15,049 $11,613 $22,982 $10,293
+2.8% +3.9% +2.7% +3.4% +5.7% +1.9%
$0.026 $ 0.036 $ 0.025 $ 0.030 $ 0.053 $ 0.018
0.75%** 0.81% 0.85% 0.85% 0.85% 0.97%**
0.55%** 0.61% 0.65% 0.65% 0.65% 0.65%**
5.49%** 3.79% 2.68% 3.41% 5.43% 7.46%**
</TABLE>
<TABLE>
<CAPTION>
CLASS O
----------------------------------------------
SIX
MONTHS
ENDED YEAR PERIOD
JUNE ENDED ENDED
30, DECEMBER DECEMBER
1995 31, 31,
(UNAUDITED) 1994 1990(b)
----------------------------------------------
<S> <C> <C>
$ 8.98 $10.44 $10.00
----- ----- -----
0.27 0.55 0.46
0.64 (1.46) 0.46
----- ----- -----
0.91 (0.91) 0.92
----- ----- -----
(0.27) (0.55) (0.46)
-- -- (0.02)
----- ----- -----
(0.27) (0.55) (0.48)
----- ----- -----
$ 9.62 $ 8.98 $10.44
----- ----- -----
----- ----- -----
$3,101 $3,333 $8,364
+10.2% -8.8% +9.4%
$ 0.15 $ 0.49 $ 0.40
3.05%** 1.17% 1.24%**
0.50%** 0.50% 0.50%**
5.67%** 5.72% 4.99%**
11% 63% 24%
</TABLE>
PAGE 15
<PAGE> 26
SALOMON BROTHERS INVESTMENT SERIES
INVESTORS FUND
<TABLE>
<CAPTION>
PERIOD ENDED JUNE 30, 1995
(UNAUDITED)
---------------------------------------
CLASS CLASS CLASS
A B C
---------------------------------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period $13.61 $13.61 $13.61
---- ---- ----
Net investment income 0.08 0.04 0.04
Net gain (or loss) on investments (both realized and unrealized) 2.21 2.21 2.21
---- ---- ----
Total from investment operations 2.29 2.25 2.25
---- ---- ----
Less dividends and distributions:
Dividends from net investment income (0.06) (0.05) (0.05)
Distributions from net realized gain on investments, options and
foreign currency transactions (0.07) (0.07) (0.07)
---- ---- ----
Total dividends and distributions (0.13) (0.12) (0.12)
---- ---- ----
Net asset value, end of period $15.77 $15.74 $15.74
------- ------- -------
------- ------- -------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (thousands) $ 292 $ 333 $ 276
Total return** +16.9% +16.6% +16.6%
Ratios to average net assets:
Expenses 0.96%*** 1.71%*** 1.71%***
Net investment income 1.54%*** 0.81%*** 0.78%***
Portfolio turnover rate 52% 52% 52%
</TABLE>
- --------------------------------------------------------------------------------
* 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.
** 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.
Due to the recent commencement of their offering, the ratios for Class A, Class
B and Class C shares may not necessarily be comparable to that of the Class O
shares and are not necessarily indicative of future ratios.
PAGE 16
<PAGE> 27
SALOMON BROTHERS INVESTMENT SERIES
<TABLE>
<CAPTION>
CLASS O
- --------------------------------------------------------------------------------------------------------------------------------
SIX
MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1995 --------------------------------------------------------------------------------------------------------------
(UNAUDITED) 1994 1993 1992 1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------------------------
<S> <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
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
0.13 0.27 0.32 0.41 0.44 0.49 0.66* 0.52 0.49 0.51
2.15 (0.48) 2.03 0.79 3.68 (1.55) 2.86 1.885 (.32) 2.085
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
2.28 (0.21) 2.35 1.20 4.12 (1.06) 3.32 2.405 .17 2.595
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(0.06) (0.27) (0.33) (0.41) (0.46) (0.55) (.63) (.525) (.51) (.535)
(0.07) (1.49) (2.52) (1.79) (1.10) (0.50) (1.59) (1.10) (2.26) (4.55)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(0.13) (1.76) (2.85) (2.20) (1.56) (1.05) (2.22) (1.625) (2.77) (5.085)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$ 15.78 $ 13.63 $ 15.60 $ 16.10 $ 17.10 $ 14.54 $ 16.65 $ 15.55 $ 14.77 $ 17.37
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
$390,214 $348,214 $386,147 $370,350 $378,615 $330,814 $393,747 $362,742 $352,272 $396,610
+16.8% -1.3% +15.1% +7.4% +29.3% -6.5% +21.8% +16.9% +0.7% +14.4%
0.71%*** 0.69% 0.68% 0.68% 0.70% 0.68% 0.63% 0.67% 0.58% 0.57%
1.78%*** 1.75% 1.90% 2.47% 2.67% 3.13% 3.76% 3.32% 2.37% 2.56%
52% 66% 79% 48% 44% 22% 36% 54% 80% 62%
<CAPTION>
CLASS O
- -----------------------
YEAR ENDED DECEMBER 31,
- -----------------------
1985
- -----------------------
<S> <C>
$ 17.61
------
0.59
3.71
------
4.30
------
(.545)
(1.505)
------
(2.05)
------
$ 19.86
------
------
$403,399
+26.9%
0.62%
3.32%
46%
</TABLE>
- --------------------------------------------------------------------------------
The tables below provide financial highlights of income and capital changes for
one share of each Class of the National Intermediate Municipal Fund, the U.S.
Government Income Fund, the High Yield Bond Fund and the Strategic Bond Fund
outstanding from commencement of operations (February 22, 1995) through June 30,
1995. This information is supplemented by the unaudited financial statements and
accompanying notes incorporated by reference in the Statement of Additional
Information.
PAGE 17
<PAGE> 28
SALOMON BROTHERS INVESTMENT SERIES
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS
A B C O
---------------------------------------
PERIOD ENDED JUNE 30, 1995(a)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.16 0.13 0.13 0.17
Net gain (loss) on investments (both realized and
unrealized) 0.14 0.14 0.14 0.14
------ ------ ------ ------
Total from investment operations 0.30 0.27 0.27 0.31
------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income (0.16) (0.13) (0.13) (0.17)
Distributions from net realized gain on investments -- -- -- --
------ ------ ------ ------
Total dividends and distributions (0.16) (0.13) (0.13) (0.17)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.14 $10.14 $10.14 $10.14
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period (thousands) $ 516 $ 334 $ 254 $9,413
TOTAL RETURN* +3.0% +2.7% +2.7% +3.1%
RATIO TO AVERAGE NET ASSETS BEFORE WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Net investment income per share $ 0.12 $ 0.10 $ 0.10 $ 0.13
Expense ratio 1.78%** 2.53%** 2.53%** 1.53%**
RATIOS TO AVERAGE NET ASSETS AFTER WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Expenses 0.75%** 1.50%** 1.50%** 0.50%**
Net investment income 4.53%** 3.75%** 3.76%** 4.76%**
Portfolio turnover rate 12% 12% 12% 12%
</TABLE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS
A B C O
---------------------------------------
PERIOD ENDED JUNE 30, 1995(a)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.21 0.18 0.18 0.22
Net gain (loss) on investments (both realized and
unrealized) 0.24 0.24 0.24 0.24
------ ------ ------ ------
Total from investment operations 0.45 0.42 0.42 0.46
------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income (0.21) (0.18) (0.18) (0.22)
Distributions from net realized gain on investments -- -- -- --
------ ------ ------ ------
Total dividends and distributions (0.21) (0.18) (0.18) (0.22)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.24 $10.24 $10.24 $10.24
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period (thousands) $ 264 $ 409 $ 256 $9,480
TOTAL RETURN* +4.6% +4.3% +4.3% +4.7%
RATIO TO AVERAGE NET ASSETS BEFORE WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Net investment income per share $ 0.17 $ 0.15 $ 0.15 $ 0.18
Expense ratio 1.93%** 2.68%** 2.68%** 1.68%**
RATIOS TO AVERAGE NET ASSETS AFTER WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Expenses 0.85%** 1.60%** 1.60%** 0.60%**
Net investment income 5.97%** 5.23%** 5.22%** 6.22%**
Portfolio turnover rate 203% 203% 203% 203%
</TABLE>
------------------------------------------------------------------
(a) February 22, 1995, commencement of investment operations, through June
30, 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.
Due to the recent commencement of their offering, the ratios for Class A, Class
B and Class C shares may not necessarily be comparable to that of the Class O
shares and are not necessarily indicative of future ratios.
PAGE 18
<PAGE> 29
SALOMON BROTHERS INVESTMENT SERIES
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS
A B C O
----------------------------------------
PERIOD ENDED JUNE 30, 1995(a)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $ 10.00
------ ------ ------ -------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.36 0.33 0.33 0.37
Net gain (loss) on investments (both realized and
unrealized) 0.46 0.46 0.46 0.46
------ ------ ------ -------
Total from investment operations 0.82 0.79 0.79 0.83
------ ------ ------ -------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income (0.36) (0.33) (0.33) (0.37)
Distributions from net realized gain on investments -- -- -- --
------ ------ ------ -------
Total dividends and distributions (0.36) (0.33) (0.33) (0.37)
------ ------ ------ -------
NET ASSET VALUE, END OF PERIOD $10.46 $10.46 $10.46 $ 10.46
------ ------ ------ -------
------ ------ ------ -------
Net assets, end of period (thousands) $4,239 $ 878 $ 333 $ 9,683
TOTAL RETURN* +8.3% +8.0% +8.0% +8.4%
RATIO TO AVERAGE NET ASSETS BEFORE WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Net investment income per share $ 0.32 $ 0.29 $ 0.30 $ 0.33
Expense ratio 2.25%** 3.00%** 3.00%** 2.00%**
RATIOS TO AVERAGE NET ASSETS AFTER WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Expenses 1.24%** 1.99%** 1.99%** 0.99%**
Net investment income 9.54%** 8.67%** 9.11%** 10.21%**
Portfolio turnover rate 63% 63% 63% 63%
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
CLASS CLASS CLASS CLASS
A B C O
---------------------------------------
PERIOD ENDED JUNE 30, 1995(a)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
NET ASSET VALUE, BEGINNING OF PERIOD $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
INCOME FROM INVESTMENT OPERATIONS:
Net investment income 0.32 0.30 0.30 0.33
Net gain (loss) on investments (both realized and
unrealized) 0.46 0.46 0.46 0.46
------ ------ ------ ------
Total from investment operations 0.78 0.76 0.76 0.79
------ ------ ------ ------
LESS DIVIDENDS AND DISTRIBUTIONS:
Dividends from net investment income (0.32) (0.30) (0.30) (0.33)
Distributions from net realized gain on investments -- -- -- --
------ ------ ------ ------
Total dividends and distributions (0.32) (0.30) (0.30) (0.33)
------ ------ ------ ------
NET ASSET VALUE, END OF PERIOD $10.46 $10.46 $10.46 $10.46
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period (thousands) $ 336 $ 526 $ 269 $9,681
TOTAL RETURN* +7.9% +7.7% +7.7% +8.0%
RATIO TO AVERAGE NET ASSETS BEFORE WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Net investment income per share $ 0.29 $ 0.26 $ 0.27 $ 0.30
Expense ratio 2.10%** 2.85%** 2.85%** 1.85%**
RATIOS TO AVERAGE NET ASSETS AFTER WAIVER OF MANAGEMENT
FEE AND/OR EXPENSES ABSORBED BY SBAM:
Expenses 1.24%** 1.99%** 1.99%** 0.99%**
Net investment income 9.00%** 8.08%** 8.28%** 9.28%**
Portfolio turnover rate 123% 123% 123% 123%
</TABLE>
- ----------------
(a) February 22, 1995, commencement of investment operations, through June
30, 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.
[/R]
SALOMON BROTHERS TOTAL RETURN FUND
<TABLE>
<CAPTION>
Class A Class B Class C Class O
------- ------- ------- -------
PERIOD ENDED DECEMBER 31, 1995 (a)
(UNAUDITED)
------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Net investment income+ 0.15 0.13 0.14 0.17
Net realized and unrealized
gains on investments 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 and expenses
absorbed by Salomon Brothers Asset Management
Inc ("SBAM"), 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>
------------------------------------------------------------------
(a) September 11, 1995, commencement of investment operations, through
December 31, 1995
(b) Per share information calculated using the average shares outstanding
method, which provides a better representation of results.
* 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.
Due to the recent commencement of their offering, the ratios for Class A, Class
B and Class C shares may not necessarily be comparable to that of the Class O
shares and are not necessarily indicative of future ratios.
PAGE 19
<PAGE> 30
- --------------------------------------------------------------------------------
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 Fund,
PAGE 20
<PAGE> 31
SALOMON BROTHERS INVESTMENT SERIES
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 21
<PAGE> 32
SALOMON BROTHERS INVESTMENT SERIES
The Cash Management Fund may also invest in variable amount master demand notes.
A variable amount master demand note differs from ordinary commercial paper in
that it is issued pursuant to a written agreement between the issuer and the
holder, its amount may from time to time be increased by the holder (subject to
an agreed maximum) or decreased by the holder or the issuer, it is payable on
demand, the rate of interest payable on it varies with an agreed formula and it
is not typically rated by a rating agency.
The Cash Management Fund may also purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent undivided
fractional interests in the underlying pool of assets. Alternatively,
asset-backed securities may be issued as interests, generally in the form of
debt securities, in a special purpose entity organized solely for the purpose of
owning the underlying assets and issuing such securities. In the latter case,
such securities are secured by and payable from a stream of payments generated
by the underlying assets. The assets underlying asset-backed securities are
often a pool of assets similar to one another, such as motor vehicle receivables
or credit card receivables. Alternatively, the underlying assets may be
particular types of securities, various contractual rights to receive payments
and/or other types of assets. Asset-backed securities frequently carry credit
protection in the form of extra collateral, subordinate certificates, cash
reserve accounts, letters of credit or other enhancements. Any asset-backed
securities held by the Fund must comply with its portfolio maturity and credit
quality requirements. For a further discussion of asset backed securities and
the risks associated therewith, see "Additional Information on Portfolio
Instruments and Investment Policies--Asset-Backed Securities" in the
Statement of Additional Information.
Among the municipal obligations that the Cash Management Fund may invest in are
participation certificates in a lease, an installment purchase contract or a
conditional sales contract (hereinafter collectively called "lease obligations")
entered into by a State or a political subdivision to finance the acquisition or
construction of equipment, land or facilities. For a further discussion of
municipal lease obligations, see "Additional Investment Activities and Risk
Factors--Municipal Lease Obligations." Certain investments in lease
obligations may be illiquid. The Fund may not invest in illiquid lease
obligations if such investments, together with all other illiquid investments,
would exceed 10% of the Fund's net assets. The Fund may, however, invest
without regard to such limitation in lease obligations which the investment
manager, pursuant to guidelines which have been adopted by
PAGE 22
<PAGE> 33
SALOMON BROTHERS INVESTMENT SERIES
the Board of Directors and subject to the supervision of the Board, determines
to be liquid.
The Cash Management Fund may purchase securities on a firm commitment basis,
including when-issued securities. See "Additional Investment Activities and Risk
Factors--Firm Commitments and When-Issued Securities" for a description of such
securities and their associated risks.
In view of the fundamental policy of the Cash Management Fund to invest at least
25% of its assets in bank obligations, except for temporary defensive purposes
as described above, an investment in the Cash Management Fund should be made
with an understanding of the characteristics of the banking industry and the
risks which such an investment may entail. See "Additional Investment Activities
and Risk Factors--Bank Obligations."
The Cash Management Fund is not authorized to use any of the various investment
strategies referred to under "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
PAGE 23
<PAGE> 34
SALOMON BROTHERS INVESTMENT SERIES
assigned by Moody's Investors Service, Inc. ("Moody's") or Standard and Poor's
Corporation ("S&P"), or determined by the investment manager to be of comparable
quality. The four highest ratings currently assigned by Moody's to municipal
bonds are Aaa, Aa, A and Baa; the four highest ratings assigned by S&P to
municipal bonds are AAA, AA, A and BBB. A description of the ratings used by
Moody's and S&P is set forth in Appendix A to this Prospectus.
Although municipal obligations rated in the fourth highest rating category by
Moody's (i.e., Baa) or S&P (i.e., BBB) are considered investment grade, they may
be subject to greater risks than other higher rated investment grade securities.
Municipal obligations rated Baa by Moody's, for example, are considered medium
grade obligations that lack outstanding investment characteristics and have
speculative characteristics as well. Municipal obligations rated BBB by S&P are
regarded as having an adequate 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
PAGE 24
<PAGE> 35
SALOMON BROTHERS INVESTMENT SERIES
of public authorities to finance various privately operated facilities and are
not payable from the unrestricted revenues of the issuer. As a result, the
credit quality of private activity bonds is frequently related directly to the
credit standing of private corporations or other entities. In addition, the
interest on private activity bonds issued after August 7, 1986 is subject to the
federal alternative minimum tax. The Fund will not be restricted with respect to
the proportion of its assets that may be invested in such obligations.
Accordingly, the Fund may not be a suitable investment vehicle for individuals
or corporations that are subject to the federal alternative minimum tax.
The New York Municipal Bond Fund's portfolio may also include "moral obligation"
securities, which are normally issued by special purpose public authorities. If
the issuer of moral obligation securities is unable to meet its 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-qual-
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ity short-term money market instruments: obligations of the U.S. government or
its agencies or instrumentalities; commercial paper of issuers rated, at the
time of purchase, A-2 or better by S&P or P-2 or better by Moody's or which, in
the opinion of the investment manager, is of comparable quality; certificates of
deposit, banker's acceptances or time deposits of U.S. banks with total assets
of at least $1 billion (including obligations of foreign branches of such banks)
and of the 75 largest foreign commercial banks in terms of total assets
(including domestic branches of such banks), and repurchase agreements with
respect to such obligations.
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 Purchase
Participation Securities, 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
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York public bodies at times have encountered and are encountering financial
difficulties. Although New York State's financial operations improved during the
most recent fiscal years, the State incurred budget deficits during the period
1989 through 1992 and both the State and the City continue to face increasing
debt levels. In the recent national recession, the State has been more heavily
impacted than the nation as a whole and has been slower in recovering. The City
and other State localities have required and continue to require significant
financial assistance from the State. In recent years, the ratings on State and
City general obligation bonds were downgraded by Moody's and S&P. If either New
York State or any of its local governmental entities is unable to meet its
financial obligations, the Fund's net asset value per share and liquidity could
be significantly adversely affected. See "Special Factors Affecting New York
Municipal Securities" in the Statement of Additional Information for further
information.
In addition, from time to time the New York Municipal Bond Fund may invest 25%
or more of its assets in municipal obligations that are related in such a way
that an economic, business or political development or change affecting one such
obligation could also affect the other obligations; for example, municipal
obligations the interest on which is paid from revenues of similar types of
projects.
Opinions relating to the validity of municipal obligations and to the 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
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SALOMON BROTHERS INVESTMENT SERIES
income tax requirements applicable to regulated investment companies. For a
discussion of futures transactions, including certain risks associated
therewith, see "Additional Investment Activities and Risk Factors--Derivatives,"
Appendix B to this Prospectus and the Statement of Additional Information.
The foregoing policies, other than the New York Municipal Bond Fund's investment
objective and its policy to invest at least 65% of its net assets, under normal
market conditions, in obligations the interest on which is exempt from personal
income taxes of New York State and New York City and at least 80% of its net
assets, under normal market conditions, in obligations the interest on which is
exempt from regular federal income taxes, are not fundamental and may be changed
by the Fund's Board of Directors without the approval of shareholders.
NATIONAL INTERMEDIATE MUNICIPAL FUND
The National Intermediate Municipal Fund's investment objective is to achieve a
high level of current income which is exempt from regular federal income taxes.
The Fund seeks to achieve its objective by investing primarily in a portfolio of
municipal obligations. The Fund will invest under normal circumstances, at least
80% of its net assets in municipal obligations the interest on which is 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
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SALOMON BROTHERS INVESTMENT SERIES
rate demand notes), P-2 or better by Moody's, SP-2, A-2 or better by S&P, or F-2
or better by Fitch, or determined by the investment manager to be of comparable
quality.
The National Intermediate Municipal Fund currently intends to invest
substantially all of its assets in obligations the interest on which is exempt
from regular federal income taxes. See "Taxation." However, in order to maintain
liquidity, the Fund may invest up to 20% of its assets in taxable obligations,
including taxable high-quality short-term money market instruments.
If at some future date, in the opinion of the investment manager, adverse
conditions prevail in the market for obligations exempt from regular federal
income taxes, the National Intermediate Municipal Fund may invest its assets
without limit in taxable high-quality short-term money market instruments, the
types and characteristics of which are set forth above in the discussion of
investment objectives and policies of the New York Municipal Bond Fund.
Dividends paid by the Fund that are attributable to interest derived from
taxable money market instruments will be taxable to investors.
Certain of the obligations that the National Intermediate Municipal Fund may
purchase may have a floating or 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
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SALOMON BROTHERS INVESTMENT SERIES
bonds, and the Fund reserves the right to conduct futures transactions based on
an index which may be developed in the future to correlate with price movements
in municipal obligations. The Fund will only enter into futures contracts
traded on recognized domestic exchanges. The Fund does not intend to enter into
futures contracts on a regular basis, and will not do so if, as a result, the
Fund will have more than 25% of the value of its total assets committed
to the completion of such contracts. The Fund will not engage in futures
transactions for leveraging purposes. The Fund's ability to pursue these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. For a discussion of futures transactions, including certain risks
associated therewith, see "Additional Investment Activities and Risk
Factors--Derivatives," Appendix B to this Prospectus and the Statement of
Additional Information.
The foregoing policies, other than the National Intermediate Municipal Fund's
investment objective, are not fundamental and may be changed by the Fund's Board
of Directors without the approval of shareholders.
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
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SALOMON BROTHERS INVESTMENT SERIES
interest rates is a function of that security's duration multiplied by the
percentage point change in interest rates. The Fund may, however, invest in
securities of any maturity or effective duration and accordingly, the
composition and weighted average maturity of the Fund's portfolio will vary from
time to time, based upon the investment manager's determination of how best to
achieve the Fund's investment objective. With respect to mortgage-backed
securities in which the Fund invests, average maturity and duration are
determined by using mathematical models that incorporate prepayment assumptions
and other factors that involve estimates of future economic parameters. These
estimates may vary from actual results, particularly during periods of extreme
market volatility. In addition, the average maturity and duration of
mortgage-backed derivative securities may not accurately reflect the price
volatility of such securities under certain market conditions.
From time to time, a significant portion of the Fund's assets may be invested in
mortgage-backed securities. The mortgage-backed securities in which the U.S.
Government Income Fund invests 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
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SALOMON BROTHERS INVESTMENT SERIES
may lend portfolio securities. The Fund does not currently intend to make loans
of portfolio securities with a value in excess of 33% of the value of its total
assets. The Fund may also enter into mortgage "dollar rolls." For a description
of these investment practices and the risks associated therewith, see
"Additional Investment Activities and Risk Factors."
The U.S. Government Income Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities and
Risk Factors--Restricted Securities and Securities with Limited Trading
Markets."
The U.S. Government Income Fund is not currently authorized to use any of the
various investment strategies referred to under "Additional Investment
Activities and Risk Factors--Derivatives." However, 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.
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SALOMON BROTHERS INVESTMENT SERIES
An investment in the High Yield Bond Fund should not be considered as a complete
investment program for all investors. For further discussion of high yield
securities and the special risks associated therewith, see "Additional
Investment Activities and Risk Factors--High Yield Securities."
In light of the risks associated with high yield corporate and sovereign debt
securities, the investment manager will take various factors into consideration
in evaluating the creditworthiness of an issuer. For corporate debt
securities, these will typically include the issuer's financial resources,
its sensitivity to economic conditions and trends, the operating history of
the issuer, and the experience and track record of the issuer's
management. For sovereign debt instruments, these will typically include the
economic and political conditions within the issuer's country, the issuer's
overall and external debt levels and debt service ratios, the issuer's access
to capital markets and other sources of funding, and the issuer's debt service
payment history. The investment manager will also review the ratings, if any,
assigned to the security by any recognized rating agencies, although the
investment manager's judgment as to the quality of a debt security may differ
from that suggested by the rating published by a rating service. The High
Yield Bond Fund's ability to achieve its investment objective may be more
dependent on the investment manager's credit analysis than would be the case if
it invested in higher quality debt securities. A description of the ratings
used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The investment manager will have discretion to select the range of maturities
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 descrip-
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SALOMON BROTHERS INVESTMENT SERIES
tion 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."
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SALOMON BROTHERS INVESTMENT SERIES
The High Yield Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of the investment manager, such purchase is appropriate.
There may be times when, in the judgment of the investment manager, conditions
in the securities markets would make pursuing the Fund's basic investment
strategy inconsistent with the best interests of the Fund's shareholders. At
such times, the Fund's investment manager may employ alternative strategies,
including investment of a substantial portion of the Fund's assets in securities
rated higher than "Baa" by Moody's or "BBB" by S&P, or of comparable quality. In
addition, in order to maintain liquidity, the Fund may invest up to 35% of its
assets in high-quality short-term money market instruments. Such instruments may
include obligations of the U.S. government or its agencies or instrumentalities;
commercial paper of issuers rated, at the time of purchase, A-2 or better by S&P
or P-2 or better by Moody's or which, in the opinion of the investment manager,
are of comparable 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
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SALOMON BROTHERS INVESTMENT SERIES
which makes the High Yield Bond Fund's investment strategy inconsistent with the
best interests of the Fund's shareholders, the Fund may invest its assets
without limit in high-quality short-term money market instruments.
The High Yield Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. For a
description of these investment practices and the risks associated therewith,
see "Additional Investment Activities and Risk Factors."
The High Yield Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase certain restricted securities
("Rule 144A securities") for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the Securities Act of
1933, as amended (the "1933 Act"). The Fund's holdings of Rule 144A securities
which are liquid securities will not be subject to the 15% limitation on
investments in illiquid securities. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities and
Risk Factors--Restricted Securities and Securities with Limited Trading
Markets."
The High Yield Bond Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." It is not presently anticipated that any of these
strategies will be used to a significant degree by the Fund. The Fund's ability
to pursue certain of these strategies may be limited by applicable regulations
of the SEC, the CFTC and the federal income tax requirements applicable to
regulated investment companies. Appendix B to this Prospectus and the Statement
of Additional Information contain descriptions of these strategies and of
certain risks associated therewith.
The foregoing investment policies, other than the High Yield Bond Fund's
investment objectives, are not fundamental and may be changed by the Fund's
Board of Directors without the approval of shareholders.
STRATEGIC BOND FUND
The primary investment objective of the Strategic Bond Fund is to seek a high
level of current income. As a secondary objective, the Fund will seek capital
appreciation. The Strategic Bond Fund seeks to achieve its objectives by
investing in a globally diverse portfolio of fixed-income investments and by
giving the investment manager broad discretion to deploy the Strategic Bond
Fund's assets among certain segments of the fixed-income market that the
investment manager believes will best contribute to the achievement of the
Fund's objectives. At any point in time, the investment manager will deploy the
Fund's assets based on the investment manager's analysis of current economic and
market conditions and the relative risks and opportunities present in the
following market segments: U.S. government 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
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SALOMON BROTHERS INVESTMENT SERIES
provide certain advisory services to the investment manager relating to currency
transactions and investments in non-dollar-denominated debt securities for the
benefit of the Fund.
The investment manager will determine the amount of assets to be allocated to
each type of security in which it invests based on its assessment of the maximum
level of income and capital appreciation that can be achieved from a portfolio
which is invested in these securities. In making this determination, the
investment manager will rely in part on quantitative analytical techniques that
measure relative risks and opportunities of each type of security based on
current and historical economic, market, political and technical data for each
type of security, as well as on its own assessment of economic and market
conditions both on a global and local (country) basis. In performing
quantitative analysis, the investment manager will employ prepayment analysis
and option adjusted spread technology to evaluate mortgage securities, mean
variance optimization models to evaluate foreign debt securities, and total rate
of return analysis to measure relative risks and opportunities in other
fixed-income markets. Economic factors considered will include current and
projected levels of growth and inflation, balance of payment status and monetary
policy. The allocation of assets to foreign debt securities will further be
influenced by current and expected currency relationships and political and
sovereign factors. The investment manager will continuously review this
allocation of assets and make such adjustments as it deems appropriate. The Fund
does not plan to establish a minimum or a maximum percentage of the assets which
it will invest in any particular type of fixed-income security.
In addition, the investment manager will have discretion to select the range of
maturities of the various fixed-income securities in which the Strategic Bond
Fund invests. The investment manager anticipates that under current market
conditions, the Fund's portfolio securities will have a weighted average life of
6 to 10 years. However, the weighted average life of the portfolio securities
may vary substantially from time to time depending on economic and market
conditions.
The investment grade corporate debt securities and the investment grade foreign
debt securities to be purchased by the Fund are domestic and foreign debt
securities rated within the four highest bond ratings of either Moody's or S&P,
or, if unrated, deemed to be of equivalent quality in the investment manager's
judgment. While debt securities carrying the fourth highest quality rating
("Baa" by Moody's or "BBB" by S&P) are considered investment grade and are
viewed to have adequate capacity for payment of principal and interest,
investments in such securities involve a higher degree of risk than that
associated with investments in debt securities in the higher rating categories
and such debt securities lack outstanding investment characteristics and in fact
have speculative characteristics as well. For example, changes in economic
conditions or other circumstances are more likely to lead to a weakened capacity
to make principal and interest payments than is the case with higher grade debt
securities.
The types and characteristics of the U.S. government obligations and mortgage-
backed securities to be purchased by the Strategic Bond Fund are set forth above
in the discussion of investment objectives and policies for the U.S. Government
Income Fund. In addition, the Fund may 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
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SALOMON BROTHERS INVESTMENT SERIES
set forth below in the section entitled "Additional Investment Activities and
Risk Factors" and in the section entitled "Additional Information on Portfolio
Instruments and Investment Policies" in the Statement of Additional Information.
The Strategic Bond Fund may invest in debt obligations issued or guaranteed by a
foreign sovereign government or one of its agencies or political subdivisions
and debt obligations issued or guaranteed by supranational organizations.
Supranational entities include international organizations designated or
supported by governmental entities to promote economic reconstruction or
development and international banking institutions and related government
agencies. Examples include the International Bank for Reconstruction and
Development (the "World Bank"), the European Coal and Steel Community, the Asian
Development Bank and the Inter-American Development Bank. Such supranational
issued instruments may be denominated in multi-national currency units. The
Strategic Bond Fund will not invest more than 10% of its total assets in issuers
located in any one country (other than issuers located in the United States).
In pursuing the Strategic Bond Fund's investment objectives, the Fund reserves
the right to invest predominantly in medium or lower-rated securities.
Investments of this type involve significantly greater risks, including price
volatility and risk of default in the payment of interest and principal, than
higher-quality securities. Although the investment manager does not anticipate
investing in excess of 75% of the Strategic Bond Fund's assets in domestic and
developing country debt securities that are rated below investment grade, the
Strategic Bond Fund may invest a greater percentage in such securities when, in
the opinion of the investment manager, the yield available from such securities
outweighs their additional risks. The investment manager anticipates that under
current market conditions, a significant portion of the Fund's assets will be
invested in such securities. By investing a portion of the Strategic Bond Fund's
assets in securities rated below investment grade as well as through investments
in mortgage securities and foreign debt securities, the investment manager
expects to provide investors with a higher yield than a high-quality domestic
corporate bond fund. Certain of the debt securities in which the Strategic Bond
Fund may invest may be rated as low as "C" by Moody's or "D" by S&P or may be
considered comparable to securities having such ratings. "Additional
Investment Activities and Risk Factors--High Yield Securities."
In light of the risks associated with high yield corporate and sovereign debt
securities, the investment manager will take various factors into consideration
in evaluating the creditworthiness of an issuer. For corporate debt securities,
these will typically include the issuer's financial resources, its sensitivity
to economic conditions and trends, the operating history of the issuer, and the
experience and track record of the issuer's management. For sovereign debt
instruments, these will typically include the economic and political conditions
within the issuer's country, the issuer's overall and external debt levels and
debt service ratios, the issuer's access to capital markets and other sources of
funding, and the issuer's debt service payment history. The investment manager
will also review the ratings, if any, assigned to the security 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
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SALOMON BROTHERS INVESTMENT SERIES
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 countries. The investment
manager expects that these countries will consist primarily of those which have
issued or have announced plans to issue Brady Bonds, but the Fund is not limited
to investing in the debt of such countries. Brady Bonds are debt securities
issued under the framework of the Brady Plan, an initiative announced by former
U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism for debtor
nations to restructure their outstanding external indebtedness. For a
description of Brady Bonds, see "Additional Investment Activities and Risk
Factors--High Yield Securities" and "Additional Information on Portfolio
Instruments and Investment Policies--Brady Bonds" in the Statement of Additional
Information. The investment manager anticipates that the Fund's investments in
sovereign debt will be concentrated in Latin American countries, including
Central and South American and Caribbean countries. The investment manager also
expects to take advantage of additional opportunities for investment in the debt
of North African countries, such as Nigeria and Morocco, Eastern European
countries, such as Poland and Hungary, and Southeast Asian countries, such as
the Philippines. Sovereign governments may include national, provincial, state,
municipal or other foreign governments with taxing authority. Governmental
entities may include the agencies and instrumentalities of such governments, as
well as state-owned enterprises. For a more detailed discussion on high yield
sovereign debt securities, see "Additional Investment Activities and Risk
Factors--High Yield Securities."
The Strategic Bond Fund will be subject to special risks as a result of its
ability to invest up to 100% of its assets in foreign securities (including
emerging market securities). Such securities may be non-U.S. dollar denominated
and there is no limit on the percentage of the Fund's assets that can be
invested in non-dollar denominated securities. The investment manager
anticipates that under current market conditions, a significant portion of the
Fund's assets will be invested in foreign securities. These risks are described
under the captions "Additional Investment Activities and Risk Factors-- Foreign
Securities." Moreover, substantial investments in foreign securities may have
adverse tax implications as described under "Taxation." The ability to spread
its investments among the fixed-income markets in a number of different
countries may, however, reduce the overall level of market risk to the extent it
may reduce the Strategic Bond Fund's exposure to a single market.
The Strategic Bond Fund may invest in zero coupon securities, pay-in-kind bonds,
Loan Participations and Assignments. See "Additional Investment Activities and
risk Factors-Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment
Securities" and "-Loan Participations and Assignments."
The Strategic Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or
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SALOMON BROTHERS INVESTMENT SERIES
exchange of fixed-income securities, but may also purchase equity securities not
associated with fixed-income securities when, in the opinion of the investment
manager, such purchase is appropriate.
The Strategic Bond Fund currently intends to invest substantially all of its
assets in fixed-income securities. In order to maintain liquidity, the Strategic
Bond Fund may invest up to 20% of its assets in high-quality short-term money
market instruments. If at some future date, in the opinion of the investment
manager, adverse conditions prevail in the market for fixed-income securities,
the Strategic Bond Fund for temporary defensive purposes may invest its assets
without limit in high-quality short-term money market instruments. The types and
characteristics of the money market securities to be purchased by the Fund are
set forth in the discussion of investment objectives and policies of the Cash
Management Fund.
The Strategic Bond Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
does not currently intend to make loans of portfolio securities with a value in
excess of 33% of the value of its total assets. The Fund may also enter into
mortgage "dollar rolls." For a description of these investment practices and the
risks associated therewith, see "Additional Investment Activities and Risk
Factors."
The Strategic Bond Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase Rule 144A securities for which
there is a secondary market of qualified institutional buyers as contemplated by
Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A securities which
are liquid securities will not be subject to the 15% limitation on investments
in illiquid securities. For further discussion of illiquid securities and their
associated risks, see "Additional Investment Activities and Risk
Factors--Restricted Securities and Securities with Limited Trading Markets."
The Strategic Bond Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies, other than the Strategic Bond Fund's
investment objectives, are not fundamental and may be changed by the Fund's
Board of Directors without the approval of shareholders.
TOTAL RETURN FUND
The primary investment objective of the Total Return Fund is to obtain above-
average income (compared to a portfolio entirely invested in equity securities).
The Fund's secondary objective is to take advantage of opportunities for growth
of capital and income. The policy of the 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
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SALOMON BROTHERS INVESTMENT SERIES
economic and market conditions, fiscal and monetary policy and underlying
security values. Under current market conditions, it is anticipated that at
least 40% of the Fund's total assets will be invested in equity securities.
Equity securities include common and preferred stock (including convertible
preferred stock), bonds, notes and debentures convertible into common or
preferred stock, stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises and American, Global or
other types of depositary receipts. Most of the equity securities purchased by
the Fund are expected to be traded on a stock exchange or in an over-the-counter
market.
SBAM will have discretion to invest in the full range of maturities of
fixed-income securities. Generally, most of the Fund's long-term debt
investments will consist of "investment grade" securities (rated Baa or better
by Moody's Investors Service, Inc. ("Moody's") or BBB or better by Standard and
Poor's Ratings Group ("S&P") or Fitch Investors Service, Inc. ("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 the investment objectives and policies for the High Yield
Bond Fund. 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."
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SALOMON BROTHERS INVESTMENT SERIES
The Total Return Fund may invest a portion of its assets in Loan Participations
and Assignments. For a discussion of Loan Participations and Assignments and
their associated risks, see "Additional Investment Activities and Risk Factors
- -- Loan Participation and Assignments."
The Total Return Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. For a
description of these investment practices, see "Additional Investment Activities
and Risk Factors." The Fund will not invest more than 10% of its assets in
repurchase agreements maturing in more than seven days.
The Total Return Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public. The
Fund will not invest more than 15% of the value of its total assets in illiquid
securities, such as "restricted securities" which are illiquid, and securities
that are not readily marketable. As more fully described in the Statement of
Additional Information, the Fund may purchase Rule 144A securities for which
there is a secondary market of qualified institutional buyers as contemplated by
Rule 144A under the 1933 Act. The Fund's holdings of Rule 144A securities which
are liquid securities will not be subject to the 15% limitation on investments
in illiquid securities. For further discussion of illiquid securities and their
associated risks, see "Additional Investment Activities and Risk
Factors--Restricted Securities and Securities with Limited Trading Market."
The Total Return Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors-- Derivatives." With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies may be limited by applicable regulations of the SEC, the
CFTC and the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies, other than the Total Return Fund's investment
objectives, are not fundamental and may be changed by the Board of Directors
without the approval of shareholders.
ASIA GROWTH FUND
The Asia Growth Fund's objective is to achieve long-term capital appreciation.
The Fund seeks to achieve its objective by investing at least 65% of its total
assets in equity and equity-related securities of Asian Companies. Asian
Companies include companies that (i) are organized under the laws of
Bangladesh, China, Hong Kong, India, Indonesia, Korea, Malaysia, Pakistan, the
Philippines, Singapore, Sri Lanka, Taiwan, Thailand or any other country in the
Asian region (other than Japan, Australia and New Zealand) that currently or in
the future permits foreign investment (collectively, "Asian Countries") or
(ii) regardless of where organized and as determined by SBAM AP, (a) derive at
least 50% of their revenues from goods produced or sold, investments made, or
services performed in or with one or more of the Asian 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 include common and preferred stocks (including convertible
preferred stock), bonds, notes and debentures convertible into common and
preferred stock, stock purchase warrants and rights, equity interests in
trusts, partnerships, joint ventures or similar enterprises, and American,
Global or other types of Depositary Receipts. Equity-linked debt securities
are debt instruments whose prices are indexed to the prices of equity
securities or securities indices. In other words, the value at maturity or
coupon rate of these equity-linked debt instruments is determined by reference
to a specific instrument or statistic. The performance of equity-linked debt
instruments depends to a great extent on the performance of the security or
index to which they are indexed, and may also be influenced by interest rate
changes in the United States and abroad. At the same time, these instruments
are subject to the credit risks associated with the issuer of the security, and
their values may decline substantially if the issuer's creditworthiness
deteriorates. Indexed instruments may be more volatile than the underlying
instruments.
There are no prescribed limits on geographic asset distributions among Asian
Countries and from time to time, SBAM AP expects to invest a significant
portion of the Asia Growth Fund's assets in Hong Kong, Malaysia, Singapore and
Thailand. Investments in each of these countries may fromtLime 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 40% of the
Fund's initial investments will be in Hong Kong. Although SBAM AP expects that
most of the equity securities purchased by the Fund will be traded on a stock
exchange or in an over-the-counter market, most of the Asian securities markets
have substantially less volume than U.S. or other established markets and some
of the stock exchanges in the Asian Countries are in the early stages of their
development. Concentration of the Fund's assets in one or a few of the Asian
countries and Asian currencies will subject the Fund, to a greater extent than
if the Fund's assets were less geographically concentrated, to the risks of
adverse changes in the securities and foreign exchange markets of such
countries and social, political or economic events which may occur in those
countries. For a more detailed discussion of the special risks which the Fund
is subject to by virtue of its investment in foreign securities, see
"Additional Investment Activities and Risk Factors--Foreign Securities." An
investment in the Asia Growth Fund should not be considered as a complete
investment program for all investors.
In pursuing the Asia Growth Fund's investment objective, SBAM AP will combine
a traditional fundamental approach towards evaluating industry sectors and
individual securities of Asian Companies with a risk management driven approach
seeking to keep the Fund's volatility of return in line with or lower than that
currently experienced in the Asian markets.
SBAM AP expects to focus on certain industry groups across Asian Countries in
an attempt to identify and capture the relative value of such groups on a
pan-regional basis. SBAM AP will research individual companies in an effort to
identify the investment opportunities within these industry groups which will
provide long-term capital appreciation. In 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 three
following principal (and potentially overlapping) types of approaches.
Pan Regional Industry Group Decisions. SBAM AP will seek to identify the
pan--regional industrial sectors which are likely to exhibit attractive returns
over the long-term. In selecting such industrial sectors, SBAM AP will focus
on industry cycles and competitiveness as well as the industrial
characteristics of the Asian economies. In addition, SBAM AP will review
government regulations, industrial policies, access to technology and
industrial research reports provided by industrial companies or associations
and securities dealers in Asian Countries. SBAM AP will focus on those
industries which represent meaningful weightings in the total market
capitalization of the Asian Countries including, but not limited to,
telecommunications, consumer durables and nondurables, food and beverage,
electronics, hotels, power engineering and generation, basic industries, public
utilities, property and financial sectors. SBAM AP believes that an investment
process that places emphasis on industry groups is appropriate given the
current state of economic and financial integration being achieved by the Asian
Countries and the relatively significant concentration of market capitalization
in Asian Countries toward certain industrial sectors.
Fundamental Analysis: Individual Security Decisions. In order to identify the
most attractive investment opportunities within industry groups, SBAM AP will
employ extensive research to select investments in Asian Countries that offer
long-term growth potential for investors. While the Asia Growth Fund generally
seeks to invest in securities of larger companies within the particular Asian
market, it may also invest in the securities of medium and smaller companies
that, in the opinion of SBAM AP, have potential for growth. In particular,
SBAM AP will employ the following three-step process to evaluate particular
investment opportunities for the Fund.
Screening Process. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
Financial Analysis Process. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use
a value-driven process which will emphasize quantitative analysis based on
return on equity ("ROE") and its components, such as operating margins,
financial leverage, asset turnover and interest and tax burdens. In addition,
the company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such
as Asia, as the ability of such companies to capture this growth by using the
right allocation of resources and asset financing is of utmost importance.
Valuation Process and Volatility Analysis. The valuation process will focus on
Price Earnings Ratio ("PER") calculations and comparisons with historical
relative PER bands and local market conditions. SBAM AP will use measures such
as PER/growth, and will evaluate whether the security enjoys accelerating
earnings growth momentum due to management changes or the introduction of new
products and/or services. In addition, where appropriate, SBAM AP will conduct
specific dividend discount model and discount cash flow analyses for specific
securities with predictable cash flows or dividend streams. Through the use of
this analysis, SBAM AP will attempt to identify companies with strong potential
for appreciation relative to their downside exposure. Lastly, SBAM AP will
conduct a volatility analysis on selected securities in an effort to forecast
the expected risk of such securities and compare the results of such risk
analysis with these securities' expected returns. Investments may be made in
companies that do not have extensive operating experience provided that SBAM AP
believes such companies nevertheless have significant growth potential.
Risk management and Macroeconomic/Top-Down Analysis. SBAM AP will also
consider macroeconomic variables, such as liquidity and capital flows, foreign
equity and industrial investments and the direction of monetary policies in the
Asian Countries in an effort to capture individual market movements as well as
attain an optimal asset allocation mix and to identify the appropriate risk
management parameters for the Asia Growth Fund. The macroeconomic data SBAM AP
will monitor and analyze includes, but is not limited to, gross domestic
product growth, balance of payments and current account balances, budget
deficits or surpluses, inflation and interest rates. SBAM AP intends to meet
with central bankers, regional economists and strategists on a regular basis to
assess the present and future direction of monetary policies and their likely
impact on the markets of the Asian Countries.
As part of the Fund's risk management approach and in an attempt to better
assess and control the Fund's overall risk level on an ongoing basis, SBAM AP
will employ a quantitative analysis at each stage of the investment process
which will consist of analyzing and forecasting volatilities of the Asian
markets and securities. SBAM AP will use a number of volatility-control
strategies, including derivative instruments (as discussed below), in an effort
to attain an optimal asset allocation mix, for hedging purposes in an attempt
to control the Fund's overall risk level and to obtain exposure to markets in
the Asian Countries which have restrictions on foreign investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities. There is no limit on the amount of the Fund's
assets that can be invested in convertible securities rated below investment
grade. For additional information on these high yield debt securities, which
may involve a high degree of risk, see "Additional Investment Activities and
Risk Factors--High Yield Securities."
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or
in another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government
of an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or supported by multiple foreign governmental entities
to promote economic reconstruction or development ("supranational entities");
(2) finance company obligations, corporate commercial paper and other
short-term commercial obligations, in each case rated, or issued by companies
with similar securities outstanding that are rated, "Prime-1" or "A" or better
by Moody's or "A-1" or "A" or better by S&P or, if unrated, of comparable
quality as determined by SBAM AP; (3) obligations (including certificates of
deposit, time deposits, demand deposits and bankers' acceptances) of banks; and
(4) repurchase agreements (as described below under "Additional Investment
Activities and Risk Factors--Repurchase Agreements") with respect to securities
in which the Fund may invest. If at some future date, in the opinion of SBAM
AP, adverse conditions prevail in the securities markets which makes the Asia
Growth Fund's investment strategy inconsistent with the best interests of the
Fund's shareholders, the Fund may invest its assets without limit in such
instruments.
The Asia Growth Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
may also invest in investment funds. For a description of these investment
practices and the risks associated therewith, see "Additional Investment
Activities and Risk Factors."
The Asia Growth Fund may purchase securities for which there is a limited
trading market or which are subject to restrictions on resale to the public.
The Fund will not invest more than 15% of the value of its total assets in
illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see "Additional Investment Activities
and Risk Factors--Restricted Securities and Securities With Limited Trading
Markets." As more fully described in the Statement of Additional Information,
the Fund may purchase Rule 144A securities. The Fund's holdings of Rule 144A
securities which are liquid securities will not be subject to the 15%
limitation on investments in illiquid securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies and activities, other than the Asia Growth
Fund's investment objective, are not fundamental and may be changed by the
Fund's Board of Directors without the approval of shareholders.
The investment objective of each Fund is deemed to be a fundamental policy and
may not be changed without the affirmative vote of the holders of a majority of
its outstanding shares as defined in the 1940 Act. There is no assurance that
a Fund will achieve its investment objective.
INVESTORS FUND
The primary investment objective of the Investors Fund is to seek long-term
growth of capital. Current income is a secondary objective. The Fund seeks to
achieve its objectives primarily through investments in common stocks of well-
known companies.
The Investor Fund's policy is to retain flexibility in the management of its
portfolio, without restrictions as to the proportion of assets which may be
invested in any class of securities. It is 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
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SALOMON BROTHERS INVESTMENT SERIES
into common stock, such as convertible preferred stock or convertible
debentures, with growth possibilities will be favored. Income-producing
securities are a secondary consideration in portfolio selection. To meet
operating expenses, to serve as collateral in connection with certain investment
techniques and to meet anticipated redemption requests, the Investors Fund
generally holds a portion of its assets in short-term fixed-income securities
(governmental obligations or investment grade debt securities) or cash or cash
equivalents. As described below, short-term investments may include repurchase
agreements with banks or broker-dealers. When management deems it appropriate,
consistent with the Investors Fund secondary objective of current income, or
during temporary defensive periods due to economic or market conditions, the
Fund may invest without limitation in fixed-income securities or hold assets in
cash or cash equivalents. The types and characteristics of investment grade
corporate debt securities and investment grade foreign debt securities which may
be purchased by the Fund are set forth above in the discussion of investment
objectives and policies for the Strategic Bond Fund. Investments in such
investment grade fixed-income securities may also be made for the purpose of
capital appreciation, as in the case of purchases of bonds traded at a
substantial discount, or when interest rates are expected to decline.
The Investors Fund from time to time may invest up to 5% of its net assets in
non-convertible debt securities rated below investment grade by S&P and Moody's
with no minimum rating required or comparable unrated securities. There is no
limit on the amount of Investors Fund's assets that can be invested in
convertible securities rated below investment grade. For additional information
on these high yield debt securities, which may involve a high degree of risk,
see the description above of investment objectives and polices for the High
Yield Bond Fund and "Additional Investment Activities and Risk Factors--High
Yield Securities."
The Investors Fund maintains a carefully selected portfolio of securities
diversified among industries and companies. The Fund may invest up to 25% of its
net assets in any one industry. The Fund generally purchases marketable
securities, primarily those traded on the New York Stock Exchange ("NYSE") or
other national securities exchanges, but also issues traded in the
over-the-counter market. The Fund will not invest more than 10% of the value of
its total assets in illiquid securities, such as "restricted securities" which
are illiquid, and securities that are not readily marketable. As more fully
described in the Statement of Additional Information, the Fund may purchase
certain Rule 144A securities for which there is a secondary market of qualified
institutional buyers as contemplated by Rule 144A under the 1933 Act. The Fund's
holdings of Rule 144A securities which are liquid securities will not be subject
to the 10% limitation on investments in illiquid securities. For further
discussion of illiquid securities and their associated risks, see "Additional
Investment Activities and Risk Factors--Restricted Securities and Securities
with Limited Trading Markets."
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."
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SALOMON BROTHERS INVESTMENT SERIES
As a hedge against either a decline in the value of securities included in the
Investors Fund's portfolio or against an increase in the price of securities
which it plans to purchase or in order to preserve to maintain a return or
spread on a particular investment or portion of its portfolio or to achieve a
particular return on cash balances, or in order to increase income, the
Investors Fund may use all of the various investment strategies referred to
under "Additional Investment Activities and Risk Factors--Derivatives." The
Fund's ability to pursue certain of these strategies may be limited by
applicable regulations of the SEC, the CFTC and the federal income tax
requirements applicable to regulated investment companies. Appendix B to this
Prospectus and the Statement of Additional Information contain descriptions of
these strategies and of certain risks associated therewith.
The foregoing investment policies, other than the Investors Fund's investment
objectives, are not fundamental and may be changed by the Board of Directors
without the approval of shareholders.
- --------------------------------------------------------------------------------
ADDITIONAL INVESTMENT ACTIVITIES
AND RISK FACTORS
BANK OBLIGATIONS. Banks are subject to extensive governmental regulations which
may limit both the amounts and types of loans and other financial commitments
which may be made and interest rates and fees which may be charged. The
profitability of this industry is largely dependent upon the availability and
cost of capital funds for the purpose of financing lending operations under
prevailing money market conditions. Also, general economic conditions play an
important part in the operations of this industry and exposure to credit losses
arising from possible financial difficulties of borrowers might affect a bank's
ability to meet its obligations.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations. See "--Foreign Securities" below. None of the Funds will purchase
bank obligations which the investment manager believes, at the time of purchase,
will be subject to exchange controls or foreign withholding 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.
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SALOMON BROTHERS INVESTMENT SERIES
Each Fund will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of the
investment manager based on guidelines established by the Fund's Board of
Directors, are deemed creditworthy. The investment manager will monitor the
value of the securities underlying the repurchase agreement at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the securities always equals or exceeds
the repurchase price. Each Fund requires that additional securities be
deposited if the value of the securities purchased decreases below their resale
price and does not bear the risk of a decline in the value of the underlying
security unless the seller defaults under the repurchase obligation. In the
event of default by the seller under the repurchase agreement, a Fund could
experience losses and experience delays in connection with the disposition of
the underlying security. 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
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SALOMON BROTHERS INVESTMENT SERIES
subject to possible depreciation. Voting rights may pass with the lending of
portfolio securities. Loans of securities by a Fund will be subject to
termination at the Fund's or the borrower's option. A Fund may pay
administrative and custodial fees in connection with a securities loan and may
pay a negotiated portion of the interest or fee earned with respect to the
collateral to the borrower or a placing broker.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES. A Fund may purchase securities on a
firm commitment basis, including when-issued securities. Securities purchased on
a firm commitment basis are purchased for delivery beyond the normal settlement
date at a stated price and yield. No income accrues to the purchaser of a
security on a firm commitment basis prior to delivery. Such securities are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. Purchasing a security on a firm commitment
basis can involve a risk that the market price at the time of delivery may be
lower than the agreed upon purchase price, in which case there could be an
unrealized loss at the time of delivery. A Fund will only make commitments to
purchase securities on a firm commitment basis with the intention of actually
acquiring the securities, but may sell them before the settlement date if it is
deemed advisable. A Fund will establish a segregated account in which it will
maintain liquid assets in an amount at least equal in value to the Fund's
commitments to purchase securities on a firm commitment basis. If the value of
these assets declines, the Fund will place additional liquid assets in the
account on a daily basis so that the value of the assets in the account is equal
to the amount of such commitments.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES.
Certain of the Funds may invest in zero coupon securities, pay-in-kind bonds
and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time
of their investment what the expected return on their investment will be.
Certain zero coupon securities also are sold at substantial discounts from
their maturity value and provide for the commencement of regular interest
payments at a deferred date. Zero coupon securities may have conversion
features. A Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay
all or a portion of their interest in the form of debt or equity securities.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon rate becomes
effective and interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities appreciates more during periods
of declining interest rates and depreciates more during periods of rising
interest rates than ordinary interest-paying debt securities with similar
maturities. Zero coupon securities, pay-in-kind bonds and deferred payment
securities may be issued by a wide variety of corporate and governmental
issuers. Although these instruments are generally not traded on a national
securities exchange, they are widely traded by brokers and dealers and, to such
extent, will not be considered illiquid for the purposes of a Fund's 15%
limitation on investments in illiquid securities discussed below.
Current federal income tax law requires the holder of a zero coupon security,
certain pay-in-kind bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments.
Accordingly, to avoid liability for federal income and excise taxes, a Fund may
be required to distribute income accrued with respect to these securities and
may have to dispose of portfolio securities under disadvantageous circumstances
in order to generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS. Certain of the Funds may invest in Loan
Participations and Assignments. The Funds consider these investments to be
investments in debt securities for purposes of this Prospectus. Loan
Participations typically will result in a Fund having a contractual relationship
only with the 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 as, 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 has adopted policies and procedures for the purpose
of determining whether Assignments and Loan Participation are liquid or
illiquid for purposes of a Fund's limitation on investment in illiquid
securities. Pursuant to those policies and procedures, the Board of Directors
has delegated to the investment manager the determination as to whether a
particular 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 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
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 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. 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
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voting rights with respect to their underlying securities, and they do not
represent any rights in assets of the issuer. An investment in warrants may be
considered speculative. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to have
value if it is not exercised prior to its expiration date.
FOREIGN SECURITIES. Investors should recognize that investing in the securities
of foreign issuers involves special considerations which are not typically
associated with investing in the securities 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 U.S.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing
on the financial statements of an emerging market country issuer may not
reflect its financial position or results of operations in the way they would
be reflected and the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that
keeps accounting records in local currency, inflation accounting rules may
require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately
reflect the real condition of those issuers and securities markets. See
"--High Yield Securities."
Finally, in the event of a default in any such foreign obligations, it may be
more difficult for a Fund to obtain or enforce a judgment against the issuers
of such obligations. For a further discussion of certain risks involved in
investing foreign securities, particularly of emerging market issuers, see
"Additional Information on Portfolio Instruments and Investment
Policies--Foreign Securities" in the Statement of Additional Information.
FIXED-INCOME SECURITIES. Changes in market yields will affect a Fund's net asset
value as prices of fixed-income securities generally increase when interest
rates decline and decrease when interest rates rise. Prices of longer term
securities generally increase or decrease more sharply than those of shorter
term securities in response to interest rate changes, particularly if such
securities were purchased at a discount. Because the New York Municipal Bond
Fund, National Intermediate Municipal Fund, U.S. Government Income Fund, the
High Yield Bond Fund and the Strategic Bond Fund will invest primarily in
fixed-income securities and the Total Return Fund may from time to time invest
in a substantial amount of fixed-income securities, the net asset value of these
Fund's shares can be expected to change as general levels of interest rates
fluctuate. It should be noted that the market values of securities rated below
investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
Except to the extent that values are affected independently by other factors
such as developments relating to a specific issuer, when interest rates decline,
the value of a fixed-income portfolio can generally be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio can
generally be expected to decline.
In addition, many fixed-income securities contain call or buy-back features that
permit their issuers to call or repurchase the securities from their holders.
Such securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a "call option" and redeems the security during a time of
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declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate of
return to the Fund.
Because the New York Municipal Bond Fund and the National Intermediate Municipal
Fund invest primarily in municipal obligations, they are more susceptible to
factors adversely affecting issuers of such obligations than funds that are not
so concentrated. The secondary market for municipal obligations may be less
liquid than for most taxable fixed-income securities. Consequently, the ability
of the New York Municipal Bond Fund and the National Intermediate Municipal Fund
to buy and sell municipal obligations may, at any particular time and with
respect to any particular securities, be limited. The amount of information
about the financial condition of an issuer of municipal obligations may not be
as extensive as information about corporations whose securities are publicly
traded. Obligations of issuers of municipal obligations may be subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the U.S. Bankruptcy Code and applicable state
laws, which could limit the ability of such Funds to recover payments of
principal or interest on such securities.
MORTGAGE-BACKED SECURITIES. The yield characteristics of the mortgage-backed
securities in which the U.S. Government Income Fund, the Strategic Bond Fund and
the Total Return Fund may invest differ from those of traditional debt
securities. Among the major differences are that interest and principal payments
are made more frequently on mortgage-backed securities, usually monthly, and
that principal may be prepaid at any time 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
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they cause the current coupon of the underlying adjustable rate mortgages to
exceed any maximum allowable annual or lifetime reset limits (or "cap rates")
for a particular mortgage. In this event, the value of the mortgage securities
in a Fund would likely decrease. Also, a Fund's net asset value could vary to
the extent that current yields on adjustable rate mortgage securities are
different than market yields during interim periods between coupon reset dates
or if the timing of changes to the index upon which the rate for the underlying
mortgages is based lags behind changes in market rates. During periods of
declining interest rates, income to a Fund derived from adjustable rate
mortgages which remain in a mortgage pool will decrease in contrast to the
income on fixed rate mortgages, which will remain constant. Adjustable rate
mortgages also have less potential for appreciation in value as interest rates
decline than do fixed rate investments.
PRIVATELY-ISSUED MORTGAGE SECURITIES. The Strategic Bond Fund and the Total
Return Fund may also purchase mortgage-backed securities issued by private
issuers which may entail greater risk than mortgage-backed securities that are
guaranteed by the U.S. government, its agencies or instrumentalities.
Privately-issued mortgage securities are issued by private originators of, or
investors in, mortgage loans, including mortgage bankers, commercial banks,
investment banks, savings and loan associations and special purpose subsidiaries
of the foregoing. Since privately-issued mortgage certificates are not
guaranteed by an entity having the credit status of GNMA or FHLMC, such
securities generally are structured with one or more types of credit
enhancement. Such credit support falls into two categories: (i) liquidity
protection and (ii) protection against 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
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on historical information with respect to the level of credit risk associated
with the underlying assets. Delinquency or loss in excess of that which is
anticipated could adversely affect the return on an investment in such security.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES. The
U.S. Government Income Fund and the Strategic Bond Fund may invest in
collateralized mortgage obligations. Collateralized mortgage obligations or
"CMOS" are debt obligations collateralized by mortgage loans or mortgage
pass-through securities. Typically, CMOs are collateralized by Ginnie Mae,
Fannie Mae or Freddie Mac Certificates, but also may be collateralized by whole
loans or private pass-throughs (such collateral collectively hereinafter
referred to as "Mortgage Assets"). Multiclass pass-through securities are
interests in a trust composed of Mortgage Assets. Unless the context indicates
otherwise, all references herein to CMOs include multiclass pass-through
securities. Payments of principal and of interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multiclass pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. government, or
by private originators of, or investors in, mortgage loans, including savings
and loan associations, mortgage banks, commercial banks, investment banks and
special purpose subsidiaries of the foregoing. CMOs acquired by the U.S.
Government Income Fund will be limited to those issued or guaranteed by agencies
or instrumentalities of the U.S. government 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
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prepayment experience on the underlying mortgage loans is at a rate faster or
slower than the predefined range or if deviations from other assumptions occur,
principal payments on the PAC Bond may be earlier or later than predicted. The
magnitude of the predefined range varies from one PAC Bond to another; a
narrower range increases the risk that prepayments on the PAC Bond will be
greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES. The Strategic Bond Fund may purchase stripped
mortgage securities which are derivative multiclass mortgage securities.
Stripped mortgage securities may be issued by agencies or instrumentalities of
the U.S. government, or by private originators of, or investors in, mortgage
loans, including savings and loan associations, mortgage banks, commercial
banks, investment banks and special purpose subsidiaries of the foregoing.
Stripped mortgage securities have greater volatility than other types of
mortgage securities. Although stripped mortgage securities are purchased and
sold by institutional investors through several investment banking firms acting
as brokers or dealers, the market for such securities has not yet been fully
developed. Accordingly, stripped mortgage securities are generally illiquid and
to such extent, together with any other illiquid investments, will be subject to
the Strategic Bond Fund's applicable restriction on investments in illiquid
securities.
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,
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coupon and maturity) securities on a specified future date. During the roll
period, a Fund foregoes principal and interest paid on the mortgage-backed
securities. A Fund is compensated by the difference between the current sales
price and the lower forward price for the future purchase (often referred to as
the "drop") as well as by the interest earned on the cash proceeds of the
initial sale. A Fund may only enter into covered rolls. A "covered roll" is a
specific type of dollar roll for which there is an offsetting cash position
which matures on or before the forward settlement date of the dollar roll
transaction. At the time a Fund enters into a mortgage "dollar roll", it will
establish a segregated account with its custodian bank in which it will maintain
cash, U.S. government securities or other liquid high grade debt obligations
equal in value to its obligations in respect of dollar rolls, and accordingly,
such dollar rolls will not be considered borrowings. Mortgage dollar rolls
involve the risk that the market value of the securities the Fund is obligated
to repurchase under the agreement may decline below the repurchase price. In the
event the buyer of securities under a mortgage dollar roll files for bankruptcy
or becomes insolvent, the Fund's use of proceeds of the dollar roll may be
restricted pending a determination by the other party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the securities.
HIGH YIELD SECURITIES. The High Yield Bond Fund and the Strategic Bond Fund may
invest without limitation in domestic and foreign "high yield" securities. The
Investors Fund and the Total Return Fund may invest without limitation in
convertible securities of this type and up to 5% and 20%, respectively, of
their net assets in non-convertible securities of this type. The Asia Growth
Fund may invest without limitation in convertible non-U.S. high yield securities
and up to 10% of its total assets in non-convertible non-U.S. high yield
securities.
Under rating agency guidelines, medium- and lower-rated securities and
comparable unrated securities will likely have some quality and protective
characteristics that are outweighed by large uncertainties or major risk
exposures to adverse conditions. Medium and lower rated securities are
considered to have extremely poor prospects of ever attaining any real
investment standing, to have a current identifiable vulnerability to default or
are in default, to be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest
or principal. Such securities are considered speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could, in certain instances, reduce the value of securities held by a
Fund with a commensurate effect on the value of the Fund's shares.
Changes by recognized rating services in their ratings of any fixed-income
security and in the ability of an issuer to make payments of interest and
principal may also affect the value of these investments. A description of the
ratings used by Moody's and S&P is set forth in Appendix A to this Prospectus.
The ratings of Moody's and S&P generally represent the opinions of those
organizations as to the quality of the securities that they rate. Such
ratings, however, are relative and subjective, are not absolute standards of
quality, are subject Lo change and do not evaluate the market risk or liquidity
of the securities. Ratings of a non-U.S. debt instrument, to the extent that
those ratings are undertaken, are related to evaluations of the country in
which the issuer of the instrument is located. Ratings generally take into
account the currency in which a non-U.S. debt instrument is denominated.
Instruments issued by a foreign government in other than the local currency,
for example, typically have a lower rating than local currency instruments due
to the existence of an additional risk that the government will be unable to
obtain the required foreign currency to service its foreign
currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for
high yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of a Fund holding such securities to dispose of
particular portfolio investments, may adversely affect the Fund's net asset
value per share and 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
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financing available to them, so that their ability to service their debt
obligations during an economic downturn or during sustained periods of rising
interest rates may be impaired. The risk of loss due to default by such issuers
is significantly greater than with investment grade securities because such
securities generally are unsecured and frequently are subordinated to the prior
payment of senior indebtedness. A Fund also may incur additional expenses to the
extent that it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-U.S. corporate debt securities, but has undergone significant changes
in the past and may undergo significant changes in the future.
High yield non-U.S. and U.S. corporate securities in which the applicable Funds
may invest include bonds, debentures, notes, commercial paper and preferred
stock and will generally be unsecured. Most of the debt securities will bear
interest at fixed rates. However, a Fund may also invest in corporate debt
securities with variable rates of interest or which involve equity features,
such as contingent interest or participations based on revenues, sales or
profits (i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture).
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES. Investing in fixed and floating
rate high yield foreign sovereign debt securities will expose Funds investing in
such securities to the direct or indirect consequences of political, social or
economic changes in the countries that issue the securities. See "--Foreign
Securities" above. The ability and willingness of sovereign obligors in
developing and emerging 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
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of foreign investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt.
As a result of the foregoing, a governmental obligor may default on its
obligations. If such an event occurs, a Fund may have limited legal recourse
against the issuer and/or guarantor. Remedies must, in some cases, be pursued in
the courts of the defaulting party itself, and the ability of the holder of
foreign sovereign debt securities to obtain recourse may be subject to the
political climate in the relevant country. In addition, no assurance can be
given that the holders of commercial bank debt will not contest payments to the
holders of other foreign sovereign debt obligations in the event of default
under their commercial bank loan agreements.
Certain debt obligations, customarily referred to as "Brady Bonds," are created
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
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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 countries are among the world's
largest debtors to commercial banks, other governments, international financial
organizations and other financial institutions. These obligors have in the past
experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which certain of the Funds may invest 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 the 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 extend 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 hedging and
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
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new instruments and strategies are developed or regulatory changes occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, currencies, futures contracts, indices and other
financial instruments, and a Fund may enter into interest rate transactions,
equity swaps and related transactions and other similar transactions which may
be developed to the extent the investment manager determines that they are
consistent with the applicable Fund's investment objective and policies and
applicable regulatory requirements (collectively, these transactions are
referred to in this Prospectus as "Derivatives"). A Fund's interest rate
transactions may take the form of swaps, caps, floors and collars, and a Fund's
currency transactions may take the form of currency forward contracts, currency
futures contracts, currency swaps and options on currencies or currency futures
contracts.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a Fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a Fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a Fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a Fund's income or gain. A Fund may
use any or all types of Derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized Derivative will be a function of numerous
variables, including market conditions. The ability of a Fund to utilize
Derivatives successfully will depend on, in addition to the factors described
above, the investment manager's ability to predict pertinent market movements,
which cannot be assured. These skills are different from those needed to select
a Fund's portfolio securities. None of the Funds is a "commodity pool" (i.e., a
pooled investment vehicle which trades in commodity futures contracts and
options thereon and the operator of which is registered with the CFTC), and
Derivatives involving futures contracts and options on futures contracts will be
purchased, sold or entered into only for bona fide hedging purposes, provided
that a Fund may enter into such transactions for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial margin
and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and losses on existing contracts provided, further, that, in the case of
an option that is in-the-money, the in-the-money amount may be excluded in
calculating the 5% limitation. The use of certain Derivatives in certain
circumstances will require that a Fund segregate cash, liquid high grade debt
obligations or other assets to the extent a Fund's obligations are not otherwise
"covered" through ownership of the underlying security, financial instrument or
currency.
Derivatives involve special risks, including possible default by the other party
to the transaction, illiquidity and, to the extent the investment manager's view
as to certain market movements is incorrect, the risk that the use of
Derivatives could result in significantly greater losses than if it had not been
used. Use of put and call options could result in losses to a Fund, force the
purchase or sale of portfolio securities at inopportune times or for prices
higher or lower than current market values, or cause a Fund to hold a
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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 New York
Municipal Bond Fund anticipates that its annual portfolio turnover rate
generally will not exceed 200%; the U.S. Government Income Fund anticipates that
its annual portfolio turnover rate generally will not exceed 300%; the National
Intermediate Municipal Fund, the High Yield Bond Fund and the Strategic Bond
Fund each anticipates that its annual portfolio turnover rate generally will not
exceed 100%; the Total Return Fund anticipates that its annual portfolio
turnover rate will not exceed 120%; the Asia Growth Fund anticipates that its
annual portfolio turnover rate generally will not exceed ___% and the
Investors Fund does not expect its portfolio turnover rate to exceed 50%.
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, 1994 and 1993 were 63% and 24%, respectively. The portfolio
turnover of the Investors Fund for the years ended December 31, 1994 and 1993
were 66% and 79%, respectively. Short-term gains realized from portfolio
transactions are taxable to shareholders as ordinary income. In addition,
higher portfolio turnover rates can result in corresponding increases in
portfolio transaction costs for a Fund.
With respect to the Cash Management Fund, the investment manager seeks to
enhance the Fund's yield by taking advantage of yield disparities or other
factors that occur in the money market. For example, market conditions
frequently result in similar securities trading at different prices. The Cash
Management 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
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such disposition is believed to be advisable due to other circumstances or
considerations. Subsequent to its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. Such an event would not require the
disposition of the instrument, but the investment manager will consider such an
event in determining whether the Cash Management Fund should continue to hold
the security. The policy of the Cash Management Fund regarding dispositions of
portfolio securities and its policy of investing in securities deemed to have
maturities of thirteen months or less will result in high portfolio turnover. A
higher rate of portfolio turnover results in increased transaction costs to the
Cash Management Fund in the form of dealer spreads.
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MULTIPLE PRICING SYSTEM
The Funds' Multiple Pricing System permits an investor to choose the method of
purchasing shares that is most beneficial given the amount of the purchase and
the length of time the investor expects to hold the shares.
CLASS A SHARES. Class A shares are offered for sale at net asset value per share
plus a front end sales charge of up to 4.75% payable at the time of purchase
(with the exception of Class A shares of the Cash Management Fund, which are
offered without such a charge). The initial sales charge may be reduced or
waived for certain purchases of Class A shares. Certain Class A shares for which
the front end sales charge is waived may be subject to a CDSC of 1% within one
year after the date of purchase. In addition, Class A shares are subject to a
12b-1 service fee at an annual rate of .25% of their respective average daily
net assets (with the exception of Class A shares of the Cash Management Fund,
which bear no such fees). The annual service fee is compensation for ongoing
services provided by Salomon Brothers to shareholders, including payments to
compensate selected securities dealers for such services. See "Purchase of
Shares--Class A Shares--Reduced Sales Charges" and "--Distributor" and
"Redemption of Shares--Class A Share Purchases of $1 million or more."
CLASS B SHARES. Class B shares are offered for sale for purchases of less than
$250,000. Class B shares are sold at net asset value without a front end sales
charge, but are subject to a CDSC of 5% of the dollar amount subject thereto
during the first and second year after purchase, and declining each year
thereafter to 0% after the sixth year. The applicable percentage is assessed on
an amount equal to the lesser of the original purchase price or the redemption
price of the shares redeemed. Any CDSC applicable to Class B shares excludes the
time the shares were held in the Cash Management Fund. The CDSC is not
applicable with respect to redemptions of Class B shares of the Cash Management
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
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redemption. Similarly, shares initially purchased as Class B shares of the Cash
Management Fund which are subsequently exchanged for Class B Shares of other
Funds will be subject to any applicable CDSC due at redemption. See "Shareholder
Services--Exchange Privilege." In addition, Class B shares are subject to a
12b-1 distribution fee at an annual rate of .75% of their respective average
daily net assets and a 12b-1 service fee at an annual rate of .25% of their
respective average daily net assets (with the exception of Class B shares of the
Cash Management Fund, which bear no such fees). Like the service fee applicable
to Class A shares, the Class B service fee is compensation for ongoing services
provided by Salomon Brothers to shareholders, including payments to compensate
selected securities dealers for such services. Additionally, the distribution
fee paid with respect to Class B shares compensates Salomon Brothers for selling
those shares. The Class B shares enjoy the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
distribution fees paid by Class B shares will cause such shares to have a higher
expense ratio and to pay lower dividends than Class A shares. See "Purchase of
Shares--Class B Shares" and "--Distributor." Class B shares will automatically
convert to Class A shares six years after the end of the calendar month in which
the shareholder's order to purchase was accepted. See "--Conversion Feature"
below.
CLASS C SHARES. Class C shares are offered for purchases of less than
$1,000,000, are offered at net asset value without a front end sales charge and
are subject to a CDSC of 1% if redeemed within the first year of purchase (with
the exception of Class C shares of the Cash Management Fund, which are not
subject to any CDSC upon redemption if they were initially purchased as such and
were never exchanged for Class C shares of another Fund). Any CDSC applicable to
Class C shares excludes the time the shares were held in the Cash Management
Fund. See "Shareholder Services--Exchange Privilege." Class C shares are subject
to a 12b-1 distribution fee at an annual rate of .75% of their respective
average daily net assets and a 12b-1 service fee at an annual rate of .25% of
their respective average daily net assets (with the exception of Class C shares
of the Cash Management Fund, which bear no such fees). Like the services fees
applicable to Class A and Class B shares, the Class C service fee is
compensation for ongoing services provided by Salomon Brothers to shareholders,
including payments to compensate selected securities dealers for such services,
and like the distribution fee applicable to Class B shares, the Class C
distribution fee compensates Salomon Brothers for selling shares of that class.
Class C shares, like Class B shares, enjoy the benefit of permitting all of the
investor's dollars to work from the time the investment is made. The ongoing
distribution fees paid by Class C shares will cause such shares to have a higher
expense ratio and to pay lower dividends than Class A shares. See "Purchase of
Shares--Class C Shares" and "--Distributor." Class C shares will automatically
convert to Class A shares ten years after the end of the calendar month in which
the shareholder's order to purchase was accepted. See "--Conversion Feature"
below.
CLASS O SHARES. Each Fund also offers Class O shares. However, only Class O
shareholders are permitted to purchase additional Class O shares. In connection
with the implementation of the Multiple Pricing System, shares outstanding as of
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.
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SALOMON BROTHERS INVESTMENT SERIES
CONVERSION FEATURE. Class B shares and Class C shares will automatically convert
to Class A shares six years and ten years, respectively, after the end of the
calendar month in which the shareholder's order to purchase was accepted and
will thereafter no longer be subject to a distribution fee. Such conversion will
be on the basis of the relative net asset values of each class, without the
imposition of any sales charge, fee or other charge. The purpose of the
conversion feature is to relieve the holders of Class B shares and Class C
shares from most of the burden of distribution-related expenses at such time as
when the shares have been outstanding for a duration sufficient for the Fund's
distributor, Salomon Brothers (in such capacity, the "Distributor"), to have
been substantially compensated for distribution-related expenses incurred in
connection with Class B shares or Class C shares, as the case may be.
Accordingly, Class B shares and Class C shares of the Cash Management Fund do
not convert to Class A shares of the Cash Management Fund at any time, as shares
of all classes of the Cash Management Fund do not bear any distribution or
service fees. If a shareholder effects one or more exchanges among Class B
shares or Class C shares, as the case may be, of the Funds during the applicable
conversion period, the period of time during which Class B shares or Class C
shares were held prior to an exchange will be added to the holding period of
Class B shares or Class C shares acquired in an exchange. However, because Class
B shares and Class C shares of the Cash Management Fund are not subject to any
distribution or service fees, the applicable conversion period is tolled for any
period of time in which Class B shares or Class C shares are held in the Cash
Management Fund. For example, if Class B shares of a Fund other than the Cash
Management Fund are exchanged for Class B shares of the Cash Management Fund two
years after purchase and are subsequently exchanged one year later for Class B
shares of a Fund other than the Cash Management Fund, the one year of ownership
in the Cash Management Fund does not count in the determination of the time of
conversion to Class A shares.
For purposes of the conversion of Class B shares and Class C shares to Class A
shares, shares purchased through the reinvestment of dividends and distributions
paid on Class B shares or Class C shares, as the case may be, in a shareholder's
Fund account will be considered to be held in a separate sub-account. Each time
any Class B shares or Class C shares in the shareholder's Fund account (other
than those in the sub-account) convert to Class A shares, a pro rata portion of
the Class B shares or Class C shares, as the case may be, in the sub-account
will also convert to Class A shares.
The conversion of Class B shares to Class A shares and the conversion of Class
C shares to Class A shares of the Total Return Fund and the Asia Growth Fund
are both subject to the availability of a ruling of the Internal Revenue
Service that payment of different dividends on Class A shares, Class B shares
and Class C shares, does not result in the Funds' dividends or distributions
constituting "preferential dividends" under the Code, and the continuing
availability of an opinion of counsel to the effect that the conversion of
shares does not constitute a taxable event under federal income tax law. Each
of the other Funds has obtained such a ruling. The Total Return Fund has
applied for such a ruling; and the Asia Growth Fund intends to apply for
such a ruling however, there can be no assurance that the Funds' ruling
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
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SALOMON BROTHERS INVESTMENT SERIES
which the shareholder's order to purchase was accepted.
FACTORS FOR CONSIDERATION. The Funds' Multiple Pricing System is designed to
offer different classes of shares to investors. Although the different classes
of shares of a particular Fund represent an interest in the same portfolio of
investments, each class is subject to a different distribution structure and, as
a result, differing expenses. The Multiple Pricing System provides investors
with the option of choosing the class of shares which is best suited to their
needs and objectives. In evaluating the options offered by the Multiple Pricing
System, investors should consider the different sales charges, distribution and
service fees and conversion features applicable to each class, and other
factors, including the amount of the purchase and the length of time the
investor expects to hold the shares. To assist investors in making their
determination, the information provided above under the caption "Expense
Information" sets forth the charges applicable to each class of shares and
presents an example of a hypothetical investment in each class of shares of each
Fund.
There are distinct advantages and disadvantages among the classes of shares that
investors should consider in evaluating the options offered by the Multiple
Pricing System. Class A, Class B and Class C shares all pay an annual 12b-1
service fee of .25% of average daily net assets, but Class A shares are not
subject to the annual 12b-1 distribution fee of .75% of average daily net assets
paid by Class B and Class C shares, and, accordingly, Class A shares pay
correspondingly higher dividends per share. However, because a front end sales
charge is deducted at the time of purchase of Class A shares, the entire
purchase price is not immediately invested and, therefore, investors purchasing
Class A shares initially own fewer shares than they would own if they had
invested the same amount in Class B shares or Class C shares. Investors may,
however, benefit from the reduction or waiver of the front end sales charge
applicable to Class A shares for certain purchases.
Although investors purchasing Class B or Class C shares benefit from the
advantage of having all their funds invested initially, Class B and Class C
shares remain subject to an ongoing distribution fee which causes them to have
higher expenses and pay lower dividends than Class A shares and may be subject
to a CDSC upon redemption. Class B shares differ from Class C shares, however,
in that Class B shares may be subject to a CDSC upon redemption if redeemed
within six years of purchase, whereas Class C shares are subject to a CDSC only
if they are redeemed within one year after purchase. In addition, Class B shares
automatically convert to Class A shares six years after the end of the month in
which the shares were purchased and thereafter are not subject to an ongoing
distribution fee, whereas Class C shares, which automatically convert to Class A
shares ten years after the end of the month in which the shares were purchased,
remain subject to an ongoing distribution fee for a longer time period. The
purchase of Class C shares may therefore prove beneficial for an investor
expecting to hold Fund shares for less than six years.
Because of the differences among the classes of shares, in deciding which class
of shares to purchase, investors should 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
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SALOMON BROTHERS INVESTMENT SERIES
to Class C shares should consider the cost of the applicable CDSC plus the
aggregate annual distribution and service fees applicable to Class B and Class C
shares, as compared with the cost of the front end sales charge plus the
aggregate annual service fees applicable to Class A shares.
(iii) Over time, the cumulative distribution and service fees applicable to
Class B and Class C shares will approach and may exceed the 4.75% maximum front
end sales charge plus the service fee applicable to Class A shares. For example,
assuming a constant net asset value, the aggregate distribution and service fees
applicable to Class B and Class C shares would equal the front end sales charge
and aggregate service fees applicable to Class A shares at the end of the sixth
year after purchase. Because Class B shares convert to Class A shares (which
bear the same service fees as Class B and Class C shares but do not bear the
expense of ongoing distribution fees) approximately six years after purchase, an
investor expecting to hold Fund shares for longer than six years would generally
pay lower cumulative expenses by purchasing Class A or Class B shares than by
purchasing Class C shares. An investor expecting to hold Fund shares for less
than six years would generally pay lower cumulative expenses by purchasing Class
C shares than by purchasing Class A shares and, due to the CDSC that would
become payable on redemption of Class B shares, such an investor would generally
pay lower cumulative expenses by purchasing Class C shares than Class B shares.
(iv) Because Class B and Class C shareholders pay no front end sales charge, the
entire purchase price is immediately invested in Fund shares. Any return
realized on the additional funds initially invested may partially or wholly
offset the ongoing distribution fees applicable to Class B and Class C shares.
There can be no assurance, however, as to the investment return, if any, which
will be realized on such additional funds.
Investors should consult their investment representatives for assistance in
evaluating the relative benefits of the different classes of shares.
Sales personnel of broker-dealers distributing each Fund's shares and any other
persons entitled to receive compensation for selling or servicing a Fund's
shares may receive different compensation for selling or servicing one class of
shares over another. The distribution and shareholder service expenses incurred
by the Distributor and dealers in connection with the sale of shares will be
paid, in the case of Class A shares, from the proceeds of front end sales
charges and the ongoing service fees; and in the cases of Class B and Class C
shares, from the proceeds of applicable CDSCs and ongoing distribution and
service fees. Investors should understand that the purpose of the front end
sales charge and ongoing service fees applicable to Class A shares is the same
as that of the CDSCs and ongoing distribution and service fees applicable to
Class B and Class C shares.
Dividends paid by each Fund with respect to all classes of shares will be
calculated in substantially the same manner at the same time on the same day,
except that distribution and service fees and any other costs specifically
attributable to a particular class of shares will be borne exclusively by the
applicable class. See "Dividends and Distributions." Net asset value per share
will also differ among the classes. Shares of each Fund may be exchanged for
shares of the same class of any other Fund, but not for shares of other classes
of any Fund. See "Shareholder Services--Exchange Privilege."
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INVESTMENT LIMITATIONS
The following investment restrictions and those described in the Statement of
Additional Information are fundamental policies applicable to the individual
Funds which may be changed only when permitted by law and approved by the
holders of a majority of each Fund's outstanding voting securities, as defined
in the 1940 Act. Except for the investment restrictions set forth below and in
the Statement of Additional Information and each Fund's investment objective(s),
the other policies and percentage limitations referred to in this Prospectus and
in the Statement of Additional Information are not fundamental policies of the
Funds and may be changed by the applicable Fund's Board of Directors without
shareholder approval.
If a percentage restriction on investment or use of assets set forth below is
adhered to at the time a transaction is effected, later changes in percentages
resulting from changing values will not be considered a violation.
CASH MANAGEMENT FUND. The Cash Management Fund may not:
(1) purchase the securities of any one issuer, other than the U.S. government,
its agencies or instrumentalities, if immediately after such purchase, more than
5% of the value of the Fund's total assets would be invested in such issuer;
provided, however, that such 5% limitation shall not apply to repurchase
agreements collateralized by obligations of the U.S. government, its agencies or
instrumentalities; and provided, further, that the Fund may invest more than 5%
(but no more than 25%) of the value of the Fund's total assets in the securities
of a single issuer for a period of up to three business days;
(2) borrow money except as a temporary measure from banks for extraordinary or
emergency purposes, and in no event in excess of 15% of the value of its total
assets, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (the Fund will not purchase any securities at any time while such
borrowings exceed 5% of the value of its total assets);
(3) invest more than 10% of the value of its net assets in securities which are
illiquid, including repurchase agreements having notice periods of more than
seven days, fixed time deposits subject to withdrawal penalties and having
notice periods of more than seven days, receivables-backed obligations and
variable amount master demand notes that are not readily saleable in the
secondary market and with respect to which principal and interest may not be
received within seven days, and securities that would be illiquid by virtue of
legal or contractual restrictions on resale;
(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, how-
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SALOMON BROTHERS INVESTMENT SERIES
ever, that up to 25% of the assets of the Fund may be invested without regard to
this limitation; or
(2) borrow money except as a temporary measure from banks for extraordinary or
emergency purposes, and in no event in excess of 20% of the value of its total
assets, except that for the purpose of this restriction, short-term credits
necessary for settlement of securities transactions are not considered
borrowings (the Fund will not purchase any securities at any time while such
borrowings exceed 5% of the value of its total assets).
NATIONAL INTERMEDIATE MUNICIPAL FUND, U.S. GOVERNMENT INCOME FUND, HIGH YIELD
BOND FUND, STRATEGIC BOND FUND AND TOTAL RETURN FUND. The National Intermediate
Municipal Fund, the U.S. Government Income Fund, the High Yield Bond Fund, the
Strategic Bond Fund and the Total Return Fund may not:
(1) purchase securities of any issuer if the purchase would cause more than 5%
of the value of each Fund's total assets to be invested in the securities of any
one issuer (excluding securities issued or guaranteed by the U.S. government,
its agencies or instrumentalities and bank obligations) or cause more than 10%
of the voting securities of the issuer to be held by a Fund, except that up to
25% of the value of each Fund's total assets may be invested without regard to
this restriction and provided that each Fund may invest all or substantially all
of its assets in another registered investment company having substantially the
same investment objective(s) and policies and substantially the same investment
restrictions as those with respect to such Fund;
(2) borrow money (including entering into reverse repurchase agreements), except
for temporary or emergency purposes and then not in excess of 10% of the value
of the total assets of the applicable Fund at the time the borrowing is made,
except that for the purpose of this restriction, short-term credits necessary
for settlement of securities transactions are not considered borrowings (a Fund
will not purchase additional securities at any time its borrowings exceed 5% of
total assets, provided, however, that a Fund may increase its interest in
another registered investment company having substantially the same investment
objective(s) and policies and substantially the same investment restrictions as
those with respect to such Fund while such borrowings are outstanding); or
(3) invest more than 25% of the total assets of each Fund in the securities of
issuers having their principal activities in any particular industry, except for
obligations issued or guaranteed by the U.S. government, its agencies or
instrumentalities or by any state, territory or any possession of the United
States or any of their authorities, agencies, instrumentalities or political
subdivisions, or with respect to repurchase agreements collateralized by any of
such obligations (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.
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
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total assets taken at cost or value, whichever is less, or mortgage or pledge
any of its assets and except that for purposes of this restriction, collateral
arrangements with respect to the writing of options on stocks and stock indices,
the purchase and sale of futures contracts and options on futures contracts, and
forward currency contracts are not deemed a pledge of assets or a borrowing of
money;
(3) lend its funds or other assets to any other person other than through the
purchase of liquid debt securities pursuant to the Fund's investment policies,
except that (a) the Fund may lend its portfolio securities as described in the
Statement of Additional Information and (b) the Fund may enter into repurchase
agreements in an amount up to an aggregate of 25% of its total assets; or
(4) invest in the securities of issuers which have been in operation for less
than three years if such purchase at the time thereof would cause more than 5%
of the net assets of the Fund to be so invested.
Each Fund may, in the future, seek to achieve its investment objective(s) by
investing all of its assets in a no-load, open-end management investment company
for which SBAM serves as investment manager and which has substantially the same
investment objective(s) and policies and substantially the same investment
restrictions as those applicable to such Fund. In such event, the Fund's
applicable investment advisory 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 and Tokyo, 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 December 31, 1995,
SBAM had approximately $12 billion of assets under management of which
approximately $___ million is invested in high yield securities and
approximately $___ million
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SALOMON BROTHERS INVESTMENT SERIES
is invested in mortgage backed securities. Michael S. Hyland serves as President
of SBAM. SBAM has access to Salomon Inc's more than 250 economists, mortgage,
bond, sovereign, and equity analysts. The business address of SBAM is 7 World
Trade Center, New York, New York 10048.
In connection with SBAM's service as investment manager to the Strategic Bond
Fund, SBAM Limited, whose business address is Victoria Plaza, 111 Buckingham
Palace Road, London SW1W OSB, England, provides certain advisory services to
SBAM relating to currency transactions and investments in non-dollar-denominated
debt securities for the benefit of the Strategic Bond Fund. SBAM Limited is
compensated by SBAM at no additional expense to the Fund. Like SBAM, SBAM
Limited is a direct, wholly-owned subsidiary of Salomon Brothers Holding Company
Inc. SBAM Limited is a member of the Investment Management Regulatory
Organization Limited in the United Kingdom and is registered as an investment
adviser in the United States pursuant to the Investment Advisers Act of 1940, as
amended. David J. Scott is primarily responsible for a portion of the Strategic
Bond Fund relating to currency transactions and investments in non-dollar
denominated debt securities. Prior to joining SBAM Limited in April, 1994, Mr.
Scott worked for four years at JP Morgan Investment Management where he was
responsible for global and non-dollar portfolios. Before joining JP Morgan
Investment Management, Mr. Scott worked for three years at Mercury Asset
Management where he was responsible for captive insurance portfolios and
products.
SBAM has retained SBAM AP to act as sub-adviser to the Asia Growth Fund, subject
to the supervision of SBAM. SBAM AP is compensated by SBAM at no additional
cost to the Fund. Like SBAM, SBAM AP is an indirect, wholly-owned subsidiary of
Salomon Inc. SBAM AP, which was formed in 1995, is a member of the Hong Kong
Securities and Futures Commission and is registered as an investment adviser in
the United States pursuant to the Investment Advisers Act of 1940, as amended.
The business address of SBAM AP is Three Exchange Square, Hong Kong. References
to investment manager in this Prospectus include SBAM Limited and SBAM AP when
the context requires.
Marybeth Whyte is primarily responsible for the day-to-day management of the New
York Municipal Bond Fund's portfolio and the National Intermediate Municipal
Fund's portfolio. Prior to joining SBAM on July 25, 1994, Ms. Whyte was a Senior
Vice President and head of the Municipal Bond Area at Fiduciary Trust Company
International, where her responsibilities included managing and advising
portfolios with assets of approximately $1.3 billion.
Steven Guterman is primarily responsible for the day-to-day management of the
U.S. Government Income Fund and the mortgage-backed securities and U.S.
government securities portions of the Strategic Bond Fund. Mr. Guterman is
assisted by Roger Lavan in the management of the two foregoing Funds. Mr.
Guterman joined SBAM in 1990 and is currently a Senior Portfolio Manager,
responsible for SBAM's investment company and institutional portfolios which
invest primarily in mortgage-backed securities and U.S. government issues. Mr.
Guterman also serves as portfolio manager for two offshore mortgage funds. In
addition, Mr. Guterman serves as portfolio manager for a number of SBAM's
institutional clients. Mr. Guterman joined Salomon Brothers in 1983. He
initially worked in the mortgage research group where he became a Research
Director and later traded derivative mortgage-backed securities for Salomon
Brothers. Mr. Lavan joined SBAM in 1990 and is a Portfolio Manager and
Quantitative Fixed Income Analyst. He is responsible for working with senior
portfolio managers to monitor and analyze market relationships and identify and
implement relative value transactions in SBAM's investment company and
institutional portfolios which invest in mortgage-backed securities and U.S.
Government securities. Prior to joining SBAM, Mr. Lavan spent four years
analyzing portfolios for Salomon Brothers' Fixed Income Sales Group and Product
Support Divisions.
Peter J. Wilby is primarily responsible for the day-to-day management of the
High Yield Bond Fund and the high yield and sovereign bond portions of the
Strategic Bond Fund. Mr. Wilby, who joined SBAM in 1989, is a Senior Portfolio
Manager, responsible for SBAM's investment company and institutional portfolios
which invest in high yield non-U.S. and U.S.
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SALOMON BROTHERS INVESTMENT SERIES
corporate debt securities and high yield foreign sovereign debt securities. Mr.
Wilby is the portfolio manager for 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 SBMA 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.
Allan R. White III and Ross S. Margolies are 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. Mr. Margolies, who joined SBAM in 1992, is a Senior Portfolio Manager
responsible for SBAM's investments in convertible securities. Mr. Margolies has
been Executive Vice President and portfolio manager for the Investors Fund since
August 1994 and is the portfolio manager for an offshore fund. From 1989 through
1992, Mr. Margolies was employed by Lehman Brothers Inc. As a Senior Vice
President in High Yield Research, Mr. Margolies analyzed a variety of
industries, sponsored industry conferences and participated in selecting the
firm's proprietary investments. Mr. Margolies is also Executive Vice President
and portfolio manager for The Salomon Brothers Fund Inc.
Richard E. Dahlberg is primarily responsible for the day-to-day management of
the Total Return Fund. Prior to joining SBAM in 1995, Mr. Dahlberg was employed
by Massachusetts Financial Services Company since 1968. For the last 10 years,
Mr. Dahlberg has been primarily responsible for the day-to-day management of the
MFS Total Return Funds.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
Commission compliance, supervision of Fund operations and certain administrative
and clerical services, and pays the compensation of the Funds' officers,
employees and directors affiliated with SBAM. Except for the expenses paid by
SBAM that are described herein, each Fund bears all costs of its operations.
As compensation for its services, the Cash Management Fund pays SBAM a monthly
fee at an annual rate of .20% of the Fund's average daily net assets. The New
York Municipal Bond Fund pays SBAM a monthly fee at an annual rate of .50% of
the Fund's average daily net assets. The National Intermediate Municipal Fund
pays SBAM a monthly fee at an annual rate of .50% of the Fund's average daily
net assets; the U.S. Government Income Fund pays SBAM a monthly fee at an annual
rate of .60% of the Fund's average daily net assets; the High Yield Bond Fund
pays SBAM a monthly fee at an annual rate of .75% of the Fund's average daily
net assets; the Strategic Bond Fund pays SBAM a monthly fee at an annual rate of
.75% of the Fund's average daily net assets; the Total Return Fund pays SBAM
a monthly fee at an annual rate of .55% of
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SALOMON BROTHERS INVESTMENT SERIES
the Fund's average daily net assets and the Asia Growth Fund pays SBAM a
monthly fee at an annual rate of .___% of the Fund's average daily net assets.
SBAM has agreed to waive all or a portion of its management fee for each Fund
other than the Total Return Fund and the Investors Fund through the fiscal year
ended December 31, 1995. SBAM has further agreed to waive its entire management
fee for the Total Return Fund for a period of six months from the date of this
prospectus. 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 and in connection with the subadvisory
agreement between SBAM and SBAM AP, SBAM will pay SBAM AP a monthly fee at an
annual rate of .___% of the Fund's average daily net assets.
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
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SALOMON BROTHERS INVESTMENT SERIES
(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, SBAM 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 SBAM 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 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 and SBAM AP
(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 $__ million to $__ million and during the period shown for
Offshore Fund II, the size of the fund ranged from $__ millon to $__ million.
The Morgan Stanley Capital International Combined Asia Ex-Japan Index is a
widely recognized market index of Asian country equity issues. The index is
composed of a sample of companies from the following ten countries: Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka
and Thailand. Constituent stocks are selected for the index on the basis of
industry representation, liquidity and sufficient float. The index is
unmanaged and accordingly, does not reflect the effect of operating expenses,
including advisory fees, transaction costs and other expenses but does reflect
reinvestment of dividends.
The performance data shown below should be read in conjunction with the notes
that follow.
[Performance results for Offshore Fund I and Offshore Fund II to be inserted]
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 each account
and fund for whom investment results are shown 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 Funds,
which have no history of operations. With respect to the composites shown
above, the results shown may not necessarily equate with the return experienced
by any one particular account or fund comprising that composite and should not
be deemed to be indicative of future results for the Funds owing to differences
in brokerage commissions and dealer spreads, account expenses, including
investment advisory fees, the size of positions taken in relation to account
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 the accounts and funds shown above differ in certain respects
from those of the respective Funds. In addition, the accounts and funds which
are not U.S. registered investment companies are 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 of the accounts and the funds shown above and that
of the Funds 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 OR SBAM AP WOULD RESULT IN DIFFERENT PERFORMANCE DATA. NO
ADJUSTMENT HAS BEEN MADE FOR ANY INCOME TAXES WHICH ARE PAYABLE ON INCOME
DIVIDENDS OR CAPITAL GAINS DISTRIBUTIONS. THE EFFECT OF TAXES ON ANY INVESTOR
WILL DEPEND ON SUCH INVESTOR'S TAX STATUS. SEE "DIVIDENDS, DISTRIBUTIONS AND
TAXES."
ADMINISTRATOR
Each Fund employs Investors Bank & Trust Company ("Investors Bank") under its
applicable administration agreement to provide certain administrative services
to the respective Fund. The administrator is not involved in the investment
decisions made with respect to the Funds.
The services provided by Investors Bank under the applicable administration
agreements include certain accounting, clerical and bookkeeping services, Blue
Sky compliance, corporate secretarial services and assistance in the preparation
and filing of tax returns and reports to shareholders and the SEC. For its
services as administrator, each Fund, other than the Investors Fund, pays
Investors Bank a fee, calculated daily and payable monthly, at an annual rate of
.08% of the applicable Fund's aggregate average daily net assets. As
compensation for its services to the Investors Fund and at no additional cost to
the Investors Fund, SBAM pays Investors Bank a fee each month at an annual rate
of .08% of the average daily value of the Investors Fund's net assets.
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.
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DETERMINATION
OF NET ASSET VALUE
For the purpose of pricing purchase and redemption orders, the net asset value
per share of each class of each Fund is calculated separately and is determined
once daily as of the close of regularly scheduled trading on the NYSE (except
with respect to the Cash Management Fund for which the determination is made at
12:00 noon (New York time)). With respect to each Fund, such calculation is
determined on each day that the NYSE is open for trading, i.e., Monday through
Friday, except for New Year's Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day, and the
preceding Friday or subsequent Monday when one of those holidays falls on a
Saturday or Sunday, respectively. Net asset value per share of each class of
each Fund is calculated by dividing the value of the portion of the Fund's
securities and other assets attributable to that class, less the liabilities
attributable to that class, by the number of shares of that class outstanding.
In calculating net asset value, all portfolio securities will be valued at
market value when there is a reliable market quotation available for the
securities and otherwise pursuant to procedures adopted by each Fund's Board of
Directors. Securities that are primarily traded on foreign exchanges generally
are valued at the preceding closing values of such securities on their
respective exchanges, except that when an occurrence subsequent to the time a
value was so established is likely to have changed such value, then the fair
value of those securities will be determined by consideration of other factors
by or under the direction of the Board of Directors. Securities may be valued
by independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. In valuing a Fund's assets, any assets
or liabilities initially expressed in terms of a foreign currency are 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.
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PURCHASE OF SHARES
Shares of each Fund may be purchased from any dealer that has a selling
agreement with Salomon Brothers. Purchases of shares made through a selected
dealer should be made in accordance with the procedures prescribed by such
selected dealer.
HOW TO OPEN AN ACCOUNT
In order to purchase shares of any Fund, an investor must submit a fully
completed Purchase Application form.
MINIMUM INVESTMENT
The minimum initial investment in any class of shares in any Fund is $500 and
the minimum subsequent investment is $50. However, for IRAs and Self-Employed
Retirement Plans (formerly Keogh Plans), the minimum initial investment in any
class of shares of any Fund is $50. In addition, an account can be established
with a minimum of $50 if the account will be receiving periodic, regular
investments through programs such as Automatic Investment Plans, Automatic
Dividend Diversification and Systematic Investing. See "Shareholder Services."
When purchasing shares of any Fund, investors must specify the class of shares.
Each Fund and the investment manager reserve the right to reject any purchase
order, to suspend the offering of shares for a period of time or to waive or
lower the minimum investment requirements.
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 The Shareholder Services Group, Inc. ("TSSG") 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 TSSG 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 TSSG. Prior to
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SALOMON BROTHERS INVESTMENT SERIES
making an initial investment by wire, an investor must call (800) SALOMON or
(800) 725-6666 to open an account. Please supply the following information: (i)
the name(s) in which the shares are to be registered, (ii) address, (iii) social
security or tax identification number (where applicable), (iv) dividend payment
election, (v) class of shares (vi) amount to be wired, (vii) name of the wiring
bank, and (viii) name and telephone number of the person to be contacted in
connection with the order. An account number will be assigned. The investor
should instruct the wiring bank to transmit the specified amount in federal
funds to:
Boston Safe Deposit and Trust Company
Boston, Massachusetts
ABA No. 011-001-234
Account #142743
Attn: (Name of Fund)
Name of Account:
Account # (As assigned):
Investors making initial investments by wire must promptly complete a Purchase
Application and forward it to TSSG. 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 TSSG 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
Purchase orders may also be placed through Salomon Brothers, the Funds'
distributor. Except as described below with respect to the Cash Management Fund,
purchase orders placed through Salomon Brothers for brokerage accounts and
received before the close of regular trading on the NYSE on any day that a Fund
is open, including orders for which payment is to be made from free cash credit
balances in brokerage accounts at Salomon Brothers, generally will be executed
at the net asset value next determined that day (the "trade date") plus any
applicable sales charge. Purchase orders received by Salomon Brothers after the
close of regular trading on the NYSE on any day that a Fund is open generally
will be executed at the net asset value determined on the next day such Fund is
open. Payment generally is due to Salomon Brothers on the settlement date (i.e.,
the third business day after the trade date). When payment is made to Salomon
Brothers by an investor before the settlement date, unless otherwise directed by
an investor, the monies will be held as a free credit balance in the investor's
brokerage account and Salomon Brothers will benefit from the temporary use of
these monies. The Board of Directors of each Fund has been advised of the
benefits to Salomon Brothers resulting from the five-day settlement procedures
and will take such benefits into consideration when reviewing the applicable
management contract and applicable distribution agreement for continuance.
Purchase orders for shares of the Cash Management Fund placed through Salomon
Brothers 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
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SALOMON BROTHERS INVESTMENT SERIES
(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. Because Salomon Brothers does not
forward investors' funds until the day on which the order is executed, it may
benefit from temporary use of such funds.
Shares may also be purchased initially by completing a Purchase Application and
mailing it, together with a check payable to TSSG, to:
(Name of Fund)
c/o TSSG
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 TSSG 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 TSSG will charge a fee of $10 to the shareholder's account. TSSG
does not intend to resubmit such checks for collection.
MULTIPLE PRICING SYSTEM
Each Fund currently offers three classes of shares to the general public through
the Multiple Pricing System. Although the Class A, Class B and Class C shares of
a particular Fund represent an interest in the same portfolio of investments,
each class is subject to different sales charge structures and expense levels.
Class A shares of all Funds are sold with a front end sales charge (with the
exception of Class A shares of the Cash Management Fund, which are sold at net
asset value) and may, under limited circumstances, be subject to a CDSC upon
redemption. Class B shares and Class C shares of all Funds are sold without a
front end sales charge but may be subject to a CDSC upon redemption (with the
exception of sales of Class B shares and Class C shares of the Cash Management
Fund, which are not subject to a CDSC). The Multiple Pricing System allows
investors to select the class that is best suited to their needs and objectives.
In considering the options afforded by the Multiple Pricing System, investors
should consider both the applicable front end sales charge or CDSC, as well as
the applicable service or distribution fee, and other relevant factors such as
whether their investment goals are long-term or short-term in order to determine
the class that best suits their circumstances and objectives. See "Multiple
Pricing System" for a discussion of factors to consider in selecting which class
of shares to purchase. In addition, Class O shareholders may purchase additional
Class O shares which are sold at net asset value and are not subject to any
sales charges, distribution or service fees.
CLASS A SHARES
The public offering price for Class A shares of each Fund is the per share net
asset value of that class plus a front end sales charge, expressed as a
percentage of the offering price as set forth in the table below. No front end
sales charge is imposed on the purchase of Class A shares of the Cash Management
Fund. However, when Class A shares of the Cash Management Fund on which no sales
charge has been paid or waived are exchanged for Class A shares of another Fund,
the sales charge applicable to purchases of Class A shares will be assessed at
that time.
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SALOMON BROTHERS INVESTMENT SERIES
CLASS A SALES CHARGE TABLE
<TABLE>
<CAPTION>
CONCESSION
TO
BROKER-DEALER
PERCENTAGE AS
PERCENTAGE OF A
OF THE PERCENTAGE
THE NET OF
AMOUNT OF OFFERING AMOUNT OFFERING
PURCHASE PAYMENT PRICE INVESTED PRICE
<S> <C> <C> <C>
- --------------------------------------------------------------------------
<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.
LETTER OF INTENT. For the purposes of determining which sales charge level in
the table above is applicable to a purchase of Class A shares, investors may
also establish a total investment goal in shares of the Funds to be achieved
over a thirteen-month period and may purchase Class A shares during such period
at the applicable reduced front end sales charge. All Class A shares, (excluding
Class A shares purchased or held in the Cash Management Fund), previously
purchased and still beneficially owned by the investor and his or her spouse and
children under the age of 21 may, upon written notice to the transfer agent,
also be included at the current net asset value to reach a level specified in
the table above.
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SALOMON BROTHERS INVESTMENT SERIES
Shares totaling 5% of the dollar amount of the Letter of Intent will be held in
escrow by the transfer agent in the name of the purchaser. The effective date of
a Letter of Intent may be back-dated up to 90 days, in order that any
investments made during this 90-day period, valued at the purchaser's cost, can
be applied to the fulfillment of the Letter of Intent goal.
The Letter of Intent does not obligate the investor to purchase, nor any Fund to
sell, the indicated amount. In the event the Letter of Intent goal is not
achieved within the thirteen-month period, the investor is required to pay the
difference between the front end sales charge otherwise applicable to the
purchases of Class A shares made during this period and the sales charge
actually paid. If a payment is due under the preceding sentence, it must be made
directly to the transfer agent within twenty days of notification or, if not
paid, the transfer agent will liquidate sufficient escrowed shares to obtain
such difference. For additional information, shareholders should contact the
applicable Fund, the transfer agent or eligible securities dealers.
GROUP PURCHASES. A reduced sales charge is available to employees (and partners)
of the same employer purchasing as a group. The sales charge applicable to
purchases by each member of such a group will be determined by the table set
forth above and will be based upon the aggregate sales of Class A shares to, and
share holdings of, all members of the group. To be eligible for such reduced
sales charges, all purchases must be pursuant to an employer or partnership-
sanctioned plan meeting certain requirements; one such requirement is that the
plan must be open to specified partners or employees of the employer and its
subsidiaries, if any. Such plans include but are not limited to plans which
provide for payroll deductions and retirement plans under Sections 401 or 408 of
the Code. The Distributor may also offer a reduced sales charge for aggregating
related fiduciary accounts under such conditions that the Distributor will
realize economies of sales efforts and sales related expenses. An individual who
is a member of a qualified group may also purchase Class A shares of the Fund at
the reduced sales charge applicable to the group as a whole. The sales charge is
based upon the aggregate dollar value of Class A shares previously purchased and
still owned by the group, plus the amount of the current purchase. A "qualified
group" is one which (i) has been in existence for more than six months, (ii) has
a purpose other than acquiring Fund shares at a discount and (iii) satisfies
uniform criteria which enables the Distributor to realize economies of scale in
its costs of distributing shares. A qualified group must have more than 10
members, must be available to arrange for group meetings between representatives
of a Fund and the members, and must agree to include sales and other materials
related to the Funds in its publications and mailings to members at no cost to
the Distributor. In order to obtain such reduced sales charge, the purchases
must provide sufficient information at the time of purchase to permit
verification that the purchase qualifies for the reduced sales charge. Approval
of group purchase reduced sales charge plans is subject to the discretion of the
Distributor.
CERTAIN QUALIFIED PURCHASERS. No front end sales charge is applicable to any
sale of Class A shares to a Director or officer of a Fund and to their immediate
families (i.e., the spouse, children, mother or father of such persons),
employees of SBAM and their immediate families, or any full-time employee or
registered representative of the Distributor or of broker-dealers having dealer
agreements with the Distributor ("Selling Broker") and their immediate families
(or any trust, pension, profit sharing or other benefit plan for the benefit of
such persons), any full-time employee of a bank, savings and loan, credit union
or other financial institution
PAGE 75
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SALOMON BROTHERS INVESTMENT SERIES
that utilizes a Selling Broker to clear purchases of the Funds' shares and their
immediate families, participants in certain "wrap-fee" or asset allocation
programs sponsored by broker-dealers and other financial institutions that have
entered into agreements with Salomon Brothers or investors who purchase Class A
shares with proceeds from the sale of shares of any other investment company
with respect to which the investor previously paid a commission, whether a
front-end sales charge or CDSC or otherwise.
CLASS B SHARES
Class B shares of each Fund are offered for sale at net asset value and are
offered for purchases of less than $250,000. No initial sales charge is imposed
at the time of purchase. A CDSC is imposed, however, on certain redemptions of
Class B shares. See "Redemption of Shares" which describes the CDSC in greater
detail.
In general, a sales commission of 4% of the amount of Class B share purchases
(other than Class B shares of the Cash Management Fund) will be paid by the
Distributor to broker-dealers at the time of sale.
CLASS C SHARES
Class C shares of each Fund are offered for sale at net asset value and are
offered for purchases of less than $1,000,000. Class C shares are sold without a
front end sales charge and are subject to a CDSC of 1% within the first year of
purchase.
A sales commission of 1% of the amount of Class C share (other than Class C
shares of the Cash Management Fund) will be paid by the Distributor to broker
dealers at the time of sale.
CLASS O SHARES
Class O shares of each Fund are offered for sale at net asset value and are not
subject to any sales charges. Only Class O shareholders may purchase additional
Class O shares.
DISTRIBUTOR
Salomon Brothers, located at 7 World Trade Center, New York, New York 10048,
serves as each Fund's distributor. Salomon Brothers is a wholly owned subsidiary
of Salomon Brothers Holding Company Inc, which is in turn wholly owned by
Salomon Inc. It is also one of the largest securities dealers in the world and a
registered broker-dealer. Salomon Brothers makes markets in securities and
provides a broad range of underwriting, research, and financial advisory
services to governments, international corporations, and institutional
investors. Salomon Brothers from time to time may receive fees from SBAM in
connection with processing and other services that it provides for certain
shareholder accounts and may from time to time receive fees from the Funds in
connection with the execution of portfolio transactions on behalf of the Funds.
Each class of each Fund (other than the Cash Management Fund) is authorized
pursuant to a services and distribution plan applicable to that class of shares
(the "Class A Plan," the "Class B Plan" and the "Class C Plan," collectively,
the "Plans") adopted pursuant to Rule 12b-1 under the 1940 Act to pay Salomon
Brothers an annual service fee with respect to Class A, Class B and Class C
shares of the applicable Fund (other than the Cash Management Fund) at the rate
of .25% of the value of the average daily net assets of the respective class.
Salomon Brothers is also paid an annual distribution fee with re-
PAGE 76
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SALOMON BROTHERS INVESTMENT SERIES
spect 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% (or, in the limited circumstances described above under
"-- --Class B Shares", 5%) of the purchase price and a quarterly trail fee at an
annual rate of .25% which will begin to accrue in the thirteenth month after
settlement. With respect to Class C shares, Salomon Brothers will pay
broker-dealers at the time of sale a commission of 1% of the purchase price and
a quarterly trail fee at an annual rate of .90% which will begin to accrue in
the thirteenth month after settlement. In addition, with respect to Class A
shares, Salomon Brothers will pay broker-dealers at the time of sale a
commission as discussed above under "Purchase of Shares--Class A Shares" and a
quarterly trail commission at an annual rate of .25% which will begin to accrue
immediately after settlement.
The Plans provide that Salomon Brothers may make payments to assist in the
distribution of a Fund's shares out of the other fees received by it or its
affiliates from such Fund, its past profits or any other sources available to
it. From time to time, Salomon Brothers may waive receipt of fees under a Plan
while retaining the ability to be paid under such Plan thereafter. The fees
payable to Salomon Brothers under the Plans and payments by Salomon Brothers to
selected securities dealers are payable without regard to actual expenses
incurred.
The Distributor may, from time to time, assist dealers by, among other things,
providing sales literature to, and holding informational programs for the
benefit of, dealers' registered representatives which may include payment for
travel expenses, including lodging, incurred in connection with trips taken by
qualifying registered representatives and members of their families within or
outside the United States. Participation of registered representatives in such
informational programs may require the sale of minimum dollar amounts of shares
of the Funds. In addition, the Distributor may also, from time to time, at its
expense or as an expense for which it may be compensated under a distribution
plan, if applicable, pay a bonus or other consideration or incentives to dealers
who sell a minimum dollar amount of shares of the Funds during a specified
period of time. In some instances, these incentives
PAGE 77
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SALOMON BROTHERS INVESTMENT SERIES
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.
- --------------------------------------------------------------------------------
REDEMPTION OF SHARES
Shareholders may redeem all or any part of their shareholdings on any business
day at the applicable net asset value next determined after the receipt of
proper redemption instructions. The value of shares on redemption may be more or
less than the investor's cost.
Payment of redemption proceeds may be made in securities, subject to regulation
by some state securities commissions. Payment of the redemption price will be
made within seven days after receipt of the redemption instructions in good
order (or such shorter time period as may be required), but each Fund may
suspend the right of redemption during any period when (i) trading on the NYSE
is restricted or the NYSE is closed, other than customary weekend and holiday
closings, (ii) the SEC has by order permitted such suspension, or (iii) an
emergency, as defined by rules of the SEC, exists, making disposal of portfolio
securities or determination of the value of the net assets of each Fund not
reasonably practicable.
For the shareholder's convenience each Fund has established several different
redemption procedures. No redemption requests will be processed until the
applicable Fund has received a completed Purchase Application. If a shareholder
holds shares in more than one class, any request for redemption must specify the
class being redeemed. Each Fund will not credit redemption proceeds for any
shares until checks received in payment for such shares have been collected,
which may take up to 15 days or more. A shareholder who anticipates the need for
more immediate access to his or her investment should purchase shares by federal
funds or bank wire, or by a certified or cashier's check.
REDEMPTION 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)
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SALOMON BROTHERS INVESTMENT SERIES
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 THROUGH DISTRIBUTOR
In addition, shareholders who hold their shares in an account with Salomon
Brothers may redeem shares by calling 1-800-SALOMON. With respect to each Fund
(other than the Cash Management Fund), redemption requests for shares held in
brokerage accounts received by Salomon Brothers prior to the close of regular
trading on the NYSE on any day that the Fund calculates its net asset value are
effective that day. Redemption requests received after the close of trading on
the NYSE are effective at the applicable net asset value per share next
determined.
Proceeds of redemption will be credited to the shareholder's brokerage account
at Salomon Brothers. A redeeming shareholder with a Salomon Brothers brokerage
account may request a check from Salomon Brothers or may elect to retain the
redemption proceeds in such brokerage account. Generally, these funds will not
be invested for the shareholder's benefit without specific instructions, and
Salomon Brothers will benefit from the use of temporarily uninvested funds.
REDEMPTION BY MAIL
Shares may be redeemed by submitting a written request to TSSG 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
TSSG'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 (TSSG 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 The Shareholder
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 TSSG 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
TSSG.
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 TSSG 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 TSSG
will employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. Each Fund and/or TSSG 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 TSSG for further information.
You may either:
Telephone the redemption request to TSSG at the following number:
(800) SALOMON or (800) 725-6666 or
Mail the request to TSSG at the following address:
(Name of Fund)
c/o TSSG
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 TSSG by 12:00 noon (New York time) on any business day,
the redemption proceeds generally will be transmitted to the shareholder's bank
that same day. Checks for redemption proceeds of less than $500 will be mailed
to the shareholder's address of record.
CHECKWRITING
Checkwriting is available only to Class A and Class O shareholders of the Cash
Management Fund. If redemption by check has been elected on the Purchase
Application, the redemption of shares may be made by using redemption checks
provided by TSSG. There is no charge for
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SALOMON BROTHERS INVESTMENT SERIES
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 TSSG 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: (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
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SALOMON BROTHERS INVESTMENT SERIES
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 class. The effective yield will be slightly higher
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than the yield because of the compounding effect of this assumed reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such
as the S&P 500 Index or other industry or financial publications such as Bank
Rate Monitor, Barron's, Business Week, CDA Investment Technologies, Inc.,
Changing Times, Forbes, Fortune, ICB Donaghue's Money Fund Report,
Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund Values,
The New York Times, USA Today and The Wall Street Journal. The annual reports
to shareholders for each of the Series Funds, other than the total Return Fund
and the Asia Growth Fund which recently commenced operations, and the Investors
Fund for the fiscal year ended December 31, 1994 containing additional
performance information are available without charge and can be obtained by
writing or calling the address or telephone number printed on the front cover.
The yield of the Cash Management Fund may also be compared to yields set forth
in the weekly statistical release H.15(519) or the monthly statistical release
designated G.13(415) published by the Board of Governors of the Federal Reserve
System. Performance figures are based on historical earnings and are not
intended to indicate future performance. See "Performance Data" in the
Statement of Additional Information.
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DIVIDENDS AND DISTRIBUTIONS
The Cash Management Fund intends to declare as a dividend substantially all of
its net investment income at the close of each business day to the Fund's
shareholders of record at 12:00 noon (New York time) on that day, and will pay
such dividends monthly. The New York Municipal Bond Fund, the National
Intermediate Municipal Fund, the U.S. Government Income Fund, the High Yield
Bond Fund, the Strategic Bond Fund and the Total Return Fund will declare
dividends from net investment income daily and pay them monthly. The Asia
Growth Fund will declare dividends from net investment income annually and pay
them annually. The Investors Fund present policy is to pay quarterly dividends
from net investment income.
Net investment income is a Fund's investment company taxable income, as that
term is defined in the Code determined without regard to the deduction for
dividends paid and excluding any net realized capital gains. For the purpose of
calculating dividends, net investment income shall consist of interest earned,
which includes, where applicable, any discount accreted or premium amortized to
the date of maturity, minus estimated expenses.
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SALOMON BROTHERS INVESTMENT SERIES
Shares of a Fund (other than the Cash Management Fund, as described below) are
entitled to dividends declared beginning on the day after the purchase order is
received in good order. Purchase orders for shares of the Cash Management Fund
for which payment is received in or converted into federal funds by 12:00 noon
(New York time) on any business day will become effective and begin to earn
dividends that same day. Purchase orders for shares of the Cash Management Fund
for which payment is received in or converted into federal funds after 12:00
noon (New York time) on any business day will become effective and begin to
earn dividends on the following business day. With respect to the Cash
Management Fund, shares redeemed by 12:00 noon (New York time) will accrue
dividends through the day prior to redemption and shares redeemed after 12:00
noon will accrue dividends through the day of redemption. The New York
Municipal Bond Fund, the National Intermediate Municipal Fund, the U.S.
Government Income Fund, the High Yield Bond Fund, the Strategic Bond Fund, the
Total Return Fund and the Asia Growth Fund will accrue dividends on settled
shares through the day of redemption. For Funds that will declare dividends
daily, net investment income for a Saturday, Sunday or holiday will be declared
as a dividend on the previous business day.
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, as amended 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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SALOMON BROTHERS INVESTMENT SERIES
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 TSSG, 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 TSSG. 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 TSSG. Shareholders may change the
distribution option at any time by notification to TSSG or calling 1-800-SALOMON
prior to the record date of any such dividend or distribution.
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TAXATION
FEDERAL INCOME TAX MATTERS. Each Fund intends to qualify and elect to be treated
as a regulated investment company under Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"). If it so qualifies, a Fund will not be
subject to U.S. federal income taxes on its net investment income (i.e.,
its investment company taxable income, as that term is defined in the Code,
determined without regard to the deduction for dividends paid) and net capital
gain (i.e., the excess of a Fund's net realized long-term capital gain over its
net realized short-term capital loss), if any, that it distributes to its
shareholders in each taxable year, provided that it distributes to its
shareholders (i) at least 90% of its net investment income for such taxable
year, and (ii) with respect to the New York Municipal Bond Fund and the National
Intermediate Municipal Fund at least 90% of its net tax-exempt interest income
for such taxable year. If in any year a Fund fails to qualify as a regulated
investment company, such Fund would incur regular corporate federal income tax
on its taxable income for that year and be subject to certain additional
distribution requirements upon requalification.
Each Fund will be subject to federal corporate income tax (currently at a
maximum rate of 35%) on any undistributed income other than tax-exempt income
from municipal obligations and to alternative minimum tax (currently at a
maximum rate of 28%) on alternative minimum taxable income, which includes
interest income on certain "private activity" obligations that is otherwise
exempt from tax.
Each Fund is subject to a nondeductible 4% excise tax calculated as a percentage
of certain undistributed amounts of ordinary income and net realized capital
gains. To the extent possible, each Fund intends to make sufficient
distributions to avoid the application of both the corporate income and excise
taxes.
All dividends and distributions to shareholders of a Fund of investment company
taxable income will be taxable to shareholders whether paid in cash or
reinvested in additional shares. For federal income
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SALOMON BROTHERS INVESTMENT SERIES
tax purposes, distributions of net investment income which includes the
excess of the Fund's net realized short-term capital gains over net realized
long-term capital losses, are taxable to shareholders as ordinary income.
Distributions of net realized long-term capital gains designated by a Fund as
"capital gain dividends" will be taxable as long-term capital gains, whether
paid in cash or additional shares, regardless of how long the shares have been
held by such shareholders, and such distributions will not be eligible for the
dividends received deduction. With respect to each Fund, a portion of each
Fund's dividends may qualify for the dividends received deduction available to
corporations. In general, the maximum federal income tax rate imposed on
individuals with respect to capital gain dividends will be limited to 28%,
whereas the maximum federal income tax rate imposed on individuals with respect
to ordinary income (and short-term capital gains, which currently are taxed at
the same rates as ordinary income) will be 39.6%. With respect to corporate
taxpayers, long-term capital gains currently are taxed at the same federal
income tax rates as ordinary income and short-term capital gains. Investors
should consider the tax implications of buying shares shortly before the record
date of a distribution because distributions of net capital gain will be taxable
even though the net asset value of shares of a Fund is reduced by the
distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of a Fund investing in foreign securities or currencies will be
reduced by these foreign taxes. Shareholders will bear the cost of any foreign
taxes but may not be able to claim a foreign tax credit or deduction for these
foreign taxes. In addition, a Fund investing in securities of passive foreign
investment companies may be subject to U.S. federal income taxes (and interest
on such taxes) as a result of such investments. The investment yield of a Fund
making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed as
capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be (i)
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares or (ii) disallowed to
the extent of any exempt-interest dividends received by the shareholder with
respect to such shares. A loss realized on a sale or exchange of shares may be
disallowed if other shares are acquired within a 61-day period beginning 30 days
before and ending 30 days after the date that the shares are disposed of.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if a Fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the following January, it will be
deemed to have been received by the shareholders and paid by the Fund no later
than December 31 of the year in which the dividend or distribution is declared.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in obligations such as certain Brady Bonds or zero coupon securities
having original issue discount
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(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 the Investment Adviser
is located in Hong Kong, (a) the Fund or its agents were deemend to carry on a
trade, profession or business in Hong Kong and (b) profits from that trade,
profession or business were to arise in or be derived from Hong Kong. Hong
Kong profits tax will not be payable in respect of profits from the sale of
shares and other securities transacted outside Hong Kong, interest arising or
derived from outside Hong Kong and profits in the nature of capital gains. The
sale of securities will not be treated as the sale of capital assets if the
profit or loss from such sale is regarded as attributable to a trade or
business carried on in Hong Kong. The Asia Growth Fund does not currently
believe that it will be subject to Hong Kong profits tax.
Dividends which the Fund pays to its shareholders are not taxable in Hong Kong
(whether through withholding or otherwise) under current legislation and
practice. No Hong Kong stamp duty will be payable in respect of transactions in
shares of the Asia Growth Fund provided that the register of shareholders is
maintained outside of Hong Kong.
STATE AND LOCAL TAX MATTERS. Depending on the residence of the shareholder for
tax purposes, distributions may also be subject to state and local taxes or
withholding taxes.
Most states provide that a regulated investment company may pass through
(without restriction) to its shareholders state and local income tax exemptions
available to direct owners of certain types of U.S. government securities (such
as U.S. Treasury obligations). Thus, for residents of these states,
distributions derived from a Fund's investment in certain types of U.S.
government securities should be free from state and local income taxes to the
extent that the interest income from such investments would have been exempt
from state and local income taxes if such securities had been held directly by
the respective shareholders themselves. Certain states, however, do not allow a
regulated investment company to pass through to its shareholders the state and
local income tax exemptions available to direct owners of certain types of U.S.
government securities unless the regulated investment company holds at least a
required amount of U.S. government securities. Accordingly, for residents of
these states, distributions derived from a Fund's investment in certain types of
U.S. government securities may not be entitled to the exemptions from state and
local income taxes that would be available if the shareholders had purchased
U.S. government securities directly. Shareholders' dividends 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
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SALOMON BROTHERS INVESTMENT SERIES
preclude states from asserting other taxes on the ownership of U.S. government
securities. To the extent that a Fund invests to a substantial degree in U.S.
government securities which are subject to favorable state and local tax
treatment, shareholders of such Fund will be notified as to the extent to which
distributions from the Fund are attributable to interest on such securities.
NEW YORK MUNICIPAL BOND FUND AND NATIONAL INTERMEDIATE MUNICIPAL FUND. The New
York Municipal Bond Fund and the National Intermediate Municipal Fund each
intends to qualify to pay "exempt-interest dividends," as that term is defined
in the Code, by holding at the end of each quarter of its taxable year at least
50% of the value of its total assets in the form of obligations described in
section 103(a) of the Code. Each Fund's policy is to pay in each taxable year
exempt-interest dividends equal to at least 90% of such Fund's interest from
tax-exempt obligations net of certain deductions. Except as discussed below,
exempt-interest dividends will be exempt from regular federal income tax. In
addition, dividends from the New York Municipal Bond Fund will not be subject to
New York State and New York City personal income taxes to the extent that such
distributions qualify as exempt-interest dividends and represent interest income
attributable to federally tax-exempt obligations of the State of New York and
its political subdivisions (as well as certain other federally tax-exempt
obligations the interest on which is exempt from New York State and New York
City personal income taxes). Dividends from the New York Municipal Bond Fund,
however, are not excluded in determining New York State or New York City
franchise taxes on corporations and financial institutions.
All or a portion of the gain from sale or redemption of tax-exempt obligations
acquired after April 30, 1993 attributable to market discount will be treated as
ordinary income rather than capital gain. This rule may increase the amount of
ordinary income dividends received by shareholders of the New York Municipal
Bond Fund and the National Intermediate Municipal Fund.
Although exempt-interest dividends may be excluded from a shareholder's gross
income for federal income tax purposes, a portion of the exempt-interest
dividends may be a specific preference item for purposes of determining the
shareholder's liability (if any) under the federal individual and corporate
alternative minimum tax provisions of the Code. Exempt-interest dividends will
constitute a specific preference item for purposes of the federal alternative
minimum tax to the extent that such dividends are derived from certain types of
private activity bonds issued after August 7, 1986. In addition, all
exempt-interest dividends will be a component of the "adjusted current earnings"
adjustment item for purposes of the federal corporate alternative minimum tax.
Moreover, the receipt of exempt-interest dividends may increase a corporate
shareholder's liability for environmental taxes under Section 59A of the Code
and a foreign corporate shareholder's liability under the branch profits tax,
and may also affect the federal tax liability of certain Subchapter S
corporations and insurance companies. Furthermore, the receipt of exempt-
interest dividends may be a factor in determining the extent to which a
shareholder's Social Security benefits are taxable.
With respect to the New York Municipal Bond Fund, the exemption of interest
income for regular federal income tax purposes and for New York State and New
York City personal income tax purposes 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
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SALOMON BROTHERS INVESTMENT SERIES
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.
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SYSTEMATIC INVESTING
An investor may request that shares of any class of a Fund be exchanged monthly
for shares of the same class of any other Fund. A predetermined dollar amount of
at least $50 per exchange will then occur on or about the 15th of each month in
accordance with the instructions provided on the initial account application or
on the Systematic Investing application. This Systematic Investing program is
also referred to as "Dollar Cost Averaging."
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
the same class of any other Fund at the applicable relative net asset value per
share without the imposition of any front end sales charge or CDSC, except as
described below. Shares of a Fund are eligible for exchange 30 days after
purchase. Shares of one class may not be exchanged for shares of any other class
of any Fund.
A front end sales charge will be imposed with respect to Class A shares of a
Fund which are issued upon an exchange from Class A Cash Management Fund shares
and as to which no front end sales charge had been previously paid or waived.
For purposes of determining a shareholder's holding period in the calculation of
any applicable CDSC, the period of time during which shares were held prior to
an exchange will be added to the holding period of shares acquired in an
exchange. However, the CDSC period is tolled for any period of time in which
shares are held in the Cash Management Fund. For example, if shares subject to a
CDSC of a Fund other than the Cash Management Fund are exchanged for shares of
the Cash Management Fund two years after purchase and are subsequently redeemed
one year later, only the first two years of ownership count in the determination
of the applicable CDSC percentage to be applied to that redemption. Furthermore,
when Cash Management Fund shares are exchanged for shares of any other Fund, the
CDSC becomes (or, in the case of Cash Management Fund shares which were subject
to a CDSC prior to a previous exchange for Cash Management Fund shares, again
becomes) applicable to those shares commencing at the time of exchange. If such
shares are subsequently redeemed, only time of ownership spent in Funds other
than the Cash Management Fund counts toward determining the applicable CDSC.
Each Fund reserves the right to refuse a telephone request for exchange if it is
believed advisable to do so. Procedures for exchanging shares by telephone may
be modified or terminated at any time by a Fund. None of the Funds or TSSG 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 TSSG may employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The Funds and/or TSSG 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
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request. The exchange privilege may be modified or terminated at any time after
notice to shareholders.
AUTOMATIC WITHDRAWAL PLAN
A shareholder may establish a plan for redemptions to be made automatically at
monthly, quarterly, semiannual or annual intervals with payments sent directly
to him or her or to persons designated by the shareholders as recipients of the
withdrawals. Requests for this service not made on the initial application
require signature guarantees unless the payments are to be made to the
shareholder and mailed to the address of record on the account. Investors are
required to have a minimum account value of $10,000 in a single account in order
to establish a monthly withdrawal plan, and a minimum of $5,000 in a single
account for quarterly, semiannual and annual withdrawal plans. Each withdrawal
constitutes a redemption of shares on which a gain or loss may be recognized.
Class B and Class C shareholders may redeem 12% annually or no more than 2%
monthly of their initial account balances without incurring a CDSC. With respect
to the New York Municipal Bond Fund and the Investors Fund, a Withdrawal Plan
may be opened with an account having a total value of at least $7,500, and a
shareholder can arrange for automatic distributions to be made monthly or
quarterly in amounts not less than $250 and $50 from the New York Municipal Bond
Fund and the Investors Fund, respectively. Maintenance of an Automatic
Withdrawal Plan concurrently with purchases of additional shares may be
disadvantageous to an investor because of the sales charges on certain purchases
and redemptions.
The redemptions will occur on or about the 10th day or the 25th day of the month
and the checks will generally be mailed within two days after the redemption
occurs. No redemption will occur if the account balance falls below the amount
required to meet the requested withdrawal amount. This service may be terminated
at any time.
REINSTATEMENT PRIVILEGE
A shareholder may return any dividend, capital gain or redemption check to a
Fund within 60 days of the transaction and have it reinvested at the applicable
net asset value without incurring a sales charge. With regard to Class A shares,
a shareholder may reinstate at net asset value any portion of shares which have
been previously redeemed if the redemption occurred within 60 days of the
request. With regard to Class B and Class C shares, if an investor redeems Class
B or Class C shares and pays a CDSC upon redemption, and then uses those
proceeds to purchase Class B or Class C shares of any Fund within 60 days, the
Class B or Class C shares purchased will be credited with any CDSC paid in
connection with the prior redemption. There are no restrictions on the number of
times a shareholder may use the Reinstatement Privilege.
Any gain recognized on a redemption or repurchase is taxable despite the
reinstatement in the Fund. Any loss realized as a result of the redemption or
repurchase may not be allowed as a deduction for federal income tax purposes but
may be applied, depending on the amount reinstated, to adjust the cost basis of
the shares acquired upon reinstatement. In addition, if the shares redeemed or
repurchased had been acquired within the 60 days preceding the redemption or
repurchase, the amount of any gain or loss 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).
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SALOMON BROTHERS INVESTMENT SERIES
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, the Total Return Fund
and the Asia Growth Fund are newly or recently organized portfolios of the
Series Funds. In addition, the Series Funds includes the Cash Manage-
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SALOMON BROTHERS INVESTMENT SERIES
ment 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, the Total Return
Fund and the Asia Growth Fund and consequently is a controlling person of such
Funds.
The Investors Fund was incorporated in Maryland on April 2, 1958. The authorized
capital stock of the Fund consists of 50,000,000 shares having a par value of
$1.00 per share.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Series Funds and the Investors Fund have considered this
factor in approving the use of a combined Prospectus.
Shares of each class of a Fund represent interests in that Fund in proportion to
each share's net asset value. The per share net asset value of each class of
shares in a Fund is calculated separately and may differ as between classes as a
result of the differences in distribution and service fees payable by the
classes and the allocation of certain incremental class-specific expenses to the
appropriate class to which such expenses apply.
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class is
required by law or where the matter involved affects only one series or class.
Each shareholder is entitled to cast, at all meetings of shareholders, such
number of votes as is equal to the number of full and fractional shares held by
such shareholder. All shares of each Fund will, when issued, be fully paid and
nonassessable. None of the Funds will issue any senior securities. Under the
corporate law of Maryland, the state of incorporation of both the Series Funds
and the Investors Fund, and the By-Laws of each of the Series Funds and the
Investors Fund, neither the Series Fund nor the Investors Fund is required and
does not currently intend to hold annual meetings of shareholders for the
election of directors except as required under the 1940 Act. A more complete
statement of the voting rights of shareholders is contained in the Statement of
Additional Information.
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APPENDIX A:
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S INVESTORS SERVICE'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A--Bonds which are rated "A" possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated "Baa" are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance and
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative in
high degree. Such issues are often in default or have other marked shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its
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SALOMON BROTHERS INVESTMENT SERIES
generic rating category; the modifier "2" indicates a mid-range ranking; and the
modifier "3" indicates that the issue ranks in the lower end of its generic
rating category.
STANDARD & POOR'S RATINGS GROUP CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and differs from "AAA" issues only in
small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or major
risk exposures to adverse conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being paid.
D--Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
PRIME-1--Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2--Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratios, while sound, will be more subject
to variation. Capitalization
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SALOMON BROTHERS INVESTMENT SERIES
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
PRIME-3--Issuers (or related supporting institutions) rated "Prime-3" have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME--Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1--This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2--Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1".
A-3--Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B--Issues rated "B" are regarded as having only speculative capacity for timely
payment.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D--Debt rated "D" is in payment default. The "D" rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S INVESTORS SERVICE'S MUNICIPAL BOND RATINGS
Aaa--Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa--Bonds which are rated Aa are judged to be of high quality by all standards.
Together with the Aaa group they comprise what are generally known as high grade
bonds. They are rated lower than the best bonds because margins of protection
may not be as large as in Aaa securities or fluctuation of protective elements
may be of greater amplitude or there may be other elements present which make
the long term risks appear somewhat larger than in Aaa securities.
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SALOMON BROTHERS INVESTMENT SERIES
A--Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa--Bonds which are rated Baa are considered as medium grade obligations, i.e.,
they are neither highly protected nor poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers "1", "2" and "3" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a
mid-range ranking; and the modifier "3" indicates that the issue ranks in the
lower end of its generic rating category.
STANDARD & POOR'S MUNICIPAL BOND RATINGS
AAA--This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA--Bonds rated AA also qualify as high quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degrees.
A--Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB--Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1--Notes rated MIG-1/VMIG-1 are of the best quality. There is present
strong protection by established cash flows, superior liquidity support or
broad-based access to the market for refinancing.
MIG-2/VMIG-2--Notes which are rated MIG-2/VMIG-2 are of high quality. Margins of
protection are ample though not so large as in the preceding group.
STANDARD & POOR'S RATINGS OF STATE AND MUNICIPAL NOTES
SP-1--Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2--Notes which are rated SP-2 have a satisfactory capacity to pay principal
and interest.
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SALOMON BROTHERS INVESTMENT SERIES
FITCH MUNICIPAL BOND RATINGS
AAA--Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA--Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A--Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB--Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position of a
credit within a rating category. Plus and minus signs, however, are not used in
the AAA category.
FITCH SHORT-TERM RATINGS
Fitch's short-term ratings apply to debt obligations that are payable on demand
or have original maturities of generally up to three years, including commercial
paper, certificates of deposit, medium-term notes, and municipal and investment
notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+--Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1--Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2--Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3--Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, although near-term adverse changes
could cause these securities to be rated below investment grade.
LOC--The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances
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SALOMON BROTHERS INVESTMENT SERIES
are more likely to lead to a weakened capacity to make principal and interest
payments than is the case with higher grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by a Fund. However, a Fund's investment manager
will consider such event in its determination of whether such Fund should
continue to hold the security. To the extent the ratings given by Moody's, S&P
or Fitch may change as a result of changes in such organizations or their rating
systems, a Fund will attempt to use comparable ratings as standards for
investments in accordance with the investment policies contained in this
Prospectus and in the Statement of Additional Information.
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APPENDIX B:
GENERAL CHARACTERISTICS
AND RISKS OF DERIVATIVES
A detailed discussion of Derivatives (as defined below) that may be used by the
investment manager on behalf of certain Funds follows below. The description in
this Prospectus of each Fund indicates which, if any, of these types of
transactions may be used by that Fund. A Fund will not be obligated, however, to
use any Derivatives and makes no representation as to the availability of these
techniques at this time or at any time in the future. "Derivatives," as used in
this Appendix B, refers to interest rate, currency or stock or bond index
futures contracts, currency forward contracts and currency swaps, the purchase
and sale (or writing) of exchange listed and over-the-counter ("OTC") put and
call options on debt and equity securities, currencies, interest rate, currency
or stock index futures and fixed-income and stock indices and other financial
instruments, entering into various interest rate transactions such as swaps,
caps, floors, collars, entering into equity swaps, caps, floors or trading in
other similar types of instruments.
A Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ("CFTC") thereunder and the federal income tax
requirements applicable to regulated investment companies which are not operated
as commodity pools.
GENERAL CHARACTERISTICS OF OPTIONS
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Derivatives involving options require segregation of Fund assets in special
accounts, as described below under "Use of Segregated and Other Special
Accounts."
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer the obligation to buy, the underlying security,
index, currency or other instrument at the exercise price. A Fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
futures contract, index, currency or other instrument might be intended to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase the instrument. An "American" style put or call option may be exercised
at any time during the option period, whereas a "European" style put or call
option may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ("OCC"), which guarantees the
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SALOMON BROTHERS INVESTMENT SERIES
performance of the obligations of the parties to the options. The discussion
below uses the OCC as an example, but is also applicable to other similar
financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
of the terms of an OTC option, including such terms as method of settlement,
term, exercise price, premium, guaranties and security, are determined by
negotiation of the parties. It is anticipated that any Portfolio authorized to
use OTC options will generally only enter into OTC options that have cash
settlement provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the investment manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York as "primary dealers,"
or broker-dealers, domestic or foreign banks, or other financial institutions
that
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SALOMON BROTHERS INVESTMENT SERIES
the investment manager deems to be creditworthy. In the absence of a change in
the current position of the staff of the SEC, OTC options purchased by a Fund
and the amount of a Fund's obligation pursuant to an OTC option sold by the Fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered" (that is, the Fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
a Fund will expose the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and indices
which may be developed in the future to the extent consistent with applicable
law, the Fund's investment objective and the restrictions set forth herein.
A Fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A Fund may trade financial futures contracts or purchase or sell put and call
options on those contracts as a hedge against anticipated interest rate,
currency or market changes, and for risk management purposes, or a Fund may seek
to increase its income or gain. Futures contracts are generally bought and sold
on the commodities exchanges on which they are listed with payment of initial
and variation margin as described below. The sale of a futures contract creates
a firm obligation by the Fund, as seller, to deliver to the buyer the specific
type of financial instrument called for in the contract at a specific future
time for a specified price (or, with respect to certain instruments, the net
cash amount). Options on futures contracts are similar to options on securities
except that an option on a futures contract gives the purchaser the right, in
return for the premium paid, to assume a position in a futures contract and
obligates the seller to deliver that position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC. Maintaining a futures contract or selling
an option on a futures contract will typically require the Fund to deposit with
a financial intermediary, as security for its obligations, an amount of cash or
other specified assets ("initial margin") that initially is from 1% to 10% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to-market value of the futures contract
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SALOMON BROTHERS INVESTMENT SERIES
fluctuates. The purchase of an option on a financial futures contract involves
payment of a premium for the option without any further obligation on the part
of the Fund. If the Fund exercises an option on a futures contract it will be
obligated to post initial margin (and potentially variation margin) for the
resulting futures position just as it would for any futures position. Futures
contracts and options thereon are generally settled by entering into an
offsetting transaction, but no assurance can be given that a position can be
offset prior to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon if, immediately
thereafter, the sum of the amount of its initial margin and premiums required to
maintain permissible non-bona fide hedging positions in futures contracts and
options thereon would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts; however, in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are described
below under "Use of Segregated and Other Special Accounts."
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
A Fund may purchase and sell call and put options on securities indices and
other financial indices. In so doing, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, options on indices settle by cash settlement; that is, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if, in the case of an OTC option, physical
delivery is specified). This amount of cash is equal to the excess of the
closing price of the index over the exercise price of the option, which also may
be multiplied by a formula value. The seller of the option is obligated, in
return for the premium received, to make delivery of this amount. The gain or
loss on an option on an index depends on price movements in the instruments
comprising the market, market segment, industry or other composite on which the
underlying index is based, rather than price movements in individual securities,
as is the case with respect to options on securities.
CURRENCY TRANSACTIONS
A Fund may engage in currency transactions with Counterparties to hedge the
value of portfolio securities denominated in particular currencies against
fluctuations in relative value or to generate income or gain. Currency
transactions include currency forward contracts, exchange-listed currency
futures contracts and options thereon, exchange-listed and OTC options on
currencies, and currency swaps. A forward currency contract involves a privately
negotiated obligation to purchase or sell (with delivery generally required) a
specific currency at a future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at a price set at the time
of the contract. A currency swap is an agreement to exchange cash flows based on
the notional
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SALOMON BROTHERS INVESTMENT SERIES
difference among two or more currencies and operates similarly to an interest
rate swap, which is described below under "Swaps, Caps, Floors and Collars." A
Fund may enter into currency transactions only with Counterparties that the
investment manager deems to be creditworthy.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under "Risk Factors." If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under "Use of Segregated and Other Special
Accounts."
COMBINED TRANSACTIONS
A Fund may enter into multiple transactions, including multiple options
transactions, multiple futures transactions, multiple currency transactions
(including forward currency contracts), multiple interest rate transactions and
any combination of futures, options, currency and interest rate transactions,
instead of a single Derivative, as part of a single or combined strategy when,
in the judgment of the investment manager, it is in the best interests of the
Fund to do so. A combined transaction will usually contain elements of risk that
are present in each of its component transactions. Although combined
transactions will normally be entered into by a Fund based on the investment
manager's judgment that the combined strategies will reduce risk or otherwise
more effectively achieve the desired portfolio management goal, it is possible
that the combination will instead increase the risks or hinder achievement of
the Fund management objective.
SWAPS, CAPS, FLOORS AND COLLARS
A Fund may enter into interest rate, currency and equity swaps, the purchase or
sale of related caps, floors and collars and other similar arrangements. A Fund
will enter into these transactions primarily to seek to preserve a return or
spread on a particular
PAGE B-5
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SALOMON BROTHERS INVESTMENT SERIES
investment or portion of its portfolio, to protect against currency
fluctuations, as a duration management technique, to protect against any
increase in the price of securities the Fund anticipates purchasing or selling
at a later date or to generate income or gain. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest (for example, an exchange of floating rate payments for
fixed rate payments with respect to a notional amount of principal). An equity
swap is an agreement to exchange cash flows on a national principal amount based
on changes in the values of the reference index. A currency swap is an agreement
to exchange cash flows on a notional amount based on changes in the values of
the currency exchange rates. The purchase of a cap entitles the purchaser to
receive payments on a notional principal amount from the party selling the cap
to the extent that a specified interest rate, currency exchange rate or index
exceeds a predetermined rate or amount. The purchase of a floor entitles the
purchaser to receive payments on a notional principal amount from the party
selling the floor to the extent that a specified interest rate, currency
exchange rate or index falls below a predetermined rate or amount. A collar is a
combination of a cap and a floor that preserves a certain return with a
predetermined range of rates or values.
A Fund will usually enter into swaps on a net basis, that is, the two payments
streams are netted out in a cash settlement on the payment date or dates
specified in the instrument, with the Fund receiving or paying, as the case may
be, only the net amount of the two payments. Inasmuch as these swaps, caps,
floors, collars and other similar types of instruments are entered into for good
faith hedging or other non-speculative purposes, they do not constitute senior
securities under the 1940 Act, and, thus, will not be treated as being subject
to the Fund's applicable borrowing restrictions. A Fund will not enter into any
swap, cap, floor, collar or other similar type of transaction unless the
investment manager deems the Counterparty to be creditworthy. If a Counterparty
defaults, the Fund may have contractual remedies pursuant to the agreements
related to the transaction. The swap market has grown substantially in recent
years with a large number of banks and investment banking firms acting both as
principals and as agents utilizing standardized swap documentation. As a result,
the swap market has become relatively liquid. Caps, floors and collars are more
recent innovations for which standardized documentation has not yet been fully
developed and, for that reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 10% restriction on investments in securities that are not
readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess, if any,
of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If a Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement. See "Use of Segregated and Other Special Accounts" below.
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SALOMON BROTHERS INVESTMENT SERIES
RISK FACTORS
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the Derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a Fund to hold a security it might
otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging instrument are
greater than gains in the value of the Fund's position. In addition, futures and
options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater on going potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a Fund does not, or cannot, terminate such a transaction in
a timely manner, a Fund may suffer a loss in excess of any amounts that it may
have received, or expected to receive, as a result of entering into the
transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction
PAGE B-7
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SALOMON BROTHERS INVESTMENT SERIES
costs. Buyers and sellers of currency futures contracts are subject to the same
risks that apply to the use of futures contracts generally. Further, settlement
of a currency futures contract for the purchase of most currencies must occur at
a bank based in the issuing nation. Trading options on currency futures
contracts is relatively new, and the ability to establish and close out
positions on these options is subject to the maintenance of a liquid market that
may not always be available. Currency exchange rates may fluctuate based on
factors extrinsic to that country's economy.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
RISKS OF DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Derivatives may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. In addition, the price of any foreign futures or foreign options
contract and, therefore, the potential profit and loss thereon, may be affected
by any variance in the foreign exchange rate between the time an order is placed
and the time it is liquidated, offset or exercised. The value of positions taken
as part of non-U.S. Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of data on which to make trading decisions than in the United States, (3) delays
in the Fund's ability to act upon economic events occurring in foreign markets
during nonbusiness hours in the United States, (4) the imposition of different
exercise and settlement terms and procedures and margin requirements than in the
United States and (5) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Derivatives by a Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with its
custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by a Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by a Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by a Fund
will require the Fund to segregate liquid high grade debt obligations equal to
the exercise price. Except when a Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires
PAGE B-8
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SALOMON BROTHERS INVESTMENT SERIES
no segregation, a currency contract that obligates the Fund to buy or sell a
foreign currency will generally require the Fund to hold an amount of that
currency or liquid securities denominated in that currency equal to the Fund's
obligations or to segregate liquid high grade debt obligations equal to the
amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options.
OCC-issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets. A Fund
will accrue the net amount of the excess, if any, of its obligations relating to
swaps over its entitlements with respect to each swap on a daily basis and will
segregate with its custodian, or designated sub-custodian, an amount of cash or
liquid high grade debt obligations having an aggregate value equal to at least
the accrued excess. Caps, floors and collars require segregation of assets with
a value equal to the Fund's net obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related Derivatives.
A Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contracts or
forward contract, a Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
PAGE B-9
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TELEPHONES
(800) SALOMON
(800) 725-6666
DISTRIBUTOR
Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
INVESTMENT MANAGER
Salomon Brothers Asset
Management Inc
Seven World Trade Center
New York, New York 10048
CUSTODIAN
Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
TRANSFER AGENT AND
DIVIDEND DISBURSING AGENT
The Shareholder 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> 121
Subject to Completion
Preliminary Statement of Additional Information
dated January 19, 1996
SALOMON BROTHERS INVESTMENT SERIES
7 World Trade Center
New York, New York 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Investment Series consists of Salomon Brothers Cash Management
Fund (the "Cash Management Fund"), Salomon Brothers New York Municipal Bond
Fund (the "New York Municipal Bond Fund"), Salomon Brothers National
Intermediate Municipal Fund (the "National Intermediate Municipal Fund"),
Salomon Brothers U.S. Government Income Fund (the "U.S. Government Income
Fund"), Salomon Brothers High Yield Bond Fund (the "High Yield Bond Fund"),
Salomon Brothers Strategic Bond Fund (the "Strategic Bond Fund"), Salomon
Brothers Total Return Fund (the "Total Return Fund"), Salomon Brothers Asia
Growth Fund (the "Asia Growth Fund") and Salomon Brothers Investors Fund Inc
(the "Investors Fund") (each a "Fund" and collectively, the "Funds"). Each of
the Funds, except for the Investors Fund, is an investment portfolio of the
Salomon Brothers Series Funds Inc (the "Series Funds"), an open-end investment
company incorporated in Maryland on April 17, 1990. The Asia Growth Fund is a
non-diversified portfolio and the other Funds which are part of the Series
Funds are diversified portfolios. The National Intermediate Municipal Fund,
U.S. Government Income Fund, 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 a diversified open-end
management investment company incorporated in Maryland on April 2, 1958. The
investment objective of each Fund is described in the Prospectus dated
____________, 1996, as the same may be amended or supplemented from time to
time (the "Prospectus").
This Statement of Additional Information is not a prospectus and is only
authorized for distribution when preceded or accompanied by the Prospectus.
This Statement of Additional Information contains additional information to
that set forth in the Prospectus and should be read in conjunction with the
Prospectus, additional copies of which may be obtained without charge by
writing or calling the Funds at the address and telephone number printed above.
_______________, 1996
<PAGE> 122
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS AND INVESTMENT POLICIES . . . . . . . . . 2
SPECIAL FACTORS AFFECTING THE FUND'S INVESTMENT IN NEW YORK MUNICIPAL OBLIGATIONS . . . . 18
INVESTMENT LIMITATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
PORTFOLIO TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63
NET ASSET VALUE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64
ADDITIONAL PURCHASE INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66
ADDITIONAL REDEMPTION INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67
ADDITIONAL INFORMATION CONCERNING TAXES . . . . . . . . . . . . . . . . . . . . . . . . . 67
PERFORMANCE DATA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 74
SHAREHOLDER SERVICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79
CAPITAL STOCK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 81
CUSTODIAN AND TRANSFER AGENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
VALIDITY OF SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
COUNSEL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
OTHER INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 83
</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> 123
3
FOREIGN SECURITIES. Investors should recognize that investing in
the securities of foreign issuers generally, and particularly in emerging
market issuers, involves special considerations which are not typically
associated with investing in securities of U.S. issuers. Investments in
securities of foreign issuers may involve risks arising from differences
between U.S. and foreign securities markets, including less volume, much
greater price volatility in and relative illiquidity of foreign securities
markets, different trading and settlement practices and less governmental
supervision and regulation, from changes in currency exchange rates, from high
and volatile rates of inflation, from economic, social and political conditions
and, as with domestic multinational corporations, from fluctuating interest
rates.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase the costs and expenses of a Fund.
Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional
taxes on foreign investors.
Certain emerging market countries may require governmental approval for the
repatriation of investment income, capital or the proceeds of sales of
securities by foreign investors which could adversely affect a Fund. in
addition, if a deterioration occurs in an emerging market country's balance of
payments, it could impose temporary restrictions on foreign capital
remittances. Investing in local markets in emerging market countries may
require a Fund to adopt special procedures, seek local government approvals or
take other actions, each of which may involve additional costs to the Fund.
Other investment risks include the possible imposition of foreign taxes on
certain amounts of a Fund's income which may reduce the net return an 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 U.S.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing
on the financial statements of an emerging market country issuer may not
reflect its financial position or results of operations in the way they would
be reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that
keeps accounting records in local currency, inflation accounting rules may
require, for both tax and accounting purposes, that certain assets and
liabilities be restated on the issuer's balance sheet in order to express items
in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits. Consequently, financial data may be
materially affected by restatements for inflation and may not accurately
reflect the real condition of those issuers and securities markets. Finally,
in the event of a default in any such foreign obligations, it may be more
difficult for a Fund to obtain or enforce a judgment against the issuers of
such obligations. See "--High Yield Securities".
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.
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 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
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them back to the issuer of the instrument or to a third party at par value
prior to maturity. Some of the demand instruments purchased by a Fund are not
traded in a secondary market and derive their liquidity solely from the ability
of the holder to demand repayment from the issuer or third party providing
credit support. If a demand instrument is not traded in a secondary market,
each Fund will nonetheless treat the instrument as "readily marketable" for the
purposes of its investment restriction limiting investments in illiquid
securities unless the demand feature has a notice period of more than seven
days; if the notice period is greater than seven days, the demand instrument
will be characterized as "not readily marketable" for such purpose.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Fund elects to demand
payment and the date payment is due that may affect the ability of the issuer
of the instrument or third party providing credit support to make payment when
due, except when such demand instruments permit same day settlement. To
facilitate settlement, these same day demand instruments may be held in book
entry form at a bank other than a Fund's custodian subject to a sub-custodian
agreement approved by such Fund between that bank and the Fund's custodian.
ASSET-BACKED SECURITIES
Asset-backed securities are generally issued as pass through
certificates, which represent undivided fractional ownership interests in the
underlying pool of assets, or as debt instruments, which are generally issued
as the debt of a special purpose entity organized solely for the purpose of
owning such assets and issuing such debt. Asset-backed securities are often
backed by a pool of assets representing the obligations of a number of
different parties. Asset-backed securities frequently carry credit protection
in the form of extra collateral, subordinated certificates, cash reserve
accounts, letters of credit or other enhancements. For example, payments of
principal and interest may be guaranteed up to certain amounts and for a
certain time period by a letter of credit or other enhancement issued by a
financial institution unaffiliated with the entities issuing the securities.
Assets which, to date, have been used to back asset-backed securities include
motor vehicle installment sales contracts or installment loans secured by motor
vehicles, and receivables from revolving credit (credit card) agreements.
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
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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 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 1994 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 and the Total Return 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
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"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.
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.
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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 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.
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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 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
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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 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
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in which a rating by S&P or Moody's has not been assigned, are generally
considered by the investment manager to be of comparable quality.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by
a debtor nation with its creditors. As a result, the financial packages
offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount from the face value
of such debt (generally known as discount bonds), bonds bearing an interest
rate which increases over time and bonds issued in exchange for the advancement
of new money by existing lenders. Discount bonds issued to date under the
framework of the Brady Plan have generally borne interest computed semiannually
at a rate equal to 13/16 of one percent above the then current six month LIBOR
rate. Regardless of the stated face amount and stated interest rate of the
various types of Brady Bonds, the applicable Funds will purchase Brady Bonds in
secondary markets, as described below, in which the price and yield to the
investor reflect market conditions at the time of purchase. Brady Bonds issued
to date have traded at a deep discount from their face value. Certain
sovereign bonds are entitled to "value recovery payments" in certain
circumstances, which in effect constitute supplemental interest payments but
generally are not collateralized. Certain Brady Bonds have been collateralized
as to principal due at maturity (typically 30 years from the date of issuance)
by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity
of such Brady Bonds, although the collateral is not available to investors
until the final maturity of the Brady Bonds. Collateral purchases are financed
by the IMF, the World Bank and the debtor nations' reserves. In addition,
interest payments on certain types of Brady Bonds may be collateralized by cash
or high-grade securities in amounts that typically represent between 12 and 18
months of interest accruals on these instruments with the balance of the
interest accruals being uncollateralized. The applicable Funds may purchase
Brady Bonds with no or limited collateralization, and will be relying for
payment of interest and (except in the case of principal collateralized Brady
Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds.
Brady Bonds issued to date are purchased and sold in secondary markets through
U.S. securities dealers and other financial institutions and are generally
maintained through European transnational securities depositories. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which the Fund invests are likely to be acquired at a discount, which involves
certain considerations discussed below under "Additional Information Concerning
Taxes."
INVERSE FLOATING RATE OBLIGATIONS
Certain Funds may invest in inverse floating rate obligations, or
"inverse floaters." Inverse floaters have coupon rates that vary inversely at a
multiple of a designated floating rate (which typically is determined by
reference to an index rate, but may also be determined through a dutch auction
or a remarketing agent) (the "reference rate"). Inverse floaters may constitute
a class of CMOs with a coupon rate that moves inversely to a designated index,
such as LIBOR (London Inter-Bank Offered Rate) or COFI (Cost of Funds Index).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates)
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causes a drop in the coupon rate while any drop in the reference rate of an
inverse floater causes an increase in the coupon rate. In addition, like most
other fixed income securities, the value of inverse floaters will generally
decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than
fixed rate obligations having similar credit quality, redemption provisions and
maturity, and inverse floater CMOs exhibit greater price volatility than the
majority of mortgage pass-through securities or CMOs. In addition, some
inverse floater CMOs exhibit extreme sensitivity to changes in prepayments. As
a result, the yield to maturity of an inverse floater CMO is sensitive not only
to changes in interest rates but also to changes in prepayment rates on the
related underlying mortgage assets.
DERIVATIVES
The description in the Prospectus of each Fund indicates which, if any,
of these types of transactions may be used by that Fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. As indicated in the Prospectus, in
order to hedge against currency exchange rate risks or to increase income,
certain Funds may enter into forward currency exchange contracts with
securities dealers, financial institutions or other parties, through direct
bilateral agreements with such counterparties. A Fund will enter into forward
currency exchange contracts only with counterparties which the investment
manager deems creditworthy. In connection with a Fund's forward currency
transactions, the Fund will set aside in a segregated account with its
custodian, cash, cash equivalents or high 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
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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 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
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market decline to attempt to offset the decrease in market value of securities
in its portfolio that might otherwise result. When a Fund is not fully
invested in securities and anticipates a significant market advance, it may
enter into long municipal bond index futures contracts in order to gain rapid
market exposure that may wholly or partially offset increases in the costs of
securities that it intends to purchase. In a substantial majority of these
transactions, a Fund will purchase such securities upon termination of the
futures position but, under unusual market conditions, a futures position may
be terminated without the corresponding purchase of securities.
OPTIONS. As indicated in the Prospectus, in order to hedge against
adverse market shifts or to increase income, certain Funds may purchase put and
call options or write "covered" put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a Fund may purchase
put and call options and write "covered" put and call options on stocks, stock
indices and currencies. A Fund may utilize options on currencies in order to
hedge against currency exchange rate risks. A call option is "covered" if, so
long as the Fund is obligated as the writer of the option, it will own (i) the
underlying investment subject to the option; (ii) securities convertible or
exchangeable without the payment of any consideration into the securities
subject to the option or (iii) a call option on the relevant security or
currency with an exercise price no higher than the exercise price on the call
option written. A put option is "covered" if, to support its obligation to
purchase the underlying investment if a put option that a Fund writes is
exercised, the Fund will either (a) deposit with its custodian in a segregated
account cash, U.S. government securities or other high grade liquid debt
obligations having a value at least equal to the exercise price of the
underlying investment or (b) continue to own an equivalent number of puts of
the same "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
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cost of the investment, less the sum of the premium received for writing the
option and the positive difference, if any, between the call price paid to the
Fund and the Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures
contracts, in purchasing a put option, a Fund will seek to benefit from a
decline in the market price of the underlying investment, while in purchasing a
call option, a Fund will seek to benefit from an increase in the market price
of the underlying investment. If an option purchased is not sold or exercised
when it has remaining value, or if the market price of the underlying
investment remains equal to or greater than the exercise price, in the case of
a put, or remains equal to or below the exercise price, in the case of a call,
during the life of the option, the Fund will lose its investment in the option.
For the purchase of an option to be profitable, the market price of the
underlying investment must decline sufficiently below the exercise price, in
the case of a put, and must increase sufficiently above the exercise price, in
the case of a call, to cover the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a Fund
may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing
a covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to expire
or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a closing purchase transaction in which
the Fund purchases an option having the same terms as the option it had written
or a closing sale transaction in which the Fund sells an option having the same
terms as the option it had purchased. A covered option writer unable to effect
a closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline
in the underlying security during such period. Should a Fund choose to
exercise an option, the Fund will purchase in the open market the securities,
commodities or commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net
amount, if any, by which the option is "in-the-money" (that is, the amount by
which the value of the underlying instrument exceeds, in the case of a call
option, or is less than, in the case of a put option, the exercise price of the
option) at the time the option is exercised.
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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 income to the Fund. In
addition, the Fund may purchase options on stocks that are traded
over-the-counter. Options on stock indices are similar to options on specific
securities. However, because options on stock indices do not involve the
delivery of an underlying security, the option represents the holder's right to
obtain from the writer cash in an amount equal to a fixed multiple of the
amount by which the exercise price exceeds (in the case of a put) or is less
than (in the case of a call) the closing value of the underlying stock index on
the exercise date. Currently, options traded include the Standard & Poor's 100
Index of Composite Stocks, Standard & Poor's 500 Index of Composite Stocks (the
"S&P 500 Index"), the New York Stock Exchange ("NYSE") Composite Index, the
American Stock Exchange ("AMEX") Market Value Index, the National
Over-the-Counter Index and other standard broadly based stock market indices.
Options are also traded in certain industry or market segment indices such as
the Oil Index, the Computer Technology Index and the Transportation Index.
Stock index options are subject to position and exercise limits and other
regulations imposed by the exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a
Fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If in fact the stock index does rise,
the price of the particular equity securities intended to be
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purchased may also increase, but that increase would be offset in part by the
increase in the value of the Fund's index option or futures contract resulting
from the increase in the index. If, on the other hand, the investment manager
expects general stock market prices to decline, it might purchase a put option
or sell a futures contract on the index. If that index does in fact decline,
the value of some or all of the equity securities in a Fund's portfolio may
also be expected to decline, but that decrease would be offset in part by the
increase in the value of the Fund's position in such put option or futures
contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income, as described above in
"Forward Currency Exchange Contracts."
(c) Options on Futures Contracts. A Fund may purchase put and call
options and write covered put and call options on futures contracts on stock
indices, interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion of
its investments or to increase income and may enter into closing transactions
in order to terminate existing positions. There is no guarantee that such
closing transactions can be effected. An option on a stock index futures
contract, interest rate futures contract or currency futures contract, as
contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will
be accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus
transaction costs). While the price of the option is fixed at the point of
sale, the value of the option does change daily and the change would be
reflected in the net asset value of the Fund.
INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain Funds
may enter into interest rate and equity swaps and may purchase or sell (i.e.,
write) interest rate and equity caps, floors and collars. A Fund expects to
enter into these transactions in order to hedge against either a decline in the
value of the securities included in the Fund's portfolio, or against an
increase in the price of the securities which it plans to purchase, or in order
to preserve or maintain a return or spread on a particular investment or
portion of its portfolio or to achieve a particular return on cash balances, or
in order to increase income. Interest rate and equity swaps involve the
exchange by a Fund with another party of their respective commitments to make
or receive payments based on a notional principal amount. The purchase of an
interest rate or equity cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined level, to receive payments on a
contractually-based principal amount from the party selling the interest rate
or equity cap. The purchase of an interest rate or equity floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of
a cap and a floor which preserve a certain return within a predetermined range
of values.
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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 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
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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
[TO BE UPDATED]
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.
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 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 debt that may be so
authorized and subsequently incurred by the State.
In April 1993, legislation was also enacted providing for significant
constitutional changes to the long-term financing practices of the State and
the Authorities.
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.
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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).
Before the approved constitutional amendment can be presented to the
voters for their consideration, it must be passed again by a separately elected
Legislature. The amendment must therefore be passed by the newly elected
Legislature in 1995 prior to presentation to the voters in November 1995. The
amendment was passed by the State Senate in June 1995, and the State expects
the Assembly to pass the amendment. If approved by the voters, the amendment
would become effective January 1, 1996.
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 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 also employs two other types of long-term financing mechanisms
which are State-supported but are not general obligations of the State: moral
obligation and lease-purchase or contractual-obligation financing. Moral
obligation financing generally involves the issuance of debt by an Authority to
finance a revenue-producing project or other activity, and that debt is secured
by project revenues and statutory provisions of the State, subject to
appropriation by the Legislature, to make up any deficiencies which may occur
in the issuer's debt service reserve fund. Under lease-purchase or
contractual-obligation
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financing arrangements, Authorities and certain municipalities have issued
obligations to finance the construction and rehabilitation of facilities or the
acquisition and rehabilitation of equipment, and expect to cover debt service
and amortization of the obligations through the receipt of rental or other
contractual payments made by the State. The State has also entered into a
payment agreement with the New York Local Government Assistance Corporation
("LGAC"). State lease-purchase or contractual-obligation financing
arrangements involve a contractual undertaking by the State to make payments to
an Authority, municipality or other entity, but 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 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. The
State has also participated in the issuance of certificates of participation
for the acquisition of real property which represent proportionate interests in
lease payments to be paid by the State.
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 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
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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 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 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 to expand in 1991, although the growth rate
for the first two years of the expansion was modest by historical standards.
The State economy remained in recession until 1993, when employment growth
resumed. Employment growth has been hindered during recent years by
significant cutbacks in the computer and instrument manufacturing, utility, and
defense industries. Personal income increased substantially in 1992 and 1993,
aided significantly by large bonus payments in banking and financial
industries.
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.
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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. There can be no assurance
that these programs will be successful.
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 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.
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The following discussion summarizes the State Financial Plan for the
1995-96 fiscal year 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 general 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.
In addition to the General Fund, the State Financial Plan includes
Special Revenue Funds, Capital Projects Funds and Debt Service Funds which are
discussed below.
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
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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.
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 Financial Plan is based upon forecasts of national and State
economic activity. Economic' forecasts have frequently failed to predict
accurately the timing and magnitude of changes in the national and the State
economies. Many uncertainties exist in forecasts of both the national and
State economies, including consumer attitudes toward spending, Federal
financial and monetary policies, the availability of credit, and the condition
of the world economy, which could have an adverse effect on the State. There
can be no assurance that the State economy will not experience results in the
1995-96 fiscal year that
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are worse than predicted, with corresponding material and adverse effects on
the State's projections of receipts and disbursements.
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 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.
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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.
Of the $1.140 billion deposited in the tax refund reserve account, $1.026
billion was available for budgetary planning purposes in the 1994-95 fiscal
year. The remaining $114 million was redeposited in the tax refund reserve
account at the end of the State's 1994-95 fiscal year to continue the process
of restructuring the State's cash flow as part of the LGAC program. The
balance in the CRF will be used to meet the cost of litigation facing the
State. The Tax Stabilization Reserve Fund may be used only in the event of an
unanticipated General Fund cash-basis deficit during the 1994-95 fiscal year.
Before the deposit of $1.140 billion in the tax refund reserve account,
General Fund receipts in the 1993-94 fiscal year exceeded those originally
projected when the State Financial Plan for that year was formulated on April
16, 1993 by $1.002 billion. Greater-than-expected receipts in the personal
income tax, the bank tax, the corporation franchise tax and the estate tax
accounted for most of this variance, and more than offset weaker-than-projected
collections from the sales and use tax and miscellaneous receipts. Collections
from individual taxes were affected by various factors including changes in
Federal business laws, sustained profitability of banks, strong performance of
securities firms, and higher-than-expected consumption of tobacco products
following price cuts.
The higher receipts resulted, in part, because the State economy
performed better than forecasted. Employment growth started in the first
quarter of the State's 1993-94 fiscal year, and, although this lagged behind
the national economic recovery, the growth in New York began earlier than
forecasted. The State economy exhibited signs of strength in the service
sector, in construction, and in trade. Long Island and the Mid-Hudson Valley
continued to lag behind the rest of the State in economic growth. The State
Division of the Budget (the "DOB") believes that approximately 100,000 jobs
were added during the 1993-94 fiscal year.
Disbursements and transfers from the General Fund were $303 million below
the level that was projected in April 1993, an amount that would have been $423
million had the State not accelerated the payment of Medicaid billings, which
in the April 1993 State Financial
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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.
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.
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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 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 March 1, 1995 and July 13, 1995, confirmed its A- rating. On
January 6,
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1992, Moody's reduced its ratings on outstanding limited-liability State lease
purchase and contractual obligations from A to Baa1. On March 1, 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. 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
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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 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.
Over the past several years 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
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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 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
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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) 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;
(ii) a challenge to State regulations which reduce base prices for the direct
and indirect component of Medicaid reimbursement for rate years commencing
1989; (iii) 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; (iv)
challenges to the practice of reimbursing certain Office of Mental Health
patient care expenses from the client's Social Security benefits; (v) alleged
responsibility of State officials to assist in remedying racial segregation in
the City of Yonkers; (vi) 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; (vii) a challenge to the constitutionality of petroleum business tax
assessments authorized by Tax Law Section 301; (viii) challenges 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; (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, and (x) a challenge
to State implementation of a program which reduces Medicaid benefits to certain
home-relief recipients.
Adverse developments in the proceedings described above or the initiation
of new proceedings could affect the ability of the State to maintain a balanced
1995-96 State Financial Plan. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1994, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $675
million. There can be no assurance that an adverse decision in any of the
above cited proceedings would not exceed the amount of the 1995-96 State
Financial Plan reserves for the payment of judgments and, therefore, could
affect the ability of the State to maintain a balanced 1995-96 State Financial
Plan.
NEW YORK CITY
The fiscal health of the State may also be impacted by the fiscal health
of its localities, particularly the City, which has required and continues to
require significant financial assistance from the State. The City's
independently audited operating results for each of its fiscal years from 1981
through 1993, which end on June 30, show a General Fund surplus reported in
accordance with generally accepted accounting principles ("GAAP"). In
addition, the City's financial statements for the 1993 fiscal year received an
unqualified opinion from the City's independent auditors, the eleventh
consecutive year the City has received such an opinion.
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In response to the City's fiscal crisis in 1975, the State took action to
assist the City in returning to fiscal stability. Among these actions, the
State established MAC to provide financing assistance to the City. The State
also enacted the New York State Financial Emergency Act for The City of New
York (the "Financial Emergency Act") which, among other things, established the
New York State Financial Control Board (the "Control Board") to oversee the
City's financial affairs. The State also established the Office of the State
Deputy Comptroller for the City of New York ("OSDC") to assist the Control
Board in exercising its powers and responsibilities; and a "Control Period"
from 1975 to 1986 during which the City was subject to certain
statutorily-prescribed fiscal-monitoring arrangements. Although the Control
Board terminated the Control Period in 1986 when certain statutory conditions
were met, thus suspending certain Control Board powers, the Control Board, MAC
and OSDC continue to exercise various fiscal-monitoring functions over the
City, and upon the occurrence or "substantial likelihood and imminence" of the
occurrence of certain events, including, but not limited to a City operating
budget deficit of more than $100 million, the Control Board is required by law
to reimpose a Control Period. Currently, the City and its Covered
Organizations (i.e., those which receive or may receive money from the City
directly, indirectly or contingently) operate under a four-year financial plan
which the City prepares annually and periodically updates.
The City submitted to the Control Board on July 21, 1995 a fourth quarter
modification to the City's financial plan for the 1995 fiscal year (the "1995
Modification"), which projects a balanced budget in accordance with GAAP for
the 1995 fiscal year, after taking into account a discretionary transfer of $75
million. On July 11, 1995, the City submitted to the Control Board the
financial plan for the 1996 through 1999 fiscal years (the "1996-1999 Financial
Plan"), which relates to the City, the Board of Education (the "BOE") and the
CUNY. The 1996-1999 Financial Plan is based on the City's expense and capital
budgets for the City's 1996 fiscal year, which were adopted on June 14, 1995,
and 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 and
productivity, efficiency and labor initiatives negotiated with the City's labor
unions, the 1996-1999 Financial Plan reflects a strategy to substantially
reduce spending for entitlements for the 1996 and subsequent fiscal years.
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.
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The 1996-1999 Financial Plan projects revenues and expenditures for the
1996 fiscal year balanced in accordance with GAAP. The projections for the
1996 fiscal year reflect proposed actions to close a previously projected gap
of approximately $3.1 billion for the 1996 fiscal year. The proposed actions
in the 1996-1999 Financial Plan for the 1996 fiscal year include (i) a
reduction in spending of $400 million, primarily affecting public assistance
and Medicaid payments by the City; (ii) expenditure reductions in agencies,
totaling $1.2 billion; (iii) traditional 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. Other proposed actions
include (i) welfare savings of $100 million from increased fraud detection;
(ii) $170 million of additional expenditure reductions in agencies and the New
York City Health and Hospitals Corporation ("HHC"); (iii) a delay in the
proposed reduction in the commercial rent tax, which would increase projected
revenues by $62 million in the 1996 fiscal year; (iv) an increase of $75
million in projected tax collections for the 1996 fiscal year; (v) $50 million
of proposed additional State aid not included in the adopted State budget and
$75 million of proposed additional federal aid; (vi) certain revenue
initiatives, including the proposed sale of delinquent tax liens and the U.N.
Plaza for $104 million; and (vii) savings from the proposed refunding of
outstanding debt, totaling $50 million.
The proposed agency spending reductions include the reduction of City
personnel through attrition, government efficiency initiatives, procurement
initiatives and labor productivity initiatives. The substantial agency
expenditure reductions proposed in the 1996-1999 Financial Plan may be
difficult to implement, and the Financial Plan is subject to the ability of the
City to implement proposed reductions in City personnel and other cost
reduction initiatives. In addition, certain initiatives are subject to
negotiation with the City's municipal unions, and various actions, including
proposed anticipated State aid totalling $50 million are subject to approval by
the Governor and the Legislature.
The 1996-1999 Financial Plan also sets forth projections for the 1997
through 1999 fiscal years and outlines a proposed gap-closing program to
eliminate projected gaps of $888 million, $1.5 billion and $1.4 billion for the
1997, 1998 and 1999 fiscal years, respectively, assuming successful
implementation of the $3.1 billion gap-closing program for the 1996 fiscal
year.
The projections for the 1996 through 1999 fiscal years assume (i)
agreement with the City's unions with respect to approximately $100 million of
savings to be derived from efficiencies in management of employee health
insurance programs and other health benefit related savings for each of the
1996 through 1999 fiscal years to be negotiated with the City's unions; (ii)
$200 million of additional anticipated State aid and $75 million of additional
anticipated Federal aid in each of the 1997 through 1999 fiscal years; (iii)
that HHC and BOE will each be able to identify actions to offset substantial
revenue shortfalls reflected in the Financial Plan, including approximately
$254 million annual reduction in revenues for HHC, which results from the
reduction in Medicaid payments proposed by the State and the City, without any
increase in City subsidy payments to HHC; (iv) the continuation of the current
assumption of no wage increases after fiscal year 1995 for City employees
unless offset by productivity increases; (v) $130 million of additional revenue
as a result of increased rent
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payments for the City's airports proposed by the City, which is subject to
further discussion with the Port Authority; and (vi) savings of $45 million in
each of the 1997 through 1999 fiscal years which would result from the
Legislature's enactment of proposed tort reform legislation. In addition, the
1996-1999 Financial Plan anticipates the receipt of substantial amounts of
Federal aid. Certain Federal legislative proposals contemplate significant
reductions in Federal spending, including proposed Federal welfare reform,
which could result in caps on , or block grants of, Federal programs.
The proposed gap-closing actions, a substantial number of which are not
specified in detail, include additional agency expenditure reductions,
primarily resulting from a partial hiring freeze, totalling between $388
million and $684 million in each of the 1997 through 1999 fiscal years;
reductions in expenditures resulting from proposed procurement initiatives
totalling between $50 million and $100 in each of the 1997 through 1999 fiscal
years; revenue initiatives totalling between $100 million and $200 million in
each of the 1997 through 1999 fiscal years; the availability in each of the
1997, 1998 and 1999 fiscal years of $100 million of the general reserve
appropriated in the prior year; and additional reduced expenditures resulting
from further revision in entitlement programs to reduce City expenditures by
$250 million, $400 million and $400 million in the 1997, 1998 and 1999 fiscal
years, respectively, which may be subject to State or Federal approval.
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.
In July 1995, the City Comptroller issued a report on the 1996-1999
Financial Plan. The report concluded that the 1996-1999 Financial Plan
includes total risks of $749 million to $1.034 billion for the 1996 fiscal
year. These risks include (i) possible tax revenue shortfalls of $53 million;
(ii) a possible $20 million to $60 million shortfall in savings resulting from
unspecified improvements in the City's health benefits system; (iii) a
potential shortfall of up to $40 million in projected savings from an early
retirement program; (iv) the receipt of $125 million of unspecified additional
Federal and State assistance; (v) up to $203 million of projected savings from
the public assistance eligibility review and electronic signature program for
public assistance recipients; (vi) $93 million of greater than projected
expenditures for overtime; (vii) $284 million of greater than projected
expenditures and lower than projected revenues at BOE; and (viii) the receipt
of $130 million of lease payments from the Port Authority. Other potential
uncertainties identified in the report include the projected $253.6 million
deficit for HHC, $160 million of the $600 million in labor savings for the
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1996 fiscal year which are yet to be identified, and the impact on the City of
a possible reduction in Federal entitlement programs.
With respect to the 1997 through 1999 fiscal years, the report noted that
the gap-closing program in the 1996-1999 Financial Plan does not include
information about how the City will implement the various gap-closing programs,
and that the entitlement cost containment and revenue initiatives will require
approval of the State legislature. Taking into account the same categories of
risks for the 1997 through 1999 fiscal years as the report identified for the
1996 fiscal year and the uncertainty concerning the gap-closing program, the
report estimated that the 1996-1999 Financial Plan includes total risk of $2.0
billion to $2.5 billion in the 1997 fiscal year, $2.8 billion to $3.3 billion
in the 1998 fiscal year and $2.9 billion to $3.4 billion in the 1999 fiscal
year. The report further noted that the City Comptroller continues to oppose
the proposed sale of the water system, primarily because of the unwillingness
of the City to guarantee that $1 billion from the $2.3 billion in proceeds of
the sale will be used only to fund capital and not operating expenses, and
concerns about the jurisdiction and composition of the Water Board once title
to the Water Board has been transferred.
In early December, 1994, the City Comptroller issued a report which noted
that the City is seeking to develop and implement plans which will satisfy the
Federal Environmental Protection Agency that the water supplied by the City
watershed areas does not need to be filtered. The City Comptroller noted that,
if the City is ordered to build filtration plants, they could cost as much as
$4.57 billion to construct, with annual debt service and operating costs of
more than $500 million, leading to a water rate increase of 45%.
On December 16, 1994, the City Comptroller issued a report noting that
the capacity of the City to issue general obligation debt could be greatly
reduced in future years due to the decline in value of taxable real property.
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, that the
latest estimates produced by the State Board of Equalization and Assessment
relating to the full value of real property, using data from a 1992 survey,
indicate a 19% decline in the market value of taxable real property from the
previous survey in 1990, and that the State Board has decided to use a
projected annual growth rate of 8.84%, as compared to its previous projection
of 14% for estimating full value after 1992. The report concludes that the
City will be within the projected legal debt incurring limit in the 1996 fiscal
year. However, the report concluded that, based on the most likely forecast of
full value of real property, the debt incurring power of the City would be
curtailed in the 1997 and 1998 fiscal years substantially. The City
Comptroller recommended, among other things, prioritization of capital projects
to determine which can be delayed or cancelled, and better maintenance of the
City's physical plant and infrastructure, which would result in less capital
spending for repair and replacement of capital structures.
On July 21, 1995, the staff on the Control Board issued a report on the
1996-1999 Financial Plan which identified risks of $873 million, $2.1 billion,
$2.8 billion and $2.8 billion for the 1996 through 1999 fiscal years,
respectively. With respect to the 1996 fiscal
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37
year, the principal risks included (i) possible shortfalls in projected tax
revenues totaling $50 million, (ii) the possibility that revenue actions and
expenditure reduction initiatives for BOE totaling $266 million might not be
successfully implemented, (iii) possible shortfalls totaling $172 million in
proposed welfare savings from increased fraud detection, and (iv) uncertainty
concerning the $50 million of proposed additional State aid and $75 million of
proposed additional Federal aid, the proposed receipt of $130 million of
increased rent payments for the City's airports and the $100 million of savings
to be derived from health benefit-related savings, which are subject to
negotiations with or approvals by other parties. Additional risks identified
for the 1997 through 1999 fiscal years include the possibility of additional
tax revenue shortfalls, uncertainty concerning the ability of the City to
implement the gap-closing actions for such years and uncertainty concerning the
projected receipt of additional anticipated State aid. Other areas of concern
identified in the report included the projected deficit at HHC of approximately
$400 million, reflecting the impact on HHC of the entitlement reductions
contained in the State budget and the City's reduction in the subsidy provided
to HHC, and the assumption in the Financial Plan that the City will realize the
full $400 million of projected savings in public assistance and Medicaid
payments enacted at the State level. The report noted that substantially more
information is needed concerning the proposed gap-closing actions for the
1997-1999 fiscal years.
On June 14, 1995, the staff of the OSDC issued a report with respect to
the 1995 fiscal year. The report noted that, during the 1995 fiscal year, the
City faced adverse financial developments totaling over $2 billion resulting
from the inability to initiate approximately 35% of the City's gap-closing
program, as well as newly-identified spending needs and revenue shortfalls
resulting from the adverse impact on the City's personal income, general
corporation and other tax revenues of the policy of the Federal Reserve of
increasing short-term interest rates and the related downturn in the bond
market and profits and bonus income on Wall Street. The report noted that the
City relied heavily on one-time actions of offset these adverse developments,
using $2 billion in one-time resources in the 1995 fiscal year, or nearly
double the 1994 amount.
On July 24, 1995, the staff of the OSDC issued a report on the 1996-1999
Financial Plan. The report concluded that there remains a budget gap for the
1996 fiscal year of $392 million, largely because the City and its unions have
yet to reach an agreement on how to achieve $160 million in unspecified labor
savings and the remaining $100 million in recurring health insurance savings
from last year's agreement. The report also identified a number of issues that
present a net potential risk of $409 million to the City's revenue and
expenditure forecasts for the 1996 fiscal year, including risks of (i) $160
million associated with anticipated increases in Federal and State assistance,
(ii) $130 million relating to projected Port Authority airport lease payments,
and (iii) $100 million with respect to unfunded BOE mandates. The report also
identified several other concerns regarding the 1996 fiscal year, including
concerns that (i) detailed programs have not yet been fully developed to meet
the $564 million and $400 million cost-reduction targets established for BOE
and HHC, respectively, (ii) State and City initiatives to reduce public
assistance and Medicaid costs, which are expected to reduce City costs by $745
million in the 1996 fiscal year, will require close monitoring to ensure that
financial targets are met; (iii) the City has not provided sufficient
assurances that the bond proceeds from its proposed sale of the water and sewer
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system would be used strictly for capital spending purposes; and (iv) the
1996-1999 Financial Plan makes no provision for wage increases in the
collective bargaining agreements between the City and its unions, which
generally will expire by October, 1995. The report further noted that growth
in City revenues is being constrained by the weak economy in the City, which is
likely to be compounded by the slowing national economy, and that there is a
likelihood of a national recession during the course of the 1996-1999 Financial
Plan. Moreover, the report noted that State and Federal budgets are undergoing
tumultuous changes, and that the potential for far-reaching reductions in
intergovernmental assistance is clearly on the horizon, with greater
uncertainty about the impact on City finances and services.
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 increased for City employees exceed the annual
wage cost 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
1996-1999 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
1996-1999 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, which may require in certain cases the cooperation of the City's
municipal unions, and the success with which the City controls expenditures;
savings for health care costs for City employees in the amounts projected in
the 1996-1999 Financial Plan; the impact on 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.
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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.
On March 1, 1994, proposed legislation enabling Staten Island to separate
from the City was submitted to the Legislature. Separation would take effect
upon approval of such enabling legislation. Based upon the advice of the State
Assembly's "home rule" counsel, the Speaker of the Assembly has determined that
the City must issue a "home rule message", which requires a formal request of
action by the Legislature by either (i) the Mayor and a majority of the City
Council or (ii) two-thirds of the City Council, before the proposed legislation
may be voted upon by the Assembly. In June 1994, a proceeding was commenced by
the members of the Assembly representing Staten Island against the speaker and
the Assembly "home rule" counsel challenging the validity of their
determination and seeking to have it rescinded. On January 17, 1995, the
Supreme Court for Albany County dismissed the petition. If any such enabling
legislation were passed, it may be subject to legal challenge and would require
approval by the United States Department of Justice under the Federal Voting
Rights Act. It cannot be determined as of the date of this Statement of
Additional Information what the content of such proposed legislation will be,
whether it will be enacted into law by the Legislature, and if so, what legal
challenges might be commenced contesting the validity of such legislation.
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, 1994 amounted to approximately
$2.6 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, Standard & Poor's revised downward its rating on City
general obligation bonds from A- to BBB+ and removed City bonds from
CreditWatch. Standard & Poor's 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 Standard &
Poor's in lowering its rating on City bonds included a trend of using one-time
measures, including
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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. rates City general obligation bonds A-. Moody's
rating for City general obligation bonds is Baa1. 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, Standard & Poor's 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 Standard & Poor's. On July 2, 1985,
Standard & Poor's revised its rating of City bonds upward to BBB+ and on
November 19, 1987, to A-. On July 10, 1995, Standard & Poor's revised its
rating of City bonds downward to BBB+, as discussed above. Moody's ratings of
City bonds were revised in November 1981 from B (in effect since 1977) to Ba1,
in November 1983 to Baa, in December 1985 to Baa1, in May 1988 to A and again
in February 1991 to Baa1. Since July 15, 1993, Fitch has rated City bonds A-.
On July 12, 1995, Fitch stated that the City's credit trend remains
"declining."
INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below
as well as those described under "Investment Limitations" in the Prospectus are
fundamental policies which may be changed only when permitted by law, if
applicable, and approved by the holders of a majority of the applicable Fund's
outstanding voting securities, which, as defined by the 1940 Act, means the
lesser of (i) 67% of the shares represented at a meeting at which more than 50%
of the outstanding shares are represented or (ii) more than 50% of the
outstanding shares. Except for (i) the investment restrictions set forth below
which are indicated as fundamental policies, (ii) the investment restrictions
set forth in the Prospectus and (iii) each Fund's investment objective(s) as
described in the Prospectus, the other policies and percentage limitations
referred to in this Statement of Additional Information and the Prospectus are
not fundamental policies of the Funds and may be changed by the applicable
Fund's Board of Directors without shareholder approval.
If a percentage restriction on investment or use of assets set forth
below is adhered to at the time a transaction is effected, later changes in
percentages resulting from changing values will not be considered a violation.
CASH MANAGEMENT FUND. The Cash Management Fund may not:
(1) purchase any securities which would cause more than 25% of the
value of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no limitation with
respect to investment in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with respect to bank obligations
or with respect to repurchase agreements collateralized by any of such
obligations (the fundamental policy of
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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);
(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
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receivables-backed obligations, both the special purpose entity issuing the
receivables-backed obligations and the issuer of the underlying receivables
will be considered an issuer.
NEW YORK MUNICIPAL BOND FUND. The New York Municipal Bond Fund may not:
(1) purchase any securities which would cause more than 25% of the
value of its total assets at the time of such purchase to be invested in
securities of one or more issuers conducting their principal business
activities in the same industry, provided that there is no 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
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43
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;
(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 and Total Return 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
<PAGE> 164
44
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 (except for short positions in a futures
contract or forward contract);
(8) purchase or retain any securities of an issuer if one or more
persons affiliated with a Fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning 1/2
of 1% together own beneficially more than 5% of such securities;
(9) invest in oil, gas and other mineral leases, provided, however, that
this shall not prohibit a Fund from purchasing publicly traded securities of
companies engaging in whole or in part in such activities;
(10) except for the Asia Growth Fund, purchase the securities of any
issuer if by reason thereof the value of its investment in all securities of
that issuer will exceed 5% of the value of the issuer's total assets;
(11) purchase securities of issuers which it is restricted from selling
to the public without registration under the 1933 Act if by reason thereof the
value of its aggregate investment in such classes of securities will exceed 10%
of its total assets, provided, however, that this limitation shall not apply to
Rule 144A securities;
(12) invest more than 5% of its total assets in securities of unseasoned
issuers (other than securities issued or guaranteed by U.S. federal or state or
foreign governments or agencies, instrumentalities or political subdivisions
thereof) which, including their predecessors, have been in operation for less
than three years;
(13) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets; or
(14) invest in warrants (other than warrants acquired by a Fund as part
of a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 5% of the
value of the Fund's net assets or if, as a
<PAGE> 165
45
result, more than 2% of the Fund's net assets would be invested in warrants
that are not listed on AMEX or NYSE.
(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 Bond Fund, Strategic Bond Fund, Total Return Fund and
Asia Growth Fund. Restrictions (6) through (15) are non-fundamental policies
of such Fund.
For the purposes of the investment limitations applicable to the New York
Municipal Bond Fund and the National Intermediate Municipal Fund, the
identification of the issuer of a municipal obligation depends on the terms and
conditions of the obligation. If the assets and revenues of an agency,
authority, instrumentality, or other political subdivision are separate from
those of the government creating the subdivision and the obligation is backed
only by the assets and revenues of the subdivision, such subdivision would be
regarded as the sole issuer. Similarly, in the case of a private activity
bond, if the bond is backed only by the assets and revenues of the
non-governmental user, such non-governmental user would be regarded as the sole
issuer. If in either case the creating government or another entity guarantees
an obligation, the guarantee would be considered a separate security and
treated as an issue of such government or entity.
INVESTORS FUND. The Investors Fund may not:
(1) purchase any securities on margin (except that the Fund may make
deposits in connection with transactions in options on securities), make any
so-called "short" sales of securities or participate in any joint or joint and
several trading accounts;
(2) act as underwriter of securities of other issuers;
(3) purchase the securities of another investment company or investment
trust except in the open market where no profit to a sponsor or dealer, other
than the customary broker's commission, results from such purchase (but the
aggregate of such investments shall not be in excess of 10% of the net assets
of the Fund), or except when such purchase is part of a plan of merger or
consolidation;
(4) buy securities from, or sell securities to, any of its officers,
directors, employees, investment manager or distributor, as principals;
(5) purchase or retain any securities of an issuer if one or more
persons affiliated with the Fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning 1/2
of 1% together own beneficially more than 5% of such securities;
<PAGE> 166
46
(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 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.)
<PAGE> 167
47
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST 5
POSITION WITH YEARS AND
NAME, ADDRESS AND AGE THE COMPANY 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: 77
Carol L. Colman (2) Director President, Colman Consulting Co.,
Colman Consulting Co., Inc. Inc.; formerly Managing Partner of
P.O. Box 212 Inferential Focus Inc.
North Salem, NY 10560
Age: 48
Daniel P. Cronin (2) Director Vice President and General Counsel,
Pfizer Inc Pfizer International Inc since 1987;
235 East 42nd Street Senior Assistant General Counsel,
New York, NY 10017 Pfizer Inc since 1989.
Age: 48
Michael S. Hyland (1) Director and President President, SBAM and Managing Director,
Age: 50 Salomon Brothers Inc ("Salomon
Brothers") since 1989; formerly
Managing Director, First Boston Asset
Management Corp. and Managing
Director, First Boston Corporation.
Giampaolo G. Guarnieri Executive Vice President Vice President and Portfolio Manager,
Salomon Brothers Asset SBAM AP since April 1995; formerly
Management Asia Senior Portfolio Investment Manager,
Pacific Limited Credit Agricole Asset Management
Three Exchange Square, Hong Kong (South East Asia) Limited since 1992
Age 32 and head of direct investment
activities from 1990-1992
Steven Guterman Executive Vice President Managing Director, SBAM
Age 42
</TABLE>
<PAGE> 168
48
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST 5
POSITION WITH YEARS AND
NAME, ADDRESS AND AGE THE COMPANY OTHER AFFILIATIONS
--------------------- ------------- -------------------------------------
<S> <C> <C>
Nancy Noyes Executive Vice President Director, SBAM and Salomon Brothers Inc
Age 37
Peter J. Wilby Executive Vice President Managing Director, SBAM
Age 37
Richard E. Dahlberg Executive Vice President Managing Director, SBAM since January
Age 39 1996; formerly Vice President, SBAM since
June 1995; prior to that employed by
Massachusetts Financial Services
Company
Lawrence H. Kaplan Executive Vice President and Vice President and Chief Counsel, SBAM
Age 39 General Counsel 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
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.
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.
</TABLE>
<PAGE> 169
49
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING PAST 5
POSITION WITH YEARS AND
NAME, ADDRESS AND AGE THE COMPANY OTHER AFFILIATIONS
--------------------- ------------- -------------------------------------
<S> <C> <C>
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.
<TABLE>
<CAPTION>
Aggregate Total Compensation from
Name of Person, Compensation Other Funds
Position from the Fund Advised by SBAM (A) Total Compensation
------------------ ------------- ------------------------ ------------------
<S> <C> <C> <C>
Charles F. Barber $ $ (12) $ (13)
Director
Daniel P. Cronin $ $ (3) $ (4)
Director
Carol Colman $ $ (3) $ (4)
Director
</TABLE>
- -----------------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
<PAGE> 170
50
INVESTORS FUND
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
POSITION WITH PAST 5 YEARS AND
NAME, ADDRESS AND AGE THE COMPANY OTHER AFFILIATIONS
--------------------- ------------- ---------------------------
<S> <C> <C>
Charles F. Barber (2) Director Consultant; formerly Chairman
66 Glenwood Drive of the Board, ASARCO
Greenwich, CT 06830 Incorporated.
Age: 78
Andrew L. Breech Director President, Dealer Operating
2120 Wilshire Boulevard Control 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
Colman Consulting Co., Inc. Co., Inc.; formerly Managing
P.O. Box 212 Partner of Inferential Focus
North Salem, NY 10560 Inc.
Age: 50
William R. Dill (3) Director Consultant; formerly Director,
25 Birch Lane Office of Global Enterprise and
Cunberland Foreside Adjunct Professor, University
Maine 04110 of Southern Maine; prior to
Age: 65 which he was President, Babson
College.
Michael S. Hyland (1) Chairman of the Board, President, SBAM and Managing
Age: 50 Director and President Director, Salomon Brothers
since 1989; formerly Managing
Director, First Boston Asset
Management Corp. and Managing
Director, First Boston
Corporation.
</TABLE>
<PAGE> 171
51
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
POSITION WITH PAST 5 YEARS AND
NAME, ADDRESS AND AGE THE COMPANY OTHER AFFILIATIONS
--------------------- ------------- ---------------------------
<S> <C> <C>
Clifford M. Kirtland, Jr. (3) Director Formerly Chairman of the Board
9 North Parkway Square and President of Cox
4200 Northside Pkwy, N.W. Communications Inc.; Director
Atlanta, GA 30327 CSX Corp., Oxford Industries,
Age: 72 Shaw Industries, Inc., Graphic
Industries, Inc.
Robert W. Lawless Director President and Chief Executive
Box 4349 Officer, Texas Tech University
Lubbock, TX 79409 and Texas Tech University
Age: 58 Health Sciences Center;
formerly Executive Vice
President and Chief Operating
Officer, Southwest Airlines
Corp.; Director, Central &
Southwest Corp.
Louis P. Mattis Director Chairman and President,
0024 Harlston Green, No. 31 Sterling Winthrop Inc.
SnowMass Village, CO 81615 (pharmaceutical company);
formerly Executive Vice
Age: 54 President of Richardson -
Vicks, Inc.
Thomas F. Schlafly (2)(3) Director Of counsel to Peper, Martin,
720 Olive Street Jensen, Maichel & Hetlage (law
St. Louis, Missouri 63101 firm); President, The Saint
Age: 47 Louis Brewery, Inc.
Ross S. Margolies Executive Vice Director and Portfolio Manager,
Age: 37 President SBAM since 1992; formerly
Senior Vice President and
Analyst, Lehman Brothers Inc.;
prior to which he was Senior
Associate and Analyst,
Prudential Investment
Management Co.
</TABLE>
<PAGE> 172
52
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
POSITION WITH PAST 5 YEARS AND
NAME, ADDRESS AND AGE THE COMPANY OTHER AFFILIATIONS
--------------------- ------------- ---------------------------
<S> <C> <C>
Allan R. White, III Executive Vice Director, Salomon Brothers
Age: 36 President since 1992; formerly Vice
President; prior to which he
was Vice President, First
Boston Corporation
Alan M. Mandel Treasurer Vice President, SBAM since
Age: 38 January 1995; formerly, Chief
Financial Officer, Hyperion
Capital Management since 1991;
prior to which he was Vice
President Mitchell Hutchins
Asset Management.
Tana E. Tselepis Secretary Compliance Officer, SBAM since
Age: 60 1993 and Senior Administrator
since 1989; Vice President,
Salomon Brothers since 1991;
formerly Vice President and
Senior Administrator, First
Boston Asset Management Corp.
since 1985.
</TABLE>
- --------------
1. Interested person as defined in the 1940 Act.
2. Audit Committee Member.
3. Nominating Committee Member.
<PAGE> 173
53
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 from
Compensation Other Funds
Name of Person, Position from the Fund Advised by SBAM(A) Total Compensation
------------------------ ------------- ------------------------ ------------------
<S> <C> <C> <C>
Charles F. Barber $ $ (12) $ (13)
Director
Andrew L. Breech $ $ (2) $ (3)
Director
Carol L. Colman $ $ (3) $ (4)
Director
William R. Dill $ $ (2) $ (3)
Director
Clifford M. Kirtland $ $ (2) $ (3)
Director
Robert W. Lawless $ $ (2) $ (3)
Director
Louis P. Mattis $ $ (2) $ (3)
Director
Thomas F. Schlafly $ $ (2) $ (3)
</TABLE>
- -----------------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
Principal Holders of Securities
As of December 31, 1995, Salomon Brother Holding Company Inc. ("SBH"),
Seven World Trade Center, New York, New York 10048 held a substantial amount of
the outstanding Class A, Class B and Class C shares of each of the Cash
Management Fund, Investors Fund, New York Municipal Bond Fund. In addition SBH
owns a substantial amount of the outstanding Class A, Class B, Class C and
Class O shares of the National
<PAGE> 174
54
Intermediate Municipal Fund, U.S. Government Income Fund, High Yield Bond Fund,
Strategic Bond Fund, the Total Return Fund and the Asia Growth Fund and
consequently is a controlling person of such funds.
The following shareholders held 5% or more of the outstanding securities
of the Funds as of December 31, 1995:
<TABLE>
<CAPTION>
Fund Class Shareholder Percentage Held
---- ----- ----------- ---------------
<S> <C>
Cash Management Fund O
A
B
C
New York Municipal O
Bond A
B
C
U.S. Government O
Income A
B
C
High Yield Bond O
A
</TABLE>
<PAGE> 175
55
<TABLE>
<CAPTION>
Fund Class Shareholder Percentage Held
---- ----- ----------- ---------------
<S> <C>
B
C
Strategic Bond O
A
B
C
National Intermediate O
Municipal A
B
C
Total Return O
A
B
C
</TABLE>
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
<PAGE> 176
56
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. For the year ended
December 31, 1995, such fees and expenses totaled $_____________ and $______
for the Series Fund and the Investors Fund, respectively.
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.
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 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,
<PAGE> 177
57
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 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 Advisers Act.
Pursuant to a sub-advisory agreement, SBAM has retained Salomon Brothers
Asia Pacific Limited as sub-adviser to the Asia Growth Fund. Subject to the
supervision of SBAM, SBAM AP will have responsibility for the day-to-day
management of the Fund's portfolio. SBAM AP is compensated at no additional
cost to the Asia Growth Fund. Like SBAM, SBAM AP is an indirect, wholly-owned
subsidiary of Salomon Inc. SBAM AP is a member of the Hong Kong Securities and
Futures Commission and is registered as an investment adviser in the United
States pursuant to the Investment Advisers Act of 1940, as amended (the
"Advisers Act").
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 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
<PAGE> 178
58
$25,813, $29,088 and $___________ 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, $36,427 and $___________, respectively, and absorbed expenses
of the New York Municipal Bond Fund totaling $15,652, $12,085 and $___________,
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; 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 .__% of the Fund's
average daily net assets. SBAM has agreed to waive all or a portion of its
management fee for each Fund other than the Investors Fund and the Total Return
Fund through __________________. See "Expense Information -- Annual Fund
Operating Expenses" in the Prospectus. SBAM AP is compensated by SBAM at no
additional expense to the Asia Growth Fund at an annual rate of ___% of the
Asia Growth Fund's daily 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 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.
<PAGE> 179
59
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 $___________, $1,747,839 and $1,721,023 in management fees for the
years ended December 31, 1995, 1994 and 1993, respectively.
With respect to each of the Funds, other than the Total Return Fund, the
Asia Growth Fund and Investors Fund, the continuance of the management contract
was approved by the Board of Directors on September 6, 1995. With respect to
the Total Return Fund, the management contract was approved by the Board of
Directors on September 6, 1995 and by the sole shareholder, SBAM, on September
6, 1995. With respect to the Asia Growth Fund, the management contract was
approved by the Board of Directors on January 19, 1996 and by the sole
shareholder, SBAM, on ___________, 1996. With respect to the Investors Fund,
the 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
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specifically approved at least annually (a) by the vote of a majority of the
directors not parties to the management contract or interested persons of such
parties, which votes are cast in person at a meeting called for the purpose of
voting on such management contract and (b) either by the Board of Directors or
a majority of the outstanding voting securities. The management contract may
be terminated on 60 days' written notice by either party and will terminate
automatically if assigned.
Under the terms of Management Contract between each Fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
Fund (including, with respect to the Asia Growth Fund, the imposition of certain
Hong Kong tax liabilities on the Fund), unless such losses or damages are
attributable to the wilful misfeasance, bad faith or gross negligence on either
the part of SBAM or its affiliate or from reckless disregard by it of its
obligations and duties under the Management Contract ("disabling conduct"). In
addition, the Asia Growth Fund will indemnify SBAM and its affiliates and hold
each of them harmless against any losses or damages, including the imposition
of certain Hong Kong tax liabilites 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 adviser 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 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
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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 $1,136 and $______ for the fiscal years ended December 31, 1994
and 1995 respectively from the Cash Management Fund, respectively. 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 years
ended December 31, 1994 and 1995, Boston Company received fees totaling $5,258,
$5,497 and $_______, and Investors Bank received $328 and $_______ for the
fiscal years ended December 31, 1994 and 1995 from the New York Municipal Bond
Fund. For the fiscal year ended December 31, 1995, Investors Bank received
$____ from the National Intermediate Bond Fund, $___ from the U.S. Government
Income Fund, $___ from the High Yield Bond Fund, $___ from the Strategic Bond
Fund and $____ from the Total Return Fund, respectively. 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.
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
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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 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 [Amount
and manner spent in connection with 12b-1 plans for year ended December 31,
1995 to be provided.] or by vote of a majority of the shares of a Fund or
class, as the case may be.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of such
Fund directors and officers who are not directors, officers or employees of the
Fund's service contractors, 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.
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PORTFOLIO TRANSACTIONS
Subject to policy established by the Board of Directors, the investment
manager is primarily responsible for each Fund's portfolio decisions and the
placing of the Fund's portfolio transactions.
Fixed-income, certain short-term securities and certain equities normally
will be purchased or sold from or to issuers directly or to dealers serving as
market makers for the securities at a net price, which may include dealer
spreads and underwriting commissions. Equity securities may also be purchased
or sold through brokers who will be paid a commission.
The general policy of each Fund in selecting brokers and dealers is to
obtain the best results taking into account factors such as the general
execution and operational facilities of the broker or dealer, the type and size
of the transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and SBAM's
arrangements related thereto (as described below), overall performance, the
dealer's risk in positioning the securities involved, and the broker's
commissions and dealer's spread or mark-up. While SBAM generally seeks the
best price in placing its orders, a Fund may not necessarily be paying the
lowest price available.
Notwithstanding the above, in compliance with Section 28(e) of the
Securities Exchange Act of 1934, the investment manager may select brokers who
charge a commission in excess of that charged by other brokers, if the
investment manager determines in good faith that the commission to be charged
is reasonable in relation to the brokerage and research services provided to
the investment manager by such brokers. Research services generally consist of
research or statistical reports or oral advice from brokers and dealers
regarding particular companies, industries or general economic conditions. The
investment manager may also have arrangements with brokers pursuant to which
such brokers provide research services to the investment manager in exchange
for a certain volume of brokerage transactions to be executed by such broker.
While the payment of higher commissions increases a Fund's costs, the
investment manager does not believe that the receipt of such brokerage and
research services significantly reduces its expenses as a Fund's investment
manager. Arrangements for the receipt of research services from brokers may
create conflicts of interest. During the fiscal year ended December 31, 1995,
SBAM, with respect to the Investors Fund, directed brokerage transactions in an
amount of $_____ and $_____ with respect to the Investors Fund and the Total
Return Fund, respectively, to certain brokers that furnished research services
to SBAM. Commissions on these transactions totaled $_______.
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
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by SBAM in servicing a Fund. Not all of these research services are used by
the investment manager in managing any particular account, including the Funds.
Under the 1940 Act, persons affiliated with a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the Commission.
However, a Fund may purchase securities from underwriting syndicates of which
the investment manager or any of its affiliates (including Salomon Brothers) is
a member under certain conditions, in accordance with the provisions of a rule
adopted under the 1940 Act.
Affiliated persons of a Fund, or affiliated persons of such persons, may
from time to time be selected to execute portfolio transactions for such Fund.
Subject to the considerations discussed above and in accordance with procedures
adopted by the Board of Directors, in order for such an affiliated person to be
permitted to effect any portfolio transactions for a Fund, the commissions,
fees or other remuneration received by such affiliated person must be
reasonable and fair compared to the commissions, fees or other remuneration
received by other brokers in connection with comparable transactions. This
standard would allow such an affiliated person to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker
in a commensurate arm's-length transaction.
Each Fund's Board of Directors has determined that Salomon Brothers may
execute portfolio transactions for such Fund so long as the Fund is charged
commission rates consistent with those charged by other brokers in comparable
transactions with clients that are comparable to the Fund.
Total brokerage commissions paid by the Investors Fund amounted to
$676,229 for 1994, $854,171 for 1993 and $683,057 for 1992. During the 1994,
1993 and 1992 fiscal years, the Investors Fund paid $61,788, $113,090 and
$45,920, respectively, in commissions to Salomon Brothers. Commissions to
Salomon Brothers in 1994 represented 9% of the total brokerage commissions paid
by the Investors Fund, and Salomon Brothers executed 9% of the aggregate dollar
amount of transactions involving commissions during the 1994 fiscal year.
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.
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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 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
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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.
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
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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 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
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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 regulated investment companies and
other securities with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of a Fund's assets and
10% of the outstanding voting securities of such issuer, and (ii) not more
than 25% of the value of its assets is invested in the securities of any one
issuer (other than U.S. government securities or the securities of other
regulated investment companies).
As a RIC, a Fund will not be subject to federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and "net capital gains" (the excess of the Fund's long-term capital gains
over short-term capital losses), if any, that it distributes in each taxable
year to its shareholders, provided that it distributes 90% of its net
investment income for such taxable year. However, a Fund would be subject to
corporate income tax (currently at a maximum rate of 35%) on any undistributed
net investment income and net capital gains. Each Fund expects to designate
amounts retained as undistributed net capital gains in a notice to its
shareholders who (i) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount,
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital gains included in the
shareholder's income.
A Fund will be subject to a non-deductible 4% excise tax to the extent
that a Fund does not distribute by the end of each calendar year: (a) at least
98% of its ordinary income for such calendar year; (b) at least 98% of the
excess of its capital gains over its capital losses for the one-year period
ending, as a general rule, on October 31 of each year; and (c) 100% of the
undistributed income and gains from the preceding calendar year (if any)
pursuant to the calculations in (a) and (b). For this purpose, any income or
gain retained by a Fund that is subject to corporate tax will be considered
to have been distributed by year-end.
A Fund's investment in options, swaps and related transactions, futures
contracts and forward contracts, options on futures contracts and stock indices
and certain other securities, including transactions involving actual or deemed
short sales or foreign exchange gains or losses are subject to many complex and
special tax rules. For example, over-the-counter options on debt securities
and equity options, including options on stock and on narrow-based stock
indexes, will be subject to tax under Section 1234 of the Code, generally
producing a long-term or short-term capital gain or loss upon exercise, lapse
or closing out of the option or sale of the underlying stock or security. By
contrast, a Fund's treatment of certain other options, futures and forward
contracts entered into by a Fund is generally governed by
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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 in pay-in-kind
bonds or in
<PAGE> 190
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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
"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
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71
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 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
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72
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 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
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73
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 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
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74
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.
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
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initial $1,000 payment, and for Class A, Class B and Class C shares, the
applicable CDSC imposed on redemption is deducted. The schedule of CDSCs due
upon redemption is described under "Redemption of Shares" in the Prospectus.
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 are, for all classes, restated
to reflect front end sales charges and CDSCs 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, rather than the
distribution and service fees and expenses currently payable by each class of
shares under the Multiple Pricing System which in certain cases are different
(as indicated in the footnotes to the tables). Until December 31, 1994, each
of the New York Municipal Bond Fund and the Investors Fund paid no distribution
or service fees. 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 (after management
fee waiver and reimbursement of certain expenses) and the Investors Fund for
certain periods of time ending December 31, 1995 restated to reflect the
effects of the maximum applicable front end sales charges and any applicable
CDSCs payable by an investor under the Multiple Pricing System.
[to be added when 12/31/95 information is available]
NEW YORK MUNICIPAL BOND FUND
<TABLE>
<CAPTION>
From commencement of operations
1 year on February 1, 1993 through December 30, 1995
------ -----------------------------------------
<S> <C> <C>
Class A %** %**
Class B %** %**
Class C %** %**
Class O % %
</TABLE>
**The return figures do not reflect the distribution and service fees currently
paid with respect to a class of shares of a Fund.
<PAGE> 196
76
As described in the Prospectus under the caption "Expense Information,"
the New York Municipal Bond Fund has been and still is subject to certain fee
waivers and expense reimbursements. Absent such waiver and reimbursement, the
returns shown above for the New York Municipal Bond Fund would be lower.
INVESTORS FUND
<TABLE>
<CAPTION>
1 year 5 years 10 years
------ ------- --------
<S> <C> <C> <C>
Class A %** %** %**
Class B %** %** %**
Class C %** %** %**
Class O % % %
</TABLE>
**The return figures do not reflect the distribution and service fees currently
paid with respect to a class of shares of a Fund.
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:
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)
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77
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 (before implementation of the Multiple Pricing System) of the
Cash Management Fund were ____% and ____%, 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:
a-b
--- 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
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78
(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 (before implementation of the Multiple Pricing
System) of the New York Municipal Bond Fund at December 31, 1995 was ____%.
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 (before implementation of the Multiple Pricing
System) of the New York Municipal Bond Fund at December 30, 1995 was _____%.
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 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.
<PAGE> 199
79
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in
the future. Because performance will vary, it may not provide a basis for
comparing an investment in Fund shares with certain bank deposits or other
investments that pay a fixed return for a stated period of time. Investors
comparing a Fund's performance with that of other mutual funds should give
consideration to the nature, quality and maturity of the respective investment
companies' portfolio securities and market conditions. An investor's principal
is not guaranteed by any Fund.
SHAREHOLDER SERVICES
EXCHANGE PRIVILEGE. Shareholders may exchange all or part of their Fund
shares for shares of the same class of other Funds in the Salomon Brothers
Investment Series, as indicated in the Prospectus, to the extent such shares
are offered for sale in the shareholder's state of residence.
The exchange privilege enables shareholders of a Fund to acquire shares
in a Fund with different investment objectives when they believe that a shift
between Funds is an appropriate investment decision. This privilege is
available to shareholders residing in any state in which the Fund shares being
acquired may legally be sold.
Exercise of the exchange privilege is treated as a sale and repurchase
for federal income tax purposes and, depending on the circumstances, a short-
or long-term capital gain or loss may be realized. The price of the shares of
the fund into which shares are exchanged will be the new cost basis for tax
purposes.
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
<PAGE> 200
80
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
The Shareholders Services Group, Inc. ("TSSG"), 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 TSSG upon notice in writing.
The Withdrawal Plan will not be carried over on exchanges between Funds
or classes. A new Withdrawal Plan application is required to establish the
Withdrawal Plan in the new Fund or class. For additional information,
shareholders should call (800) SALOMON or (800) 725-6666.
SELF EMPLOYED RETIREMENT PLANS. Each Fund offers a prototype retirement
plan for self-employed individuals. Under such plan, self-employed individuals
may contribute out of earned income to purchase shares of a Fund and/or certain
other mutual funds managed by SBAM.
Each Fund's custodian has agreed to serve as custodian and furnish the
services provided for in the plan and the related custody agreement. Each
Fund's custodian will charge individuals adopting a self employed retirement
plan an application fee as well as certain additional fees for its services
under the custody agreement.
For information required for adopting a self employed retirement plan,
including information on fees, obtain the form of the plan and custody
agreement available from a Fund. Because application of particular tax
provisions will vary depending on each individual's situation, consultation
with a financial adviser regarding a self employed retirement plan is
recommended.
IRAS. A prototype individual retirement account ("IRA") is available,
which has been approved as to form by the Internal Revenue Service ("IRS").
Contributions to an IRA made available by a Fund may be invested in shares of
such Fund and/or certain other mutual funds managed by SBAM.
Each Fund's custodian has agreed to serve as custodian of the IRA and
furnish the services provided for in the custody agreement. Each Fund's
custodian will charge each IRA an application fee as well as certain additional
fees for its services under the custody agreement. In accordance with IRS
regulations, an individual may revoke an IRA within seven calendar days after
it is established.
Contributions in excess of allowable limits, premature distributions to
an individual who is not disabled before age 59-1/2 or insufficient
distributions after age 70-1/2 will generally result in substantial adverse tax
consequences.
<PAGE> 201
81
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 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.
<PAGE> 202
82
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 hedging transactions.
TSSG, 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, TSSG 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, TSSG receives a monthly fee computed separately for each
class of a Fund's shares and is reimbursed separately by each class for
out-of-pocket expenses.
VALIDITY OF SHARES
The validity of the shares of each Fund will be passed upon by Piper &
Marbury L.L.P., Baltimore, Maryland.
INDEPENDENT ACCOUNTANTS
Price Waterhouse LLP ("Price Waterhouse") provides audit services, tax
return preparation and assistance and consultation in connection with review of
Commission filings. The financial statements and financial highlights included
or incorporated by reference in the Prospectus and included in this Statement
of Additional Information have been included in reliance on the report of Price
Waterhouse, independent accountants, given on the authority of that firm as
experts in auditing and accounting. Price Waterhouse's address is 1177 Avenue
of the Americas, New York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett serves as counsel to each Fund (a partnership
which includes professional corporations), and is located at 425 Lexington
Avenue, New York, New York 10017-3954.
<PAGE> 203
83
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> 204
84
FINANCIAL STATEMENTS
<PAGE> 205
Statement of Net Assets Salomon Brothers Investors Fund Inc
December 31, 1994
<TABLE>
<CAPTION>
Value
Shares COMMON STOCKS-86.0% Cost (Note 1a)
- ------ -------- -----------
Basic Industries-16.2%
<S> <C> <C> <C>
200,000 Albemarle ............................ $ 2,952,775 $ 2,775,000
50,000 Broken Hill Proprietary-ADR .......... 2,121,750 3,081,250
156,000 Crown Cork & Seal* ................... 5,801,422 5,889,000
18,000 Dupont (E.I.) de Nemours ............. 1,040,751 1,012,500
135,000 Eastman Kodak ........................ 5,831,644 6,446,250
47,500 First U.S.A. ......................... 1,647,538 1,561,563
68,500 International Paper .................. 3,297,503 5,163,188
225,000 Morton International.................. 6,450,850 6,412,500
150,000 Payless Cashways* .................... 1,834,030 1,387,500
91,250 Rayonier ............................. 2,641,968 2,783,125
107,500 Temple-Inland ........................ 5,221,518 4,850,938
175,000 Tyco International ................... 8,268,460 8,312,500
147,100 Willamette Industries ................ 5,462,822 6,950,475
------------ ------------
52,573,031 56,625,789
------------ ------------
Consumer Products & Services-15.1%
200,000 Albertson's .......................... 5,102,363 5,800,000
250,000 Dillard Department Stores, Class A ... 8,371,532 6,687,500
422,800 Federated Department Stores* ......... 8,561,787 8,138,900
250,000 Kroger* .............................. 6,134,328 6,031,250
125,000 Penn Traffic* ........................ 5,003,199 4,750,000
82,500 Philip Morris Companies .............. 4,742,548 4,743,750
75,000 Sherwin-Williams ..................... 2,438,899 2,484,375
550,000 Stop and Shop Companies* ............. 10,996,029 14,025,000
------------ ------------
51,350,685 52,660,775
------------ ------------
Defense-2.6%
140,000 Raytheon ............................. 8,420,124 8,942,500
------------ ------------
Financial Services-12.5%
175,000 American Express ..................... 3,614,124 5,162,500
172,500 Bank of New York ..................... 4,726,911 5,002,500
58,500 Chemical Banking ..................... 2,131,920 2,098,688
77,000 Federal National Mortgage Association 5,945,395 5,611,375
150,000 First Data ........................... 5,163,373 7,106,250
125,000 Grupo Financiero Banorte, Series C ... 545,815 303,550
21,512 Grupo Mexicano de Desarrollo,
Series B-ADR* ....................... 377,970 164,029
48,500 Grupo Posadas-GDR* ................... 1,079,125 757,813
26,250 Mellon Bank .......................... 1,008,497 803,906
154,000 MGIC Investment ...................... 4,363,631 5,101,250
</TABLE>
<PAGE> 206
Statement of Net Assets (continued) Salomon Brothers Investors Fund Inc
December 31, 1994
<TABLE>
<CAPTION>
Value
Shares COMMON STOCKS (continued Cost (Note 1a)
- ------ -------- -----------
Financial Services (continued)
<S> <C> <C> <C>
160,800 SunAmerica ........................... $ 5,861,130 $ 5,829,000
167,666 Travelers ............................ 2,429,894 5,449,145
------------ ------------
37,247,785 43,390,006
------------ ------------
Food & Beverage-2.7%
150,000 Coca-Cola ............................ 5,990,236 7,725,000
60,000 Dr Pepper/Seven-Up Companies*(a) ..... 1,268,975 1,537,500
------------ ------------
7,259,211 9,262,500
------------ ------------
Health Care-1.5%
225,000 Beverly Enterprises* ................. 2,879,604 3,234,375
66,000 Mallinckrodt Group ................... 2,170,988 1,971,750
------------ ------------
5,050,592 5,206,125
------------ ------------
Machinery & Equipment-6.4%
300,000 Albany International, Class A ........ 5,152,874 5,775,000
130,000 Deere ................................ 9,886,010 8,612,500
97,500 General Electric ..................... 312,433 4,972,500
90,000 Potash Corporation of Saskatchewan ... 2,966,427 3,060,000
------------ ------------
18,317,744 22,420,000
------------ ------------
Oil & Gas-9.9%
90,000 Amoco ................................ 5,119,736 5,321,250
140,000 Chevron .............................. 4,858,373 6,247,500
400,000 MetroGas, Class B-ADR* ............... 5,190,125 4,050,000
80,000 Mobil ................................ 5,718,500 6,740,000
70,000 Royal Dutch Petroleum, 5 Guilder ..... 3,888,670 7,525,000
45,000 Texaco ............................... 2,349,236 2,694,375
62,500 TOTAL-ADR ............................ 1,861,263 1,843,750
------------ ------------
28,985,903 34,421,875
------------ ------------
Technology-6.4%
80,000 Apple Computer ....................... 2,959,300 3,110,000
235,000 BISYS Group* ......................... 4,337,495 5,170,000
50,000 Hewlett-Packard ...................... 3,020,065 4,993,750
48,500 National Data ........................ 785,119 1,248,875
60,000 Plantronics* ......................... 1,683,091 1,800,000
60,000 Stratus Computer* .................... 1,682,753 2,280,000
102,500 Sun Microsystems*(a) ................. 2,894,695 3,632,344
------------ ------------
17,362,518 22,234,969
------------ ------------
</TABLE>
<PAGE> 207
Statement of Net Assets (continued) Salomon Brothers Investors Fund Inc
December 31, 1994
<TABLE>
<CAPTION>
Value
Shares COMMON STOCKS (continued) Cost (Note 1a)
- ------ -------- -----------
Telecommunications & Utilities-6.2%
<S> <C> <C> <C>
107,000 AirTouch Communications* ............. $ 1,806,578 $ 3,116,375
119,000 AT&T ................................. 5,815,237 5,979,750
160,000 Motorola(a) .......................... 1,596,329 9,260,000
80,000 Telefonos de Mexico, Series L-ADR .... 2,638,838 3,280,000
------------ ------------
11,856,982 21,636,125
------------ ------------
Transportation-6.5%
135,000 AlliedSignal ......................... 3,609,925 4,590,000
245,000 Ford Motor ........................... 7,570,770 6,860,000
130,000 General Motors, Class H .............. 5,033,587 4,533,750
60,000 Norfolk Southern ..................... 3,662,800 3,637,500
70,000 Union Pacific ........................ 3,379,820 3,193,750
------------ ------------
23,256,902 22,815,000
------------ ------------
TOTAL COMMON STOCKS 261,681,477 299,615,664
------------ ------------
PREFERRED STOCKS-3.5%
Financial Services-0.0%
1,500 American Express Decs 6.25%, 10/15/96 66,465 63,938
------------ ------------
Technology-1.8%
100,000 Ceridian 5.50%, Convertible .......... 5,640,630 6,300,000
------------ ------------
Telecommunications & Utilities-1.4%
65,000 Nokia-ADR ............................ 3,847,819 4,875,000
------------ ------------
Transportation-0.3%
10,000 Ford Motor 8.40%, Convertible ........ 926,225 920,000
------------ ------------
TOTAL PREFERRED STOCKS 10,481,139 12,158,938
------------ ------------
Principal
Amount BONDS & NOTES-5.6%
------ Basic Industries-1.3%
$3,500,000 Fort Howard Zero Coupon to 11/1/94,
14.125% thereafter, due 11/1/04 ..... 3,592,849 3,530,622
1,000,000 IMO Industries, 12.25%, due 8/15/97 .. 1,015,000 1,007,500
------------ ------------
4,607,849 4,538,122
------------ ------------
Consumer Products & Services-1.5%
1,000,000 Marriott, 9.00%, Senior Notes,
Series I, due 5/24/95 ............... 1,015,030 1,010,000
2,000,000 Pathmark Stores 9.625%, Senior Sub.
Notes due 5/01/03 ................... 1,821,875 1,755,000
3,000,000 Pathmark Stores Zero Coupon to 11/1/99,
10.75% thereafter, due 11/1/03 ...... 1,513,553 1,518,750
1,000,000 Penn Traffic 9.625%, due 4/15/05 ..... 908,750 870,000
------------ ------------
5,259,208 5,153,750
------------ ------------
Financial Services-1.4%
350,000 Banco Nacional de Mexico 7.00%,
due 12/15/99 ........................ 392,000 276,500
500,000 Kroger 6.375%, due 12/01/99 .......... 612,000 655,000
4,000,000 Liberty Property Trust, 8.00%
Exchangeable Sub. Debs., due 7/01/01 4,001,875 3,880,000
------------ ------------
5,005,875 4,811,500
------------ ------------
</TABLE>
<PAGE> 208
Statement of Net Assets (continued) Salomon Brothers Investors Fund Inc
December 31, 1994
<TABLE>
<CAPTION>
Principal Value
Amount BONDS & NOTES (continued) Cost (Note 1a)
- --------- ------ -----------
U.S. Government-1.1%
<S> <C> <C> <C>
$4,000,000 U.S. Treasury Note, 6.50%, due 9/30/96 $ 3,978,281 $ 3,928,800
------------ ------------
Health Care-0.3%
1,000,000 American Medical International,
9.50%, due 4/15/06 ................. 1,003,750 988,750
------------ ------------
TOTAL BONDS & NOTES .................. 19,854,963 19,420,922
------------ ------------
No. of Premium
Contracts PURCHASED CALL OPTION-0.4% Paid (Received)
- --------- -----------------
200 Standard & Poors Index @ $400
Exp. 3/18/95 ........................ 1,310,280 1,262,500
------------ ------------
TOTAL INVESTMENTS-95.5% $293,327,859 332,458,024
============ ===========
WRITTEN CALL OPTIONS-(0.1)%
(175) DrPepper/Seven-Up Companies @$25Exp.
1/21/95 ............................ $ (35,926) (19,688)
(425) DrPepper/Seven-Up Companies @$22.50Exp.
1/21/95 ............................ (73,098) (138,125)
(200) Motorola @ $60 Exp. 4/22/95 .......... (59,398) (62,500)
(825) Sun Microsystems @ $35 Exp. 2/18/95 .. (187,831) (201,094)
(200) Sun Microsystems @ $35 Exp. 4/22/95 .. (71,898) (70,000)
------ --------- --------
(1,825) TOTAL WRITTEN OPTIONS(a) ............. $(428,151) (491,407)
====== ========= ========
</TABLE>
<TABLE>
<CAPTION>
Principal
Amount REPURCHASE AGREEMENT-4.9%
- ---------
<S> <C> <C>
$17,000,000 J.P. Morgan Securities, 5.30%, cost $17,000,000,
dated 12/30/94, $17,010,011 due 1/03/95,
collateralized by $11,746,000 U.S. Treasury
Bond, 14.00%, due 11/15/11, valued at $17,545,588 ... 17,000,000
------------
CASH AND RECEIVABLES-1.7% ............ 6,092,264
LIABILITIES-(2.0)% ................... (6,844,645) (752,381)
------------ ------------
NET ASSETS-equivalent to $13.63, offering and
redemption price per share on 25,551,783
shares outstanding .................................. $348,214,236
============
Net Assets Consist of:
Paid-in capital ....................................... $307,610,607
Undistributed net realized gain ....................... 1,536,720
Net unrealized appreciation ........................... 39,066,909
------------
Net Assets ............................................ $348,214,236
============
<FN>
- ---------
*Non-income producing security.
(a)60,000, 20,000, and 102,500 shares of Dr Pepper/Seven-Up Companies, Motorola,
and Sun Microsystems, respectively, are held by the Fund's custodian in a
segregated account in connection with written call options outstanding at
December 31, 1994.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE> 209
Statement of Operations Salomon Brothers Investors Fund Inc
Year Ended December 31, 1994
<TABLE>
<S> <C> <C>
Investment Income
Income
Dividends (net of foreign withholding tax of $58,310) ............ $ 7,015,773
Interest ......................................................... 2,069,822
------------
9,085,595
------------
Expenses
Management fee .................................... $ 1,747,839
Shareholder services .............................. 294,550
Printing .......................................... 99,215
Legal ............................................. 90,555
Directors' fees and expenses ...................... 82,755
Audit and tax return preparation fees ............. 66,370
Custodian ......................................... 46,550
Postage ........................................... 41,125
Other ............................................. 109,172 2,578,131
------------ ------------
Net investment income ............................................ 6,507,464
------------
Net Realized Gain on Investments, Options
and Foreign Currency Transactions .............................. 26,937,166
Net Unrealized Appreciation of Investments and Options
Beginning of year ................................. 77,335,908
End of year ....................................... 39,066,909
------------
Decrease in net unrealized appreciation .......................... (38,268,999)
------------
Net realized gain and decrease in net unrealized appreciation .... (11,331,833)
------------
Net decrease in net assets from operations ....................... $ (4,824,369)
============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 210
Statement of Changes in Net Assets Salomon Brothers Investors Fund Inc
<TABLE>
<CAPTION>
Year Ended December 31,
1994 1993
------------ ------------
<S> <C> <C>
Operations
Net investment income ............................................... $ 6,507,464 $ 7,121,760
Net realized gain on investments, options, and foreign currency
transactions ...................................................... 26,937,166 62,894,440
Decrease in net unrealized appreciation ............................. (38,268,999) (15,986,212)
------------ ------------
Increase (decrease) in net assets from operations ................... (4,824,369) 54,029,988
------------ ------------
Net Equalization Credit
Undistributed net investment income included in price of shares
issued and redeemed(a) ............................................ - 619,541
------------ ------------
Distributions to Shareholders from
Net investment income ............................................... (6,555,567) (7,289,166)
Net realized gains .................................................. (36,204,568) (55,947,930)
------------ ------------
(42,760,135) (63,237,096)
------------ ------------
Capital Share Transactions
Proceeds from sales of 1,535,504 and 244,382 shares,
respectively ...................................................... 22,813,829 3,947,724
Net asset value of 2,324,823 and 3,096,845 shares, respectively,
issued in reinvestment of net investment income and net
realized gain distributions ....................................... 32,449,031 46,474,136
Payment for redemption of 3,057,955 and 1,600,872 shares,
respectively ...................................................... (45,611,321) (26,037,035)
------------ ------------
Increase in net assets resulting from capital share transactions,
representing net increases of 802,372 and 1,740,355 shares,
respectively ...................................................... 9,651,539 24,384,825
------------ ------------
Total increase (decrease) in net assets ............................. (37,932,965) 15,797,258
------------ ------------
Net Assets
Beginning of year ................................................... 386,147,201 370,349,943
------------ ------------
End of year (includes undistributed net investment income of
$48,103 for 1993) ................................................. $348,214,236 $386,147,201
============ ============
<FN>
- ----------
(a) The Fund discontinued the accounting practice of equalization during 1993.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE> 211
Notes to Financial Statements Salomon Brothers Investors Fund Inc
1. Significant Accounting Policies
The Fund is registered as a diversified, open-end, management investment
company under the Investment Company Act of 1940, as amended. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements. The policies are in conformity with
generally accepted accounting principles.
(a) Securities Valuation. Portfolio securities listed or traded on
national securities exchanges, or reported on the NASDAQ national market
system, are valued at the last sale price, or if there have been no sales on
that day, at the mean of the current bid and 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 for which no quotations
are readily available (as may be the case for securities of limited
marketability) and other assets are valued at fair value determined pursuant
to procedures established by the Board of Directors.
(b) Written Option Contracts. When the Fund writes a call option or a
put option, an amount equal to the premium received is recorded as a
liability, the value of which is marked-to-market daily to reflect the
current market value of the written option. When a written option expires,
the Fund realizes a gain equal to the amount of the premium received. When
the Fund enters into a closing purchase transaction, it realizes a gain (or
loss if the cost of the closing purchase transaction exceeds the premium
received when the option was sold) without regard to any unrealized gain or
loss on the underlying security, and the liability related to such option is
eliminated. When a call option is exercised, the Fund realizes a gain or
loss from the sale of the underlying security and the proceeds from such
sale are increased by the premium originally received. When a put option is
exercised, the amount of the premium received reduces the cost of the
security that the Fund purchased upon exercise.
(c) Federal Income Taxes. The Fund has complied and intends to continue
to comply with the requirements of the Internal Revenue Code applicable to
regulated investment companies, including the distribution requirements of
the Tax Reform Act of 1986, and to distribute all of its taxable income, to
shareholders. Therefore, no Federal income tax or excise tax provision is
required.
(d) Repurchase Agreements. When entering into repurchase agreements, it
is the Fund's policy to take possession, through its custodian, of the
underlying collateral and to monitor the collateral's value at the time the
agreement is entered into and at all times during the term of the repurchase
agreement to ensure that it always equals or exceeds the repurchase price.
In the event of default or bankruptcy by the other party to the agreement,
realization and/or retention of the collateral may be subject to legal
proceedings.
(e) Dividends and Distributions. Dividends and distributions to
shareholders are recorded on the ex-dividend date, and determined in
accordance with income tax regulations which may differ from generally
accepted accounting principles primarily due to deferral of wash sale and
post-October losses.
(f) Other. Securities transactions are recorded as of the trade date.
Dividend income is recorded on the ex-dividend date. Gains or losses on
sales of securities are calculated for financial accounting and Federal
income tax purposes on the identified cost basis. Interest is recognized as
interest income when earned.
<PAGE> 212
Notes to Financial Statements (continued) Salomon Brothers Investors Fund Inc
2. Distribution After December 31, 1994
On January 24, 1995, the Fund declared a distribution from net long-term
gains of $.07 per share. The distribution was payable February 9 to shareholders
of record January 25, 1995.
3. Capital Stock
At December 31, 1994, there were 50,000,000 shares of authorized capital
stock, $1.00 par value. The par value of capital stock outstanding at that date
amounted to $25,551,783. The amount payable for Fund shares redeemed at December
31, 1994 amounted to $48,763.
4. Management Fee and Other Agreements
The Fund retains Salomon Brothers Asset Management Inc ("SBAM"), an
indirect, wholly-owned subsidiary of Salomon Inc, to act as investment manager
of the Fund subject to the supervision by the Board of Directors of the Fund.
SBAM furnishes the Fund with office space and pays the compensation of its
officers.
At its annual meeting on April 21, 1994, the shareholders of the Fund
approved an amendment to the Management Agreement between the Fund and SBAM to
change the structure of the management fee to a performance-based fee
arrangement. The new performance-based fee arrangement became effective on
August 1, 1994.
Under the new fee arrangement, the Fund pays SBAM a base fee subject to an
increase or decrease depending on the extent, if any, to which the investment
performance of the Fund exceeds or is exceeded by the investment record of the
Standard & Poor's 500 Index of Composite Stocks ("S&P 500 Index") over a rolling
one-year period. The base fee is paid quarterly based on the following annual
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>
For each percentage point by which the investment performance of the Fund
exceeds or is exceeded by the investment record of the S&P 500 Index, the base
fee will be adjusted upward or downward by .01% (annualized). The maximum annual
adjustment is .10% which would occur if the 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 based on the one-year period ending
September 30, 1995. Thereafter, the performance adjustment will be paid
quarterly based on a rolling one-year period.
Prior to August 1, 1994, the management fee for these services had been
payable quarterly based on the following annual percentages of the Funds'
average daily net assets: first $25 million-none; next $325 million-.50%; next
$150 million-.30%; next $250 million-.25%; excess over $750 million-.20%. For
the three months ended December 31, 1994, the S&P 500 Index's performance
exceeded the Fund's performance by two percent. Under the performance fee
arrangement, the Fund would be entitled to a .02% reduction in its management
fee payable to SBAM for the year ended September 30, 1995 should this
performance continue at the same level through September 30, 1995.
Brokerage commissions of $61,788 were paid to Salomon Brothers Inc, the
Fund's distributor and an indirect wholly-owned subsidiary of Salomon Inc, for
transactions executed on behalf of the Fund for the year ended December 31,
1994.
<PAGE> 213
Notes to Financial Statements (continued) Salomon Brothers Investors Fund Inc
If in any fiscal year the total expenses of the Fund, excluding taxes,
interest, brokerage and extraordinary expenses, but including the management
fee, exceed the most stringent expense limitation imposed by state securities
regulations applicable to the Fund, SBAM will pay or reimburse the Fund for the
excess. Currently, this limitation 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.
For the year ended December 31, 1994 there was no such reimbursement.
As of December 1, 1994, Investors Bank and Trust Company ("IBT") serves as
the Fund's custodian and administrator. IBT performs custodial and certain
administrative services in connection with the operation of the Fund. Prior to
December 1, 1994, administrative services were provided by The Shareholder
Services Group, Inc. ("TSSG") and custodial services were provided by Boston
Safe Deposit and Trust Company. TSSG continues to serve as the Fund's transfer
and shareholder services agent.
5. Portfolio Activity
The cost of securities purchased and proceeds from securities sold (other
than short-term investments and written options) during the year ended December
31, 1994 aggregated $238,342,172 and $272,683,079, respectively. Amounts payable
for securities purchased at December 31, 1994 aggregated $6,251,105. Cost of
securities held (excluding short-term investments and written options) on
December 31, 1994 for Federal income tax purposes was $293,513,010. As of
December 31, 1994, total unrealized appreciation and depreciation, based on cost
for Federal income tax purposes, was to $48,668,719 and $9,723,705,
respectively, resulting in net unrealized appreciation of $38,945,014.
Transactions in options written during the year ended December 31, 1994 were
as follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
--------- --------
<S> <C> <C>
Options outstanding at December 31, 1993 ............ (900) $(176,544)
Options written ..................................... (83,054) (994,435)
Options terminated in closing purchase transactions . 55,882 501,094
Options expired ...................................... 25,997 206,548
Options exercised ................................... 250 35,186
-------- ----------
Options outstanding at December 31, 1994 ............. (1,825) $(428,151)
-------- ----------
</TABLE>
During the year ended December 31, 1994 net realized gain from written
option transactions amounted to $463,347. During the year ended December 31,
1994 net realized loss from purchased option transactions amounted to $879,193,
for a net realized loss on all option transactions of $415,846.
A risk in writing a call option is that the Fund may forego the opportunity
of profit if the market price of the underlying security increases and the
option is exercised. A risk in writing a put option is that the Fund may incur a
loss if the market price of the underlying security decreases and the option is
exercised. In addition, there is the risk that the Fund may not be able to enter
a closing transaction because of an illiquid secondary market.
6. Subsequent Event
Subsequent to December 31, 1994, the Fund implemented a multiple class
pricing system. In connection with such implementation, the Fund designated all
outstanding shares of capital stock as Class O shares and created three new
classes of shares designated Class A, Class B and Class C shares. Each of the
new classes of shares has its own distribution plan and sales charge structure.
<PAGE> 214
Financial Highlights Salomon Brothers Investors Fund Inc
Selected data per share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990(+) 1989 1988 1987 1986 1985
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Per Share Operating
Performance:
Net asset value,
beginning of year . $15.60 $16.10 $17.10 $14.54 $16.65 $15.55 $14.77 $17.37 $19.86 $17.61
Net investment income 0.27 0.32 0.41 0.44 0.49 0.66* 0.52 0.49 0.51 0.59
Net gains (losses) on
securities (both
realized and
unrealized) ....... (0.48) 2.025 0.79 3.675 (1.555) 2.66 1.885 (0.32) 2.085 3.71
Total from investment
operations ........ (0.21) 2.345 1.20 4.115 (1.065) 3.32 2.405 0.17 2.595 4.30
Less dividends and
distributions:
Dividends from net
investment income . (0.27) (0.325) (0.41) (0.455) (0.55) (0.63) (0.525) (0.51) (0.535) (0.545)
Distributions from
net realized gain
on investments,
options and
foreign currency
transactions ...... (1.49) (2.52) (1.79) (1.10) (.495) (1.59) (1.10) (2.26) (4.55) (1.505)
Total dividends and
distributions ... (1.76) (2.845) (2.20) (1.555) (1.045) (2.22) (1.625) (2.77) (5.085) (2.05)
Net asset value,
end of year ....... $13.63 $15.60 $16.10 $17.10 $14.54 $16.65 $15.55 $14.77 $17.37 $19.86
Total investment
return based on net
asset value per
share ............. -1.3% +15.1% +7.4% +29.3% -6.5% +21.8% +16.9% +0.7% +14.4% +26.9%
Ratios/Supplemental Data:
Net assets end of
year (thousands) .. $348,214 $386,147 $370,350 $378,615 $330,814 $393,747 $362,742 $352,272 $398,610 $403,399
Ratio of expenses to
average net assets. 0.69% 0.68% 0.68% 0.70% 0.68% 0.63% 0.67% 0.58% 0.57% 0.62%
Ratio of net
investment income
to average net
assets ............ 1.75% 1.90% 2.47% 2.67% 3.13% 3.76% 3.32% 2.37% 2.56% 3.32%
Portfolio turnover
rate .............. 66% 79% 48% 44% 22% 36% 54% 80% 62% 46%
<FN>
- ----------
*Includes $.05 per share of noncash 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.
</FN>
</TABLE>
See accompanying notes to financial statements.
<PAGE> 215
Report of Independent Accountants Salomon Brothers Investors Fund Inc
To the Board of Directors and Shareholders of
Salomon Brothers Investors Fund Inc
In our opinion, the accompanying statement of net assets 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 Investors Fund Inc (the "Fund") at December 31, 1994, the
results of its operations for the year then ended, the changes in its net assets
for each of the two years in the period then ended, and the financial highlights
for each of the ten years in the period then ended, in conformity with generally
accepted accounting principles. These financial statements and financial
highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits, which included confirmation of securities at December 31, 1994 by
correspondence with the custodian and brokers and the application of alternative
auditing procedures where confirmations from brokers were not received, provide
a reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 17, 1995
<PAGE> 216
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRNICIPAL ON DATE OF MATURITY VALUE
AMOUNT PURCHASE* DATE (NOTE 1a)
- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER-36.5%
$ 700,000 American Express Credit Corporation ....................... 5.80% 01/03/95 $ 699,774
595,000 Fairfax County, Virginia Economic
Development Agency ...................................... 6.25 01/12/95 595,000
800,000 General Mills ............................................. 5.97 01/03/95 799,735
500,000 Gillette Company .......................................... 5.70 01/03/95 499,842
700,000 Goldman Sachs Group ....................................... 5.95 01/09/95 699,074
500,000 Idaho Housing Agency ...................................... 5.60 01/05/95 499,689
500,000 Koch Industries ........................................... 5.90 01/03/95 499,836
500,000 Merrill Lynch ............................................. 5.80 01/03/95 499,839
600,000 Methodist Hospital ........................................ 5.75 01/06/95 600,000
500,000 Quaker Oats Company ....................................... 6.18 01/04/95 499,509
500,000 Smith Barney .............................................. 5.45 01/06/95 499,621
600,000 Sunshine State Governmental Financing
Commission, Florida ..................................... 6.33 01/17/95 598,313
-----------
TOTAL COMMERCIAL PAPER (cost $6,990,232) ......................................... 6,990,232
-----------
FLOATING RATE NOTES-32.5%
600,000 Community Health Systems, VR .............................. 6.40 01/04/95 600,000
500,000 Florida State Housing Finance Agency VR ................... 6.10 01/04/95 500,000
610,000 Fulton County, New York
Industrial Development Agency VR ........................ 6.35 01/05/95 610,000
500,000 Health Insurance Plan, Greater New York VR ................ 6.45 01/04/95 500,000
500,000 Illinois Student Assistance Commission VR ................. 6.17 01/04/95 500,000
315,000 New Jersey,
Economic Development Authority VR ....................... 6.41 01/03/95 315,000
285,000 New Jersey,
Economic Development Authority VR ....................... 6.29 01/03/95 285,000
400,000 New York, New York
Industrial Development Agency VR ........................ 6.30 01/04/95 400,000
200,000 New York, New York
Industrial Development Agency VR ........................ 6.30 01/04/95 200,000
500,000 Pasadena, California
Certificates of Participation VR ........................ 6.30 01/03/95 500,000
500,000 Selma, Alabama
Industrial Development Board VR ......................... 6.56 01/10/95 500,000
600,000 Tyler, Texas
Health Facilities Development VR ........................ 6.40 01/04/95 600,000
700,000 Virginia State,
Housing Development Authority VR ........................ 6.75 01/03/95 700,000
-----------
TOTAL FLOATING RATE NOTES (cost $6,210,000) ...................................... 6,210,000
-----------
</TABLE>
<PAGE> 217
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT PURCHASE* DATE (NOTE 1a)
- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
SHORT-TERM BONDS-7.6%
$ 700,000 Metro Pier & Export Authority, MBIA ....................... 5.50% 06/15/95 $ 700,000
750,000 Richmond County, Georgia
Development Authority PUT ............................... 5.71 06/01/95 750,000
-----------
TOTAL SHORT-TERM BONDS (cost $1,450,000) ......................................... 1,450,000
-----------
REPURCHASE AGREEMENT-18.5%
3,530,399 J.P. Morgan Securities, dated 12/30/94, with a
maturity value of $3,532,478, collateralized
by $3,727,000 U.S. Treasury Note, 5.625%,
due 8/31/97, valued at $3,671,095
(cost $3,530,399) ....................................... 5.30 01/03/95 3,530,399
-----------
TOTAL INVESTMENTS-95.1% OF NET ASSETS
(cost $18,180,631) ............................................................. $18,180,631
===========
</TABLE>
------------
*Yield to maturity on date of purchase, except in the case of
Variable Rate Demand Notes (VR), whose yields are determined on
date of the last interest rate change. For Variable Rate
Demand Notes, maturity date shown is the date of next interest
rate change.
Abbreviations used in this statement:
MBIA Insured as to principal and interest by the Municipal Bond
Investors Assurance Corporation.
PUT Optional or mandatory put. Maturity date shown is the put
date as well as the date of next interest rate change.
See accompanying notes to financial statements.
<PAGE> 218
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $14,650,232) ............................................... $14,650,232
Repurchase Agreement .................................................................. 3,530,399
Receivable for Fund shares sold ....................................................... 1,136,727
Interest receivable ................................................................... 46,104
Unamortized organization expenses ..................................................... 9,071
-----------
Total assets ...................................................................... 19,372,533
-----------
LIABILITIES
Payable for Fund shares redeemed ...................................................... 208,949
Dividend payable ...................................................................... 17,659
Accrued expenses ...................................................................... 19,109
-----------
Total liabilities ................................................................. 245,717
-----------
NET ASSETS (equivalent to $1.00 per share on 19,128,930 shares of $.001 par value
capital stock outstanding; 1,333,333,334 shares authorized) ....................... $19,126,816
===========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
INCOME
Interest .............................................................................. $ 640,634
EXPENSES
Management fee .............................................................. $ 29,088
Registration and filing fees ................................................ 17,044
Amortization of organization expenses ....................................... 12,000
Administration fee .......................................................... 11,635
Custodian ................................................................... 9,800
Shareholder services ........................................................ 9,642
Legal ....................................................................... 8,961
Audit and tax return preparation fees ....................................... 8,007
Printing .................................................................... 7,249
Directors' fees ............................................................. 2,713
Other ....................................................................... 2,279
-------
118,418
Management fee waived ....................................................... (29,088) 89,330
------- -----------
Net investment income ................................................................. 551,304
Net realized loss on securities sold .................................................. (415)
-----------
Net increase in net assets resulting from operations .................................. $ 550,889
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 219
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS CASH MANAGEMENT FUND
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment income ...................................................... $ 551,304 $ 346,089
Net realized loss on securities sold ....................................... (415) (257)
----------- -----------
Net increase in net assets resulting from operations ....................... 550,889 345,832
----------- -----------
DIVIDENDS FROM NET INVESTMENT INCOME ....................................... (551,304) (346,089)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares .............................................. 75,796,036 80,014,866
Net asset value of shares issued in reinvestment of dividends .............. 401,895 215,401
Payment for redemption of shares ........................................... (72,120,070) (76,793,905)
----------- -----------
Net increase in net assets resulting from capital share transactions ....... 4,077,861 3,436,362
----------- -----------
Total increase in net assets ............................................... 4,077,446 3,436,105
NET ASSETS
Beginning of year .......................................................... 15,049,370 11,613,265
----------- -----------
End of year ................................................................ $19,126,816 $15,049,370
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990*
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................................ $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income ............................ .038+ .027+ .033+ .055+ .019+
Dividends from net investment
income ......................................... (.038) (.027) (.033) (.055) (.019)
------ ------ ------ ------ ------
Net asset value, end of period ................... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period
(thousands) .................................... $19,127 $15,049 $11,613 $22,982 $10,293
Total investment return .......................... +3.9% +2.7% +3.4% +5.7% +1.9%
Ratios to average net assets:
Expenses ..................................... 0.61%+ 0.65%+ 0.65%+ 0.65%+ 0.65%**+
Net investment income ........................ 3.79% 2.68% 3.41% 5.43% 7.46%**
</TABLE>
- ------------
*October 2, 1990, commencement of operations, through December 31, 1990.
**Annualized.
+Net investment income would have been $.036, $.025, $.030, $.053 and $.018
and the expense ratios would have been .81%, .85%, .85%, .85% and .97%,
respectively, for the periods ended December 31, 1994, 1993, 1992, 1991 and
1990 before waiver of management fee and/or expenses absorbed by Salomon
Brothers Asset Management Inc ("SBAM").
See accompanying notes to financial statements.
<PAGE> 220
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK-100.1%
$2,745,000 Albany County, New York
Industrial Development Agency PUT ....................... 4.65% 08/15/95 $ 2,745,000
3,300,000 Albany County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 3,300,000
1,210,000 Albany County, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 1,210,000
875,000 Albany County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 875,000
2,540,000 Albany, New York
Industrial Development Agency PUT ....................... 4.25 07/01/95 2,540,000
1,169,000 Albany, New York
Housing Authority VR .................................... 3.80 01/03/95 1,169,000
3,015,000 Amherst, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 3,015,000
400,000 Amherst, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 400,000
950,000 Auburn, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 950,000
1,175,000 Babylon, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,175,000
2,350,000 Broome County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 2,350,000
650,000 Broome County, New York
Industrial Development Agency VR ........................ 4.90 01/04/95 650,000
2,450,000 Chautaugua County, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 2,450,000
3,760,000 Colonie, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 3,760,000
630,000 Colonie, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 630,000
750,000 Colonie, New York
Housing Development Corporation VR ...................... 3.80 01/04/95 750,000
2,000,000 Dutchess County, New York
Industrial Development Agency VR ........................ 5.10 01/05/95 2,000,000
1,400,000 Dutchess County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,400,000
500,000 Erie County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 500,000
</TABLE>
<PAGE> 221
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 450,800 Erie County, New York
Industrial Development Agency VR ........................ 5.85% 01/05/95 $ 450,800
590,000 Erie County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 590,000
1,240,000 Erie County, New York
Industrial Development Agency,
Series B VR ............................................. 5.85 01/05/95 1,240,000
1,330,000 Fulton County, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 1,330,000
1,910,000 Fulton County, New York
Industrial Development Agency VR ........................ 5.35 01/05/95 1,910,000
800,000 Lewis County, New York
Industrial Development Agency VR ........................ 5.40 01/04/95 800,000
6,500,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 6,500,000
250,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 250,000
3,325,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.40 01/05/95 3,325,000
2,050,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 2,050,000
4,825,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 4,825,000
1,950,000 Monroe County, New York
Industrial Development Agency PUT ....................... 4.60 06/01/95 1,950,000
1,005,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,005,000
1,620,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,620,000
2,550,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 2,550,000
700,000 Monroe County, New York
Industrial Development Agency PUT ....................... 4.40 06/15/95 700,000
1,700,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/04/95 1,700,000
7,000,000 Nassau County, New York
Series B TAN ............................................ 4.50 03/15/95 7,003,445
</TABLE>
<PAGE> 222
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$10,000,000 Nassau County, New York
Series A RAN ............................................ 4.00% 04/14/95 $ 10,010,978
7,685,000 Nassau County, New York
Series D BAN ............................................ 5.00 08/15/95 7,724,341
10,000,000 Nassau County, New York
Series C TAN ............................................ 5.40 09/28/95 10,021,311
1,230,000 Nassau County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,230,000
1,100,000 New York State, Environment
Facilities Corporation VR ............................... 6.10 01/03/95 1,100,000
4,400,000 New York State,
Energy Research & Development TECP ...................... 4.50 01/03/95 4,400,000
1,915,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 1,915,000
110,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 110,000
115,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 115,000
1,035,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 1,035,000
85,000 New York State,
Job Development Authority VR ............................ 3.85 01/03/95 85,000
535,000 New York State,
Job Development Authority VR ............................ 3.85 01/03/95 535,000
7,100,000 New York State,
Housing Finance Agency VR ............................... 5.50 01/04/95 7,100,000
500,000 New York State,
Energy Research & Development VR ........................ 3.55 01/03/95 500,000
3,400,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 3,400,000
2,600,000 New York State,
Local Government Assistance
Corporation VR .......................................... 5.10 01/04/95 2,600,000
7,600,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 7,600,000
300,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 300,000
1,200,000 New York State, Dormitory Authority VR .................... 4.80 01/04/95 1,200,000
16,235,000 New York State, Dormitory Authority
TECP .................................................... 4.25 01/09/95 16,235,000
</TABLE>
<PAGE> 223
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$3,000,000 New York State,
Dormitory Authority TECP ............................. 4.00% 01/10/95 $ 3,000,000
1,500,000 New York State, Medical Care Facility
Finance Agency FHA P/R ............................... 2.65-2.70 01/15/95 1,533,960
3,675,000 New York, New York
Series A RAN ......................................... 4.50 04/12/95 3,681,833
4,000,000 New York, New York
Series B RAN ......................................... 4.75 06/30/95 4,013,121
860,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 860,000
1,600,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 1,600,000
230,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 230,000
1,255,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 1,255,000
475,000 New York, New York
Industrial Development Agency VR ..................... 5.80 01/05/95 475,000
700,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 700,000
2,400,000 New York, New York
Industrial Development Agency VR ..................... 5.40 01/04/95 2,400,000
3,000,000 New York, New York
Industrial Development Agency VR ..................... 5.25 01/05/95 3,000,000
1,765,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 1,765,000
300,000 New York, New York
Industrial Development Agency VR ..................... 5.35 01/04/95 300,000
4,500,000 New York, New York
Industrial Development Agency VR ..................... 5.15 01/03/95 4,500,000
2,000,000 New York, New York
Industrial Development Agency VR ..................... 4.80 01/04/95 2,000,000
16,000,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 16,000,000
1,900,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 1,900,000
2,000,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 2,000,000
6,600,000 New York, New York
Housing Development Corporation VR ................... 5.40 01/04/95 6,600,000
</TABLE>
<PAGE> 224
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$3,000,000 New York, New York
Housing Development Corporation VR ...................... 5.75% 01/04/95 $ 3,000,000
1,700,000 New York, New York Series A VR ............................ 6.00 01/03/95 1,700,000
2,000,000 New York, New York VR ..................................... 6.50 01/03/95 2,000,000
400,000 New York, New York VR ..................................... 6.00 01/03/95 400,000
600,000 New York, New York VR ..................................... 6.00 01/03/95 600,000
1,500,000 New York, New York VR ..................................... 6.00 01/03/95 1,500,000
3,350,000 New York, New York VR ..................................... 6.05 01/03/95 3,350,000
5,000,000 New York, New York
Municipal Water TECP .................................... 4.50 01/06/95 5,000,000
100,000 New York City
Trust for Cultural Resources VR ......................... 5.00 01/04/95 100,000
1,000,000 New York, New York Water Authority VR ..................... 6.00 01/03/95 1,000,000
3,600,000 Newburgh, New York
Industrial Development Agency VR ........................ 5.30 01/04/95 3,600,000
3,090,000 Niagara County, New York
Industrial Development Agency VR ........................ 5.65 01/04/95 3,090,000
1,250,000 Niagara County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,250,000
3,500,000 Onondaga County, New York
Industrial Development Agency,
Series B VR ............................................. 5.60 01/04/95 3,500,000
1,300,000 Onondaga County, New York
Industrial Development Agency,
Series 1989 VR .......................................... 5.60 01/04/95 1,300,000
3,100,000 Onondaga County, New York
Industrial Development Agency VR ........................ 5.50 01/05/95 3,100,000
379,000 Oneida County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 379,000
400,000 Port Authority,
New York & New Jersey VR ................................ 5.40 01/03/95 400,000
1,690,000 Rockland County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,690,000
1,800,000 Rockland County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,800,000
1,010,000 Saratoga County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,010,000
430,000 Schoharie County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 430,000
</TABLE>
<PAGE> 225
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 80,000 St. Lawrence County, New York
Industrial Development Agency VR ........................ 5.75% 01/04/95 $ 80,000
8,000,000 Suffolk County, New York
Water Authority VR ...................................... 4.85 01/04/95 8,000,000
1,930,000 Suffolk County, New York
Industrial Development Agency VR ........................ 5.50 01/04/95 1,930,000
3,000,000 Suffolk County, New York
Industrial Development Agency VR ........................ 5.25 01/04/95 3,000,000
500,000 Suffolk County, New York
Industrial Development Agency VR ........................ 4.85 01/04/95 500,000
3,550,000 Syracuse, New York
Industrial Development Agency VR ........................ 5.85 01/04/95 3,550,000
1,550,000 Syracuse, New York
Industrial Development Agency PUT ....................... 4.40 06/15/95 1,550,000
725,000 Wyoming County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 725,000
1,580,000 Yates County, New York
Industrial Development Agency VR ........................ 5.35 01/05/95 1,580,000
1,000,000 Yonkers, New York
Industrial Development Agency VR ........................ 5.95 01/03/95 1,000,000
1,230,000 Yonkers, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,230,000
------------
TOTAL INVESTMENTS-100.1% OF NET ASSETS
(cost $270,042,789) ............................................................ $270,042,789
============
</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.
Abbreviations used in this statement:
BAN Bond Anticipation Note
FHA Mortgage Insured by Federal Housing Administration
RAN Revenue Anticipation Note
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
VR Variable Rate Demand Note. Maturity date shown is the date
of next interest rate change
See accompanying notes to financial statements.
<PAGE> 226
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $270,042,789) .............................................. $270,042,789
Cash .................................................................................. 38,083
Receivable for securities sold ........................................................ 30,000
Receivable for Fund shares sold ....................................................... 1,749,838
Interest receivable ................................................................... 1,458,308
Unamortized organization expenses ..................................................... 9,071
------------
Total assets ...................................................................... 273,328,089
------------
LIABILITIES
Payable for Fund shares redeemed ...................................................... 3,408,802
Dividend payable ...................................................................... 16,954
Management fee payable ................................................................ 40,457
Accrued expenses ...................................................................... 73,881
------------
Total liabilities ................................................................. 3,540,094
------------
NET ASSETS equivalent to $1.00 per share on 270,044,096 shares of $.001 par
value capital stock outstanding; 3,333,333,333 shares authorized) ................... $269,787,995
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<S> <C> <C>
INCOME
Interest ................................................................... $ 7,132,055
EXPENSES
Management fee ............................................................. $468,902
Administration fee ......................................................... 190,022
Shareholder services ....................................................... 114,737
Audit and tax return preparation fee ....................................... 49,325
Legal ...................................................................... 45,727
Custodian .................................................................. 36,572
Printing ................................................................... 29,876
Amortization of organization expenses ...................................... 11,968
Registration and filing fees ............................................... 7,330
Directors' fees ............................................................ 2,714
Other ...................................................................... 13,928 971,101
-------- ------------
Net investment income ................................................................. 6,160,954
Net realized loss on securities sold .................................................. (65,622)
------------
Net increase in net assets resulting from operations .................................. $ 6,095,332
============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 227
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993
------------- ------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................. $ 6,160,954 $ 5,102,444
Net realized gain (loss) on securities sold ............................ (65,622) 49,102
------------ ------------
Net increase in net assets resulting from operations ................... 6,095,332 5,151,546
------------ ------------
DIVIDENDS FROM NET INVESTMENT INCOME ................................... (6,160,954) (5,102,444)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares .......................................... 424,692,601 516,356,557
Net asset value of shares issued in reinvestment of dividends .......... 5,955,238 4,803,596
Payment for redemption of shares ....................................... (423,206,832) (522,482,028)
------------ ------------
Net change in net assets resulting from capital share transactions ..... 7,441,007 (1,321,875)
------------ ------------
Total change in net assets ............................................. 7,375,385 (1,272,773)
NET ASSETS
Beginning of year ...................................................... 262,412,610 263,685,383
------------ ------------
End of year ............................................................ $269,787,995 $262,412,610
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990*
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ................................ $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income ................... .027 .023 .031 .047 .014+
Dividends from net investment
income ................................ (.027) (.023) (.031) (.047) (.014)
------ ------ ------ ------ ------
Net asset value, end of period .......... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period
(thousands) ........................... $269,788 $262,413 $263,685 $154,782 $34,529
Total investment return ................. +2.7% +2.3% +3.1% +4.8% +1.4%
Ratios to average net assets:
Expenses ............................ .41% .41% .42% .60% .64%**+
Net investment income ............... 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 would have been $.012, and the expense ratio would
have been 1.23% for the period ended December 31, 1990 before waiver of
management fee and expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 228
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS U.S. TREASURY SECURITIES
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT OF PURCHASE DATE (NOTE 1a)
- -------- ----------- ---- --------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS-103.8%
$8,049,000 U.S. Treasury Bill ....... 4.71% 02/02/95 $ 8,015,302
807,000 U.S. Treasury Bill ....... 4.65 02/09/95 802,935
3,260,000 U.S. Treasury Bill ....... 4.87 02/09/95 3,242,801
3,667,000 U.S. Treasury Bill ....... 5.20 02/09/95 3,646,342
2,200,000 U.S. Treasury Bill ....... 5.22 02/09/95 2,187,559
5,000,000 U.S. Treasury Bill ....... 5.33 03/09/95 4,950,401
6,000,000 U.S. Treasury Bill ....... 5.77 05/18/95 5,868,256
------------
28,713,596
------------
TOTAL U.S. TREASURY BILLS
(cost $28,713,596) ............................... 28,713,596
------------
TOTAL INVESTMENTS-103.8% OF NET ASSETS .............. $28,713,596
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 229
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS U.S. TREASURY SECURITIES
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $28,713,596) ........................ $28,713,596
Cash ............................................................ 8
Receivable for Fund shares sold ................................. 23,658
Unamortized organization expenses ............................... 11,241
-----------
Total assets ................................................ 28,748,503
-----------
LIABILITIES
Payable for Fund shares redeemed ................................ 1,052,863
Dividend payable ................................................ 14,563
Management fee payable .......................................... 2,203
Accrued expenses ................................................ 12,184
-----------
Total liabilities ........................................... 1,081,813
-----------
NET ASSETS (equivalent to $1.00 per share on 27,720,532
shares of $.001 par value capital stock outstanding;
2,000,000,000 shares authorized) .............................. $27,666,690
===========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
INCOME
Interest ............................................... $1,177,203
EXPENSES
Management fee ......................................... $29,658
Administration fee ..................................... 23,727
Registration and filing fees ........................... 12,960
Shareholder services ................................... 12,852
Amortization of organization expenses .................. 12,000
Custodian .............................................. 10,997
Printing ............................................... 8,873
Audit and tax return preparation fees .................. 7,850
Legal .................................................. 5,309
Directors' fees ........................................ 2,713
Other .................................................. 5,015 131,954
------- ----------
Net investment income ........................................... 1,045,249
Net realized loss on securities sold ............................ (2,037)
----------
Net increase in net assets resulting from operations ............ $1,043,212
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 230
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS U.S. TREASURY SECURITIES
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993
---------- -----------
<S> <C> <C>
OPERATIONS
Net investment income ................................................ $ 1,045,249 $ 1,135,069
Net realized loss on securities sold ................................. (2,037) (4,000)
----------- -----------
Net increase in net assets resulting from operations ................. 1,043,212 1,131,069
----------- -----------
DIVIDENDS FROM NET INVESTMENT INCOME ................................. (1,045,249) (1,135,069)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares ........................................ 127,781,043 78,899,102
Net asset value of shares issued in reinvestment of dividends ........ 881,270 963,319
Payment for redemption of shares ..................................... (135,113,944) (96,292,490)
----------- -----------
Net decrease in net assets resulting from capital share transactions . (6,451,631) (16,430,069)
----------- -----------
Total decrease in net assets ......................................... (6,453,668) (16,434,069)
NET ASSETS
Beginning of year .................................................... 34,120,358 50,554,427
----------- -----------
End of year .......................................................... $27,666,690 $34,120,358
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------------------------ DECEMBER 31,
1994 1993 1992 1991 1990*
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income .............. .036 .028 .034 (.054)+ .005+
Dividends from net investment
income ............................ (.036) (.028) (.034) (.054) (.005)
------ ------ ------ ------ ------
Net asset value, end of period ..... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period (thousands) $27,667 $34,120 $50,554 $35,414 $4,596
Total investment return ............ +3.6% +2.9% +3.4% +5.5% +0.5%
Ratios to average net assets:
Expenses ....................... .45% .35% .44% .54%+ .74%**+
Net investment income .......... 3.53% 2.83% 3.42% 5.23% 6.45%**
</TABLE>
- ---------
*December 7, 1990, commencement of operations, through December 31, 1990.
**Annualized.
+Net investment income would have been $.052 and $.004, and the expense
ratios would have been .64% and 1.72%, respectively, for the years ended
December 31, 1991 and December 31, 1990 before waiver of management fee and
expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 231
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL CREDIT VALUE
AMOUNT MUNICIPAL SECURITIES RATING (NOTE 1a)
- --------- ---------- ---------
<S> <C> <C> <C>
NEW YORK-84.4%
$ 110,000 Metropolitan Transportation Authority New York
6.50%, 07/01/16 ............................... Baa1/BBB $ 102,320
120,000 Metropolitan Transportation Authority
5.75%, 07/01/15 ............................... Baa1/BBB 102,068
300,000 New York City Health & Hospital Corporation
6.30%, 02/15/20 ............................... Baa/BBB 267,855
300,000 New York Municipal Water Finance Authority
6.00%, 06/15/17 ............................... A/A- 270,648
100,000 New York State, Medical Care Finance Agency
6.00%, 02/15/11 ............................... Baa1/BBB+ 89,701
250,000 New York State, Local Government Assistance
6.00%, 04/01/18 ............................... A/A 226,500
100,000 New York State,
Dormitory Authority 5.75%, 07/01/18 ........... Baa1/BBB 84,873
315,000 New York State,
Dormitory Authority 6.00%, 05/15/17 ........... Baa1/BBB+ 276,088
55,000 New York State,
Dormitory Authority 6.00%, 07/01/16 ........... Baa1/BBB 48,379
250,000 New York State,
Thruway Authority Services 6.00%, 04/01/10 .... Baa1/BBB 231,608
100,000 New York State, Urban Development 5.50%, 01/01/18 Baa1/BBB 81,029
300,000 New York, New York 6.75%, 10/01/17 .............. Baa1/A- 284,952
300,000 New York, New York 7.375%, 08/15/13 ............. Baa1/A- 305,469
250,000 Onondaga County, New York Industrial Development
Agency 6.625%, 01/01/18 ....................... Baa/BBB 222,215
250,000 Port Authority of New York & New Jersey
6.00%, 01/15/28 ................................ A1/AA- 220,554
---------
TOTAL NEW YORK (COST $3,077,171) ................ 2,814,259
---------
PUERTO RICO-22.7%
250,000 Commonwealth of Puerto Rico 6.00%, 07/01/14 ..... Baa1/A 229,075
250,000 Puerto Rico, Commonwealth Highway Authority
6.00%, 07/01/20 ................................ Baa1/A 223,170
325,000 Puerto Rico,
Electric Power Authority 6.00%, 07/01/10 ....... Baa1/A- 302,972
---------
TOTAL PUERTO RICO (COST $823,516) .......................... 755,217
---------
TOTAL INVESTMENTS-107.1% OF NET ASSETS
(cost $3,900,687) ....................................... $3,569,476
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 232
STATEMENT OF ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $3,900,687) ........................ $3,569,476
Cash ........................................................... 18,145
Receivable from SBAM ........................................... 12,085
Interest receivable ............................................ 82,108
Unamortized organization expenses .............................. 41,896
----------
Total assets .............................................. 3,723,710
----------
LIABILITIES
Payable for Fund shares redeemed .............................. 359,878
Dividend payable................................................ 23,550
Accrued expenses ............................................... 6,852
----------
Total liabilities ......................................... 390,280
----------
NET ASSETS (equivalent to $8.98 per share on 371,007 shares
of $.001 par value capital stock outstanding;
3,333,333,333 shares authorized) .............................. $3,333,430
==========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
INCOME
Interest ............................................. $ 453,076
EXPENSES
Management fee ....................................... $ 36,428
Amortization of organization expenses ................ 14,001
Printing ............................................. 7,817
Shareholder services ................................. 6,017
Administration fee ................................... 5,825
Audit and tax return preparation fees ................ 5,620
Directors' fees ...................................... 2,714
Registration and filing fees ......................... 1,208
Legal ................................................ 1,099
Custodian ............................................ 147
Other ................................................ 4,065
--------
84,941
Management fee waived and expenses absorbed by SBAM .. (48,513) 36,428
-------- ----------
Net investment income ................................ 416,648
----------
NET REALIZED LOSS ON SECURITIES SOLD ................. (552,459)
----------
NET UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENTS
Beginning of year .................................... 304,835
End of year .......................................... (331,211)
--------
Decrease in net unrealized appreciation ........................ (636,046)
----------
Net realized loss and decrease in net unrealized appreciation .. (1,188,505)
----------
Net decrease in net assets resulting from operations ........... $ (771,857)
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 233
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
OPERATIONS
Net investment income $ 416,648 $ 327,999
Net realized gain (loss) on securities sold and futures transactions ............. (552,459) 9,043
Change in net unrealized appreciation ............................................ (636,046) 304,835
--------- ---------
Net change in net assets resulting from operations ............................... (771,857) 641,877
--------- ---------
DIVIDENDS TO SHAREHOLDERS FROM
Net investment income ............................................................ (416,648) (327,999)
Net realized gain on securities sold and futures ................................. - (15,783)
--------- ---------
(416,648) (343,782)
--------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of 194,976 and 985,472 shares, respectively .................. 1,960,677 9,956,475
Net asset value of 40,650 and 27,528 shares, respectively, issued in
reinvestment of dividends ...................................................... 390,961 283,762
Payment for redemption of 665,997 and 211,632 shares, respectively ............... (6,193,972) (2,174,163)
--------- ---------
Net change in net assets resulting from capital share transactions representing
a net decrease of 430,371 and a net increase of 801,368 shares,
respectively ................................................................... (3,842,334) 8,066,074
--------- ---------
Total change in net assets ....................................................... (5,030,839) 8,364,169
NET ASSETS
Beginning of year ................................................................ 8,364,269 100
--------- ---------
End of year ...................................................................... $3,333,430 $8,364,269
========== ==========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993*
----------- ------------
<S> <C> <C>
Net asset value, beginning of period ............................................. $10.44 $10.00
------ ------
Net investment income ............................................................ .55+ .46+
Net gains (losses) on securities and futures (both realized and unrealized) ...... (1.46) .46
------ ------
Total from investment operations ................................................. (.91) .92
------ ------
Dividends from net investment income ............................................. (.55) (.46)
Distibutions from net realized gain on securities and futures .................... - (.02)
------ ------
Total dividends and distributions ................................................ (.55) (.48)
------ ------
Net asset value, end of period ................................................... $ 8.98 $10.44
====== ======
Net assets end of period (thousands) ............................................. $3,333 $8,364
Total investment return .......................................................... -8.8%** +9.4%**
Ratios to average net assets:
Expenses ....................................................................... .50%+ .50%***+
Net investment income .......................................................... 5.72% 4.99%***
Portfolio turnover rate .......................................................... 63% 24%
</TABLE>
- ----------
*February 1, 1993, commencement of operations, through December 31, 1993.
**Dividends are declared daily and paid the first day of the following month in
which declared. For the purpose of the total return calculation, the
reinvestment is assumed using the end of month net asset value per share.
***Annualized.
+Net investment income would have been $.49 and $.40, and the expense ratios
would have been 1.17% and 1.24% for the year ended December 31, 1994 and the
period ended December 31, 1993, respectively, before waiver of management fee
and expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 234
NOTES TO FINANCIAL STATEMENTS SALOMON BROTHERS SERIES FUNDS INC
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 comprising three money market portfolios
(individually, the "Fund"): Salomon Brothers Cash Management Fund (the "Cash
Fund"), Salomon Brothers New York Municipal Money Market Fund (the "Municipal
Fund") and Salomon Brothers U.S. Treasury Securities Money Market Fund (the
"U.S. Treasury Fund"); and one long-term bond portfolio, Salomon Brothers New
York Municipal Bond Fund (the "Bond Fund").
Certain costs incurred in connection with the Company's organization, which
were payable to Salomon Brothers Asset Management Inc ("SBAM") have been
deferred and are being amortized by the Company over a 60 month period from the
date each Fund commenced operations. In the event that any of the 100,000 shares
purchased by SBAM on September 27, 1990 (the "Initial Shares") are redeemed
during the amortization period by any holder thereof, the Company will be
reimbursed by SBAM for any remaining unamortized costs in the same proportion as
the number of Initial Shares redeemed bears to the total number of Initial
Shares outstanding at the time of redemption.
Following is a summary of significant accounting policies followed by the
Company in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
(a) Securities Valuation. Portfolio securities for the money market fund
portfolios 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.
For the Bond Fund, portfolio securities are valued by using either
market quotations or independent pricing services which use prices provided
by market-makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics.
Securities for which reliable quotations or prices from pricing services are
not readily available and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Board of Directors.
Short-term securities, held by the Bond Fund, with less than 60 days
remaining to maturity when acquired by the Fund will be valued at amortized
cost which approximates market value. If the Fund acquires such securities
with more than 60 days remaining to maturity, they will be valued at current
market value (using the bid price) until the 60th day prior to maturity, and
will then be valued on an amortized cost basis.
(b) Futures Contracts. The Bond Fund may use futures contracts, which
involves paying or receiving variation margin, which will be recorded as
unrealized gain or loss until the contract is closed, at such time, a
realized gain or loss will be recognized. Outstanding contracts involve
elements of market risk in excess of amounts reported in the financial
statements.
(c) 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> 235
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
(d) Dividends. Dividends on the shares of each Fund are declared each
business day to shareholders of record that day, and for the Cash Fund,
Municipal Fund and U.S. Treasury Fund, paid on the last day of the month.
For the Bond Fund, dividends are paid the first day of the month following
that in which the dividends have been declared. Distributions of net
realized gains to shareholders, if any, are declared annually and recorded
on the ex-dividend date.
(e) Expenses. Direct expenses are charged to the Fund that incurred
them, and general expenses are allocated to the Funds based on each Fund's
relative average net assets for the period.
(f) Other. Investment transactions are recorded as of the trade date.
Interest income, including the amortization of discounts or 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 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 Cash Fund and
the Municipal Fund, .10% for the U.S. Treasury Fund and .50% for the Bond Fund.
For the year ended December 31, 1994, SBAM waived its management fees of $29,088
and $36,428 for the Cash Fund and Bond Fund, respectively, and voluntarily
absorbed $12,085 of expenses for the Bond Fund.
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, 1994.
At December 31, 1994, the Bond Fund has a receivable from SBAM of $12,085
relating to expenses voluntarily absorbed by SBAM.
As of December 1, 1994, Investors Bank and Trust Company ("IBT") serves as
the Company's custodian and administrator. IBT performs custodial and certain
administrative services in connection with the operation of the Company. Prior
to December 1, 1994, administrative services were provided by The Shareholder
Services Group, Inc. ("TSSG") and custodial services were provided by Boston
Safe Deposit and Trust Company. TSSG continues to serve as the Company's
transfer and shareholder services agent.
Each Fund has an agreement with Salomon Brothers Inc to distribute its
shares.
<PAGE> 236
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
3. CAPITAL STOCK
At December 31, 1994, the Company had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share.
The authorized shares are allocated as follows: Cash Fund-1,333,333,334
shares, Municipal Fund-3,333,333,333 shares, U.S. Treasury Fund-2,000,000,000
shares and Bond Fund-3,333,333,333 shares.
<TABLE>
<CAPTION>
Net assets consist of:
CASH FUND MUNICIPAL FUND U.S. TREASURY FUND BOND FUND
--------- -------------- ------------------ ---------
<S> <C> <C> <C> <C>
Par value .......................... $ 19,129 $ 270,044 $ 27,721 $ 371
Paid-in capital in excess of par ... 19,109,801 269,774,052 27,692,811 4,222,749
Accumulated net realized loss on
investments ....................... (2,114) (256,101) (53,842) (558,479)
Net unrealized depreciation ........ - - - (331,211)
----------- ------------ ------------ ----------
Net assets ......................... $19,126,816 $269,787,995 $27,666,690 $3,333,430
=========== ============ =========== ==========
</TABLE>
4. PORTFOLIO ACTIVITY
The Cash Fund and Municipal Fund invest 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 Municipal Fund and the Bond Fund each pursue their
investment objectives by investing at least 65% of their 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 Municipal Fund and
the Bond Fund invest primarily in obligations of the State and City of New York,
they are more susceptible to factors adversely affecting issuers of such
obligations than a fund that is more diversified.
When entering into repurchase agreements, it is the Company's policy to
take possession, through its custodian, of the underlying collateral and to
monitor the collateral value at the time the agreement is entered into and at
all times during the term of the repurchase agreement to ensure that such
collateral always equals or exceeds the repurchase price plus accrued interest.
In the event of default of the obligation to repurchase, the Company has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
At December 31, 1994, the Cash Fund, Municipal Fund, U.S. Treasury Fund and
Bond Fund had net capital loss carryovers available to offset future capital
gains as follows:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION CASH FUND MUNICIPAL FUND U.S. TREASURY FUND BOND FUND
- ---------- --------- -------------- ------------------ ---------
<S> <C> <C> <C> <C>
1999 .......... $ 894 $ 94,844 - -
2000 .......... 396 94,778 $48,666 -
2001 .......... 409 - 4,363 -
2002 .......... 415 65,321 2,005 $305,822
------ -------- ------- --------
$2,114 $254,943 $55,034 $305,822
====== ======== ======= ========
</TABLE>
<PAGE> 237
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
At December 31, 1994, as permitted under Federal income tax regulations,
the Municipal Fund, U.S. Treasury Fund and the Bond Fund have elected to defer
$301, $32 and $252,597, respectively, of Post-October losses to the next taxable
year.
The Bond Fund's cost of securities for Federal income tax purposes is the
same as for financial statement purposes, which amounted to $3,900,687. As of
December 31, 1994, total unrealized appreciation and depreciation, based on cost
for Federal income tax purposes, amounted to $12,169 and $343,380, respectively,
resulting in net unrealized depreciation of $331,211. Cost of securities
purchased and proceeds from securities sold (other than short-term investments)
during the year ended December 31, 1994 aggregated $4,451,411 and $8,247,502,
respectively.
5. SUBSEQUENT EVENT
Subsequent to December 31, 1994, the Company implemented a multiple class
pricing system with respect to the Cash Fund and the Bond Fund. In connection
with such implementation, the Fund designated all outstanding shares of the Cash
Fund and the Bond Fund as Class O shares, added four new portfolios, The
National Intermediate Municipal Fund, The U.S. Government Income Fund, The High
Yield Bond Fund and The Strategic Bond Fund and created three new classes of
shares designated Class A, Class B and Class C shares. Each of the new classes
of shares has its own distribution plan and sales charge structure.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
SALOMON BROTHERS SERIES FUNDS INC
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Salomon Brothers
Cash Management Fund, Salomon Brothers New York Municipal Money Market Fund,
Salomon Brothers U.S. Treasury Securities Money Market Fund and Salomon
Brothers New York Municipal Bond Fund (constituting Salomon Brothers Series
Funds Inc, hereafter referred to as the "Fund") at December 31, 1994, 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 (for
Salomon Brothers New York Municipal Bond Fund, for the year ended December 31,
1994 and the period from February 1, 1993 (commencement of operations) through
December 31, 1993) and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1994 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
New York, New York
February 27, 1995
<PAGE> 238
SALOMON BROTHERS TOTAL RETURN FUND (Note 1)
STATEMENT OF ASSETS AND LIABILITIES
July 13, 1995
<TABLE>
<S> <C>
Assets:
Cash $ 5,000
Deferred organization expenses (Note 2) 90,000
-------
Total assets 95,000
-------
Liabilities:
Organization expenses payable (Note 2) 90,000
Commitments and contingencies (Notes 2 and 3) -
-------
Total liabilities 90,000
-------
Net assets $ 5,000
=======
Class A:
- --------
Net assets $ 1,250
Shares outstanding 125
-------
Net asset value and redemption price per share $10.00
======
Maximum offering price per share (net asset value
plus sales charge of 4.75% of offering price) $10.50
======
Class B:*
- --------
Net assets $ 1,250
Shares outstanding 125
-------
Net asset value and offering price per share $10.00
======
Class C:*
- --------
Net assets $ 1,250
Shares outstanding 125
-------
Net asset value and offering price per share $10.00
======
Class O:
- -------
Net assets $ 1,250
Shares outstanding 125
-------
Net asset value $10.00
======
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
See notes to financial statement.
<PAGE> 239
NOTES TO FINANCIAL STATEMENT
NOTE 1
Salomon Brothers Series Funds, Inc. (the "Fund") was incorporated as a
Maryland corporation on April 17, 1990 as an open-end management investment
company and currently operates as a Series company comprising of eight
portfolios. Salomon Brothers Total Return Fund (the "Return Fund"), a new
portfolio of the Fund, was formed on July 13, 1995 and has had no operations to
date other than matters relating to its organization and registration as a
diversified, open-end management investment company under the Investment
Company Act of 1940, as amended, and the sale and issuance to Salomon Brothers
Asset Management Inc. of 125 shares of each of Classes A, B, C and O common
stock for an aggregate purchase price of $5,000. The Fund 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 Return Fund incurred and to be
incurred by the Investment Adviser will be reimbursed by the Return Fund. Such
expenses, estimated at $90,000, will be deferred and amortized on a
straight-line basis for a five-year period beginning at the commencement of
operations of the Fund.
NOTE 3
The Return Fund will enter into a management agreement with the
Investment Adviser pursuant to which the Investment Adviser will provide
investment advisory services to the Return Fund and will be responsible for the
management of the Return Fund's portfolio in accordance with the Return Fund's
investment policies and for making decisions to buy, sell, or hold particular
securities. Investors Bank & Trust Company will serve as the Return Fund's
Administrator (the "Administrator") pursuant to an administration agreement
entered into between the Return Fund and the Administrator.
The Return Fund will pay the Investment Adviser a monthly fee for its
advisory services at an annual rate of .50% of the Return Fund's average daily
net assets. The Return Fund will pay the Administrator a monthly fee for its
administration services at an annual rate of .08% of the Return Fund's average
daily net assets.
<PAGE> 240
The Return Fund will offer four classes of shares each with its own
distribution plan and sales charge structure.
Certain officers and/or directors of the Return Fund are officers
and/or directors of the Investment Adviser.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors
of Salomon Brothers Total Return Fund (the "Fund")
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Salomon Brothers
Total Return Fund (one of the portfolios constituting Salomon Brothers Series
Funds Inc) at July 13, 1995, in conformity with generally accepted accounting
principles. This financial statement is the repsonsibility of the Fund's
management; our responsibility is to express an opinion on this financial
statement base on our audit. We conducted our audit of this financial
statement in accordance with generally accepted auditing standards which require
that we plan and perform the audit to obtain reasonable assurance about
whether the financial statement is free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
/s/ PRICE WATERHOUSE LLP
- ------------------------
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
July 13, 1995
<PAGE> 241
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
- ------------------------------------------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
COMMON STOCKS - 43.2%
BASIC INDUSTRIES - 3.5%
6,000 Ball . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 165,000
1,600 Dow Chemical . . . . . . . . . . . . . . . . . . . . . . . . 112,600
3,000 Dupont (E.I.) de Nemours . . . . . . . . . . . . . . . . . . . . 209,625
---------------
487,225
---------------
CAPITAL GOODS - 4.1%
2,800 Boeing . . . . . . . . . . . . . . . . . . . . . . . . . . 219,450
6,000 Deere . . . . . . . . . . . . . . . . . . . . . . . . . . 211,500
2,200 Textron . . . . . . . . . . . . . . . . . . . . . . . . . . 148,500
---------------
579,450
---------------
CONSUMER CYCLICALS - 4.7%
4,000 Eastman Kodak . . . . . . . . . . . . . . . . . . . . . . . . 268,000
6,000 Ford Motor . . . . . . . . . . . . . . . . . . . . . . . . . 174,000
5,100 May Department Stores . . . . . . . . . . . . . . . . . . . . . 215,475
---------------
657,475
---------------
CONSUMER NON-CYCLICALS - 1.7%
1,500 Philip Morris Companies . . . . . . . . . . . . . . . . . . . . 135,750
2,000 Tambrands . . . . . . . . . . . . . . . . . . . . . . . . . 95,500
---------------
231,250
---------------
ENERGY - 10.7%
3,500 Amoco . . . . . . . . . . . . . . . . . . . . . . . . . . 251,559
3,000 Exxon . . . . . . . . . . . . . . . . . . . . . . . . . . 240,375
2,000 Mobil . . . . . . . . . . . . . . . . . . . . . . . . . . 224,000
1,000 Royal Dutch Petroleum, 5 Guilder . . . . . . . . . . . . . . . . . 141,125
3,000 Texaco . . . . . . . . . . . . . . . . . . . . . . . . . . 235,500
7,000 Ultramar . . . . . . . . . . . . . . . . . . . . . . . . . 180,250
5,000 Williams Companies . . . . . . . . . . . . . . . . . . . . . . 219,375
---------------
1,492,184
---------------
FINANCIAL SERVICES - 7.3%
2,500 American General . . . . . . . . . . . . . . . . . . . . . . 87,188
7,000 Beacon Properties . . . . . . . . . . . . . . . . . . . . . . 161,000
3,300 Citicorp . . . . . . . . . . . . . . . . . . . . . . . . . 221,925
6,200 Patriot American Hospitality . . . . . . . . . . . . . . . . . . 159,650
7,000 Prudential Reinsurance Holdings . . . . . . . . . . . . . . . . . 163,625
4,200 UNUM . . . . . . . . . . . . . . . . . . . . . . . . . . 231,000
---------------
1,024,388
---------------
HEALTH CARE - 2.9%
1,200 American Home Products . . . . . . . . . . . . . . . . . . . . 116,400
5,200 SmithKline Beecham - ADR . . . . . . . . . . . . . . . . . . . . 288,600
---------------
405,000
---------------
</TABLE>
<PAGE> 242
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
- ------------------------------------------------------------------------------------------------------------------
SHARES DESCRIPTION VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C>
TELECOMMUNICATIONS & UTILITIES - 6.4%
5,000 American Electric Power . . . . . . . . . . . . . . . . . . . . $ 202,500
3,000 Ameritech . . . . . . . . . . . . . . . . . . . . . . . . . 177,000
4,600 BellSouth . . . . . . . . . . . . . . . . . . . . . . . . . 200,100
3,000 Boston Edison . . . . . . . . . . . . . . . . . . . . . . . 88,500
5,000 GTE . . . . . . . . . . . . . . . . . . . . . . . . . . . 220,000
---------------
888,100
---------------
TRANSPORTATION - 1.9%
18,000 Canadian National Railway . . . . . . . . . . . . . . . . . . . 270,000
---------------
TOTAL COMMON STOCKS
(cost $5,687,214) . . . . . . . . . . . . . . . . . . . . . 6,035,072
---------------
CONVERTIBLE PREFERRED STOCKS - 4.6%
CAPITAL GOODS - 1.1%
3,000 Browning-Ferris 7.25%, 6/30/98 . . . . . . . . . . . . . . . . . . 94,125
4,000 Coopers Industries 6.00%, 01/01/99 . . . . . . . . . . . . . . . . 55,000
---------------
149,125
---------------
CONSUMER CYCLICALS - 0.2%
2,500 MascoTech, 07/01/97 . . . . . . . . . . . . . . . . . . . . . 31,250
---------------
CONSUMER NON-CYCLICALS - 0.3%
1,500 James River 9.00%, 07/01/98 . . . . . . . . . . . . . . . . . . . 35,063
---------------
ENERGY - 1.9%
1,000 Ashland, 12/31/49 . . . . . . . . . . . . . . . . . . . . . . 58,875
1,000 Diamond Shamrock 5.00%, 12/31/49 . . . . . . . . . . . . . . . . . 55,375
1,000 Tejas Gas 5.25%, 12/31/49 . . . . . . . . . . . . . . . . . . . 47,500
2,000 Unocal 7.00%, 12/31/49 . . . . . . . . . . . . . . . . . . . . 107,250
---------------
269,000
---------------
MEDIA - 0.4%
2,500 Times Mirror . . . . . . . . . . . . . . . . . . . . . . . . 64,531
---------------
TECHNOLOGY - 0.7%
2,000 Elsag Bailey 5.50%, 12/31/49 . . . . . . . . . . . . . . . . . . 100,250
---------------
TOTAL CONVERTIBLE PREFERRED STOCKS
(cost $651,064) . . . . . . . . . . . . . . . . . . . . . . 649,219
---------------
</TABLE>
<PAGE> 243
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL INTEREST MATURITY
AMOUNT DESCRIPTION RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORPORATE BONDS - 19.3%
BASIC INDUSTRIES - 3.6%
$ 100,000 Acetex . . . . . . . . . . . . . . . 9.750 % 10/01/03 $ 104,500
100,000 Crown Paper . . . . . . . . . . . . . 11.000 09/01/05 87,500
200,000 International Semi-Technology (Zero coupon
until 08/15/00, 11.50% thereafter) (a) . . . 13.420 08/15/03 107,250
100,000 RBX . . . . . . . . . . . . . . . 11.250 10/15/05 99,000
100,000 Silgan Holdings . . . . . . . . . . . 11.750 06/15/02 107,000
---------------
505,250
---------------
CONSUMER CYCLICALS - 2.2%
100,000 Cole National . . . . . . . . . . . . 11.250 10/01/01 100,250
100,000 Grand Casinos . . . . . . . . . . . . 10.125 12/01/03 104,875
100,000 Herff Jones . . . . . . . . . . . . . 11.000 08/15/05 106,750
---------------
311,875
---------------
CONSUMER NON-CYCLICALS - 5.7%
100,000 American Safety Razor . . . . . . . . . . 9.875 08/01/05 101,750
100,000 Bally's Grand . . . . . . . . . . . . 10.375 12/15/03 102,000
100,000 Berry Plastics . . . . . . . . . . . . 12.250 04/15/04 107,500
100,000 Carr-Gottstein Foods . . . . . . . . . . 12.000 11/15/05 101,000
100,000 Jordan Industries . . . . . . . . . . . 10.375 08/01/03 89,000
100,000 Pathmark Stores . . . . . . . . . . . . 9.625 05/01/03 97,250
100,000 Samsonite . . . . . . . . . . . . . . 11.125 07/15/05 96,000
100,000 Selmer . . . . . . . . . . . . . . . 11.000 05/15/05 98,500
---------------
793,000
---------------
ENERGY - 0.7%
100,000 Public Service Electric & Gas . . . . . . . 6.500 05/01/04 100,598
---------------
FINANCIAL SERVICES - 3.8%
50,000 Commercial Credit . . . . . . . . . . . 6.875 05/01/02 52,281
100,000 Ford Motor Credit . . . . . . . . . . . 8.200 02/15/02 110,758
150,000 Household Finance . . . . . . . . . . . 6.750 06/01/00 155,096
100,000 Standard Credit Card Master Trust . . . . . . 6.750 06/07/00 102,718
100,000 USL Capital . . . . . . . . . . . . . 8.125 02/15/00 107,878
---------------
528,731
---------------
MEDIA - 3.3%
200,000 Diamond Cable (Zero coupon
until 12/15/00, 11.750% thereafter) (a) . . . 11.750 12/15/05 117,500
200,000 Marcus Cable (Zero coupon
until 12/15/00, 14.125% thereafter) (a) . . . 12.921 12/15/05 136,000
100,000 Rogers Cablesystems . . . . . . . . . . 10.000 12/01/07 107,750
150,000 United International Holdings (a) . . . . . . 13.187 11/15/99 93,000
---------------
454,250
---------------
TOTAL CORPORATE BONDS
(cost $2,642,343) . . . . . . . . . . . . . . . . . . . . . 2,693,704
---------------
</TABLE>
<PAGE> 244
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL INTEREST MATURITY
AMOUNT DESCRIPTION RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
U.S. GOVERNMENT & AGENCY - 15.3%
$ 48,636 Federal National Mortgage Association . . . . . 6.500 % 10/01/10 $ 48,894
119,850 Federal National Mortgage Association . . . . . 7.500 08/01/23 122,860
97,811 Federal National Mortgage Association . . . . . 7.000 09/01/25 98,637
98,000 Federal National Mortgage Association . . . . . 6.500 12/01/25 96,959
150,000 U.S. Treasury Bond . . . . . . . . . . . 7.625 02/15/25 183,422
350,000 U.S. Treasury Note . . . . . . . . . . . 7.750 01/31/00 380,188
450,000 U.S. Treasury Note . . . . . . . . . . . 5.750 10/31/00 456,467
650,000 U.S. Treasury Note . . . . . . . . . . . 7.875 11/15/04 752,375
---------------
TOTAL U.S. GOVERNMENT & AGENCY
(cost $2,096,216) . . . . . . . . . . . . . . . . . . . . . 2,139,802
---------------
CONVERTIBLE CORPORATE BONDS - 7.0%
BASIC INDUSTRIES - 3.5%
50,000 Albany International . . . . . . . . . . . 5.250 03/15/02 44,500
50,000 Allegheny Ludlum . . . . . . . . . . . . 5.875 03/15/02 51,500
150,000 Exide . . . . . . . . . . . . . . . 2.900 12/15/05 108,750
75,000 Magna International . . . . . . . . . . . 5.000 10/15/02 76,500
150,000 Roche Holdings (a) . . . . . . . . . . . 6.218 04/20/10 66,375
100,000 RPM (a) . . . . . . . . . . . . . . . 5.110 09/30/12 42,875
100,000 Unifi . . . . . . . . . . . . . . . 6.000 03/15/02 100,500
---------------
491,000
---------------
CONSUMER CYCLICALS - 1.9%
125,000 Federated Department Stores . . . . . . . . 5.000 10/01/03 124,688
50,000 MascoTech . . . . . . . . . . . . . . 4.500 12/15/03 39,000
125,000 Proffitt's . . . . . . . . . . . . . . 4.750 11/01/03 106,250
---------------
269,938
---------------
ENERGY - 0.4%
50,000 Pennzoil . . . . . . . . . . . . . . . 4.750 10/01/03 50,625
---------------
FINANCIAL SERVICES - 1.2%
100,000 Liberty Property Trust . . . . . . . . . . 8.000 07/01/01 102,750
50,000 Trenwick Group . . . . . . . . . . . . 6.000 12/15/99 57,750
---------------
160,500
---------------
TOTAL CONVERTIBLE CORPORATE BONDS
(cost $962,876) . . . . . . . . . . . . . . . . . . . . . . 972,063
---------------
</TABLE>
<PAGE> 245
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995 (UNAUDITED)
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
- ------------------------------------------------------------------------------------------------------------------
PRINCIPAL INTEREST MATURITY
AMOUNT DESCRIPTION RATE DATE VALUE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REPURCHASE AGREEMENTS - 20.1%
$1,405,000 Repurchase Agreement dated 12/29/95, with
J.P. Morgan, collaterallized by $1,077,000
U.S. Treasury Bonds, 8.500%, due 02/15/20,
valued at $1,433,756; proceeds: $1,405,898 . . 5.750 % 01/02/96 $ 1,405,000
1,405,000 Repurchase Agreement dated 12/29/95, with
Merrill Lynch, collaterallized by $1,415,000
U.S. Treasury Notes, 5.625%, due 10/31/97,
valued at $1,437,994; proceeds: $1,405,874 . . 5.600 01/02/96 1,405,000
---------------
TOTAL REPURCHASE AGREEMENTS
(cost $2,810,000) . . . . . . . . . . . . . . . . . . . . . 2,810,000
---------------
TOTAL INVESTMENTS - 109.5%
(cost $14,849,713) . . . . . . . . . . . . . . . . . . . . . 15,299,860
Liabilities in excess of other assets - (9.5%) . . . . . . . . . . . . (1,325,621)
---------------
NET ASSETS -- 100% . . . . . . . . . . . . . . . . . . . . . $ 13,974,239
===============
</TABLE>
---------------
(a) Zero or step coupon bond. Interest rate shown reflects yield
to maturity on date of purchase.
<PAGE> 246
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995 (UNAUDITED)
==============================================================================
<S> <C>
ASSETS:
Investments, at value (Note A) $12,489,860
Repurchase agreements, at value and cost 2,810,000
Cash 784
Receivable for fund shares sold 117,005
Interest and dividends receivable 105,572
Deferred organization expense 89,854
Net receivable from investment advisor 4,346
Other assets and receivables 6,578
-----------
Total assets 15,623,999
-----------
LIABILITIES:
Payable for:
Securities purchased 1,562,019
Dividends and distributions declared 77,289
Service and distribution fees 5,055
Fund shares redeemed 901
Accrued expenses 4,496
-----------
Total Liabilities 1,649,760
-----------
NET ASSETS: $13,974,239
===========
NET ASSETS CONSIST OF:
Paid-in capital $13,514,968
Distributions in excess of net investment income (1,185)
Accumulated net realized gain on investments 10,309
Net unrealized appreciation on investments 450,147
-----------
NET ASSETS: $13,974,239
===========
CLASS A $ 3,658,044
===========
CLASS B $ 5,378,037
===========
CLASS C $ 444,641
===========
CLASS O $ 4,493,517
===========
SHARES OUTSTANDING:
CLASS A 346,685
===========
CLASS B 510,399
===========
CLASS C 42,109
===========
CLASS O 425,125
===========
NET ASSET VALUE:
CLASS A SHARES
Net asset value and redemption price per share $10.55
Maximum offering price per share (based on ===========
maximum front end sales charge of 4.75%) $11.08
===========
CLASS B SHARES
Net asset value and offering price * $10.54
===========
CLASS C SHARES
Net asset value and offering price * $10.56
===========
CLASS O SHARES
Net asset value, offering price and
redemption price per share $10.57
===========
Note A: Cost of investments $12,039,713
</TABLE>
* Redemption price per share is equal to net asset value less any applicable
contingent deferred sales charge.
<PAGE> 247
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
STATEMENT OF OPERATIONS
FOR THE PERIOD ENDED DECEMBER 31, 1995 * (UNAUDITED)
===================================================================
<S> <C>
INCOME:
Interest $ 116,200
Dividends 39,659
----------
155,859
EXPENSES:
Management fee 15,069
Amortization of organization expenses 5,868
Custody and administration fees 4,302
Shareholder services 2,000
Directors' fees and expenses 1,375
Other 4,500
----------
33,114
Management fee waived and expenses
absorbed by investment advisor (19,415)
----------
13,699
Distribution and service fees:
Class A Shares 1,287
Class B Shares 7,696
Class C Shares 1,086
----------
Net expenses 23,768
----------
NET INVESTMENT INCOME 132,091
----------
REALIZED AND UNREALIZED GAIN:
Net realized gain on investments 24,049
Net change in unrealized appreciation on investments 450,147
----------
NET REALIZED AND UNREALIZED GAIN 474,196
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS $ 606,287
==========
</TABLE>
* Fund's commencement of investment operations was September 11, 1995.
<PAGE> 248
<TABLE>
<CAPTION>
SALOMON BROTHERS TOTAL RETURN FUND
STATEMENT OF CHANGES IN NET ASSETS
FOR THE PERIOD ENDED DECEMBER 31, 1995 * (UNAUDITED)
================================================================================
<S> <C>
CHANGE IN NET ASSETS FROM:
OPERATIONS:
Net investment income $ 132,091
Net realized gain on investments 24,049
Net change in unrealized appreciation on investments 450,147
------------
Net increase in net assets resulting from operations 606,287
------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A (36,044)
Class B (47,544)
Class C (3,496)
Class O (46,192)
------------
(133,276)
------------
Distributions from net realized gains:
Class A (3,580)
Class B (5,288)
Class C (438)
Class O (4,434)
------------
(13,740)
------------
NET FUND CAPITAL SHARE TRANSACTIONS:
Class A 3,580,176
Class B 5,255,708
Class C 424,084
Class O 4,250,000
------------
Net increase in net assets derived from share transactions 13,509,968
------------
NET CHANGE IN NET ASSETS 13,969,239
NET ASSETS:
Beginning of period 5,000
------------
End of period $ 13,974,239
============
</TABLE>
* Fund's commencement of investment operations was September 11, 1995.
<PAGE> 249
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT THE PERIOD (b):
================================================================================
SALOMON BROTHERS TOTAL RETURN FUND
<TABLE>
<CAPTION>
Class A Class B Class C Class O
------- ------- ------- -------
PERIOD ENDED DECEMBER 31, 1995 (a)
(UNAUDITED)
------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period $10.00 $10.00 $10.00 $10.00
------ ------ ------ ------
Net investment income+ 0.15 0.13 0.14 0.17
Net realized and unrealized
gains on investments 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 and expenses
absorbed by Salomon Brothers Asset Management
Inc ("SBAM"), 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>
- ----------------
(a) September 11, 1995, commencement of investment operations, through
December 31, 1995
(b) Per share information calculated using the average shares outstanding
method, which provides a better representation of results.
* 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> 250
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JANUARY 19, 1996
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 World Trade Center, New York, New York 10048
800-725-6666
Salomon Brothers Institutional Investment Series consists of Salomon Brothers
Institutional Money Market Fund (the "Money Market Fund"), Salomon Brothers
Institutional High Yield Bond Fund (the "High Yield Bond Fund"), Salomon
Brothers Institutional Emerging Markets Debt Fund (the "Emerging Markets Debt
Fund") and Salomon Brothers Institutional Asia Growth Fund (the "Asia Growth
Fund") (each, a "Fund" and collectively, the "Funds"). Each of the Funds, except
the Money Market Fund, is a no-load investment portfolio of Salomon Brothers
Institutional Series Funds Inc ("Institutional Series Funds"). The Money Market
Fund is a no-load investment portfolio of Salomon Brothers Series Funds Inc
("Series Funds").
The MONEY MARKET FUND seeks as high a level of current income as is consistent
with liquidity and the stability of principal. The Fund seeks to achieve its
objective by investing in high-quality, short-term U.S. dollar denominated money
market instruments, and seeks to maintain a stable net asset value of $1.00 per
share. THERE IS NO ASSURANCE THAT A STABLE NET ASSET VALUE OF $1.00 PER SHARE
WILL BE MAINTAINED. INVESTMENTS IN THE FUND ARE NOT GUARANTEED OR INSURED BY THE
U.S. GOVERNMENT.
The HIGH YIELD BOND FUND seeks to maximize total return. The Fund seeks to
achieve its objective by investing primarily in a portfolio of high yield
fixed-income securities that offer a yield above that generally available on
debt securities in the four highest rating categories of the recognized rating
services.
The EMERGING MARKETS DEBT FUND seeks to maximize total return. The Fund
seeks to achieve its objective by investing at least 80% of its total assets in
debt securities of government, government related and corporate issuers located
in emerging market countries, and of entities organized to restructure
outstanding debt of such issuers.
The ASIA GROWTH FUND seeks long-term capital appreciation. The Fund seeks to
achieve its objective by investing at least 65% of its total assets in equity
and equity-related securities of Asian Companies (as defined in this
Prospectus).
THERE CAN BE NO ASSURANCE THAT ANY FUND WILL ACHIEVE ITS INVESTMENT OBJECTIVE
AND EACH OF THE FUNDS MAY EMPLOY CERTAIN INVESTMENT PRACTICES WHICH INVOLVE
SPECIAL RISK CONSIDERATIONS. CERTAIN FUNDS MAY INVEST IN HIGH YIELD SECURITIES
WHICH PRESENT A HIGH DEGREE OF RISK. HIGH-YIELDING, LOWER-QUALITY SECURITIES
INVOLVE COMPARATIVELY GREATER RISKS, INCLUDING PRICE VOLATILITY AND THE RISK OF
DEFAULT IN THE TIMELY PAYMENT OF INTEREST
<PAGE> 251
2
AND PRINCIPAL, THAN HIGHER-QUALITY SECURITIES. SEE "ADDITIONAL INVESTMENT
ACTIVITIES AND RISK FACTORS."
This Prospectus sets forth concisely the information a prospective investor
should know before investing in a Fund. This Prospectus should be read and
retained for ready future reference to information about a Fund. A Statement of
Additional Information dated __________, 1996, containing additional information
about each Fund has been filed with the Securities and Exchange Commission (the
"SEC") and is hereby incorporated by reference into this Prospectus. It is
available without charge and can be obtained by writing or calling the Funds at
the address and telephone number printed above.
- -------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
SALOMON BROTHERS ASSET MANAGEMENT INC - INVESTMENT MANAGER
SALOMON BROTHERS INC - DISTRIBUTOR
PROSPECTUS
________ __, 1996
<PAGE> 252
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FEE TABLE................................................................. 4
HIGHLIGHTS................................................................ 6
FINANCIAL HIGHLIGHTS...................................................... 10
PERFORMANCE INFORMATION................................................... 10
INVESTMENT OBJECTIVE AND POLICIES......................................... 12
ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS......................... 26
INVESTMENT LIMITATIONS.................................................... 39
PURCHASE AND REDEMPTION OF SHARES......................................... 41
MANAGEMENT................................................................ 45
DIVIDENDS, DISTRIBUTIONS AND TAXES........................................ 48
ACCOUNT SERVICES.......................................................... 53
CAPITAL STOCK............................................................. 53
APPENDIX A: DESCRIPTION OF RATINGS....................................... A-1
APPENDIX B: GENERAL CHARACTERISTICS AND RISKS OF DERIVATIVES............. B-1
</TABLE>
<PAGE> 253
4
FEE TABLE
Information in the table below is given as a percentage of average daily net
assets. Shares of each Fund are sold without imposition of any sales charge,
deferred sales charge or any other transaction fee.
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING MONEY MARKET HIGH YIELD EMERGING MARKETS ASIA GROWTH
EXPENSES FUND* BOND FUND** DEBT FUND *** FUND****
- ----------------------------------------- ------------ ----------- ---------------- -----------
<S> <C> <C> <C> <C>
Management Fee (after waiver)............ . % . % . % . %
Other Expenses (after reimbursement)..... . % + . % + . % + . % +
--- --- --- ---
Total Fund Operating Expenses (after
waiver and reimbursement)............... . % . % . % . %
=== === === ===
</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 $ $ $ $
High Yield Bond Fund $ $ N/A N/A
Emerging Markets Debt Fund $ $ N/A N/A
Asia Growth Fund $ $ N/A N/A
</TABLE>
- ---------------------
* The information in the fee table set forth above has been restated
because, as of the date of this Prospectus, Salomon Brothers Asset
Management Inc ("SBAM"), the Fund's investment manager, has agreed 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
.25% of the Fund's average daily net assets and for a period of at
least one year from the date of this Prospectus, such expenses shall
not exceed .18% of the Fund's average daily net assets. For the year
ended December 31, 1995, actual Management Fee, Other Expenses and
Total Fund Operating Expenses were .__%, .__% and .__%, respectively.
** As of the date of this Prospectus, SBAM has 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, Management
Fee, Other Expenses and Total Fund Operating Expenses are expected to
be .__%, .__%, and .__%, respectively.
*** As of the date of this Prospectus, SBAM has 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,
Management Fee, Other Expenses and Total Fund Operating Expenses are
expected to be .__%, .__%, and .__%, respectively.
**** As of the date of this Prospectus, SBAM has 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 .__% of the
<PAGE> 254
5
Fund's average daily net assets. Without this agreement, Management
Fee, Other Expenses and Total Fund Operating Expenses are expected be
.__%, .__%, and .__%, 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.
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> 255
6
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.
<PAGE> 256
7
- --------------------------------------------------------------------------------
Benefits of Investing Mutual funds, such as the Funds, are flexible
in the Funds 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
and a degree of diversification 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.
- 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.
<PAGE> 257
8
- 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. See "Purchase and Redemption of
Shares--Exchange Privilege."
- --------------------------------------------------------------------------------
Purchase and The minimum initial investment in the Money Market
Redemption of Shares 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 Each Fund retains Salomon Brothers Asset Management
Services 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 Asia Pacific
Limited ("SBAM AP"), to serve as sub-adviser to the
Asia Growth Fund, subject to the supervision of
SBAM. See "Management."
- --------------------------------------------------------------------------------
Distributor Salomon Brothers Inc ("Salomon Brothers") serves as
each Fund's distributor. Salomon Brothers is an
indirect, wholly-owned subsidiary of Salomon Inc.
Salomon Brothers is one of the largest securities
dealers in the world and a registered
broker-dealer.
- --------------------------------------------------------------------------------
Risk Factors Prospective investors should consider certain risks
associated with an investment in each Fund. Certain
Funds may use various investment practices that
involve special considerations, including investing
in high yield securities, illiquid securities,
foreign securities (including emerging market
securities), zero
<PAGE> 258
9
coupon and deferred payment securities, loan
participations and assignments and warrants and
engaging in repurchase and reverse repurchase
agreements and hedging and derivative transactions.
See "Additional Investment Activities and Risk
Factors."
<PAGE> 259
10
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, 1994, 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 ______, 1996. On __________, 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. 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>
SIX MONTHS
ENDED JUNE YEAR ENDED DECEMBER 31, PERIOD ENDED
PER SHARE OPERATING 30, 1995 ------------------------------------------------ DECEMBER 31,
PERFORMANCE (UNAUDITED) 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 ................ 0.024 .036 .028 .034 .054+ .005+
Dividends from net investment
income .............................. (0.024) (.036) (.028) (.034) (.054) (.005)
------- ------- ------- ------- ------- ------
NET ASSET VALUE, END OF PERIOD ....... $ 1.000 $ 1.000 $ 1.000 $1.000 $ 1.000 $1.000
======= ======= ======= ======= ======= ======
Net assets end of period (thousands) . $13,954 $27,667 $34,120 $50,554 $35,414 $4,596
TOTAL INVESTMENT RETURN .............. +2.5% +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>
- ---------------------
* Annualized.
** December 7, 1990, commencement of operations, through December 31,
1990.
+ Net investment income would have been $.052 and $.004, and the expense
ratios would have been .64% and 1.72%, respectively, for the years
ended December 31, 1991 and December 31, 1990 before waiver of
management fee and expenses absorbed by SBAM.
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
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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
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12
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, 1994 containing additional performance information is available
without charge and can be obtained by writing or calling the address or
telephone number printed on the front cover of this Prospectus. See "Performance
Data" in the Statement of Additional Information.
INVESTMENT OBJECTIVE AND POLICIES
MONEY MARKET FUND
The investment objective of the Money Market Fund is to seek as high a level of
current income as is consistent with liquidity and the stability of principal.
The Fund invests in high-quality, short-term U.S. dollar-denominated money
market instruments which are deemed to mature in thirteen months or less, and is
managed so that the average portfolio maturity of all portfolio instruments (on
a dollar-weighted basis) will not exceed 90 days. The Fund is diversified
within the meaning of the Investment Company Act of 1940, as amended (the "1940
Act"), and will seek to maintain a stable net asset value of $1.00 per share.
The instruments in which the Money Market Fund may invest include, but are not
limited to:
- - Securities issued or guaranteed by the U.S. government or by agencies or
instrumentalities thereof;
- - Obligations issued or guaranteed by U.S. and foreign banks ("Bank
Obligations");
- - Commercial paper;
- - Corporate debt obligations, including variable rate
obligations;
- - Short-term credit facilities;
- - Asset-backed securities; and
- - 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."
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13
Securities issued or guaranteed by the U.S. government or by its agencies or
instrumentalities include obligations of several kinds. Such securities in
general include a wide variety of U.S. Treasury obligations consisting of bills,
notes and bonds, which principally differ only in their interest rates,
maturities and times of issuance. Securities issued or guaranteed by U.S.
government agencies and instrumentalities are debt securities issued by agencies
or instrumentalities established or sponsored by the U.S. government and may be
backed only by the credit of the issuing agency or instrumentality. The Fund
will invest in such obligations only where SBAM is satisfied that the credit
risk with respect to the issuer is minimal.
Bank Obligations that may be purchased by the Money Market Fund include
certificates of deposit, commercial paper, bankers' acceptances and fixed time
deposits. Fixed time deposits are obligations of branches of U.S. banks or
foreign banks which are payable at a stated maturity date and bear a fixed rate
of interest. Although fixed time deposits do not have a market, there are no
contractual restrictions on the right to transfer a beneficial interest in the
deposit to a third party. For a discussion of the risks associated with
investing in bank obligations, see "Additional Information on Portfolio
Instruments and Investment Policies--Bank Obligations" in the Statement of
Additional Information.
The Money Market Fund's investments in corporate debt securities consist of
non-convertible corporate debt securities such as bonds and debentures that
have thirteen months or less remaining to maturity.
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
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14
issued pursuant to a written agreement between the issuer and the holder, its
amount may from time to time be increased by the holder (subject to an agreed
maximum) or decreased by the holder or the issuer, it is payable on demand, the
rate of interest payable on it varies with an agreed formula and it is not
typically rated by a rating agency.
The Money Market Fund may enter into, or acquire participations in, short-term
borrowing arrangements with corporations, consisting of either a short-term
revolving credit facility or a master note agreement payable upon demand. Under
these arrangements, the borrower may reborrow funds during the term of the
facility. The Fund treats any commitments to provide such advances as a standby
commitment to purchase the borrower's notes.
The Money Market Fund may also purchase asset-backed securities. Asset-backed
securities represent defined interests in an underlying pool of assets. Such
securities may be issued as pass-through certificates, which represent undivided
fractional interests in the underlying pool of assets. Alternatively,
asset-backed securities may be issued as interests, generally in the form of
debt securities, in a special purpose entity organized solely for the purpose of
owning the underlying assets and issuing such securities. In the latter case,
such securities are secured by and payable from a stream of payments generated
by the underlying assets. The assets underlying asset-backed securities are
often a pool of assets similar to one another, such as motor vehicle receivables
or credit card receivables. Alternatively, the underlying assets may be
particular types of securities, various contractual rights to receive payments
and/or other types of assets. Asset-backed securities frequently carry credit
protection in the form of extra collateral, subordinated certificates, cash
reserve accounts, letters of credit or other enhancements. Any asset-backed
securities held by the Fund must comply with its portfolio maturity and credit
quality requirements.
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 the Fund 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
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15
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 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 or "BB" or "B" or lower
by 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
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
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16
the investment objective and policies of the Emerging Markets Debt Fund. The
risks associated with these investments are described under the captions
"Additional Investment Activities and Risk Factors--Foreign Securities" and
"--High Yield Securities." Moreover, investments in foreign securities may have
adverse tax implications as described under "Dividends, Distributions and
Taxes."
In light of the risks associated with high yield corporate debt securities, SBAM
will take various factors into consideration in evaluating the creditworthiness
of an issuer. These will typically include the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of the
issuer, and the experience and track record of the issuer's management. SBAM
will also review the ratings, if any, assigned to the security by any recognized
rating agencies, although SBAM's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. In
addition to the foregoing credit analysis, SBAM will evaluate the relative value
of an investment compared with its perceived credit risk. In selecting
securities for the Fund, SBAM intends to consider the correlation among
securities represented in the Fund's portfolio in an attempt to reduce the risk
of exposure to market, industry and issuer volatility. The High Yield Bond
Fund's ability to achieve its investment objective may be more dependent on
SBAM's credit analysis than would be the case if it invested in higher quality
debt securities. A description of the ratings used by Moody's and S&P is set
forth in Appendix A to this Prospectus.
SBAM will be free to invest in high yield debt securities of any maturity and
may adjust the average maturity of the Fund's portfolio from time to time,
depending on SBAM's assessment of the relative yields available on securities of
different maturities and its expectations of future changes in interest rates.
Long-term debt securities generally provide a higher yield than short-term debt
securities, and therefore SBAM expects that, based upon current market
conditions, the Fund's high yield debt securities will initially have an average
maturity of 10 to 15 years.
The High Yield Bond Fund may invest in zero coupon securities, pay-in-kind bonds
and deferred payment securities, which involve special risk considerations. See
"Additional Investment Activities and Risk Factors--Zero Coupon Securities,
Pay-in-Kind Bonds and Deferred Payment Securities."
The Fund may also invest in fixed and floating rate loans ("Loans") arranged
through private negotiations between a corporate borrower or a foreign sovereign
entity and one or more financial institutions ("Lenders"). The Fund may invest
in such Loans in the form of participations in Loans ("Loan Participations") and
assignments of all or a portion of Loans from third parties ("Assignments"). See
"Additional Investment Activities and Risk Factors--Loan Participations and
Assignments."
The Fund may invest up to 10% of its total assets in either (1) equipment
lease certificates, equipment trust certificates and conditional sales
contracts or (2) limited partnership interests. The Fund may invest up to 10%
of its total assets in common stock, convertible securities, warrants or other
equity securities (other than preferred stock for which there is no limit) when
consistent with 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
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17
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 Standard & Poor's Rating Services Group ("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, the Fund may 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
Fund's Board of Directors 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 India Philippines
Argentina Indonesia Poland
Brazil Ivory Coast Portugal
Bulgaria Jamaica Russia
Chile Jordan Slovakia
China Lebanon Slovenia
Colombia Malaysia South Africa
Costa Rica Mexico Thailand
Czech Republic Morocco Trinidad & Tobago
Dominican Republic Nicaragua Tunisia
Ecuador Nigeria Turkey
Egypt Pakistan Uruguay
Greece Panama Venezuela
Hungary Paraguay Vietnam
Peru Zaire
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
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Assignments and interests issued by entities organized and operated for the
purpose of restructuring the investment characteristics of instruments issued by
emerging market country issuers. The Fund is subject to no restrictions on the
maturities of the emerging market country debt securities in which it will
invest and such maturities may range from overnight to thirty years. There is
no limit on the percentage of the Fund's assets that may be invested in
non-U.S. dollar denominated securities and a substantial portion of the Fund's
assets may be invested in non-U.S. dollar denominated securities. The amount of
assets invested in non-U.S. dollar denominated securities will vary depending
upon market conditions. The Fund may invest in Brady Bonds, which are debt
securities issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness. For a description of Brady Bonds, see "Additional Investment
Activities and Risk Factors--High Yield Securities" herein and "Additional
Information on Portfolio Instruments and Investment Policies--Brady Bonds" in
the Statement of Additional Information. For a description of Loan
Participations and Assignments, see "Additional Investment Activities and Risk
Factors--Loan Participations and Assignments."
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
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20
lowest rating categories of internationally recognized credit rating
organizations or of comparable quality. Such securities involve significantly
greater risks, including price volatility and risk of default of payment of
interest and principal than higher rated securities. An investment in the
Emerging Markets Debt Fund should not be considered as a complete investment
program for all investors. See "Additional Investment Activities and Risk
Factors--Foreign Securities" and "--High Yield Securities." Moreover,
substantial investments in foreign securities may have adverse tax implications
as described under "Dividends, Distributions and Taxes."
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, these will
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt service
ratios, the issuer's access to capital markets and other sources of funding, and
the issuer's debt service payment history. SBAM will also review the ratings, if
any, assigned to the security by any recognized rating organizations, although
SBAM's judgment as to the quality of a debt security may differ from that
suggested by the rating published by a rating service. In addition to the
foregoing credit analysis, SBAM will evaluate the relative value of an
investment compared with its perceived credit risk. In selecting securities for
the Emerging Markets Debt Fund, SBAM intends to consider the correlation among
securities represented in the Fund's portfolio in an attempt to reduce the risk
of exposure to market, industry and issuer volatility. The Fund's ability to
achieve its investment objective may be more dependent on SBAM's credit analysis
than would be the case if it invested in higher quality debt securities. A
description of the ratings used by Moody's and S&P is set forth in Appendix A to
this Prospectus.
The Emerging Markets Debt Fund may invest in zero coupon securities, pay-in-kind
bonds and deferred payment securities. The characteristics and risks of these
investments are described under "Additional Investment Activities and Risk
Factors--Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment
Securities."
The Emerging Markets Debt Fund may invest up to 10% of its total assets in
common stock, convertible securities, warrants or other equity securities when
consistent with the Fund's objective. The Fund will generally hold such equity
investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of SBAM, such purchase is appropriate.
In order to maintain liquidity, the Emerging Markets Debt Fund may hold and/or
invest up to 20% of its total assets in cash and/or U.S. dollar denominated debt
securities including: (1) short-term (less than 12 months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by (a) the U.S. government or the government of a developed country,
their agencies or instrumentalities or (b) international
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21
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, the Fund may
invest its assets without limit in such instruments.
The Emerging Markets Debt Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund may
also invest in investment funds. For a description of these investment practices
and the risks associated therewith, see "Additional Investment Activities and
Risk Factors."
The Emerging Markets Debt Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as "restricted securities" which are illiquid, and
securities that are not readily marketable. See "Additional Investment
Activities and Risk Factors--Restricted Securities and Securities with Limited
Trading Markets." The Fund's holdings of Rule 144A securities which are liquid
securities will not be subject to the 15% limitation on investments in illiquid
securities.
The Emerging Markets Debt Fund is currently authorized to use all of the various
investment strategies referred to under "Additional Investment Activities and
Risk Factors--Derivatives." With the exception of currency transactions,
however, it is not presently anticipated that any of these strategies will be
used to a significant degree by the Fund. The Fund's ability to pursue certain
of these strategies, including the ability to hedge against currency exchange
rate risks with respect to its holdings of non-U.S. dollar denominated
securities, may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies and activities, other than the Emerging
Markets Debt Fund's investment objective, are not fundamental and may be changed
by the Fund's Board of Directors without the approval of shareholders.
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22
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 include common and preferred stocks (including convertible
preferred stock), bonds, notes and debentures convertible into common and
preferred stock, stock purchase warrants and rights, equity interests in trusts,
partnerships, joint ventures or similar enterprises, and American, Global or
other types of Depositary Receipts. Equity-linked debt securities are debt
instruments whose prices are indexed to the prices of equity securities or
securities indices. In other words, the value at maturity or coupon rate of
these equity-linked debt instruments is determined by reference to a specific
instrument or statistic. The performance of equity-linked debt instruments
depends to a great extent on the performance of the security or index to which
they are indexed, and may also be influenced by interest rate changes in the
United States and abroad. At the same time, these instruments are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates. Indexed
instruments may be more volatile than the underlying instruments.
There are no prescribed limits on geographic asset distributions among Asian
Countries and from time to time, SBAM AP expects to invest a significant portion
of the Asia Growth Fund's assets in Hong Kong, Malaysia, Singapore and Thailand.
Investments in each of these countries may from time to time exceed 25% of the
Fund's total assets. In addition, more than 25% of the Fund's total assets may
be denominated or quoted in the currencies of any one or more of such countries.
In this connection, SBAM AP anticipates that up to 40% 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,
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23
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 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.
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24
Screening Process. SBAM AP will implement a systematic screening process in an
effort to identify individual securities it believes likely to exhibit
attractive returns over the long term. SBAM AP will screen companies according
to factors such as the perceived quality of their management and business,
overall sustainable competitiveness, historical earnings, dividend records over
at least a full business cycle, liquidity, trading volumes and historical and
expected volatility.
Financial Analysis Process. The financial analysis of selected companies will
focus on evaluating the fundamental value of the enterprise. SBAM AP will use a
value-driven process which will emphasize quantitative analysis based on return
on equity ("ROE") and its components, such as operating margins, financial
leverage, asset turnover and interest and tax burdens. In addition, the
company's cash flow generating capabilities and return on assets will be
considered. SBAM AP believes that ROE and cash flow dynamics are appropriate
variables when analyzing companies which operate in high growth markets, such as
Asia, as the ability of such companies to capture this growth by using the right
allocation of resources and asset financing is of utmost importance.
Valuation Process and Volatility Analysis. The valuation process will focus on
Price Earnings Ratio ("PER") 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
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25
of volatility-control strategies, including derivative instruments (as discussed
below), in an effort to attain an optimal asset allocation mix, for hedging
purposes in an attempt to control the Fund's overall risk level and to obtain
exposure to markets in the Asian Countries which have restrictions on foreign
investment.
The Asia Growth Fund from time to time may invest up to 10% of its total assets
in non-convertible debt securities, which may include securities rated below
investment grade by S&P and Moody's with no minimum rating required or
comparable unrated securities. There is no limit on the amount of the Fund's
assets that can be invested in convertible securities rated below investment
grade. For additional information on these high yield debt securities, which may
involve a high degree of risk, see "Additional Investment Activities and Risk
Factors--High Yield Securities."
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities denominated in U.S. dollars or
in another freely convertible currency including: (1) short-term (less than 12
months to maturity) and medium-term (not greater than five years to maturity)
obligations issued or guaranteed by (a) the U.S. government or the government of
an Asian Country, their agencies or instrumentalities or (b) international
organizations designated or supported by multiple foreign governmental entities
to promote economic reconstruction or development ("supranational entities");
(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
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26
securities. The Fund's holdings of Rule 144A securities which are liquid
securities will not be subject to the 15% limitation on investments in illiquid
securities.
The Asia Growth Fund is currently authorized and intends to use the various
investment strategies referred to under "Additional Investment Activities
and Risk Factors--Derivatives." The Fund's ability to pursue certain of these
strategies may be limited by applicable regulations of the SEC, the CFTC and
the federal income tax requirements applicable to regulated investment
companies. Appendix B to this Prospectus and the Statement of Additional
Information contain descriptions of these strategies and of certain risks
associated therewith.
The foregoing investment policies and activities, other than the Asia Growth
Fund's investment objective, are not fundamental and may be changed by the
Fund's Board of Directors without the approval of shareholders.
The investment objective of each Fund is deemed to be a fundamental policy and
may not be changed without the affirmative vote of the holders of a majority of
its outstanding shares as defined in the 1940 Act. There is no assurance that a
Fund will achieve its investment objective.
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, 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. 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
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27
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 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
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28
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 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
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29
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 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 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 Assignments and Loan Participations.
To the extent that liquid Assignments and Loan Participations 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 Assignments and Loan
Participations and will consider appropriate measures to enable a Fund to
maintain sufficient liquidity for operating purposes and to meet redemption
requests.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS. Each Fund may
purchase securities for which there is a limited trading market or which are
subject to restrictions on resale to the public. Investments in securities which
are "restricted" may involve added expenses to a Fund should the Fund be
required to bear registration costs with respect to such securities and could
involve delays in disposing of such securities which might have an adverse
effect upon the price and timing of sales of such securities and the liquidity
of the Fund with respect to redemptions. Restricted securities and securities
for which there is a limited trading market may be significantly more difficult
to value due to the unavailability of reliable market quotations for such
securities, and investment in such securities may have an adverse impact on net
asset value. Rule 144A is a recent development and there is no assurance that a
liquid market in Rule 144A securities will develop or be maintained. To the
extent that the number of qualified institutional buyers is reduced, a
previously liquid Rule 144A security may be determined to be illiquid, thus
increasing the
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30
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.
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
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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 U.S.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers and securities markets. Finally, in the event of a
default in any such foreign obligations, it may be more difficult for a Fund to
obtain or enforce a judgment against the issuers of such obligations. See
"--High Yield Securities."
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.
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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, 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
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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).
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
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
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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
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collateralized or uncollateralized and issued in various currencies (although
most are U.S. dollar denominated) and they are actively traded in the
over-the-counter secondary market. U.S. dollar denominated, collateralized
Brady Bonds, which may be fixed rate par bonds or floating rate discount bonds,
are generally collateralized in full as to principal due at maturity by U.S.
Treasury zero coupon obligations which have the same maturity as the Brady
Bonds. Certain interest payments on these Brady Bonds may be collateralized by
cash or securities in an amount that, in the case of fixed rate bonds, is
typically equal to between 12 and 18 months of rolling interest payments or, in
the case of floating rate bonds, initially is typically equal to between 12 and
18 months rolling interest payments based on the applicable interest rate at
that time and is adjusted at regular intervals thereafter with the balance of
interest accruals in each case being uncollateralized. Payment of interest and
(except in the case of principal collateralized Brady Bonds) principal on Brady
Bonds with no or limited collateral depends on the willingness and ability of
the foreign government to make payment. In the event of a default on
collateralized Brady Bonds for which obligations are accelerated, the
collateral for the payment of principal will not be distributed to investors,
nor will such obligations be sold and the proceeds distributed. The collateral
will be held by the collateral 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 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.
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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.
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 the Fund invests in other investment funds, the Fund's
shareholders will incur certain duplicative fees and expenses, including
investment advisory fees. A Fund's investment in certain investment funds will
result in special U.S. Federal income tax consequences described below under
"Dividends, Distributions and Taxes."
BORROWING. Each of the Funds may borrow in certain limited circumstances. See
"Investment Limitations." Borrowing creates an opportunity for increased return,
but, at the 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 unduly 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 hedging and
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
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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, 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 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.
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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, 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 __%. However, the expected portfolio rates may be exceeded if
conditions warrant. Short-term gains realized from portfolio transactions are
taxable to shareholders as ordinary income. In addition, higher portfolio
turnover rates can result in corresponding increases in portfolio transaction
costs for a Fund.
With respect to the Money Market Fund, SBAM seeks to enhance the Fund's yield by
taking advantage of yield disparities or other factors that occur in the money
market. For example, market conditions frequently result in similar securities
trading at different prices. The Money Market Fund may dispose of any portfolio
security prior to its maturity if such
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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, so long as no more than 25%
of its total assets are invested in the securities of any one issuer;
(2) borrow money except as a temporary measure from banks for
extraordinary or emergency purposes, and in no event in excess of 15%
of the value of its total assets, except that for the purpose of this
restriction, short-term credits necessary for settlement of securities
transactions are not considered borrowings (the Fund will not purchase
any securities at any time while such borrowings exceed 5% of the value
of its total assets); or
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(3) 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.
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).
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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 at 4:00 p.m. (New
York time). With respect to each Fund, such calculation is determined on each
day that the NYSE is open for trading, i.e., Monday through Friday, except for
New Year's Day, President's Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day, and the preceding Friday or
subsequent Monday when one of those holidays falls on a Saturday or Sunday,
respectively. 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 each Fund's Board of Directors. Securities that are primarily traded
on foreign exchanges generally are valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed such
value, then the fair value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors. Securities may be valued by independent pricing services which use
prices provided by market-makers or estimates of market values obtained from
yield data relating to instruments or securities with similar characteristics.
In valuing a Fund's assets, any assets or liabilities initially expressed in
terms of a foreign currency are 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.
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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 __________, the Funds' transfer
agent and dividend-disbursing agent. Federal funds will not necessarily become
available to a Fund and consequently share purchase orders may not be deemed
received on the same date a check is received from the shareholder.
Purchases of shares of Funds can be made by wire transfer, check or money order
through ______________. The shareholder's bank may impose a charge to execute a
wire transfer. The wiring instructions are:
________________________
ABA #___________
Account Name: ____________
Account #: _______________
Name of Account:
Reference: Name of Fund
Share purchase orders made with a check or money order should be mailed to the
following address:
______________________
______________________
______________________
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
(___)________ to inform _____________ 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 ___________, 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 ___________
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___, 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 _______________ of proper notice of redemption as
described below. Shareholders liquidating their holdings will receive upon
redemption all dividends reinvested through the date of redemption. If notice of
redemption is received on any Business Day, the redemption will be effective on
the date of receipt. Payment will ordinarily be made by wire on the next
Business Day, but, in any case, within no more than seven business days from the
date of receipt. If the notice is received on a day that is not a Business Day
or after the close of regularly scheduled trading on the NYSE, the redemption
notice will be deemed received as of the next Business Day. The value of shares
at the time of redemption may be more or less than the shareholder's cost
depending on the market value of the securities held by the Fund at such time.
A shareholder may elect to receive payment upon redemption of their shares in
the form of a wire or check. There is no charge imposed by a Fund to redeem
shares of the Fund; however, in the case of a redemption by wire, a
shareholder's bank may impose its own wire transfer fee for receipt of the wire.
Redemptions may be executed in any amount requested by the shareholder up to the
total amount such shareholder has invested in that Fund.
REDEMPTION BY MAIL
A shareholder wishing to redeem shares may do so by mailing proper notice of
redemption directly to _______________. 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 their names appear on _______________ register. In certain instances,
____________ 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 _________________, payment will be mailed 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 ______________ with the dollar or
share amount to
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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
____________ with a signature guaranteed by a national bank which is a member of
the Federal Reserve System (not a savings bank) or by a member firm of any
national or regional securities exchange. Notarized signatures are not
sufficient. Further documentation may be required when deemed appropriate by
___________________.
TELEPHONE REDEMPTION
A shareholder may request redemption by calling ______________ at _____________.
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 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 _______________. 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 $___ or less
if the reduction in value is the result of shareholder redemptions or transfers
and not as a result of a decline in the net asset value. However, any
shareholder affected by the exercise of this right will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.
EXCHANGE PRIVILEGE
Shareholders of any Fund may exchange all or part of their shares for shares of
any other Fund at the applicable relative net asset value per share. The value
of the shares exchanged must meet the investment minimum of the Fund into which
the investor is exchanging. Shares of a Fund are eligible for exchange 30 days
after purchase.
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45
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, __________
and ___________ 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 ____________ may employ reasonable
procedures to confirm that instructions communicated by telephone are genuine.
The Funds, ______________ and ___________ 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. __________ and
____________ reserve the right to reject any exchange request. The exchange
privilege may be modified or terminated at any time after notice to
shareholders.
DISTRIBUTOR
Shares of each of the Funds may be purchased through Salomon Brothers, the
Funds' distributor. Salomon Brothers, located at 7 World Trade Center, New York,
New York 10048, is a wholly-owned subsidiary of Salomon Brothers Holding Company
Inc, which is in turn wholly-owned by Salomon Inc. It is also one of the largest
securities dealers in the world and a registered broker-dealer. Salomon Brothers
makes markets in securities and provides a broad range of underwriting,
research, and financial advisory services to governments, international
corporations, and institutional investors. Salomon Brothers from time to time
may receive fees from SBAM in connection with processing and other services that
it provides for certain shareholder accounts.
MANAGEMENT
DIRECTORS AND OFFICERS
The business and affairs of each Fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between a Fund and the persons or companies that furnish services to the Fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Fund's investment manager and administrator. The Statement of
Additional Information contains general background information regarding the
Directors and officers of each Fund.
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46
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 December 31, 1995, SBAM had approximately $__
billion of assets under management of which approximately $______ million is
invested in high yield securities and approximately $____________ of which is
invested in emerging market debt securities. SBAM has access to Salomon Inc's
more than 250 economists, mortgage, bond, sovereign, and equity analysts. The
business address of SBAM is 7 World Trade Center, New York, New York 10048.
SBAM has retained Salomon Brothers 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, 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 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.
Subject to policy established by the Board of Directors, which has overall
responsibility for the business and affairs of each Fund, SBAM manages the
investment and reinvestment of each Fund's assets pursuant to the applicable
management contract. SBAM also furnishes office space, personnel and certain
facilities required for the performance by SBAM of certain additional services
provided by it to each Fund under the applicable management contract, including
SEC compliance, supervision of Fund operations and certain administrative and
clerical services, and pays the compensation of the Funds' officers, employees
and directors
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47
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 _____________, 1996 and the
fee increase became effective shortly thereafter. SBAM has 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 .25% of the Fund's average daily net assets and for a
period of at least one year from the date of this Prospectus, such expenses
shall not exceed .18% of the Fund's average daily net assets.
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 .__% of the Fund's average daily net assets.
SBAM AP is compensated by SBAM at no additional expense to the Asia Growth Fund
at an annual rate of ___% of the Asia Growth Fund's daily assets. SBAM has
agreed to reduce or otherwise limit expenses of the High Yield Bond Fund, the
Emerging Markets Debt Fund and the Asia Growth Fund (exclusive of taxes,
interest and extraordinary expenses such as litigation and indemnification
expenses), on an annualized basis to .55%, .75% and ___%, 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
High Yield Bond Fund. Set forth in the chart below is performance data
provided by SBAM relating to certain accounts managed by the portfolio manager
of the High Yield Bond Fund, each with substantially similar, though not
necessarily identical, investment objectives, policies and strategies as those
of the Fund. The composite shown is comprised of one discretionary
institutional account and the high-yield portion of two U.S. registered closed-
end investment companies. During the period shown, the accounts ranged in
size, individually, from $___ million to $___ million and, in the aggregate,
from $___ million to $___ million.
The performance results shown below are compared to the Salomon Brothers High
Yield Market Index, a widely recognized index of security issues of at least
$50 million in original issue size which are rated between BB+ and CCC by S&P
and traded or priced at least monthly. The index is unmanaged and accordingly,
does not reflect the effect of advisory fees and other expenses. The
performance results are also compared to Lipper's High Current Yield Universe,
prepared by Lipper Analytical Services, Inc. ("Lipper"), which reflects the
average total return performance, as calculated by Lipper, of ____ U.S.
registered open-end investment companies. The Lipper data assumes reinvestment
of dividends and other distributions on the ex-dividend date and reflects the
effect of operating expenses, including advisory fees and other expenses.
The performance data shown below should be read in conjunction with the notes
that follow.
[Performance results for the High Yield Composite to be inserted]
Emerging Markets Debt Fund. Set forth in the chart below is performance data
provided by SBAM relating to certain accounts managed by the portfolio manager
of the Emerging Markets Debt Fund, each with substantially similar, though not
necessarily identical, investment objectives, policies and strategies as those
of the Fund. The composite shown is comprised of up to three discretionary
institutional accounts and up to three U.S. registered closed-end investment
companies. During the period shown, the accounts ranged in size, individually,
from $___ million to $___ million and, in the aggregate, from $___ million to
$___ million.
The performance results shown below are compared to the Salomon Brothers Brady
Bond Index, a widely recognized index that measures the performance of emerging
market debt that has been restructured under the Brady Plan ("Brady Bonds").
See "Additional Investment Activities--High Yield Securities" for a discussion
of Brady Bonds. The index measures returns for all Brady Bonds beginning with
the first issue of Brady Bonds in March 1990 by Mexico and is comprised of Brady
Bonds issued by the following countries: Mexico, Costa Rica, Philippines,
Venezuela, Uruguay, Nigeria, Brazil, Argentina, Bulgaria and Poland. The index
is unmanaged and accordingly, does not reflect the effect of operating
expenses, including advisory fees and other expenses.
The performance data shown below should be read in conjunction with the notes
that follow.
[Performance results for the Emerging Markets Composite to be inserted]
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 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 and SBAM AP (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 $___ million to $___ million and
during the period shown for Offshore Fund II, the size of the fund ranged from
$___ millon to $___ million.
The Morgan Stanley Capital International Combined Asia Ex-Japan Index is a
widely recognized market index of Asian country equity issues. The index is
composed of a sample of companies from the following ten countries: Hong Kong,
India, Indonesia, Korea, Malaysia, Pakistan, Philippines, Singapore, Sri Lanka
and Thailand. Constituent stocks are selected for the index on the basis of
industry representation, liquidity and sufficient float. The index is
unmanaged and accordingly, does not reflect the effect of operating expenses,
including advisory fees, transaction costs and other expenses but does reflect
reinvestment of dividends.
The performance data shown below should be read in conjunction with the notes
that follow.
[Performance results for Offshore Fund I and Offshore Fund II to be inserted]
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 each account
and fund for whom investment results are shown 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 Funds,
which have no history of operations. With respect to the composites shown
above, the results shown may not necessarily equate with the return experienced
by any one particular account or fund comprising that composite and should not
be deemed to be indicative of future results for the Funds owing to differences
in brokerage commissions and dealer spreads, account expenses, including
investment advisory fees, the size of positions taken in relation to account
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 the accounts and funds shown above differ in certain respects
from those of the respective Funds. In addition, the accounts and funds which
are not U.S. registered investment companies are 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 of the accounts and the funds shown above and that
of the Funds 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 OR 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."
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ADMINISTRATOR
Each Fund employs _______________ under an administration agreement to provide
certain administrative services to each Fund. _______________ is not involved in
the investment decisions made with respect to the Funds. The services provided
by _______________ 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, each
Fund pays _______________ a fee, calculated daily and payable monthly, at an
annual rate of .__% of each Fund's average daily net assets.
TRANSFER AGENT
_______________ acts as each Fund's transfer agent pursuant to a transfer
agency, dividend disbursing agency and shareholder servicing agency agreement.
Pursuant to this Agreement, ______________ is responsible for the issuance,
transfer and redemption of shares and the opening and maintenance of shareholder
accounts.
EXPENSES
Each Fund's expenses include taxes, interest, fees and salaries of the directors
and officers who are not directors, officers or employees of the Fund's service
contractors, SEC fees, state securities qualification fees, costs of preparing
and printing prospectuses for regulatory purposes and for distribution to
existing shareholders, advisory and administration fees, charges of the
custodian, transfer agent and dividend disbursing agent, certain insurance
premiums, outside auditing and legal expenses, costs of shareholder reports and
shareholder meetings and any extraordinary expenses. Each Fund also pays for
brokerage fees and commissions (if any) in connection with the purchase and sale
of portfolio securities.
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
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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. The High Yield Bond Fund, the Emerging Markets Debt Fund and the
Asia Growth Fund will accrue dividends on settled shares through the day of
redemption. With respect to the Money Market Fund, 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.
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. A
shareholder who does not have a brokerage account may inform _______________, by
notice sent to _______________, that he or she wishes to receive such dividends
or distributions in cash directly from _______________. If such distribution is
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
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registered with __________. Shareholders may change the distribution option at
any time by notification to __________ or calling __________ 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 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
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51
for the dividends received deduction available to corporations. In general, the
maximum federal income tax rate imposed on individuals with respect to capital
gain dividends will be limited to 28%, whereas the maximum federal income tax
rate imposed on individuals with respect to ordinary income (and short-term
capital gains, which currently are taxed at the same rates as ordinary income)
will be 39.6%. With respect to corporate taxpayers, long-term capital gains
currently are taxed at the same federal income tax rates as ordinary income and
short-term capital gains. Investors should consider the tax implications of
buying shares shortly before the record date of a distribution because
distributions of net capital gain will be taxable even though the net asset
value of shares of a Fund is reduced by the distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of a Fund investing in foreign securities or currencies will be
reduced by these foreign taxes. Shareholders will bear the cost of any foreign
taxes but may not be able to claim a foreign tax credit or deduction for these
foreign taxes. In addition, a Fund investing in securities of passive foreign
investment companies may be subject to U.S. federal income taxes (and interest
on such taxes) as a result of such investments. The investment yield of a Fund
making such investments will be reduced by these taxes and interest.
Shareholders will bear the cost of these taxes and interest, but will not be
able to claim a deduction for these amounts.
The redemption, sale or exchange of shares of one Fund for shares of another is
a taxable event and may result in a gain or loss. Gain or loss, if any,
recognized on the sale or other disposition of shares of a Fund will be taxed as
capital gain or loss if the shares are capital assets in the shareholder's
hands. Generally, a shareholder's gain or loss will be a long-term gain or loss
if the shares have been held for more than one year. If a shareholder sells or
otherwise disposes of shares of a Fund before holding them for more than six
months, any loss on the sale or other disposition of such shares shall be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the shareholder with respect to such shares. A loss realized on a
sale or exchange of shares may be disallowed if other shares are acquired within
a 61-day period beginning 30 days before and ending 30 days after the date that
the shares are disposed of.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if a Fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the 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
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52
Fund elects to accrue market discount on a current basis. In addition, income
may continue to accrue for federal income tax purposes with respect to a
non-performing investment. Any such income would be treated as income earned by
a Fund and therefore would be subject to the distribution requirements of the
Code. Because such income may not be matched by a corresponding cash
distribution to a Fund, such Fund may be required to borrow money or dispose of
other securities to be able to make distributions to its investors. The extent
to which a Fund may liquidate securities at a gain may be limited by the
requirement that less than 30% of its annual gross income be derived from the
sale or other disposition of securities and certain other investments held for
less than three months (the "short-short test"). In addition, if an election is
not made to currently accrue market discount with respect to a market discount
bond, all or a portion of any deduction or any interest expense incurred to
purchase or hold such bond may be deferred until such bond is sold or otherwise
disposed.
Each Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends (other than exempt-interest dividends) and
redemption proceeds paid to noncorporate shareholders. This tax may be withheld
from dividends if (i) the payee fails to furnish the Fund with the payee's
correct taxpayer identification number (e.g., an individual's social security
number), (ii) the Internal Revenue Service ("IRS") notifies the Fund that the
payee has failed to report properly certain interest and dividend income to the
IRS and to respond to notices to that effect, or (iii) when required to do so,
the payee fails to certify that he or she is not subject to backup withholding.
Redemption proceeds may be subject to withholding under the circumstances
described in (i) above. Backup withholding is not an additional tax and any
amounts withheld may be credited against the shareholder's federal income tax
liability.
HONG KONG TAX MATTERS. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that the Investment Adviser
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.
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53
Statements detailing the tax status of each shareholders' dividends and
distributions will be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a Fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding federal,
state, local and foreign tax consequences of ownership of shares in a Fund.
ACCOUNT SERVICES
Shareholders of each Fund will be kept informed through semi-annual reports
showing diversification of investments and other financial data for such Fund.
Annual reports for all Funds will include audited financial statements.
Shareholders of each Fund will receive a Statement of Account following each
share transaction, except for shareholders of the Money Market Fund, who will
receive a Statement of Account at least monthly showing transactions in the
account, the total number of shares owned, and any dividends or distributions
paid. Shareholders can write or call a Fund at the address and telephone number
on the front cover of this Prospectus with any questions relating to their
investment in shares of such Fund.
CAPITAL STOCK
The Institutional Series Funds was incorporated in Maryland on January 19, 1996.
The authorized capital stock of the Institutional Series Funds consists of
10,000,000,000 shares of common stock having a par value of $.001 per share.
Pursuant to the Institutional Series Funds' Articles of Incorporation, the Board
of Directors has authorized the issuance of three series of shares, each
representing shares in one of three separate funds. The High Yield Bond Fund,
the Emerging Markets Debt Fund and the Asia Growth Fund are the currently
existing portfolios of the Institutional Series Funds. The assets of each Fund
are segregated and separately managed. The Institutional Series Funds' Board of
Directors may, in the future, authorize the issuance of additional classes of
capital stock representing shares of additional investment portfolios.
The Money Market Fund, a portfolio of Salomon Brothers Series Funds Inc (the
"Series Funds"), changed its name from Salomon Brothers U.S. Treasury Securities
Money Market Fund to its current name on ______, 1996. The Series Funds was
incorporated in Maryland on April 17, 1990. On __________, 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
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54
Fund, Salomon Brothers Cash Management Fund, Salomon Brothers New York Municipal
Bond Fund and Salomon Brothers New York Municipal Money Market Fund. The assets
of each fund are segregated and separately managed. The Series Funds' Board of
Directors may, in the future, authorize the issuance of additional classes of
capital stock representing shares of additional investment portfolios. As of the
date of this Prospectus, Salomon Brothers Holding Company Inc, the parent
company of SBAM, owns a significant percentage of the outstanding shares of the
High Yield Bond Fund, the Emerging Markets Debt Fund and the Asia Growth Fund,
and consequently is a controlling person of such Funds.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in this Prospectus about another Fund.
The Directors of the Institutional Series Funds and the Series Funds have
considered this factor in approving the use of a combined Prospectus.
All shares of each Fund have equal voting rights and will be voted in the
aggregate, and not by series or class, except where voting by series or class is
required by law or where the matter involved affects only one series or class.
Each shareholder is entitled to cast, at all meetings of shareholders, such
number of votes as is equal to the number of full and fractional shares held by
such shareholder. All shares of each Fund will, when issued, be fully paid and
nonassessable. None of the funds will issue any senior securities. Under the
corporate law of Maryland, the state of incorporation of the Institutional
Series Funds and the Series Funds, and the By-Laws of both the Institutional
Series Funds and the Series Funds, neither the Institutional Series Funds nor
the Series Funds is required and does not currently intend to hold annual
meetings of shareholders for the election of directors except as required under
the 1940 Act. A more complete statement of the voting rights of shareholders is
contained in the Statement of Additional Information.
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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 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 in
high degree. Such issues are often in default or have other marked shortcomings.
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A-2
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.
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 regraded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C-Bonds rated "BB", "B", "CCC" and "C" are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI-Bonds rated "CI" are income bonds on which no interest is being paid.
D-Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set both above may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
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A-3
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
PRIME-1-Issuers (or related supporting institutions) rated "Prime-1" have a
superior ability for repayment of senior short-term debt obligations. "Prime-1"
repayment ability will often be evidenced by many of the following
characteristics: leading market positions in well-established industries, high
rates of return on funds employed, conservative capitalization structures with
moderate reliance on debt and ample asset protection, broad margins in earnings
coverage of fixed financial charges and high internal cash generation, and
well-established access to a range of financial markets and assured sources of
alternate liquidity.
PRIME-2-Issuers (or related supporting institutions) rated "Prime-2" have a
strong ability for repayment of senior short-term obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage ratio, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
PRIME-3-Issuers (or related supporting institutions) rated "Prime-3" have an
acceptable ability for repayment of senior short-term obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level of
debt protection measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
NOT PRIME-Issuers rated "Not Prime" do not fall within any of the Prime rating
categories.
STANDARD & POOR'S RATINGS GROUP COMMERCIAL PAPER RATINGS
A-S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A-1-This highest category indicates that the degree of safety regarding timely
payment is strong. Those issues determined to possess extremely strong safety
characteristics are denoted with a plus (+) sign designation.
A-2-Capacity for timely payment on issues with this designation is satisfactory.
However, the relative degree of safety is not as high as for issues designated
"A-1."
A-3-Issues carrying this designation have adequate capacity for timely payment.
They are, however, somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designations.
B-Issues rated "B" are regarded as having only speculative capacity for timely
payment.
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A-4
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.
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.
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A-5
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-1 have a satisfactory capacity to pay principal
and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
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
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A-6
AA categories are not significantly vulnerable to foreseeable future
developments, short-term debt of these issues is generally rated F-1+ by Fitch.
A-Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB-Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position of a
credit within a rating category. Plus and minus signs, however, are not used in
the AAA category.
FITCH SHORT-TERM RATINGS
Fitch short-term ratings apply, to debt obligations that are payable on demand
or have original maturities of, generally, up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1+-Issues assigned this rating are regarded as having the strongest degree of
assurance for timely payment.
F-1-Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2-Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues
assigned F-1+ and F-1 ratings.
F-3-Issues assigned this rating have characteristics suggesting that the degree
of assurance for timely payment is adequate, although near-term adverse changes
could cause these securities to be rated below investment grade.
LOC-The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
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A-7
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 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
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B-2
options are issued by a regulated intermediary such as the Options Clearing
Corporation ("OCC"), which guarantees the performance of the obligations of the
parties to the options. The discussion below uses the OCC as an example, but is
also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or (currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is "in-the-money" (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may coincide with the hours during which
the underlying financial instruments are traded. To the extent that the option
markets close before the markets for the underlying financial instruments,
significant price and rate movements can take place in the underlying markets
that would not be reflected in the corresponding option markets.
Over-the-counter ("OTC") options are purchased from or sold to securities
dealers, financial institutions or other parties (collectively referred to as
"Counterparties" and individually referred to as a "Counterparty") through a
direct bilateral agreement with the Counterparty. In contrast to exchange-listed
options, which generally have standardized terms and performance mechanics, all
the terms of an OTC option, including such terms as method of settlement, term,
exercise price, premium guaranties and security, are determined by negotiation
of the parties. It is anticipated that any Portfolio authorized to use OTC
options will generally only enter into OTC options that have cash settlement
provisions, although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security,
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B-3
currency or other instrument underlying an OTC option it has entered into with
the Fund or fails to make a cash settlement payment due in accordance with the
terms of that option, the Fund will lose any premium it paid for the option as
well as any anticipated benefit of the transaction. Thus, the investment manager
must assess the creditworthiness of each such Counterparty or any guarantor or
credit enhancement of the Counterparty's credit to determine the likelihood that
the terms of the OTC option will be met. A Fund will enter into OTC option
transactions only with U.S. government securities dealers recognized by the
Federal Reserve Bank of New York as "primary dealers," or broker-dealers,
domestic or foreign banks, or other financial institutions that the investment
manager deems to be creditworthy. In the absence of a change in the current
position of the staff of the SEC, OTC options purchased by a Fund and the amount
of a Fund's obligation pursuant to an OTC option sold by the Fund (the cost of
the sell-back plus the in-the-money amount, if any) or the value of the assets
held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the sale of put options can also provide
gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on
U.S. and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
"covered" (that is, the Fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it or against loss, a call sold
by a Fund will expose the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and
indices, (whether or not it holds the securities in its portfolio) and on
securities indices, currencies and futures contracts. In selling put options, a
Fund faces the risk that it may be required to buy the underlying security at a
disadvantageous price above the market price.
A Fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
GENERAL CHARACTERISTICS OF FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
A Fund may trade financial futures contracts or purchase or sell put and call
options on those contracts as a hedge against anticipated interest rate currency
or market changes, and for risk management purposes or a Fund may seek to
increase its income or gain. Futures contracts are generally bought and sold on
the commodities exchange on which they are listed with
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payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the Fund, as seller, to deliver
to the buyer the specific type of financial instrument called for in the
contract at a specific future time for a specified price (or, with respect to
certain instruments, the net cash amount). Options on futures contracts are
similar to options on securities except that an option on a futures contract
gives the purchaser the right, in return for the premium paid, to assume a
position in a futures contract and obligates the seller to deliver that
position.
A Fund's use of financial futures contracts and options thereon will in all
cases be consistent with applicable regulatory requirements and in particular
the rules and regulations of the CFTC. Maintaining a futures contract or selling
an option on a futures contract will typically require the Fund to deposit with
a financial intermediary, as security for its obligations, an amount of cash or
other specified asset ("initial margin") that initially is from 1% to 10% of the
face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ("variation margin") may be required to be deposited
thereafter daily as the mark-to market value of the futures contract fluctuates.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting
futures position just as it would for any futures position. Futures contracts
and options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
A Fund will not enter into a futures contract or option thereon if, immediately
thereafter, the sum of the amount of its initial margin and premiums required to
maintain permissible non-bona fide hedging positions in futures contracts and
options thereon would exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts; however in the case of an option that is in-the-money at the time of
the purchase, the in-the-money amount may be excluded in calculating the 5%
limitation. The value of all futures contracts sold by the Fund (adjusted for
the historical volatility relationship between the Fund and the contracts) will
not exceed the total market value of the Fund's securities. The segregation
requirements with respect to futures contracts and options thereon are described
below under "Use of Segregated and Other Special Accounts."
OPTIONS ON SECURITIES INDICES AND OTHER FINANCIAL INDICES
A Fund may purchase and sell call and put options on securities indices and
other financial indices. In doing so, the Fund can achieve many of the same
objectives it would achieve through the sale or purchase of options on
individual securities or other instruments. Options on securities indices and
other financial indices are similar to options on a security or other instrument
except that, rather than settling by physical delivery of the underlying
instrument, options on indices settle by cash settlement; that is, an option on
an index gives the holder the right to receive, upon exercise of the option, an
amount of cash if the closing level of the index upon which the option is based
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option (except if in the case of an OTC option, physical
<PAGE> 315
B-5
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.
<PAGE> 316
B-6
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.
<PAGE> 317
B-7
Inasmuch as these swaps, caps, floors, collars and other similar types of
instruments are entered into for good faith hedging or other non-speculative
purposes, they do not constitute senior securities under the 1940 Act, and,
thus, will not be treated as being subject to the Fund's applicable borrowing
restrictions. A Fund will not enter into any swap, cap, floor, collar or other
similar type of transaction unless the investment manager deems the Counterparty
to be creditworthy. If a Counterparty defaults, the Fund may have contractual
remedies pursuant to the agreements related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid. Caps, floors and collars are more recent innovations for
which standardized documentation has not yet been fully developed and, for that
reason, they are less liquid than swaps.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the 10% restriction on investment in securities that are not
readily marketable.
A Fund will maintain cash and appropriate liquid assets (i.e., high grade debt
securities) in a segregated custodial account to cover its current obligations
under swap agreements. If a Fund enters into a swap agreement on a net basis, it
will segregate assets with a daily value at least equal to the excess, if any,
of the Fund's accrued obligations under the swap agreement over the accrued
amount the Fund is entitled to receive under the agreement. If a Fund enters
into a swap agreement on other than a net basis, it will segregate assets with a
value equal to the full amount of the Fund's accrued obligations under the
agreement. See "Use of Segregated and Other Special Accounts" below.
RISK FACTORS
Derivatives have special risks associated with them, including possible default
by the Counterparty to the transaction, illiquidity and, to the extent the
investment manager's view as to certain market movements is incorrect, the risk
that the use of the Derivatives could result in losses greater than if they had
not been used. Use of put and call options could result in losses to a Fund,
force the sale or purchase of portfolio securities at inopportune times or for
prices higher than (in the case of put options) or lower than (in the case of
call options) current market values, or cause a Fund to hold a security it might
otherwise sell.
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
<PAGE> 318
B-8
over-the-counter options could have no markets. As a result, in certain markets,
a Fund might not be able to close out a transaction without incurring
substantial losses. Although a Fund's use of futures and options transactions
for hedging should tend to minimize the risk of loss due to a decline in the
value of the hedged position, at the same time it will tend to limit any
potential gain to the Fund that might result from an increase in value of the
position. There is also the risk of loss by a Fund of margin deposits in the
event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when the investment manager deems
it desirable to do so. To the extent a Fund does not, or cannot, terminate such
a transaction in a timely manner, a Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of the
investment manager entering into the transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the mantenance 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.
<PAGE> 319
B-9
RISK OF DERIVATIVES OUTSIDE THE UNITED STATES
When conducted outside the United States, Derivatives may not be regulated as
rigorously as in the United States, may not involve a clearing mechanism and
related guarantees, and will be subject to the risk of governmental actions
affecting trading in, or the prices of, foreign securities, currencies and other
instruments. In addition, the price of any foreign futures or foreign options
contract and, therefore, the potential profit and loss thereon, may be affected
by any variance in the foreign exchange rate between the time an order is placed
and the time it is liquidated, offset or exercised. The value of positions taken
as part of non-U.S. Derivatives also could be adversely affected by: (1) other
complex foreign political, legal and economic factors, (2) lesser availability
of dates on which to make trading decisions than in the United States, (3)
delays in the Fund's ability to act upon economic events occurring in foreign
markets during nonbusiness hours in the United States, (4) the imposition of
different exercise and settlement terms and procedures and margin requirements
than in the United States and (5) lower trading volume and liquidity.
USE OF SEGREGATED AND OTHER SPECIAL ACCOUNTS
Use of many Derivatives by a Fund will require, among other things, that the
Fund segregate cash, liquid high grade debt obligations or other assets with its
custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise "covered" through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of cash or liquid high
grade debt obligations at least equal to the current amount of the obligation
must be segregated with the custodian or sub-custodian. The segregated assets
cannot be sold or transferred unless equivalent assets are substituted in their
place or it is no longer necessary to segregate them. A call option on
securities written by a Fund, for example, will require the Fund to hold the
securities subject to the call (or securities convertible into the needed
securities without additional consideration) or to segregate liquid high grade
debt obligations sufficient to purchase and deliver the securities if the call
is exercised. A call option sold by a Fund on an index will require the Fund to
own portfolio securities that correlate with the index or to segregate liquid
high grade debt obligations equal to the excess of the index value over the
exercise price on a current basis. A put option on securities written by a Fund
will require the Fund to segregate liquid high grade debt obligations equal to
the exercise price. Except when a Fund enters into a forward contract in
connection with the purchase or sale of a security denominated in a foreign
currency or for other non-speculative purposes, which requires no segregation, a
currency contract that obligates the fund to buy or sell a foreign currency will
generally require the Fund to hold an amount of that currency or liquid
securities denominated in that 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,
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B-10
when a Fund sells these instruments it will segregate an amount of assets equal
to its obligations under the Options. OCC-issued and exchange-listed options
sold by a Fund other than those described above generally settle with physical
delivery, and the Fund will segregate an amount of assets equal to the full
value of the option. OTC options settling with physical delivery or with an
election of either physical delivery or cash settlement will be treated the same
as other options settling with physical delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating assets sufficient to meet its obligations to purchase or
provide securities or currencies, or to pay the amount owed at the expiration of
an index-based futures contract. These assets may consist of cash, cash
equivalents, liquid debt or equity securities or other acceptable assets. A Fund
will accrue the net amount of the excess, if any, of its obligations relating to
swaps over its entitlements with respect to each swap on a daily basis and will
segregate with its custodian, or designated sub-custodian, an amount of cash or
liquid high grade debt obligations having an aggregate value equal to at least
the accrued excess. Caps, floors and collars require segregation of assets with
a value equal to the Fund's net obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A Fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related Derivatives.
A Fund could purchase a put option, for example, if the strike price of that
option is the same or higher than the strike price of a put option sold by the
Fund. Moreover, instead of segregating assets if it holds a futures contract or
forward contract, a Fund could purchase a put option on the same futures
contract or forward contract with a strike price as high or higher than the
price of the contract held. Other Derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
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SALOMON BROTHERS INSTITUTIONAL
INVESTMENT SERIES
PROSPECTUS
__________ __, 1996
No dealer, salesman or other person has been authorized to give any information
or to make any representations, other than those contained in this Prospectus
and, if given or made, such other information or representations must not be
relied upon as having been authorized by a Fund, the distributor or the
investment manager. This Prospectus does not constitute an offering in any state
in which such offering may not lawfully be made.
<PAGE> 322
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This statement of additional information shall not constitute an
offer to sell or the solicitation of an offer to buy nor shall there be any sale
of these securities in any State in which such offer, solicitation or sale would
be unlawful prior to registration or qualification under the securities laws of
any such State.
Subject to Completion
Preliminary Statement of Additional Information
dated January 19, 1996
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 World Trade Center
New York, New York 10048
(800) SALOMON
(800) 725-6666
STATEMENT OF ADDITIONAL INFORMATION
Salomon Brothers Institutional Investment Series consists of Salomon
Brothers Institutional Money Market Fund (the "Money Market Fund"), Salomon
Brothers Institutional High Yield Bond Fund (the "High Yield Bond Fund"),
Salomon Brothers Institutional Emerging Markets Debt Fund (the "Emerging
Markets Debt Fund") and Salomon Brothers Institutional Asia Growth Fund (the
"Asia Growth Fund") (each, a "Fund" and collectively, the "Funds"). Each of the
Funds, except the Money Market Fund, is a no-load investment portfolio of
Salomon Brothers Institutional Series Funds Inc, an open-end investment company
incorporated in Maryland on January 19, 1996. 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.
This Statement of Additional Information is not a Prospectus and is
only authorized for distribution when preceded or accompanied by the Prospectus
dated __, 1996 (the "Prospectus"). This Statement of Additional Information
contains additional information to that set forth in the Prospectus and should
be read in conjunction with the Prospectus, additional copies of which may be
obtained without charge by writing or calling the Funds at the address and
telephone number printed above.
___________ __, 1996
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2
Table of Contents
<TABLE>
<CAPTION>
Page
----
<S> <C>
ADDITIONAL INFORMATION ON PORTFOLIO INSTRUMENTS
AND INVESTMENT POLICIES ............................................. 3
INVESTMENT LIMITATIONS .............................................. 20
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION ...................... 23
PORTFOLIO TRANSACTIONS .............................................. 25
MANAGEMENT .......................................................... 27
NET ASSET VALUE ..................................................... 36
ADDITIONAL INFORMATION CONCERNING TAXES ............................. 37
PERFORMANCE DATA .................................................... 43
CAPITAL STOCK ....................................................... 45
CUSTODIAN AND TRANSFER AGENT ........................................ 46
VALIDITY OF SHARES .................................................. 46
INDEPENDENT ACCOUNTANTS ............................................. 47
COUNSEL ............................................................. 47
OTHER INFORMATION ................................................... 47
</TABLE>
<PAGE> 324
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
<PAGE> 325
4
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
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having smaller, emerging capital markets, which may result in a Fund incurring
additional costs and delays in transporting and custodying such securities
outside such countries. Delays in settlement or other problems could result in
periods when assets of a Fund are uninvested and no return is earned thereon.
The inability of a Fund to make intended security purchases due to settlement
problems or the risk of intermediary counterparty failures could cause a Fund to
miss attractive investment opportunities. The inability to dispose of a
portfolio security due to settlement problems could result either in losses to a
Fund due to subsequent declines in the value of such portfolio security or, if
the Fund has entered into a contract to sell the security, could result in
possible liability to the purchaser.
Rules adopted under the 1940 Act permit a Fund to maintain its foreign
securities and cash in the custody of certain eligible non-U.S. banks and
securities depositories. Certain banks in foreign countries may not be eligible
sub-custodians for a Fund, in which event the Fund may be precluded from
purchasing securities in certain foreign countries in which it otherwise would
invest or which may result in the Fund's incurring additional costs and delays
in providing transportation and custody services for such securities outside of
such countries. A Fund may encounter difficulties in effecting on a timely basis
portfolio transactions with respect to any securities of issuers held outside
their countries. Other banks that are eligible foreign sub-custodians may be
recently organized or otherwise lack extensive operating experience. In
addition, in certain countries there may be legal restrictions or limitations on
the ability of a Fund to recover assets held in custody by foreign
sub-custodians in the event of the bankruptcy of the sub-custodian.
BANK OBLIGATIONS
Banks are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments which may be
made and interest rates and fees which may be charged. The profitability of this
industry is largely dependent upon the availability and cost of capital funds
for the purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
Investors should also be aware that securities issued or guaranteed by
foreign banks, foreign branches of U.S. banks, and foreign government and
private issuers may involve investment risks in addition to those relating to
domestic obligations. See "Additional Investment Activities and Risk
Factors--Foreign Securities" in the Prospectus and "--Foreign Securities" above.
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As stated in the Prospectus, bank obligations that may be purchased by
a Fund include certificates of deposit, banker's acceptances and fixed time
deposits. A certificate of deposit is a short-term negotiable certificate issued
by a commercial bank against funds deposited in the bank and is either
interest-bearing or purchased on a discount basis. A bankers' acceptance is a
short-term draft drawn on a commercial bank by a borrower, usually in connection
with an international commercial transaction. The borrower is liable for payment
as is the bank, which unconditionally guarantees to pay the draft at its face
amount on the maturity date. Fixed time deposits are obligations of branches of
U.S. banks or foreign banks which are payable at a stated maturity date and bear
a fixed rate of interest. Although fixed time deposits do not have a market,
there are no contractual restrictions on the right to transfer a beneficial
interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may
be limited to the issuing branch by the terms of the specific obligations or by
government regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
As stated in the Prospectus, certain of the floating or variable rate
obligations that may be purchased by a Fund may carry a demand feature that
would permit the holder to tender them back to the issuer of the instrument or
to a third party at par value prior to maturity. Some of the demand instruments
purchased by the Funds are not traded in a secondary market and derive their
liquidity solely from the ability of the holder to demand repayment from the
issuer or third party providing credit support. If a demand instrument is not
traded in a secondary market, each Fund will nonetheless treat the instrument as
"readily marketable" for the purposes of its investment restriction limiting
investments in illiquid securities unless the demand feature has a notice period
of more than seven days; if the notice period is greater than seven days, the
demand instrument will be characterized as "not readily marketable" for such
purpose.
A Fund's right to obtain payment at par on a demand instrument could be
affected by events occurring between the date such Fund elects to demand payment
and the date payment is due that may affect the ability of the issuer of the
instrument or a third party providing credit support to make payment when due,
except when such demand instruments permit same day settlement. To facilitate
settlement, these same day demand instruments may be held in book entry form at
a bank other than a Fund's custodian subject to a sub-custodian agreement
approved by the Fund between that bank and the Fund's custodian.
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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
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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 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
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
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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 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 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.
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Investors should recognize that Brady Bonds have been issued only
recently, and accordingly do not have a long payment history. Brady Bonds which
have been issued to date are rated in the categories "BB" or "B" by S&P or "Ba"
or "B" by Moody's or, in cases in which a rating by S&P or Moody's has not been
assigned, are generally considered by the investment manager to be of comparable
quality.
Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by a
debtor nation with its creditors. As a result, the financial packages offered by
each country differ. The types of options have included the exchange of
outstanding commercial bank debt for bonds issued at 100% of face value of such
debt which carry a below-market stated rate of interest (generally known as par
bonds), bonds issued at a discount from the face value of such debt (generally
known as discount bonds), bonds bearing an interest rate which increases over
time and bonds issued in exchange for the advancement of new money by existing
lenders. Discount bonds issued to date under the framework of the Brady Plan
have generally borne interest computed semiannually at a rate equal to 13/16 of
one percent above the then current six month LIBOR rate. Regardless of the
stated face amount and stated interest rate of the various types of Brady Bonds,
the applicable Funds will purchase Brady Bonds in secondary markets, as
described below, in which the price and yield to the investor reflect market
conditions at the time of purchase. Brady Bonds issued to date have traded at a
deep discount from their face value. Certain sovereign bonds are entitled to
"value recovery payments" in certain circumstances, which in effect constitute
supplemental interest payments but generally are not collateralized. Certain
Brady Bonds have been collateralized as to principal due at maturity (typically
30 years from the date of issuance) by U.S. Treasury zero coupon bonds with a
maturity equal to the final maturity of such Brady Bonds, although the
collateral is not available to investors until the final maturity of the Brady
Bonds. Collateral purchases are financed by the IMF, the World Bank and the
debtor nations' reserves. In addition, interest payments on certain types of
Brady Bonds may be collateralized by cash or high-grade securities in amounts
that typically represent between 12 and 18 months of interest accruals on these
instruments with the balance of the interest accruals being uncollateralized.
The applicable Funds may purchase Brady Bonds with no or limited
collateralization, and will be relying for payment of interest and (except in
the case of principal collateralized Brady Bonds) principal primarily on the
willingness and ability of the foreign government to make payment in accordance
with the terms of the Brady Bonds. Brady Bonds issued to date are purchased and
sold in secondary markets through U.S. securities dealers and other financial
institutions and are generally maintained through European transnational
securities depositories. A substantial portion of the Brady Bonds and other
sovereign debt securities in which the Fund invests are likely to be acquired at
a discount,
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which involves certain considerations discussed below under "Additional
Information Concerning Taxes."
STRUCTURED INVESTMENTS.
Included among the issuers of emerging market country debt securities
in which the Emerging Markets Debt Fund may invest are entities organized and
operated solely for the purpose of restructuring the investment characteristics
of various securities. These entities are typically organized by investment
banking firms which receive fees in connection with establishing each entity and
arranging for the placement of its securities. This type of restructuring
involves the deposit with or purchase by an entity, such as a corporation or
trust, of specified instruments (such as Brady Bonds) and the issuance by that
entity of one or more classes of securities ("Structured Investments") backed
by, or representing interests in, the underlying instruments. The cash flow on
the underlying instruments may be apportioned among the newly issued Structured
Investments to create securities with different investment characteristics such
as varying maturities, payment priorities or interest rate provisions; the
extent of the payments made with respect to Structured Investments is dependent
on the extent of the cash flow on the underlying instruments. Because Structured
Investments of the type in which the Emerging Markets Debt Fund anticipates
investing typically involve no credit enhancement, their credit risk will
generally be equivalent to that of the underlying instruments.
The Emerging Markets Debt Fund is permitted to invest in a class of
Structured Investments that is either subordinated or unsubordinated to the
right of payment of another class. Subordinated Structured Investments typically
have higher yields and present greater risks than unsubordinated Structured
Investments. Although the Fund's purchase of subordinated Structured Investments
would have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be borrowing for purposes of the
limitations placed on the extent of the Fund's assets that may be used for
borrowing. See "Additional Investment Activities and Risk Factors--Borrowing" in
the Prospectus.
Certain issuers of Structured Investments may be deemed to be
"investment companies" as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act described in the Prospectus under "Additional
Investment Activities and Risk Factors--Investment Funds." Structured
Investments are typically sold in private placement transactions, and there
currently is no active trading market for Structured Investments.
DERIVATIVES
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The description in the Prospectus of each Fund indicates which, if any,
of these types of transactions may be used by that Fund.
FORWARD CURRENCY EXCHANGE CONTRACTS. As indicated in the Prospectus, in
order to hedge against currency exchange rate risks or to increase income,
certain Funds may enter into forward currency exchange contracts with securities
dealers, financial institutions or other parties, through direct bilateral
agreements with such counterparties. A Fund will enter into forward currency
exchange contracts only with counterparties which the investment manager deems
creditworthy. In connection with a Fund's forward currency transactions, the
Fund will set aside in a segregated account with its custodian, cash, cash
equivalents or high quality debt securities in an amount equal to the amount of
the contract, to be used to pay for the commitment. The segregated account will
be marked-to-market on a daily basis. In addition to the circumstances set forth
in the Prospectus, a Fund may enter into forward currency exchange contracts
when the investment manager believes that the currency of a particular country
may suffer a substantial decline against the U.S. dollar. In those
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.
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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 rate from that
specified in the contract. In some (but not many) cases, securities called for
by a futures contract may have a shorter term than the term of the futures
contract and, consequently, may not in fact have been issued when the futures
contract was entered.
OPTIONS. As indicated in the Prospectus, in order to hedge against
adverse market shifts or to increase income, certain Funds may purchase put and
call options or write "covered" put and call options on futures contracts on
stock indices, interest rates and currencies. In addition, in order to hedge
against adverse market shifts or to increase its income, a
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Fund may purchase put and call options and write "covered" put and call options
on stocks, 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
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seek to benefit from a decline in the market price of the underlying investment,
while in purchasing a call option, a Fund will seek to benefit from an increase
in the market price of the underlying investment. If an option purchased is not
sold or exercised when it has remaining value, or if the market price of the
underlying investment remains equal to or greater than the exercise price, in
the case of a put, or remains equal to or below the exercise price, in the case
of a call, during the life of the option, the Fund will lose its investment in
the option. For the purchase of an option to be profitable, the market price of
the underlying investment must decline sufficiently below the exercise price, in
the case of a put, and must increase sufficiently above the exercise price, in
the case of a call, to cover the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a
Fund may purchase a put option in anticipation of a rise in interest rates, and
purchase a call option in anticipation of a fall in interest rates. By writing a
covered call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to
expire or terminate them prior to their expiration by entering into closing
transactions. A Fund may enter into a closing purchase transaction in which the
Fund purchases an option having the same terms as the option it had written or a
closing sale transaction in which the Fund sells an option having the same terms
as the option it had purchased. A covered option writer unable to effect a
closing purchase transaction will not be able to sell the underlying security
until the option expires or the underlying security is delivered upon exercise,
with the result that the writer will be subject to the risk of market decline in
the underlying security during such period. Should a Fund choose to exercise an
option, the Fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain
exceptions, generally settle by physical delivery of the underlying security or
currency, although in the future, cash settlement may become available.
Frequently, rather than taking or making delivery of the underlying instrument
through the process of exercising the option, listed options are closed by
entering into offsetting purchase or sale transactions that do not result in
ownership of the new option. Index options are cash settled for the net amount,
if any, by which the option is "in-the-money" (that is, the amount by which the
value of the underlying instrument exceeds, in the case of a call option, or is
less than, in the case of a put option, the exercise price of the option) at the
time the option is exercised.
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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 income to the Fund. In addition,
the Fund may purchase options on stocks that are traded over-the-counter.
Options on stock indices are similar to options on specific securities. However,
because options on stock indices do not involve the delivery of an underlying
security, the option represents the holder's right to obtain from the writer
cash in an amount equal to a fixed multiple of the amount by which the exercise
price exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying stock index on the exercise date. Currently,
options traded include the Standard & Poor's 100 Index of Composite Stocks,
Standard & Poor's 500 Index of Composite Stocks (the "S&P 500 Index"), the New
York Stock Exchange ("NYSE") Composite Index, the American Stock Exchange
("AMEX") Market Value Index, the National Over-the-Counter Index and other
standard broadly based stock market indices. Options are also traded in certain
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17
industry or market segment indices such as the Oil Index, the Computer
Technology Index and the Transportation Index. Stock index options are subject
to position and exercise limits and other regulations imposed by the exchange on
which they are traded.
If the investment manager expects general stock market prices to rise,
a Fund might purchase a call option on a stock index or a futures contract on
that index as a hedge against an increase in prices of particular equity
securities it wants ultimately to buy. If in fact the stock index does rise, the
price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the value
of the Fund's index option or futures contract resulting from the increase in
the index. If, on the other hand, the investment manager expects general stock
market prices to decline, it might purchase a put option or sell a futures
contract on the index. If that index does in fact decline, the value of some or
all of the equity securities in a Fund's portfolio may also be expected to
decline, but that decrease would be offset in part by the increase in the value
of the Fund's position in such put option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies
traded on domestic and foreign securities exchanges in order to hedge against
currency exchange rate risks or to increase income, as described above in
"Forward Currency Exchange Contracts."
(c) Options on Futures Contracts. A Fund may purchase put and call
options and write covered put and call options on futures contracts on stock
indices, interest rates and currencies traded on domestic and, to the extent
permitted by the CFTC, foreign exchanges, in order to hedge all or a portion of
its investments or to increase income and may enter into closing transactions in
order to terminate existing positions. There is no guarantee that such closing
transactions can be effected. An option on a stock index futures contract,
interest rate futures contract or currency futures contract, as contrasted with
the direct investment in such a contract, gives the purchaser the right, in
return for the premium paid, to assume a position in the underlying contract at
a specified exercise price at any time on or before the expiration date of the
option. Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account. The potential
loss related to the purchase of an option on a futures contract is limited to
the premium paid for the option (plus transaction costs). While the price of the
option is fixed at the point of sale, the value of the option does change daily
and the change would be reflected in the net asset value of the Fund.
<PAGE> 339
18
INTEREST RATE AND EQUITY SWAPS AND RELATED TRANSACTIONS. Certain Funds
may enter into interest rate and equity swaps and may purchase or sell (i.e.,
write) interest rate and equity caps, floors and collars. A Fund expects to
enter into these transactions in order to hedge against either a decline in the
value of the securities included in the Fund's portfolio, or against an increase
in the price of the securities which it plans to purchase, or in order to
preserve or maintain a return or spread on a particular investment or portion of
its portfolio or to achieve a particular return on cash balances, or in order to
increase income. Interest rate and equity swaps involve the exchange by a Fund
with another party of their respective commitments to make or receive payments
based on a notional principal amount. The purchase of an interest rate or equity
cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined level, to receive payments on a contractually-based principal
amount from the party selling the interest rate or equity cap. The purchase of
an interest rate or equity floor entitles the purchaser, to the extent that a
specified index falls below a predetermined rate, to receive payments on a
contractually-based principal amount from the party selling the interest rate or
equity floor. A collar is a combination of a cap and a floor which preserve a
certain return within a predetermined range of values.
A Fund may enter into interest rate and equity swaps, caps, floors and
collars on either an asset-based or liability-based basis, depending on whether
it is hedging its assets or its liabilities, and will usually enter into
interest rate and equity swaps on a net basis (i.e., the two payment streams are
netted out), with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of a Fund's
obligations over its entitlements with respect to each interest rate or equity
swap will be accrued on a daily basis, and an amount of cash and/or liquid high
grade debt securities having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the Fund's
custodian. If a Fund enters into an interest rate or equity swap on other than a
net basis, the Fund will maintain a segregated account in the full amount
accrued on a daily basis of the Fund's obligations with respect to the swap. A
Fund will only enter into interest rate and equity swap, cap, floor or collar
transactions with counterparties the investment manager deems to be
creditworthy. The investment manager will monitor the creditworthiness of
counterparties to its interest rate and equity swap, cap, floor and collar
transactions on an ongoing basis. If there is a default by the other party to
such a transaction, a Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms acting
both as principals and agents utilizing standardized swap documentation. The
investment manager has determined that, as a result, the swap market has become
relatively liquid. Caps,
<PAGE> 340
19
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 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.
<PAGE> 341
20
INVESTMENT LIMITATIONS
Unless otherwise indicated, the investment restrictions described below
as well as those described under "Investment Restrictions" 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 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. 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 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) 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 or with respect to
repurchase agreements collateralized by any of such obligations;
(2) invest more than 10% of the value of its net assets in securities which
are illiquid;
(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
<PAGE> 342
21
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 purpose of exercising control over management of any
company;
(8) 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;
(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 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.
Each of the above restrictions are fundamental policies of the Money
Market Fund. For the purpose of applying the above percentage restrictions and
the percentage investment limitations set forth in the Prospectus to
receivables-backed obligations, both the special purpose entity issuing the
receivables-backed obligations and the issuer of the underlying receivables will
be considered an issuer.
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;
<PAGE> 343
22
(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 and policies, (b) a Fund
may enter into repurchase agreements with respect to portfolio securities,
subject to applicable limitations of its investment policies, (c) a Fund may
lend portfolio securities with a value not in excess of one-third of the value
of its total assets, provided that collateral arrangements with respect to
options, forward currency and futures transactions will not be deemed to involve
loans of securities, and (d) delays in the settlement of securities transactions
will not be considered loans;
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(6) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin payments
in connection with purchases or sales of futures contracts);
(7) sell securities short; provided that short positions in a futures
contract or forward contract are permitted;
(8) purchase or retain any securities of an issuer if one or more
persons affiliated with a Fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning 1/2
of 1% together own beneficially more than 5% of such securities;
(9) invest in oil, gas and other mineral leases, provided, however,
that this shall not prohibit a Fund from purchasing publicly traded securities
of companies engaging in whole or in part in such activities;
(10) with respect to the High Yield Bond Fund only, purchase the
securities of any issuer if by reason thereof the value of its investment in all
securities of that issuer will exceed 5% of the value of its total assets;
<PAGE> 344
23
(11) purchase securities of issuers which it is restricted from selling
to the public without registration under the 1933 Act if by reason thereof the
value of its aggregate investment in such classes of securities will exceed 10%
of its total assets, provided, however, that this limitation shall not apply to
Rule 144A securities;
(12) invest more than 5% of its total assets in securities of
unseasoned issuers (other than securities issued or guaranteed by U.S. federal
or state or foreign governments or agencies, instrumentalities or political
subdivisions thereof) which, including their predecessors, have been in
operation for less than three years;
(13) purchase puts, calls, straddles, spreads and any combination
thereof if by reason thereof the value of its aggregate investment in such
classes of securities will exceed 5% of its total assets; or
(14) invest in warrants (other than warrants acquired by a Fund as part
of a unit or attached to securities at the time of purchase) if, as a result,
the investments (valued at the lower of cost or market) would exceed 5% of the
value of the Fund's net assets or if, as a result, more than 2% of the Fund's
net assets would be invested in warrants that are not listed on AMEX or NYSE.
Investment restrictions (1) through (5) described above are fundamental
policies of each of the High Yield Bond Fund, Emerging Markets Fund and Asia
Growth Fund. Restrictions (6) through (14) are non-fundamental policies of such
Fund.
ADDITIONAL PURCHASE AND REDEMPTION INFORMATION
Certificates representing shares of the Funds will not normally be
issued to shareholders. ______________, 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.
______________ will require that a shareholder provide requests in
writing, accompanied by a valid signature guarantee form, when changing certain
information in an account (i.e., wiring instructions, telephone privileges,
etc.).
If the Board of Directors 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
<PAGE> 345
24
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, Inc. (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 exchange privilege enables shareholders of a Fund to acquire shares
in a Fund with a different investment objective when they believe that a shift
between Funds is an appropriate investment decision. This privilege is available
to shareholders residing in any state in which the Fund shares being acquired
may legally be sold.
Exercise of the exchange privilege is treated as a sale and repurchase
for federal income tax purposes and, depending on the circumstances, a short- or
long-term capital gain or loss may be realized. The price of the shares of the
Fund into which shares are exchanged will be the new cost basis for tax
purposes.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds immediately invested in shares of the Fund being
acquired at a price equal to the then current net asset value of such shares.
All accounts involved in a telephone or telegram exchange must have the
same registration. If a new account is to be established, the dollar amount to
be exchanged must be at least as much as the minimum initial investment of the
Fund whose
<PAGE> 346
25
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.
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
<PAGE> 347
26
transactions to be executed by such broker. While the payment of higher
commissions increases a Fund's costs, the investment manager does not believe
that the receipt of such brokerage and research services significantly reduces
its expenses as a Fund's investment manager. Arrangements for the receipt of
research services from brokers may create conflicts of interest.
Research services furnished to the investment manager by brokers who
effect securities transactions for a Fund may be used by the investment manager
in servicing other investment companies and accounts which it manages.
Similarly, research services furnished to the investment manager by brokers who
effect securities transactions for other investment companies and accounts which
the investment manager manages may be used by the investment manager in
servicing a Fund. Not all of these research services are used by the investment
manager in managing any particular account, including the Funds.
Affiliated persons of a Fund, or affiliated persons of such persons,
may from time to time be selected to execute portfolio transactions for such
Fund. Subject to the considerations discussed above and in accordance with
procedures adopted by 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.
Each Fund's Board of Directors has determined that Salomon Brothers may
execute portfolio transactions for such Fund so long as the Fund is charged
commission rates consistent with those charged by other brokers in comparable
transactions with clients that are comparable to the Fund.
Under the 1940 Act, persons affiliated with a Fund are prohibited from
dealing with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However, a
Fund may purchase securities from underwriting syndicates of which the
investment manager or any of their affiliates (including Salomon Brothers Inc)
is a member under certain conditions, in accordance with the provisions of Rule
10f-3 under the 1940 Act.
<PAGE> 348
27
MANAGEMENT
DIRECTORS AND OFFICERS
The principal occupations of the directors and executive officers of
the Institutional Series Funds and the Series Funds for the past five years are
listed below. Certain of the directors and officers are also directors and
officers of one or more other investment companies for which SBAM acts as
investment manager.
Except as indicated below with respect to non-interested directors and
Mr. Guarnieri, the address of each other director and executive officer is
Salomon Brothers Asset Management Inc, 7 World Trade Center, New York, New York
10048.
<PAGE> 349
28
DIRECTORS
<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 of the
66 Glenwood Drive (Audit Committee Member) Board, ASARCO Incorporated
Greenwich, CT 06830
Age 77
Carol L. Colman Director President, Colman Consulting Co.,
Colman Consulting Co., Inc. (Audit Committee Member) Inc.; formerly Managing Partner of
P.O. Box 212 Inferential Focus
North Salem, NY 10560
Age 48
Daniel P. Cronin Director Vice President and General Counsel,
Pfizer, Inc (Audit Committee Member) Pfizer International Inc since 1987;
253 East 42nd Street Senior Assistant General Counsel,
New York, NY 10017 Pfizer, Inc since 1989
Age 48
Michael S. Hyland*/ Director and President President, SBAM and Managing
Age 50 Director, Salomon Brothers since
1989; formerly Managing Director,
First Boston Asset Management and
Managing Director, The First Boston
Corporation
</TABLE>
[Directors of Institutional Series Funds to be named]
- ----------------------
*/ Interested Person as defined in the 1940 Act.
<PAGE> 350
29
EXECUTIVE OFFICERS OF SERIES FUNDS
<TABLE>
<CAPTION>
Principal
Position(s) Occupation(s)
Name and Address Held Past 5 Years
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Giampaolo G. Guarnieri Executive Vice President Vice President and Portfolio Manager, SBAM
Salomon Brothers Asset AP since April 1995; formerly Senior
Management Asia Portfolio Investment Manager, Credit
Pacific Limited Agricole Asset Management (South East
Three Exchange Square, Asia) Limited since 1992 and head of
Hong Kong direct investment activities from 1990-
Age 32 1992
Steven Guterman Executive Vice President Managing Director, SBAM
Age 42
Nancy Noyes Executive Vice President Director, SBAM and Salomon Brothers Inc
Age 37
Peter J. Wilby Executive Vice President Managing Director, SBAM
Age 37
Richard E. Dahlberg Executive Vice President Managing Director, SBAM since January 1996;
Age 39 formerly Vice President SBAM since
June 1995; prior to that employed by
Massachusetts Financial Services Company
Lawrence H. Kaplan Executive Vice President and Vice President and Chief Counsel, SBAM and
Age 39 General Counsel 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
</TABLE>
<PAGE> 351
30
<TABLE>
<CAPTION>
Principal
Position(s) Occupation(s)
Name and Address Held Past 5 Years
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Alan M. Mandel Treasurer Vice President, SBAM since January 1995;
Age 38 formerly Chief Financial Officer, Hyperion
Capital Management since 1991; prior to
which he was Vice President,
Mitchell Hutchins Asset Management
Tana E. Tselepis Secretary Compliance Officer, SBAM since 1993 and
Age 60 Senior Administrator since 1989; Vice
President, Salomon Brothers since 1991;
formerly Vice President and Senior
Administrator at First Boston Asset
Management Corporation, 1985-1989
Jennifer G. Muzzey Assistant Secretary Employee of SBAM since June 1994; formerly
Age 36 Vice President of SunAmerica Asset
Management Corporation
</TABLE>
[Executive Officers of Institutional Series Fund to be named]
COMPENSATION TABLE
The following tables provide information concerning the compensation
paid during the fiscal year ended December 31, 1995 to each director of the
Series Funds and the estimated compensation expected to be paid to each director
of the Institutional Series Funds for the 1996 fiscal year. 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
<PAGE> 352
31
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 from Total Compensation
Name of Person, the from Other Funds
Position Series Funds Advised by SBAM(A) Total Compensation
--------------- ----------------- ------------------ ------------------
<S> <C>
Charles F. Barber
Director (12)
Daniel P. Cronin
Director (3)
Carol L. Colman
Director (3)
</TABLE>
- -----------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
Institutional Series Funds
<TABLE>
<CAPTION>
Estimated
Aggregate Total
Compensation Compensation
from the from Other Estimated
Name of Person, Institutional Funds Advised Total
Position Series Funds by SBAM(A) Compensation
--------------- ------------- ------------- ------------
<S> <C> <C> <C>
</TABLE>
- -----------------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
Principal Holders of Securities
Salomon Brothers Holding Company 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. As of _____________, held ___% of the
outstanding shares of the Money Market Fund.
<PAGE> 353
32
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.
For the year ended December 31, 1995, such fees and expenses borne by the Series
Funds Fund totaled $_______.
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. The Institutional Series Funds was incorporated on January
__, 1996 and therefore no shares were outstanding as of December 31, 1995.
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, 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, SBAM has retained Salomon
Brothers Asia Pacific Limited as sub-adviser to the Asia Growth Fund. Subject to
the supervision of SBAM, SBAM AP will have responsibility for the day-to-day
management of the Fund's
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33
portfolio. 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 registered as an investment adviser 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 ________, 1996
and the fee increase became effective shortly thereafter. As of the date of
this Statement of Additional Information, SBAM has agreed to reduce or otherwise
limit the expenses of the Fund (exclusive of taxes, interest and extraordinary
expenses such as litigation and indemnification expenses), on an annualized
basis, to .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 $_______
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 .__% of the Fund's average daily net assets.
Effective as of the date of the Prospectus, SBAM has agreed to reduce or
otherwise limit the expenses of the High Yield Bond Fund, Emerging Markets Debt
Fund and the Asia Growth Fund (exclusive of taxes, interest and extraordinary
expenses such as litigation and indemnification expenses) on an annualized
basis, to .55%, .75% and .__%, respectively, of the applicable Fund's average
daily net assets. See "Fee Table" in the Prospectus. SBAM AP is compensated by
SBAM at no additional expense to the Asia Growth Fund at an annual rate of ___%
of the Asia Growth Fund's daily 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 __________, 1996 and by the
sole shareholder of each Fund, SBAM, on __________, 1996. The management
contract for each Fund provides that it will continue automatically for
successive annual periods
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34
provided that such continuance is approved at least annually (a) by the vote of
a majority of the directors not parties to the management contract or interested
persons of such parties, which votes are cast in person at a meeting called for
the purpose of voting on such management contract and (b) either by the Board of
Directors or a majority of the outstanding voting securities. Each management
contract may be terminated by either party on 60 days' written notice, and will
terminate immediately in the event of its assignment.
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 Fund wil 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
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35
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 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
Each Fund employs _______, under its applicable administration
agreement to provide certain administrative services to the respective Fund. The
services provided by ________ 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. ___________ is
located at ___________. For the fiscal year ended December 31, 1995, Investors
Bank and Trust Company received fees totaling $________ from the Money Market
Fund for services as administered to that 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
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36
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 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 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 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
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37
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 Money Market Fund has established
procedures 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.
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.
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38
Each Fund intends to qualify and elect to be treated as a regulated
investment company ("RIC") under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code").
Qualification as a RIC requires, among other things, that a Fund: (a)
derive at least 90% of its gross income in each taxable year from dividends,
interest, payments with respect to securities loans and gains from the sale or
other disposition of stock or securities, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; (b) derive less than 30% of
its gross income in each taxable year from the sale or other disposition of any
of the following held for less than three months: stock, securities, and certain
options, futures or forward contracts; and (c) diversify its holdings so that,
at the end of each quarter of each taxable year, (i) at least 50% of the market
value of a Fund's assets is represented by cash, cash items, United States
government securities, securities of other regulated investment companies and
other securities with such other securities limited, in respect of any one
issuer, to an amount not greater than 5% of the value of a Fund's assets and 10%
of the outstanding voting securities of such issuer, and (ii) not more than 25%
of the value of its assets is invested in the securities of any one issuer
(other than United States government securities or the securities of other
regulated investment companies).
As a RIC, a Fund will not be subject to Federal income tax on its net
investment income (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and "net capital gains" (the excess of the Funds net long-term capital
gains over net short-term capital losses), if any, that it distributes in each
taxable year to its shareholders, provided that the Fund distributes at least
90% of its net investment income for such taxable year. However, a Fund would be
subject to corporate income tax (currently at a maximum rate of 35%) on any
undistributed net investment income and net capital gains. Each Fund expects to
designate amounts retained as undistributed net capital gains in a notice to its
shareholders who (i) will be required to include in income for United States
federal income tax purposes, as long-term capital gains, their proportionate
shares of the undistributed amount, (ii) will be entitled to credit their
proportionate shares of the 35% tax paid by a Fund on the undistributed amount,
against their federal income tax liabilities and to claim refunds to the extent
such credits exceed their liabilities and (iii) will be entitled to increase
their tax basis, for federal income tax purposes, in their shares by an amount
equal to 65% of the amount of undistributed net capital gains included in the
shareholder's income.
A Fund will be subject to a nondeductible 4% excise tax to the extent
that it does not distribute by the end of each calendar year: (a) at least 98%
of its ordinary income for such
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39
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 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
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40
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
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.
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41
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 potion 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
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42
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.
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
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43
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.
AVERAGE ANNUAL TOTAL RETURN
A Fund's "average annual total return" figures, as described and shown
in the Prospectus, are computed according to a formula prescribed by the SEC.
The formula can be expressed as follows:
P(1+T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at
the beginning of a 1, 5, or 10 year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
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44
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.
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 __% and __%, respectively.
In periods of declining interest rates the Money Market Fund's yield
will tend to be somewhat higher than prevailing market rates on short-term
obligations, and in periods of rising interest rates the Fund's yield will tend
to be somewhat lower. Also, when interest rates are falling, the inflow of net
new
<PAGE> 366
45
money to the Money Market Fund from the continuous sale of shares will likely be
invested in portfolio instruments producing lower yields than the balance of the
Fund's portfolio, thereby reducing the Fund's current yield. In periods of
rising interest rates, the opposite can be expected to occur.
Any quotation of performance stated in terms of yield will be given no
greater prominence than the information prescribed under SEC rules. In addition,
all advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Advertisements and communications may compare a Fund's performance with
that of other mutual funds, as reported by Lipper Analytical Services, Inc. or
similar independent services or financial publications. From time to time,
advertisements and other Fund materials and communications may cite statistics
to reflect a Fund's performance over time utilizing comparisons to indices.
A Fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of Fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in Fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
Fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any Fund.
CAPITAL STOCK
As used in the Prospectus and this Statement of Additional Information,
the term "majority", when referring to the approvals to be obtained from
shareholders in connection with matters affecting a particular Fund or any other
single portfolio (e.g., approval of investment management contracts), means the
vote of the lesser of (i) 67% of the shares of the portfolio represented at a
meeting if the holders of more than 50% of the outstanding shares of the
portfolio are present in person or by proxy or (ii) more than 50% of the
outstanding shares of the portfolio. Shareholders are entitled to one vote for
each full share held and fractional votes for fractional shares held.
Each share of a Fund is entitled to such dividends and distributions
out of the income earned on the assets belonging to
<PAGE> 367
46
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
_________________, which is located at _______________________________,
serves as custodian and transfer agent for each Fund. As each Fund's custodian,
____________________ among other things, maintains a custody account or accounts
in the name of the Fund; receives and delivers all assets for the Fund upon
purchase and upon sale or maturity; collects and receives all income and other
payments and distributions on account of the assets of the Fund; and makes
disbursements on behalf of the Fund. The custodian does not determine the
investment policies of a Fund, nor decides which securities a Fund will buy or
sell. For its services as custodian, _________________ 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 hedging transactions. As each
Fund's transfer agent, ___________ registers and processes transfer 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, _______________
receives a monthly fee.
VALIDITY OF SHARES
The validity of the shares will be passed upon for the Company by Piper
and Marbury L.L.P., Baltimore, Maryland.
<PAGE> 368
47
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.
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> 369
84
FINANCIAL STATEMENTS
<PAGE> 370
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT PURCHASE* DATE (NOTE 1a)
- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
COMMERCIAL PAPER-36.5%
$ 700,000 American Express Credit Corporation ....................... 5.80% 01/03/95 $ 699,774
595,000 Fairfax County, Virginia Economic
Development Agency ...................................... 6.25 01/12/95 595,000
800,000 General Mills ............................................. 5.97 01/03/95 799,735
500,000 Gillette Company .......................................... 5.70 01/03/95 499,842
700,000 Goldman Sachs Group ....................................... 5.95 01/09/95 699,074
500,000 Idaho Housing Agency ...................................... 5.60 01/05/95 499,689
500,000 Koch Industries ........................................... 5.90 01/03/95 499,836
500,000 Merrill Lynch ............................................. 5.80 01/03/95 499,839
600,000 Methodist Hospital ........................................ 5.75 01/06/95 600,000
500,000 Quaker Oats Company ....................................... 6.18 01/04/95 499,509
500,000 Smith Barney .............................................. 5.45 01/06/95 499,621
600,000 Sunshine State Governmental Financing
Commission, Florida ..................................... 6.33 01/17/95 598,313
-----------
TOTAL COMMERCIAL PAPER (cost $6,990,232) ......................................... 6,990,232
-----------
FLOATING RATE NOTES-32.5%
600,000 Community Health Systems, VR .............................. 6.40 01/04/95 600,000
500,000 Florida State Housing Finance Agency VR ................... 6.10 01/04/95 500,000
610,000 Fulton County, New York
Industrial Development Agency VR ........................ 6.35 01/05/95 610,000
500,000 Health Insurance Plan, Greater New York VR ................ 6.45 01/04/95 500,000
500,000 Illinois Student Assistance Commission VR ................. 6.17 01/04/95 500,000
315,000 New Jersey,
Economic Development Authority VR ....................... 6.41 01/03/95 315,000
285,000 New Jersey,
Economic Development Authority VR ....................... 6.29 01/03/95 285,000
400,000 New York, New York
Industrial Development Agency VR ........................ 6.30 01/04/95 400,000
200,000 New York, New York
Industrial Development Agency VR ........................ 6.30 01/04/95 200,000
500,000 Pasadena, California
Certificates of Participation VR ........................ 6.30 01/03/95 500,000
500,000 Selma, Alabama
Industrial Development Board VR ......................... 6.56 01/10/95 500,000
600,000 Tyler, Texas
Health Facilities Development VR ........................ 6.40 01/04/95 600,000
700,000 Virginia State,
Housing Development Authority VR ........................ 6.75 01/03/95 700,000
-----------
TOTAL FLOATING RATE NOTES (cost $6,210,000) ...................................... 6,210,000
-----------
</TABLE>
<PAGE> 371
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE OF MATURITY VALUE
AMOUNT PURCHASE* DATE (NOTE 1a)
- --------- ---------- -------- ---------
<S> <C> <C> <C> <C>
SHORT-TERM BONDS-7.6%
$ 700,000 Metro Pier & Export Authority, MBIA ....................... 5.50% 06/15/95 $ 700,000
750,000 Richmond County, Georgia
Development Authority PUT ............................... 5.71 06/01/95 750,000
-----------
TOTAL SHORT-TERM BONDS (cost $1,450,000) ......................................... 1,450,000
-----------
REPURCHASE AGREEMENT-18.5%
3,530,399 J.P. Morgan Securities, dated 12/30/94, with a
maturity value of $3,532,478, collateralized
by $3,727,000 U.S. Treasury Note, 5.625%,
due 8/31/97, valued at $3,671,095
(cost $3,530,399) ....................................... 5.30 01/03/95 3,530,399
-----------
TOTAL INVESTMENTS-95.1% OF NET ASSETS
(cost $18,180,631) ............................................................. $18,180,631
===========
</TABLE>
------------
*Yield to maturity on date of purchase, except in the case of
Variable Rate Demand Notes (VR), whose yields are determined on
date of the last interest rate change. For Variable Rate
Demand Notes, maturity date shown is the date of next interest
rate change.
Abbreviations used in this statement:
MBIA Insured as to principal and interest by the Municipal Bond
Investors Assurance Corporation.
PUT Optional or mandatory put. Maturity date shown is the put
date as well as the date of next interest rate change.
See accompanying notes to financial statements.
<PAGE> 372
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS CASH MANAGEMENT FUND
DECEMBER 31, 1994
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $14,650,232) ............................................... $14,650,232
Repurchase Agreement .................................................................. 3,530,399
Receivable for Fund shares sold ....................................................... 1,136,727
Interest receivable ................................................................... 46,104
Unamortized organization expenses ..................................................... 9,071
-----------
Total assets ...................................................................... 19,372,533
-----------
LIABILITIES
Payable for Fund shares redeemed ...................................................... 208,949
Dividend payable ...................................................................... 17,659
Accrued expenses ...................................................................... 19,109
-----------
Total liabilities ................................................................. 245,717
-----------
NET ASSETS (equivalent to $1.00 per share on 19,128,930 shares of $.001 par value
capital stock outstanding; 1,333,333,334 shares authorized) ....................... $19,126,816
===========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
INCOME
Interest .............................................................................. $ 640,634
EXPENSES
Management fee .............................................................. $ 29,088
Registration and filing fees ................................................ 17,044
Amortization of organization expenses ....................................... 12,000
Administration fee .......................................................... 11,635
Custodian ................................................................... 9,800
Shareholder services ........................................................ 9,642
Legal ....................................................................... 8,961
Audit and tax return preparation fees ....................................... 8,007
Printing .................................................................... 7,249
Directors' fees ............................................................. 2,713
Other ....................................................................... 2,279
-------
118,418
Management fee waived ....................................................... (29,088) 89,330
------- -----------
Net investment income ................................................................. 551,304
Net realized loss on securities sold .................................................. (415)
-----------
Net increase in net assets resulting from operations .................................. $ 550,889
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 373
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS CASH MANAGEMENT FUND
<TABLE>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993
----------- -----------
<S> <C> <C>
OPERATIONS
Net investment income ...................................................... $ 551,304 $ 346,089
Net realized loss on securities sold ....................................... (415) (257)
----------- -----------
Net increase in net assets resulting from operations ....................... 550,889 345,832
----------- -----------
DIVIDENDS FROM NET INVESTMENT INCOME ....................................... (551,304) (346,089)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares .............................................. 75,796,036 80,014,866
Net asset value of shares issued in reinvestment of dividends .............. 401,895 215,401
Payment for redemption of shares ........................................... (72,120,070) (76,793,905)
----------- -----------
Net increase in net assets resulting from capital share transactions ....... 4,077,861 3,436,362
----------- -----------
Total increase in net assets ............................................... 4,077,446 3,436,105
NET ASSETS
Beginning of year .......................................................... 15,049,370 11,613,265
----------- -----------
End of year ................................................................ $19,126,816 $15,049,370
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990*
------ ------ ------ ------ ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ........................................ $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income ............................ .038+ .027+ .033+ .055+ .019+
Dividends from net investment
income ......................................... (.038) (.027) (.033) (.055) (.019)
------ ------ ------ ------ ------
Net asset value, end of period ................... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period
(thousands) .................................... $19,127 $15,049 $11,613 $22,982 $10,293
Total investment return .......................... +3.9% +2.7% +3.4% +5.7% +1.9%
Ratios to average net assets:
Expenses ..................................... 0.61%+ 0.65%+ 0.65%+ 0.65%+ 0.65%**+
Net investment income ........................ 3.79% 2.68% 3.41% 5.43% 7.46%**
</TABLE>
- ------------
*October 2, 1990, commencement of operations, through December 31, 1990.
**Annualized.
+Net investment income would have been $.036, $.025, $.030, $.053 and $.018
and the expense ratios would have been .81%, .85%, .85%, .85% and .97%,
respectively, for the periods ended December 31, 1994, 1993, 1992, 1991 and
1990 before waiver of management fee and/or expenses absorbed by Salomon
Brothers Asset Management Inc ("SBAM").
See accompanying notes to financial statements.
<PAGE> 374
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK-100.1%
$2,745,000 Albany County, New York
Industrial Development Agency PUT ....................... 4.65% 08/15/95 $ 2,745,000
3,300,000 Albany County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 3,300,000
1,210,000 Albany County, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 1,210,000
875,000 Albany County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 875,000
2,540,000 Albany, New York
Industrial Development Agency PUT ....................... 4.25 07/01/95 2,540,000
1,169,000 Albany, New York
Housing Authority VR .................................... 3.80 01/03/95 1,169,000
3,015,000 Amherst, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 3,015,000
400,000 Amherst, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 400,000
950,000 Auburn, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 950,000
1,175,000 Babylon, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,175,000
2,350,000 Broome County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 2,350,000
650,000 Broome County, New York
Industrial Development Agency VR ........................ 4.90 01/04/95 650,000
2,450,000 Chautaugua County, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 2,450,000
3,760,000 Colonie, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 3,760,000
630,000 Colonie, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 630,000
750,000 Colonie, New York
Housing Development Corporation VR ...................... 3.80 01/04/95 750,000
2,000,000 Dutchess County, New York
Industrial Development Agency VR ........................ 5.10 01/05/95 2,000,000
1,400,000 Dutchess County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,400,000
500,000 Erie County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 500,000
</TABLE>
<PAGE> 375
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 450,800 Erie County, New York
Industrial Development Agency VR ........................ 5.85% 01/05/95 $ 450,800
590,000 Erie County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 590,000
1,240,000 Erie County, New York
Industrial Development Agency,
Series B VR ............................................. 5.85 01/05/95 1,240,000
1,330,000 Fulton County, New York
Industrial Development Agency PUT ....................... 5.00 12/01/95 1,330,000
1,910,000 Fulton County, New York
Industrial Development Agency VR ........................ 5.35 01/05/95 1,910,000
800,000 Lewis County, New York
Industrial Development Agency VR ........................ 5.40 01/04/95 800,000
6,500,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.75 01/04/95 6,500,000
250,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 250,000
3,325,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.40 01/05/95 3,325,000
2,050,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 2,050,000
4,825,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 4,825,000
1,950,000 Monroe County, New York
Industrial Development Agency PUT ....................... 4.60 06/01/95 1,950,000
1,005,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,005,000
1,620,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,620,000
2,550,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 2,550,000
700,000 Monroe County, New York
Industrial Development Agency PUT ....................... 4.40 06/15/95 700,000
1,700,000 Monroe County, New York
Industrial Development Agency VR ........................ 5.85 01/04/95 1,700,000
7,000,000 Nassau County, New York
Series B TAN ............................................ 4.50 03/15/95 7,003,445
</TABLE>
<PAGE> 376
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ -------- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$10,000,000 Nassau County, New York
Series A RAN ............................................ 4.00% 04/14/95 $ 10,010,978
7,685,000 Nassau County, New York
Series D BAN ............................................ 5.00 08/15/95 7,724,341
10,000,000 Nassau County, New York
Series C TAN ............................................ 5.40 09/28/95 10,021,311
1,230,000 Nassau County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,230,000
1,100,000 New York State, Environment
Facilities Corporation VR ............................... 6.10 01/03/95 1,100,000
4,400,000 New York State,
Energy Research & Development TECP ...................... 4.50 01/03/95 4,400,000
1,915,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 1,915,000
110,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 110,000
115,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 115,000
1,035,000 New York State,
Job Development Authority VR ............................ 3.75 01/03/95 1,035,000
85,000 New York State,
Job Development Authority VR ............................ 3.85 01/03/95 85,000
535,000 New York State,
Job Development Authority VR ............................ 3.85 01/03/95 535,000
7,100,000 New York State,
Housing Finance Agency VR ............................... 5.50 01/04/95 7,100,000
500,000 New York State,
Energy Research & Development VR ........................ 3.55 01/03/95 500,000
3,400,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 3,400,000
2,600,000 New York State,
Local Government Assistance
Corporation VR .......................................... 5.10 01/04/95 2,600,000
7,600,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 7,600,000
300,000 New York State,
Energy Research & Development VR ........................ 5.00 01/03/95 300,000
1,200,000 New York State, Dormitory Authority VR .................... 4.80 01/04/95 1,200,000
16,235,000 New York State, Dormitory Authority
TECP .................................................... 4.25 01/09/95 16,235,000
</TABLE>
<PAGE> 377
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$3,000,000 New York State,
Dormitory Authority TECP ............................. 4.00% 01/10/95 $ 3,000,000
1,500,000 New York State, Medical Care Facility
Finance Agency FHA P/R ............................... 2.65-2.70 01/15/95 1,533,960
3,675,000 New York, New York
Series A RAN ......................................... 4.50 04/12/95 3,681,833
4,000,000 New York, New York
Series B RAN ......................................... 4.75 06/30/95 4,013,121
860,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 860,000
1,600,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 1,600,000
230,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 230,000
1,255,000 New York, New York
Industrial Development Agency VR ..................... 5.85 01/05/95 1,255,000
475,000 New York, New York
Industrial Development Agency VR ..................... 5.80 01/05/95 475,000
700,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 700,000
2,400,000 New York, New York
Industrial Development Agency VR ..................... 5.40 01/04/95 2,400,000
3,000,000 New York, New York
Industrial Development Agency VR ..................... 5.25 01/05/95 3,000,000
1,765,000 New York, New York
Industrial Development Agency VR ..................... 5.95 01/05/95 1,765,000
300,000 New York, New York
Industrial Development Agency VR ..................... 5.35 01/04/95 300,000
4,500,000 New York, New York
Industrial Development Agency VR ..................... 5.15 01/03/95 4,500,000
2,000,000 New York, New York
Industrial Development Agency VR ..................... 4.80 01/04/95 2,000,000
16,000,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 16,000,000
1,900,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 1,900,000
2,000,000 New York, New York
Housing Development Corporation VR ................... 6.00 01/05/95 2,000,000
6,600,000 New York, New York
Housing Development Corporation VR ................... 5.40 01/04/95 6,600,000
</TABLE>
<PAGE> 378
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$3,000,000 New York, New York
Housing Development Corporation VR ...................... 5.75% 01/04/95 $ 3,000,000
1,700,000 New York, New York Series A VR ............................ 6.00 01/03/95 1,700,000
2,000,000 New York, New York VR ..................................... 6.50 01/03/95 2,000,000
400,000 New York, New York VR ..................................... 6.00 01/03/95 400,000
600,000 New York, New York VR ..................................... 6.00 01/03/95 600,000
1,500,000 New York, New York VR ..................................... 6.00 01/03/95 1,500,000
3,350,000 New York, New York VR ..................................... 6.05 01/03/95 3,350,000
5,000,000 New York, New York
Municipal Water TECP .................................... 4.50 01/06/95 5,000,000
100,000 New York City
Trust for Cultural Resources VR ......................... 5.00 01/04/95 100,000
1,000,000 New York, New York Water Authority VR ..................... 6.00 01/03/95 1,000,000
3,600,000 Newburgh, New York
Industrial Development Agency VR ........................ 5.30 01/04/95 3,600,000
3,090,000 Niagara County, New York
Industrial Development Agency VR ........................ 5.65 01/04/95 3,090,000
1,250,000 Niagara County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,250,000
3,500,000 Onondaga County, New York
Industrial Development Agency,
Series B VR ............................................. 5.60 01/04/95 3,500,000
1,300,000 Onondaga County, New York
Industrial Development Agency,
Series 1989 VR .......................................... 5.60 01/04/95 1,300,000
3,100,000 Onondaga County, New York
Industrial Development Agency VR ........................ 5.50 01/05/95 3,100,000
379,000 Oneida County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 379,000
400,000 Port Authority,
New York & New Jersey VR ................................ 5.40 01/03/95 400,000
1,690,000 Rockland County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,690,000
1,800,000 Rockland County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,800,000
1,010,000 Saratoga County, New York
Industrial Development Agency VR ........................ 5.95 01/05/95 1,010,000
430,000 Schoharie County, New York
Industrial Development Agency VR ........................ 5.75 01/05/95 430,000
</TABLE>
<PAGE> 379
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT MUNICIPAL BONDS AND NOTES (CONTINUED) OF PURCHASE* DATE (NOTE 1a)
- --------- ------------ ---- ---------
<S> <C> <C> <C> <C>
NEW YORK (CONTINUED)
$ 80,000 St. Lawrence County, New York
Industrial Development Agency VR ........................ 5.75% 01/04/95 $ 80,000
8,000,000 Suffolk County, New York
Water Authority VR ...................................... 4.85 01/04/95 8,000,000
1,930,000 Suffolk County, New York
Industrial Development Agency VR ........................ 5.50 01/04/95 1,930,000
3,000,000 Suffolk County, New York
Industrial Development Agency VR ........................ 5.25 01/04/95 3,000,000
500,000 Suffolk County, New York
Industrial Development Agency VR ........................ 4.85 01/04/95 500,000
3,550,000 Syracuse, New York
Industrial Development Agency VR ........................ 5.85 01/04/95 3,550,000
1,550,000 Syracuse, New York
Industrial Development Agency PUT ....................... 4.40 06/15/95 1,550,000
725,000 Wyoming County, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 725,000
1,580,000 Yates County, New York
Industrial Development Agency VR ........................ 5.35 01/05/95 1,580,000
1,000,000 Yonkers, New York
Industrial Development Agency VR ........................ 5.95 01/03/95 1,000,000
1,230,000 Yonkers, New York
Industrial Development Agency VR ........................ 5.85 01/05/95 1,230,000
------------
TOTAL INVESTMENTS-100.1% OF NET ASSETS
(cost $270,042,789) ............................................................ $270,042,789
============
</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.
Abbreviations used in this statement:
BAN Bond Anticipation Note
FHA Mortgage Insured by Federal Housing Administration
RAN Revenue Anticipation Note
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
VR Variable Rate Demand Note. Maturity date shown is the date
of next interest rate change
See accompanying notes to financial statements.
<PAGE> 380
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investments at value (cost $270,042,789) .............................................. $270,042,789
Cash .................................................................................. 38,083
Receivable for securities sold ........................................................ 30,000
Receivable for Fund shares sold ....................................................... 1,749,838
Interest receivable ................................................................... 1,458,308
Unamortized organization expenses ..................................................... 9,071
------------
Total assets ...................................................................... 273,328,089
------------
LIABILITIES
Payable for Fund shares redeemed ...................................................... 3,408,802
Dividend payable ...................................................................... 16,954
Management fee payable ................................................................ 40,457
Accrued expenses ...................................................................... 73,881
------------
Total liabilities ................................................................. 3,540,094
------------
NET ASSETS equivalent to $1.00 per share on 270,044,096 shares of $.001 par
value capital stock outstanding; 3,333,333,333 shares authorized) ................... $269,787,995
============
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<S> <C> <C>
INCOME
Interest ................................................................... $ 7,132,055
EXPENSES
Management fee ............................................................. $468,902
Administration fee ......................................................... 190,022
Shareholder services ....................................................... 114,737
Audit and tax return preparation fee ....................................... 49,325
Legal ...................................................................... 45,727
Custodian .................................................................. 36,572
Printing ................................................................... 29,876
Amortization of organization expenses ...................................... 11,968
Registration and filing fees ............................................... 7,330
Directors' fees ............................................................ 2,714
Other ...................................................................... 13,928 971,101
-------- ------------
Net investment income ................................................................. 6,160,954
Net realized loss on securities sold .................................................. (65,622)
------------
Net increase in net assets resulting from operations .................................. $ 6,095,332
============
</TABLE>
See accompanying notes to financial statements.
<PAGE> 381
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993
------------- ------------
<S> <C> <C>
OPERATIONS
Net investment income .................................................. $ 6,160,954 $ 5,102,444
Net realized gain (loss) on securities sold ............................ (65,622) 49,102
------------ ------------
Net increase in net assets resulting from operations ................... 6,095,332 5,151,546
------------ ------------
DIVIDENDS FROM NET INVESTMENT INCOME ................................... (6,160,954) (5,102,444)
------------ ------------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares .......................................... 424,692,601 516,356,557
Net asset value of shares issued in reinvestment of dividends .......... 5,955,238 4,803,596
Payment for redemption of shares ....................................... (423,206,832) (522,482,028)
------------ ------------
Net change in net assets resulting from capital share transactions ..... 7,441,007 (1,321,875)
------------ ------------
Total change in net assets ............................................. 7,375,385 (1,272,773)
NET ASSETS
Beginning of year ...................................................... 262,412,610 263,685,383
------------ ------------
End of year ............................................................ $269,787,995 $262,412,610
============ ============
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
---------------------------------------------- DECEMBER 31,
1994 1993 1992 1991 1990*
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of
period ................................ $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income ................... .027 .023 .031 .047 .014(D)
Dividends from net investment
income ................................ (.027) (.023) (.031) (.047) (.014)
------ ------ ------ ------ ------
Net asset value, end of period .......... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period
(thousands) ........................... $269,788 $262,413 $263,685 $154,782 $34,529
Total investment return ................. +2.7% +2.3% +3.1% +4.8% +1.4%
Ratios to average net assets:
Expenses ............................ .41% .41% .42% .60% .64%**+
Net investment income ............... 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 would have been $.012, and the expense ratio would
have been 1.23% for the period ended December 31, 1990 before waiver of
management fee and expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 382
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS U.S. TREASURY SECURITIES
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<CAPTION>
YIELD TO
MATURITY
PRINCIPAL ON DATE MATURITY VALUE
AMOUNT OF PURCHASE DATE (NOTE 1a)
- -------- ----------- ---- --------
<S> <C> <C> <C> <C>
U.S. TREASURY BILLS-103.8%
$8,049,000 U.S. Treasury Bill ....... 4.71% 02/02/95 $ 8,015,302
807,000 U.S. Treasury Bill ....... 4.65 02/09/95 802,935
3,260,000 U.S. Treasury Bill ....... 4.87 02/09/95 3,242,801
3,667,000 U.S. Treasury Bill ....... 5.20 02/09/95 3,646,342
2,200,000 U.S. Treasury Bill ....... 5.22 02/09/95 2,187,559
5,000,000 U.S. Treasury Bill ....... 5.33 03/09/95 4,950,401
6,000,000 U.S. Treasury Bill ....... 5.77 05/18/95 5,868,256
------------
28,713,596
------------
TOTAL U.S. TREASURY BILLS
(cost $28,713,596) ............................... 28,713,596
------------
TOTAL INVESTMENTS-103.8% OF NET ASSETS .............. $28,713,596
===========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 383
STATEMENT OF ASSETS AND LIABILITIES SALOMON BROTHERS U.S. TREASURY SECURITIES
DECEMBER 31, 1994 MONEY MARKET FUND
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $28,713,596) ........................ $28,713,596
Cash ............................................................ 8
Receivable for Fund shares sold ................................. 23,658
Unamortized organization expenses ............................... 11,241
-----------
Total assets ................................................ 28,748,503
-----------
LIABILITIES
Payable for Fund shares redeemed ................................ 1,052,863
Dividend payable ................................................ 14,563
Management fee payable .......................................... 2,203
Accrued expenses ................................................ 12,184
-----------
Total liabilities ........................................... 1,081,813
-----------
NET ASSETS (equivalent to $1.00 per share on 27,720,532
shares of $.001 par value capital stock outstanding;
2,000,000,000 shares authorized) .............................. $27,666,690
===========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
INCOME
Interest ............................................... $1,177,203
EXPENSES
Management fee ......................................... $29,658
Administration fee ..................................... 23,727
Registration and filing fees ........................... 12,960
Shareholder services ................................... 12,852
Amortization of organization expenses .................. 12,000
Custodian .............................................. 10,997
Printing ............................................... 8,873
Audit and tax return preparation fees .................. 7,850
Legal .................................................. 5,309
Directors' fees ........................................ 2,713
Other .................................................. 5,015 131,954
------- ----------
Net investment income ........................................... 1,045,249
Net realized loss on securities sold ............................ (2,037)
----------
Net increase in net assets resulting from operations ............ $1,043,212
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 384
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS U.S. TREASURY SECURITIES
MONEY MARKET FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1994 1993
---------- -----------
<S> <C> <C>
OPERATIONS
Net investment income ................................................ $ 1,045,249 $ 1,135,069
Net realized loss on securities sold ................................. (2,037) (4,000)
----------- -----------
Net increase in net assets resulting from operations ................. 1,043,212 1,131,069
----------- -----------
DIVIDENDS FROM NET INVESTMENT INCOME ................................. (1,045,249) (1,135,069)
----------- -----------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of shares ........................................ 127,781,043 78,899,102
Net asset value of shares issued in reinvestment of dividends ........ 881,270 963,319
Payment for redemption of shares ..................................... (135,113,944) (96,292,490)
----------- -----------
Net decrease in net assets resulting from capital share transactions . (6,451,631) (16,430,069)
----------- -----------
Total decrease in net assets ......................................... (6,453,668) (16,434,069)
NET ASSETS
Beginning of year .................................................... 34,120,358 50,554,427
----------- -----------
End of year .......................................................... $27,666,690 $34,120,358
=========== ===========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, PERIOD ENDED
------------------------------------------------ DECEMBER 31,
1994 1993 1992 1991 1990*
-------- -------- -------- -------- ------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $1.000 $1.000 $1.000 $1.000 $1.000
------ ------ ------ ------ ------
Net investment income .............. .036 .028 .034 (.054)+ .005+
Dividends from net investment
income ............................ (.036) (.028) (.034) (.054) (.005)
------ ------ ------ ------ ------
Net asset value, end of period ..... $1.000 $1.000 $1.000 $1.000 $1.000
====== ====== ====== ====== ======
Net assets end of period (thousands) $27,667 $34,120 $50,554 $35,414 $4,596
Total investment return ............ +3.6% +2.9% +3.4% +5.5% +0.5%
Ratios to average net assets:
Expenses ....................... .45% .35% .44% .54%+ .74%**+
Net investment income .......... 3.53% 2.83% 3.42% 5.23% 6.45%**
</TABLE>
- ---------
*December 7, 1990, commencement of operations, through December 31, 1990.
**Annualized.
+Net investment income would have been $.052 and $.004, and the expense
ratios would have been .64% and 1.72%, respectively, for the years ended
December 31, 1991 and December 31, 1990 before waiver of management fee and
expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 385
PORTFOLIO OF INVESTMENTS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<CAPTION>
MOODY'S/S&P
PRINCIPAL CREDIT VALUE
AMOUNT MUNICIPAL SECURITIES RATING (NOTE 1a)
- --------- ---------- ---------
<S> <C> <C> <C>
NEW YORK-84.4%
$ 110,000 Metropolitan Transportation Authority New York
6.50%, 07/01/16 ............................... Baa1/BBB $ 102,320
120,000 Metropolitan Transportation Authority
5.75%, 07/01/15 ............................... Baa1/BBB 102,068
300,000 New York City Health & Hospital Corporation
6.30%, 02/15/20 ............................... Baa/BBB 267,855
300,000 New York Municipal Water Finance Authority
6.00%, 06/15/17 ............................... A/A- 270,648
100,000 New York State, Medical Care Finance Agency
6.00%, 02/15/11 ............................... Baa1/BBB+ 89,701
250,000 New York State, Local Government Assistance
6.00%, 04/01/18 ............................... A/A 226,500
100,000 New York State,
Dormitory Authority 5.75%, 07/01/18 ........... Baa1/BBB 84,873
315,000 New York State,
Dormitory Authority 6.00%, 05/15/17 ........... Baa1/BBB+ 276,088
55,000 New York State,
Dormitory Authority 6.00%, 07/01/16 ........... Baa1/BBB 48,379
250,000 New York State,
Thruway Authority Services 6.00%, 04/01/10 .... Baa1/BBB 231,608
100,000 New York State, Urban Development 5.50%, 01/01/18 Baa1/BBB 81,029
300,000 New York, New York 6.75%, 10/01/17 .............. Baa1/A- 284,952
300,000 New York, New York 7.375%, 08/15/13 ............. Baa1/A- 305,469
250,000 Onondaga County, New York Industrial Development
Agency 6.625%, 01/01/18 ....................... Baa/BBB 222,215
250,000 Port Authority of New York & New Jersey
6.00%, 01/15/28 ................................ A1/AA- 220,554
---------
TOTAL NEW YORK (COST $3,077,171) ................ 2,814,259
---------
PUERTO RICO-22.7%
250,000 Commonwealth of Puerto Rico 6.00%, 07/01/14 ..... Baa1/A 229,075
250,000 Puerto Rico, Commonwealth Highway Authority
6.00%, 07/01/20 ................................ Baa1/A 223,170
325,000 Puerto Rico,
Electric Power Authority 6.00%, 07/01/10 ....... Baa1/A- 302,972
---------
TOTAL PUERTO RICO (COST $823,516) .......................... 755,217
---------
TOTAL INVESTMENTS-107.1% OF NET ASSETS
(cost $3,900,687) ....................................... $3,569,476
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 386
STATEMENT OF ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<S> <C>
ASSETS
Investments, at value (cost $3,900,687) ........................ $3,569,476
Cash ........................................................... 18,145
Receivable from SBAM ........................................... 12,085
Interest receivable ............................................ 82,108
Unamortized organization expenses .............................. 41,896
----------
Total assets .............................................. 3,723,710
----------
LIABILITIES
Payable for Fund shares redeemed .............................. 359,878
Dividend payable................................................ 23,550
Accrued expenses ............................................... 6,852
----------
Total liabilities ......................................... 390,280
----------
NET ASSETS (equivalent to $8.98 per share on 371,007 shares
of $.001 par value capital stock outstanding;
3,333,333,333 shares authorized) .............................. $3,333,430
==========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1994
<TABLE>
<S> <C> <C>
INCOME
Interest ............................................. $ 453,076
EXPENSES
Management fee ....................................... $ 36,428
Amortization of organization expenses ................ 14,001
Printing ............................................. 7,817
Shareholder services ................................. 6,017
Administration fee ................................... 5,825
Audit and tax return preparation fees ................ 5,620
Directors' fees ...................................... 2,714
Registration and filing fees ......................... 1,208
Legal ................................................ 1,099
Custodian ............................................ 147
Other ................................................ 4,065
--------
84,941
Management fee waived and expenses absorbed by SBAM .. (48,513) 36,428
-------- ----------
Net investment income ................................ 416,648
----------
NET REALIZED LOSS ON SECURITIES SOLD ................. (552,459)
----------
NET UNREALIZED APPRECIATION (DEPRECIATION) OF
INVESTMENTS
Beginning of year .................................... 304,835
End of year .......................................... (331,211)
--------
Decrease in net unrealized appreciation ........................ (636,046)
----------
Net realized loss and decrease in net unrealized appreciation .. (1,188,505)
----------
Net decrease in net assets resulting from operations ........... $ (771,857)
==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 387
STATEMENT OF CHANGES IN NET ASSETS SALOMON BROTHERS NEW YORK MUNICIPAL
DECEMBER 31, 1994 BOND FUND
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993
----------- ------------
<S> <C> <C>
OPERATIONS
Net investment income $ 416,648 $ 327,999
Net realized gain (loss) on securities sold and futures transactions ............. (552,459) 9,043
Change in net unrealized appreciation ............................................ (636,046) 304,835
--------- ---------
Net change in net assets resulting from operations ............................... (771,857) 641,877
--------- ---------
DIVIDENDS TO SHAREHOLDERS FROM
Net investment income ............................................................ (416,648) (327,999)
Net realized gain on securities sold and futures ................................. - (15,783)
--------- ---------
(416,648) (343,782)
--------- ---------
CAPITAL SHARE TRANSACTIONS
Proceeds from sales of 194,976 and 985,472 shares, respectively .................. 1,960,677 9,956,475
Net asset value of 40,650 and 27,528 shares, respectively, issued in
reinvestment of dividends ...................................................... 390,961 283,762
Payment for redemption of 665,997 and 211,632 shares, respectively ............... (6,193,972) (2,174,163)
--------- ---------
Net change in net assets resulting from capital share transactions representing
a net decrease of 430,371 and a net increase of 801,368 shares,
respectively ................................................................... (3,842,334) 8,066,074
--------- ---------
Total change in net assets ....................................................... (5,030,839) 8,364,169
NET ASSETS
Beginning of year ................................................................ 8,364,269 100
--------- ---------
End of year ...................................................................... $3,333,430 $8,364,269
========== ==========
</TABLE>
FINANCIAL HIGHLIGHTS
SELECTED DATA PER SHARE OF CAPITAL STOCK OUTSTANDING
THROUGHOUT EACH PERIOD:
<TABLE>
<CAPTION>
YEAR ENDED PERIOD ENDED
DECEMBER 31, DECEMBER 31,
1994 1993*
----------- ------------
<S> <C> <C>
Net asset value, beginning of period ............................................. $10.44 $10.00
------ ------
Net investment income ............................................................ .55+ .46+
Net gains (losses) on securities and futures (both realized and unrealized) ...... (1.46) .46
------ ------
Total from investment operations ................................................. (.91) .92
------ ------
Dividends from net investment income ............................................. (.55) (.46)
Distibutions from net realized gain on securities and futures .................... - (.02)
------ ------
Total dividends and distributions ................................................ (.55) (.48)
------ ------
Net asset value, end of period ................................................... $ 8.98 $10.44
====== ======
Net assets end of period (thousands) ............................................. $3,333 $8,364
Total investment return .......................................................... -8.8%** +9.4%**
Ratios to average net assets:
Expenses ....................................................................... .50%+ .50%***+
Net investment income .......................................................... 5.72% 4.99%***
Portfolio turnover rate .......................................................... 63% 24%
</TABLE>
- ----------
*February 1, 1993, commencement of operations, through December 31, 1993.
**Dividends are declared daily and paid the first day of the following month in
which declared. For the purpose of the total return calculation, the
reinvestment is assumed using the end of month net asset value per share.
***Annualized.
+Net investment income would have been $.49 and $.40, and the expense ratios
would have been 1.17% and 1.24% for the year ended December 31, 1994 and the
period ended December 31, 1993, respectively, before waiver of management fee
and expenses absorbed by SBAM.
See accompanying notes to financial statements.
<PAGE> 388
NOTES TO FINANCIAL STATEMENTS SALOMON BROTHERS SERIES FUNDS INC
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 comprising three money market portfolios
(individually, the "Fund"): Salomon Brothers Cash Management Fund (the "Cash
Fund"), Salomon Brothers New York Municipal Money Market Fund (the "Municipal
Fund") and Salomon Brothers U.S. Treasury Securities Money Market Fund (the
"U.S. Treasury Fund"); and one long-term bond portfolio, Salomon Brothers New
York Municipal Bond Fund (the "Bond Fund").
Certain costs incurred in connection with the Company's organization, which
were payable to Salomon Brothers Asset Management Inc ("SBAM") have been
deferred and are being amortized by the Company over a 60 month period from the
date each Fund commenced operations. In the event that any of the 100,000 shares
purchased by SBAM on September 27, 1990 (the "Initial Shares") are redeemed
during the amortization period by any holder thereof, the Company will be
reimbursed by SBAM for any remaining unamortized costs in the same proportion as
the number of Initial Shares redeemed bears to the total number of Initial
Shares outstanding at the time of redemption.
Following is a summary of significant accounting policies followed by the
Company in the preparation of its financial statements. The policies are in
conformity with generally accepted accounting principles.
(a) Securities Valuation. Portfolio securities for the money market fund
portfolios 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.
For the Bond Fund, portfolio securities are valued by using either
market quotations or independent pricing services which use prices provided
by market-makers or estimates of market values obtained from yield data
relating to instruments or securities with similar characteristics.
Securities for which reliable quotations or prices from pricing services are
not readily available and all other assets will be valued at their
respective fair value as determined in good faith by, or under procedures
established by, the Board of Directors.
Short-term securities, held by the Bond Fund, with less than 60 days
remaining to maturity when acquired by the Fund will be valued at amortized
cost which approximates market value. If the Fund acquires such securities
with more than 60 days remaining to maturity, they will be valued at current
market value (using the bid price) until the 60th day prior to maturity, and
will then be valued on an amortized cost basis.
(b) Futures Contracts. The Bond Fund may use futures contracts, which
involves paying or receiving variation margin, which will be recorded as
unrealized gain or loss until the contract is closed, at such time, a
realized gain or loss will be recognized. Outstanding contracts involve
elements of market risk in excess of amounts reported in the financial
statements.
(c) 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> 389
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
(d) Dividends. Dividends on the shares of each Fund are declared each
business day to shareholders of record that day, and for the Cash Fund,
Municipal Fund and U.S. Treasury Fund, paid on the last day of the month.
For the Bond Fund, dividends are paid the first day of the month following
that in which the dividends have been declared. Distributions of net
realized gains to shareholders, if any, are declared annually and recorded
on the ex-dividend date.
(e) Expenses. Direct expenses are charged to the Fund that incurred
them, and general expenses are allocated to the Funds based on each Fund's
relative average net assets for the period.
(f) Other. Investment transactions are recorded as of the trade date.
Interest income, including the amortization of discounts or 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 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 Cash Fund and
the Municipal Fund, .10% for the U.S. Treasury Fund and .50% for the Bond Fund.
For the year ended December 31, 1994, SBAM waived its management fees of $29,088
and $36,428 for the Cash Fund and Bond Fund, respectively, and voluntarily
absorbed $12,085 of expenses for the Bond Fund.
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, 1994.
At December 31, 1994, the Bond Fund has a receivable from SBAM of $12,085
relating to expenses voluntarily absorbed by SBAM.
As of December 1, 1994, Investors Bank and Trust Company ("IBT") serves as
the Company's custodian and administrator. IBT performs custodial and certain
administrative services in connection with the operation of the Company. Prior
to December 1, 1994, administrative services were provided by The Shareholder
Services Group, Inc. ("TSSG") and custodial services were provided by Boston
Safe Deposit and Trust Company. TSSG continues to serve as the Company's
transfer and shareholder services agent.
Each Fund has an agreement with Salomon Brothers Inc to distribute its
shares.
<PAGE> 390
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
3. CAPITAL STOCK
At December 31, 1994, the Company had 10,000,000,000 shares of authorized
capital stock, par value $.001 per share.
The authorized shares are allocated as follows: Cash Fund-1,333,333,334
shares, Municipal Fund-3,333,333,333 shares, U.S. Treasury Fund-2,000,000,000
shares and Bond Fund-3,333,333,333 shares.
<TABLE>
<CAPTION>
Net assets consist of:
CASH FUND MUNICIPAL FUND U.S. TREASURY FUND BOND FUND
--------- -------------- ------------------ ---------
<S> <C> <C> <C> <C>
Par value .......................... $ 19,129 $ 270,044 $ 27,721 $ 371
Paid-in capital in excess of par ... 19,109,801 269,774,052 27,692,811 4,222,749
Accumulated net realized loss on
investments ....................... (2,114) (256,101) (53,842) (558,479)
Net unrealized depreciation ........ - - - (331,211)
----------- ------------ ------------ ----------
Net assets ......................... $19,126,816 $269,787,995 $27,666,690 $3,333,430
=========== ============ =========== ==========
</TABLE>
4. PORTFOLIO ACTIVITY
The Cash Fund and Municipal Fund invest 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 Municipal Fund and the Bond Fund each pursue their
investment objectives by investing at least 65% of their 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 Municipal Fund and
the Bond Fund invest primarily in obligations of the State and City of New York,
they are more susceptible to factors adversely affecting issuers of such
obligations than a fund that is more diversified.
When entering into repurchase agreements, it is the Company's policy to
take possession, through its custodian, of the underlying collateral and to
monitor the collateral value at the time the agreement is entered into and at
all times during the term of the repurchase agreement to ensure that such
collateral always equals or exceeds the repurchase price plus accrued interest.
In the event of default of the obligation to repurchase, the Company has the
right to liquidate the collateral and apply the proceeds in satisfaction of the
obligation. Under certain circumstances, in the event of default or bankruptcy
by the other party to the agreement, realization and/or retention of the
collateral may be subject to legal proceedings.
At December 31, 1994, the Cash Fund, Municipal Fund, U.S. Treasury Fund and
Bond Fund had net capital loss carryovers available to offset future capital
gains as follows:
<TABLE>
<CAPTION>
YEAR OF
EXPIRATION CASH FUND MUNICIPAL FUND U.S. TREASURY FUND BOND FUND
- ---------- --------- -------------- ------------------ ---------
<S> <C> <C> <C> <C>
1999 .......... $ 894 $ 94,844 - -
2000 .......... 396 94,778 $48,666 -
2001 .......... 409 - 4,363 -
2002 .......... 415 65,321 2,005 $305,822
------ -------- ------- --------
$2,114 $254,943 $55,034 $305,822
====== ======== ======= ========
</TABLE>
<PAGE> 391
NOTES TO FINANCIAL STATEMENTS (CONTINUED) SALOMON BROTHERS SERIES FUNDS INC
At December 31, 1994, as permitted under Federal income tax regulations,
the Municipal Fund, U.S. Treasury Fund and the Bond Fund have elected to defer
$301, $32 and $252,597, respectively, of Post-October losses to the next taxable
year.
The Bond Fund's cost of securities for Federal income tax purposes is the
same as for financial statement purposes, which amounted to $3,900,687. As of
December 31, 1994, total unrealized appreciation and depreciation, based on cost
for Federal income tax purposes, amounted to $12,169 and $343,380, respectively,
resulting in net unrealized depreciation of $331,211. Cost of securities
purchased and proceeds from securities sold (other than short-term investments)
during the year ended December 31, 1994 aggregated $4,451,411 and $8,247,502,
respectively.
5. SUBSEQUENT EVENT
Subsequent to December 31, 1994, the Company implemented a multiple class
pricing system with respect to the Cash Fund and the Bond Fund. In connection
with such implementation, the Fund designated all outstanding shares of the Cash
Fund and the Bond Fund as Class O shares, added four new portfolios, The
National Intermediate Municipal Fund, The U.S. Government Income Fund, The High
Yield Bond Fund and The Strategic Bond Fund and created three new classes of
shares designated Class A, Class B and Class C shares. Each of the new classes
of shares has its own distribution plan and sales charge structure.
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF
SALOMON BROTHERS SERIES FUNDS INC
In our opinion, the accompanying statements of assets and liabilities,
including the portfolios of investments, and the related statements of
operations and of changes in net assets and the financial highlights present
fairly, in all material respects, the financial position of Salomon Brothers
Cash Management Fund, Salomon Brothers New York Municipal Money Market Fund,
Salomon Brothers U.S. Treasury Securities Money Market Fund and Salomon
Brothers New York Municipal Bond Fund (constituting Salomon Brothers Series
Funds Inc, hereafter referred to as the "Fund") at December 31, 1994, 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 (for
Salomon Brothers New York Municipal Bond Fund, for the year ended December 31,
1994 and the period from February 1, 1993 (commencement of operations) through
December 31, 1993) and the financial highlights for each of the periods
indicated, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
December 31, 1994 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
February 27, 1995
<PAGE> 392
SALOMON BROTHERS SERIES FUNDS INC
PART C. OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements included in Part A:
For the Salomon Brothers New York Municipal Money Market Fund, Salomon
Brothers U.S. Treasury Securities Money Market Fund, Salomon Brothers Cash
Management Fund, Salomon Brothers New York Municipal Bond Fund, the Salomon
Brothers National Intermediate Municipal Fund, Salomon Brothers U.S.
Government Income Fund, the Salomon Brothers High Yield Bond Fund, Salomon
Brothers Strategic Bond Fund, Salomon Brothers Total Return Fund and
Salomon Brothers Investors Fund Inc:
Selected Per Share Data and Ratios for the specified periods for each Fund
are presented under the heading "Financial Highlights" in the Prospectus
Financial Statements included in Part B:
(i) Salomon Brothers Series Funds Inc
Audited
For Salomon Brothers Cash Management Fund, Salomon Brothers New York Municipal
Money Market Fund, Salomon Brothers U.S. Treasury Securities Money Market Fund
and Salomon Brothers New York Municipal Bond Fund:
Portfolio of Investments at December 31, 1994
Statement of Assets and Liabilities at December 31, 1994
Statement of Operations for the year ended December 31, 1994
Statement of Changes in Net Assets for the years ended December 31,
1994 and 1993
Financial Highlights for the years ended December 31, 1994, 1993, 1992
and 1991 and the period from October 2, 1990 (commencement of
operations) through December 31, 1990 (for the Cash Management Fund and
New York Municipal Money Market Fund)
Financial Highlights for the years ended December 31, 1994, 1993, 1992
and 1991 and for the period from December 7, 1990 (commencement of
operations) through December 31, 1990 (for the U.S. Treasury Securities
Money Market Fund)
C-1
<PAGE> 393
Financial Highlights for the years ended December 31, 1994 and 1993
(for the Salomon Brothers New York Municipal Bond Fund)
Notes to Financial Statements for Salomon Brothers Series Funds Inc
Report of Independent Accountants
For Salomon Brothers Total Return Fund:
Statement of Assets and Liabilities at July 13, 1995
Notes to Financial Statement
Report of Independent Accountants
Unaudited
For Salomon Brothers Total Return Fund
Portfolio of Investments at December 31, 1995 (unaudited)
Statement of Assets and Liabilities at December 31, 1995 (unaudited)
Statement of Operations for the period from September 11, 1995
(commencement of operations) through December 31, 1995 (unaudited)
Statement of Changes in Net Assets for the period from September 11, 1995
(commencement of operations) through December 31, 1995 (unaudited)
Financial Highlights for the period from September 11, 1995 (commencement
of operations) through December 31, 1995 (unaudited)
(ii) Salomon Brothers Investors Fund Inc:
Audited
Statement of Net Assets at December 31, 1994
Statement of Operations for the year ended December 31, 1994
Statement of Changes in Net Assets for the years ended December 31, 1994
and 1993
Notes to Financial Statements for Salomon Brothers Investors Fund Inc
Report of Independent Accountants
(b) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1(a) -- Articles of Incorporation of Registrant (filed as Exhibit 1 to the
Registration Statement on Form N-1A (File Nos. 33-34423 and
811-06087) and incorporated herein by reference).
1(b) -- Articles Supplementary (filed as Exhibit 1(b) to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A and
incorporated herein by reference).
</TABLE>
C-2
<PAGE> 394
<TABLE>
<S> <C>
1(c) -- Articles Supplementary (filed as Exhibit 1(c) to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A and
incorporated herein by reference).
1(d) -- Form of Registrant's Articles of Amendment (filed as Exhibit 1(d) to
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
1(e) -- Form of Articles Supplementary (filed as Exhibit 1(e) to
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
1(f) -- Form of Articles Supplementary (filed as Exhibit 1(f) to
Post-Effective Amendment No. 15 to the Registration Statement on
Form N-1A and incorporated herein by reference).
1(g) -- Form of Articles Supplementary.
2(a) -- Registrant's By-Laws (filed as Exhibit 2 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and
incorporated herein by reference).
3 -- None.
4(a) -- Form of Stock Certificate for shares of Class A Stock (filed as
Exhibit 4(a) to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and
incorporated herein by reference).
4(b) -- Form of Stock Certificate for shares of Class B Stock (filed as
Exhibit 4(b) to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and
incorporated herein by reference).
4(c) -- Form of Stock Certificate for shares of Class C Stock (filed as
Exhibit 4(c) to Post-Effective Amendment No. 2 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and
incorporated herein by reference).
4(d) -- Form of Stock Certificate for shares of Class D Stock (filed as
Exhibit 4(d) to Post-Effective Amendment No. 6 to the Registration
Statement on Form N-1A and incorporated herein by reference).
4(e) -- Forms of Specimen Stock Certificates: for Cash Management Fund - A,
New York Municipal Bond Fund - A, National Intermediate Municipal
Fund - A, U.S.
</TABLE>
C-3
<PAGE> 395
<TABLE>
<S> <C>
Government Income Fund - A, High Yield Bond Fund - A, Strategic
Bond Fund - A, Cash Management Fund - B, New York Municipal Bond
Fund - B, National Intermediate Municipal Fund - B, U.S. Government
Income Fund - B, High Yield Bond Fund - B, Strategic Bond Fund - B,
Cash Management Fund - C, New York Municipal Bond Fund - C, National
Intermediate Municipal Fund - C, U.S. Government Income Fund - C,
High Yield Bond Fund - C and Strategic Bond Fund - C, Cash
Management Fund - O, New York Municipal Bond Fund - O, National
Intermediate Municipal Fund - O, U.S. Government Income Fund - O,
High Yield Bond Fund - O, Strategic Bond Fund - O (filed as Exhibit
4(e) to Post-Effective Amendment No. 12 to the Registration
Statement on Form N-1A and incorporated herein by reference).
4(f) -- Forms of Specimen Stock Certificates for Total Return Fund - A,
Total Return Fund - B, Total Return Fund - C and Total Return Fund -
O (filed as Exhibit 4(f) to Post-Effective Amendment No. 15 to the
Registration Statement on Form N-1A and incorporated herein by
reference).
4(g) -- Forms of Specimen Stock Certificates for Asia Growth Fund - A, Asia
Growth Fund - B, Asia Growth Fund - C and Asia Growth Fund - O.*
4(h) -- Form of Specimen Stock Certificate for Salomon Brothers
Institutional Money Market Fund.*
5(a) -- Management Contract between Registrant and Salomon Brothers Asset
Management Inc dated September 27, 1990 relating to the Salomon
Brothers Cash Management Fund and the Salomon Brothers New York
Municipal Money Market Fund (filed as Exhibit 5(a) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(b) -- Management Contract between Registrant and Salomon Brothers Asset
Management Inc dated December 7, 1990 relating to the Salomon
Brothers U.S. Treasury Securities Money Market Fund (filed as
Exhibit 5 to Post-Effective Amendment No. 5 to the Registration
Statement on Form N-1A and incorporated herein by reference).
5(c) -- Management Contract between Registrant and Salomon Brothers Asset
Management Inc dated December 8, 1992 relating to the Salomon
Brothers New York Municipal Bond Fund (filed as Exhibit 5(c) to
Post-Effective Amendment No. 7 to the Registration Statement on Form
N-1A and incorporated herein by reference).
</TABLE>
- -------------
* To be filed by amendment.
C-4
<PAGE> 396
<TABLE>
<S> <C>
5(d) -- Form of Management Contract between Registrant and Salomon Brothers
Asset Management Inc relating to the Salomon Brothers National
Intermediate Municipal Fund (filed as Exhibit 5(d) to Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(e) -- Form of Management Contract between Registrant and Salomon Brothers
Asset Management Inc relating to the Salomon Brothers U.S.
Government Income Fund (filed as Exhibit 5(e) to Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
5(f) -- Form of Management Contract between Registrant and Salomon Brothers
Asset Management Inc relating to the Salomon Brothers High Yield
Bond Fund (filed as Exhibit 5(f) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A and incorporated herein
by reference).
5(g) -- Form of Management Contract between Registrant and Salomon Brothers
Asset Management Inc relating to the Salomon Brothers Strategic Bond
Fund (filed as Exhibit 5(g) to Post-Effective Amendment No. 12 to
the Registration Statement on Form N-1A and incorporated herein by
reference).
5(h) -- Form of Subadvisory Consulting Agreement between Salomon Brothers
Asset Management Inc and Salomon Brothers Asset Management Limited
relating to the Strategic Bond Fund (filed as Exhibit 5(h) to
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
5(i) -- Form of Management Contract between Registrant and Salomon Brothers
Asset Management Inc relating to the Salomon Brothers Total Return
Fund (filed as Exhibit 5(i) to Post-Effective Amendment No. 15 to
the Registration Statement on Form N-1A and incorporated herein by
reference).
5(j) -- Form of Management Contract between Registrant and Salomon Brothers
Asset Management Inc relating to the Salomon Brothers Asia Growth
Fund.*
5(k) -- Form of Sub-advisory Contract between Salomon Brothers Asset
Management Inc and Salomon Brothers Asset Management Asia Pacific
Limited relating to the Salomon Brothers Asia Growth Fund.*
6(a) -- Distribution Agreement between Registrant and Salomon Brothers Inc
dated September 27, 1990 (filed as Exhibit
</TABLE>
- -------------
* To be filed by amendment.
C-5
<PAGE> 397
<TABLE>
<S> <C>
6 to Post-Effective Amendment No. 5 to the Registration Statement on
Form N-1A and incorporated herein by reference).
6(b) -- Distribution Agreement between Registrant and Salomon Brothers Inc
dated December 7, 1990 relating to the Salomon Brothers U.S.
Treasury Money Market Fund (filed as Exhibit 6 to Post-Effective
Amendment No. 5 on Form N-1A and incorporated herein by reference).
6(c) -- Distribution Agreement between Registrant and Salomon Brothers Inc
dated December 8, 1992 relating to the New York Municipal Bond Fund
(filed as Exhibit 6(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A and incorporated herein by
reference).
6(d) -- Distribution Agreement between Registrant and AMT Capital Services,
Inc. dated June 18, 1993 relating to the Salomon Brothers New York
Municipal Money Market Fund and the Salomon Brothers New York
Municipal Bond Fund (filed as Exhibit 6(d) to Post-Effective
Amendment No. 8 to the Registration Statement on Form N-1A and
incorporated herein by reference).
6(e) -- Form of Distribution Agreement between Registrant and Salomon
Brothers Inc relating to Salomon Brothers National Intermediate
Municipal Fund, Salomon Brothers U.S. Government Income Fund,
Salomon Brothers High Yield Bond Fund and Salomon Brothers Strategic
Bond Fund (filed as Exhibit 6(e) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A and incorporated herein
by reference).
6(f) -- Form of Distribution Agreement between Registrant and Salomon
Brothers Inc relating to Salomon Brothers Total Return Fund (filed
as Exhibit 6(f) to Post-Effective Amendment No. 15 to the
Registration Statement on Form N-1A and incorporated herein by
reference).
6(g) -- Form of Distribution Agreement between Registrant and Salomon
Brothers Inc relating to Salomon Brothers Asia Growth Fund.*
7 -- None.
8(a) -- Custody Agreement between Registrant and Boston Safe Deposit and
Trust Company (filed as Exhibit 8 to Post-Effective Amendment No. 4
to the Registration Statement on Form N-1A (File Nos. 33-34423 and
811-06087) and incorporated herein by reference).
</TABLE>
- -------------
* To be filed by amendment.
C-6
<PAGE> 398
<TABLE>
<S> <C>
8(b) -- Form of Custodian Agreement between Registrant and Investors Bank &
Trust Company (filed as Exhibit 8(b) to Post-Effective Amendment No.
12 to the Registration Statement on Form N-1A and incorporated
herein by reference).
9(a) -- Transfer Agency Agreement between Registrant and The Shareholder
Services Group, Inc. (filed as Exhibit 9(a) to Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A and
incorporated herein by reference).
9(b) -- Administration Agreement between Registrant and The Boston Company
Advisors, Inc. (filed as Exhibit 9(a) to Post-Effective Amendment
No. 4 to the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
9(c) -- Form of Administration Agreement between Registrant and Investors
Bank & Trust Company (filed as Exhibit 9(c) to Post-Effective
Amendment No. 12 to the Registration Statement on Form N-1A and
incorporated herein by reference).
9(d) -- Form of Amendment to Transfer Agency Agreement between Registrant
and The Shareholders Services Group, Inc (filed as Exhibit 9(d) to
Post-Effective Amendment No. 12 to the Registration Statement on
Form N-1A and incorporated herein by reference).
10 -- Opinion and Consent of Counsel of Piper & Marbury, LLP as to the
Legality of Securities Being Registered.*
11 -- Consents of Independent Accountants.
12 -- None.
13(a) -- Share Purchase Agreement (filed as Exhibit 13 to Post-Effective
Amendment No. 5 to the Registration Statement on Form N-1A (File
Nos. 33-34423 and 811-06087) and incorporated herein by reference).
13(b) -- Form of Share Purchase Agreement relating to Salomon Brothers New
York Municipal Bond Fund, Salomon Brothers National Intermediate
Municipal Fund, Salomon Brothers U.S. Government Income Fund,
Salomon Brothers High Yield Bond Fund and the Strategic Bond Fund
(filed as Exhibit 13(b) to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A and incorporated herein by
reference).
</TABLE>
- -------------
* To be filed by amendment.
C-7
<PAGE> 399
<TABLE>
<S> <C>
13(c) -- Form of Share Purchase Agreement Relating to Salomon Brothers Total
Return Fund (filed as Exhibit 13(c) to Post-Effective Amendment No.
15 to the Registration Statement on Form N-1A and incorporated
herein by reference).
13(d) -- Form of Share Purchase Agreement Relating to Salomon Brothers Asia
Growth Fund.*
14 -- None.
15(a) -- Form of Services and Distribution Plan for Salomon Brothers New York
Municipal Bond Fund, Salomon Brothers National Intermediate
Municipal Fund, Salomon Brothers U.S. Government Income Fund,
Salomon Brothers High Yield Bond Fund and Salomon Brothers Strategic
Bond Fund (filed as Exhibit 15(a) to Post-Effective Amendment No. 12
to the Registration Statement on Form N-1A and incorporated herein
by reference).
15(b) -- Form of Services and Distribution Plan for Salomon Brothers Total
Return Fund (filed as Exhibit 15(b) to Post-Effective Amendment No.
15 to the Registration Statement on Form N-1A and incorporated
herein by reference).
15(c) -- Form of Services and Distribution Plan for Salomon Brothers Asia
Growth Fund.*
16(a) -- Performance Data (filed as Exhibit 16 to Post-Effective Amendment
No. 4 to the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
16(b) -- Schedule of Performance Data for Class A, Class B, Class C and
Class O Shares for Salomon Brothers New York Municipal Bond Fund
(filed as Exhibit 16(b) to Post-Effective Amendment No. 12 to the
Registration Statement on Form N-1A and incorporated herein by
reference).
17(a) -- Financial Data Schedule for Salomon Brothers Cash Management Fund,
Salomon Brothers New York Municipal Bond Fund, Salomon Brothers
National Intermediate Municipal Fund, Salomon Brothers U.S.
Government Income Fund, Salomon Brothers High Yield Bond Fund,
Salomon Brothers Strategic Bond Fund and Salomon Brothers Investors
Fund Inc (filed as Exhibit 17 to Post Effective Amendment No. 15 to
the Registration Statement on Form N-1A and incorporated herein by
reference).
</TABLE>
- -------------
* To be filed by amendment.
C-8
<PAGE> 400
<TABLE>
<S> <C>
17(b) -- Financial Data Schedule for Salomon Brothers New York Municipal
Money Market Fund.
17(c) -- Financial Data Schedule for Salomon Brothers U.S. Treasury Securities
Money Market Fund.
17(d) -- Financial Data Schedule for Salomon Brothers Total Return Fund (filed
as Exhibit 17(b) to Post-Effective Amendment No. 16 to the
Registration Statement on Form N-1A (File Nos. 33-34423 and
811-06087) and incorporated herein by reference).
18 -- Form of Application and Signature Card for Salomon Brothers
Investment Series (filed as Exhibit 18 to Post-Effective Amendment
No. 13 to the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
18(a)-- Powers of Attorney (filed as an Exhibit to Post-Effective Amendment
No. 1 to the Registration Statement on Form N-1A (File Nos. 33-34423
and 811-06087) and incorporated herein by reference).
18(b) -- Powers of Attorney of Carol L. Colman and Daniel P. Cronin (filed as
an Exhibit to Post-Effective Amendment No. 11 to the Registration
Statement on Form N-1A (File Nos. 33-34423 and 811-06087) and
incorporated herein by reference).
18(c) -- Powers of Attorney of Carol L. Colman, Daniel P. Cronin and Charles
F. Barber (filed as Exhibit 18(c) to Post-Effective Amendment No. 13
to the Registration Statement on Form N-1A (File Nos. 33-34423 and
811-06087) and incorporated herein by reference).
18(d) -- Form of Multiclass Plan Pursuant to Rule 18f-3 Under the Investment
Company Act of 1940 for the Salomon Brothers Series Funds Inc (filed
as Exhibit 18(d) to Post-Effective Amendment No. 13 to the
Registration Statement on Form N-1A (File Nos. 33-34423 and
811-06087) and incorporated herein by reference).
</TABLE>
- -----------------
* To be filed by amendment.
Item 25. Persons Controlled by or under Common Control with Registrant.
Salomon Brothers Holding Company Inc ("SBH"), owns a substantial amount of the
outstanding shares of the National Intermediate Municipal Fund, U.S. Government
Income Fund, High Yield Bond Fund, Strategic Bond Fund and Total Return
Fund and consequently is a controlling person of such Funds. SBH owns the
outstanding shares of SBAM, Salomon Brothers Inc and certain of their
affiliates.
C-9
<PAGE> 401
Item 26. Number of Holders of Securities.
<TABLE>
<CAPTION>
Number of Record
Holders at
Title of Class January 15, 1996
----------------
<S> <C>
Shares of Salomon Brothers Cash
Management Fund, par value
$.001 per share
Class A 25
Class B 4
Class C 14
Class O 129
Shares of Salomon Brothers New
York Municipal Money Market
Fund, par value $.001 per share 838
Shares of Salomon Brothers U.S.
Treasury Securities Money Market
Fund, par value $.001 per share 108
Shares of Salomon Brothers New
York Municipal Bond Fund, par
value $.001 per share
Class A 5
Class B 6
Class C 1
Class O 73
Shares of Salomon Brothers
Investors Fund, par value $1.00
per share
Class A 21
Class B 29
Class C 5
Class O 16,437
Shares of Salomon Brothers
National Intermediate Municipal
Fund, par value $.001 per share
Class A 1,086
Class B 6
Class C 2
Class O 2
Shares of Salomon Brothers U.S.
Government Income Fund, par
value $.001 per share
Class A 1,087
Class B 8
Class C 2
Class O 1
</TABLE>
C-10
<PAGE> 402
<TABLE>
<S> <C>
Shares of Salomon Brothers
High Yield Bond Fund, par
value $.001 per share
Class A 1,391
Class B 453
Class C 47
Class O 4
Shares of Salomon Brothers
Strategic Bond Fund, par
value $.001 per share
Class A 1,115
Class B 110
Class C 18
Class O 2
Shares of Salomon Brothers
Total Return Fund, par
value $.001 per share
Class A 1,345
Class B 380
Class C 19
Class O 2
Shares of Salomon Brothers
Asia Growth Fund, par
value $.001 per share
Class A 0
Class B 0
Class C 0
Class O 0
</TABLE>
Item 27. Indemnification.
Reference is made to Article VII of Registrant's Articles of
Incorporation, Article IV of Registrant's By-Laws and Section 4 of the
Distribution Agreements between the Registrant and Salomon Brothers Inc.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of the Registrant pursuant to the foregoing
provisions, or otherwise, the Registrant understands that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. In
the event that a claim for indemnification
C-11
<PAGE> 403
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
Item 28. Business and Other Connections
of Investment Adviser.
The list required by this Item 28 of officers and directors of SBAM,
Salomon Brothers Asset Management Limited ("SBAM Limited") and Salomon Brothers
Asia Pacific Limited ("SBAM AP"), together with information as to any other
business, profession, vocation or employment of a substantial nature engaged in
by such officers and directors during the past two years, is incorporated by
reference to Schedules A and D of their respective FORM ADV filed by SBAM, SBAM
Limited and SBAM AP, respectively, pursuant to the Advisers Act (SEC File Nos.
801-32046, 801-43335 and _______________, respectively).
Item 29. Principal Underwriter.
(a) Salomon Brothers Inc ("Salomon Brothers") currently acts as
distributor for, in addition to the Registrant, Salomon Brothers Capital Fund
Inc, Salomon Brothers Investors Fund Inc and Salomon Brothers Opportunity Fund
Inc.
(b) The information required by this Item 29 with respect to each
director, officer or partner of Salomon Brothers is incorporated by reference
to Schedule A of Form BD filed by Salomon Brothers pursuant to the Securities
Exchange Act of 1934 (SEC File No. 8-26920).
(c) Not applicable.
Item 30. Location of Accounts and Records.
(1) Salomon Brothers Asset Management Inc
7 World Trade Center New York,
New York 10048
(2) Investors Bank & Trust Company
89 South Street
Boston, Massachusetts 02111
(3) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
C-12
<PAGE> 404
Item 31. Management Services.
Not applicable.
Item 32. Undertakings.
(a) Not applicable.
(b) The Registrant undertakes to file a post-effective amendment
containing financial statements as of a reasonably current date, which need not
be certified, within four to six months from the date of commencement of
investment operations for the Asia Growth Fund.
(c) Registrant undertakes to furnish to each person to whom a prospectus
is delivered a copy of Registrant's latest annual report to shareholders, upon
request and without charge.
(d) Registrant hereby undertakes to call a meeting of shareholders for
the purpose of voting upon the question of removal of one or more of
Registrant's directors when requested in writing to do so by the holders of at
least 10% of Registrant's outstanding shares of common stock and, in connection
with such meeting, to assist in communications with other shareholders in this
regard, as provided under Section 16(c) of the Investment Company Act of 1940,
as amended.
C-13
<PAGE> 405
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this Amendment
to this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York, and State of New York, on
the 18th day of January, 1996.
SALOMON BROTHERS SERIES FUNDS INC
(Registrant)
By /s/ MICHAEL S. HYLAND
------------------------------
Michael S. Hyland
President
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ MICHAEL S. HYLAND
- ---------------------
Michael S. Hyland Director and President 1/18/96
(principal executive
officer)
* Director 1/18/96
- -------------------
Charles F. Barber
* Director 1/18/96
- -------------------
Carol L. Colman
* Director 1/18/96
- -------------------
Daniel P. Cronin
/s/ ALAN M. MANDEL Treasurer 1/18/96
- ------------------- (principal financial
Alan M. Mandel and accounting officer)
</TABLE>
C-14
<PAGE> 406
<TABLE>
<S> <C>
*By:/s/ ALAN M. MANDEL 1/18/96
--------------------
Alan M. Mandel as
(Attorney-in-Fact)
</TABLE>
C-15
<PAGE> 407
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
1(g) -- Form of Articles Supplementary.
11 -- Consents of Independent Accountants.
17(b) -- Financial Data Schedule for Salomon Brothers New York Municipal
Money Market Fund.
17(c) -- Financial Data Schedule for Salomon Brothers U.S. Treasury Securities
Money Market Fund.
</TABLE>
<PAGE> 1
EXHIBIT 1(g)
SALOMON BROTHERS SERIES FUNDS INC
ARTICLES SUPPLEMENTARY
Salomon Brothers Series Funds Inc, a Maryland corporation having its
principal office in Baltimore, Maryland (hereinafter called the "Corporation"),
certifies to the State Department of Assessments and Taxation of Maryland that:
FIRST: The Corporation's Board of Directors has authorized the
creation of an additional portfolio of the Corporation, and pursuant to the
authority of the Board of Directors to classify and reclassify unissued shares
of capital stock of the Corporation, the Board of Directors has duly
reclassified
(a) 111,111,112 shares of the authorized and unissued shares of Class
A capital stock of the Corporation, par value $.001 per share, of which
27,777,778 shall be from each of the A Sub-Class, the B Sub-Class, the C
Sub-Class and the O Sub-Class;
(b) 111,111,112 shares of the authorized and unissued shares of
Class B capital stock of the Corporation, par value $.001 per share;
(c) 111,111,112 shares of the authorized and unissued shares of
Class C capital stock of the Corporation, par value $.001 per share;
(d) 111,111,112 shares of the authorized and unissued shares of Class
D capital stock of the Corporation, par value $.001 per share, of which
27,777,778 shall be from each of the A Sub-Class, the B Sub-Class, the C
Sub-Class and the O Sub-Class;
(e) 111,111,112 shares of the authorized and unissued shares of Class
E capital stock of the Corporation, par value $.001 per share, of which
27,777,778 shall be from each of the A Sub-Class, the B Sub-Class, the C
Sub-Class and the O Sub-Class;
(f) 111,111,112 shares of the authorized and unissued shares of Class
F capital stock of the Corporation, par value $.001 per share, of which
27,777,778 shall be from each of the A Sub-Class, the B Sub-Class, the C
Sub-Class and the O Sub-Class;
(g) 111,111,112 shares of the authorized and unissued shares of Class
G capital stock of the Corporation, par value $.001 per share, of which
27,777,778 shall be from each of the A Sub-Class, the B Sub-Class, the C
Sub-Class and the O Sub-Class;
<PAGE> 2
2
(h) 111,111,112 shares of the authorized and unissued shares of Class
H capital stock of the Corporation, par value $.001 per share, of which
27,777,778 shall be from each of the A Sub-Class, the B Sub-Class, the C
Sub-Class and the O Sub-Class;
(i) 111,111,112 shares of the authorized and unissued shares of Class
I capital stock of the Corporation, par value $.001 per share, of which
27,777,778 shall be from each of the A Sub-Class, the B Sub-Class, the C
Sub-Class and the O Sub-Class;
in each case, into Class J capital stock and has provided for the
issuance of such class.
Any class of capital stock shall be referred to herein individually
as a "Class" and collectively, together with any further classes from time to
time established, as "Classes."
SECOND: The shares of Class J capital stock, as so divided and
reclassified by the Corporation's Board of Directors, shall have and be subject
to all of the preferences, conversion and other rights, voting powers,
restrictions, limitations as to dividends, qualifications and terms and
conditions of rights to require redemption set forth in the Corporation's
Articles of Incorporation, except as otherwise set forth in these Articles
Supplementary. These Articles Supplementary do not increase the authorized
capital stock of the Corporation.
THIRD: Notwithstanding any provision to the contrary in the
Articles of Incorporation, including, without limitation, Article V, Section
5(b)(iv) thereof, with respect to determining dividends payable to shareholders
of Class J capital stock, the Board of Directors may determine not to permit
certain dividends to accrue on shares until the proceeds from the sale thereof
are included in assets belonging to the Corporation's Class J capital stock
and/or to permit certain dividends to continue to accrue on shares redeemed
through the day before redemption proceeds are removed from the assets
belonging to the Corporation's Class J capital stock.
FOURTH: (a) The Board of Directors designates the shares of unissued
capital stock in Class J so that Class J shall have four sub-classes. Until
further changed, the "A" sub-class shall consist of 250,000,002 shares, the "B"
sub-class shall consist of 250,000,002 shares, the "C" sub-class shall consist
of 250,000,002 shares, and the "O" sub-class shall consist of 250,000,002
shares.
(b) Any sub-class of any Class of capital stock shall be referred to
herein individually as a "Sub-Class" and collectively, together with any
further sub-classes from time to time established, as "Sub-Classes."
(c) All Sub-Classes of a particular Class of capital stock of the
Corporation shall represent the same interest in the
<PAGE> 3
3
Corporation and have identical voting, dividend, liquidation, and other
rights, terms and conditions with any other shares of capital stock of that
Class; provided however, that notwithstanding anything in the charter of the
Corporation to the contrary:
(1) The shares of the A Sub-Class of a Class, B Sub-Class of a
Class and C Sub-Class of a Class shall be subject to such front-end
sales charges and/or contingent deferred sales charges as may be
established by the Board of Directors from time to time in accordance
with the Investment Company Act of 1940, as amended (the "Investment
Company Act") and applicable rules and regulations of the National
Association of Securities Dealers, Inc. (the "NASD").
(2) The shares of the O Sub-Class of a Class and all shares of
Class A capital stock shall not be subject to front-end sales charges
or contingent deferred sales charges.
(3) Expenses related solely to a particular Sub-Class of a
Class (including, without limitation, distribution expenses under a
Rule 12b-1 plan and administrative expenses under an administration
or service agreement, plan or other arrangement, however designated)
shall be borne by that Sub-Class and shall be appropriately reflected
(in the manner determined by the Board of Directors) in the net asset
value, dividends, distribution and liquidation rights of the shares
of that Sub-Class.
(4) Except as may be otherwise required by law pursuant to any
applicable order, rule or regulation issued by the Securities and
Exchange Commission (the "SEC") or under Maryland law or otherwise,
the holders of stock of any Class or Sub-Class created by these
Articles Supplementary shall have respectively (i) exclusive voting
rights with respect to any matter submitted to a vote of stockholders
which affects such Class or Sub-Class (provided that it if it affects
one or more of such Classes or Sub-Classes, but less than all of such
Classes or Sub-Classes, the affected Sub-Classes shall together have
the exclusive vote), including without limitation, the provisions of
any distribution plan adopted by the Corporation pursuant to Rule
12b-1 under the Investment Company Act applicable to such Class or
Sub-Class and (ii) no voting rights with respect to the provisions of
any Rule 12b-1 plan not applicable to such Class or Sub-Class or with
regard to any other matter submitted to a vote of stockholders that
does not affect the holders of such Class or Sub-Class.
<PAGE> 4
4
(5) On the sixth anniversary of the first business day of the
month following the month in which shares of the B Sub-Class of a
Class were purchased by a stockholder, such shares of the B Sub-Class
of such Class (as well as a pro rata portion of any shares of such B
Sub-Class of such Class purchased through the reinvestment of
dividends and other distributions paid in respect of all shares of
such B Sub-Class of such Class held by such stockholder) shall
automatically convert to shares of the A Sub-Class of such Class;
provided, however, that such conversion shall be subject to the
continuing availability of an Internal Revenue Service ruling and an
opinion of counsel to the effect that the conversion of the shares of
such B Sub-Class of such Class does not constitute a taxable event
under federal income tax law. The Board of Directors, in its sole
discretion, may suspend the conversion of shares of any B Sub-Class
of a Class if such ruling and opinion are no longer available.
(6) On the tenth anniversary of the first business day of the
month following the month in which shares of the C Sub-Class of a
Class were purchased by a stockholder, such shares of the C Sub-Class
of such Class (as well as a pro rata portion of any shares of such C
Sub-Class of such Class purchased through the reinvestment of
dividends and other distributions paid in respect of all shares of
such C Sub-Class of such Class held by such stockholder) shall
automatically convert to shares of the A Sub-Class of such Class;
provided, however, that such conversion shall be subject to the
continuing availability of an Internal Revenue Service ruling and an
opinion of counsel to the effect that the conversion of the shares of
such C Sub-Class of such Class does not constitute a taxable event
under federal income tax law. The Board of Directors, in its sole
discretion, may suspend the conversion of shares of any C Sub-Class
of a Class if such ruling and opinion are no longer available.
(7) The number of shares of the A Sub-Class capital stock
into which the B Sub-Class or C Sub-Class capital stock is converted
pursuant to paragraphs (5) and (6) above shall equal the number
(including for these purposes fractional shares) obtained by dividing
the net asset value per share of the B Sub-Class or C Sub-Class
capital stock, as the case may be, for purposes of sales and
redemptions on the conversion date by the net asset value per share
of the A Sub-Class capital stock for purposes of sales and
redemptions thereof on the conversion date.
(8) The holders of each Class or Sub-Class of capital
stock classified or designated by these Articles
<PAGE> 5
5
Supplementary shall have such rights to exchange their shares for
stock of any other Class or Sub-Class or shares of another investment
company upon such terms as may be approved by the Board of Directors
from time to time and set forth in appropriate disclosure documents
under the applicable law, rules and regulations of the SEC and the
rules of the NASD, including but not limited to such rights to credit
holding periods of the stock exchanged with respect to the stock
received in the exchange.
FIFTH: The shares aforesaid have been duly classified or
reclassified by the Corporation's Board of Directors pursuant to authority and
power contained in the Corporation's Charter.
<PAGE> 6
6
IN WITNESS WHEREOF, Salomon Brothers Series Funds Inc has caused
these Articles Supplementary to be executed by its President and witnessed by
its Secretary on this 18th day of January, 1996. The President of the
Corporation who executed these Articles Supplementary acknowledges them to be
the act of the Corporation and states under penalties of perjury that, to the
best of his knowledge, information and belief, the matters and facts set forth
herein relating to authorization and approval hereof are true in all material
respects.
SALOMON BROTHERS SERIES FUNDS INC
(SEAL) By: /s/ MICHAEL S. HYLAND
-----------------------------
Michael S. Hyland
President
WITNESS:
/s/ TANA E. TSELEPIS
- -------------------------
Tana E. Tselepis
Secretary
<PAGE> 1
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 17 to the registration
statement on Form N-1A (the "Registration Statement") for Salomon Brothers
Series Funds Inc of our report dated February 17, 1995, relating to the
financial statements and financial highlights of Salomon Brothers Investors
Fund Inc, which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 17, 1996
<PAGE> 2
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 17 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated July
13, 1995, relating to the financial statement of Salomon Brothers Total Return
Fund (one of the portfolios constituting Salomon Brothers Series Funds Inc),
which appears in such Statement of Additional Information, and to the
incorporation by reference of our report into the Prospectus which constitutes
part of this Registration Statement.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 17, 1996
<PAGE> 3
EXHIBIT 11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Post-Effective Amendment No. 17 to the registration
statement on Form N-1A (the "Registration Statement") of our report dated
February 27, 1995, relating to the financial statements and financial
highlights of Salomon Brothers Cash Management Fund, Salomon Brothers New York
Municipal Money Market Fund, Salomon Brothers U.S. Treasury Securities Money
Market Fund and Salomon Brothers New York Municipal Bond Fund (each a portfolio
of Salomon Brothers Series Funds Inc), which appears in such Statement of
Additional Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement. We also
consent to the reference to us under the heading "Independent Accountants" in
such Statement of Additional Information and to the reference to use under the
heading "Financial Highlights" in such Prospectus.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
January 17, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Salomon Brothers New York Municipal Money Market Fund
This Schedule contains Summary Financial Information extracted from the
Financial Statements filed in Part B of this Registration Statement and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1.0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0.018
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0.018
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.0
<EXPENSE-RATIO> 0.42<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Annualized.
</FN>
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
Salomon Brothers U.S. Treasury Securities Money Market Fund
This Schedule contains Summary Financial Information extracted from the
Financial Statements filed in Part B of this Registration Statement and is
qualified in its entirety by reference to such Financial Statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 0
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 0
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 1.0
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0.024
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0.024
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 1.0
<EXPENSE-RATIO> 0.65<F1>
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<FN>
<F1>Annualized.
</FN>
</TABLE>
