<PAGE>
PROSPECTUS
AND
APPLICATION
April 28, 2000
SALOMON BROTHERS
ASSET MANAGEMENT
ASIA GROWTH FUND
BALANCED FUND
CAPITAL FUND
CASH MANAGEMENT FUND
HIGH YIELD BOND FUND
INTERNATIONAL EQUITY FUND
SALOMON BROTHERS INVESTORS VALUE FUND
LARGE CAP GROWTH FUND
NATIONAL INTERMEDIATE MUNICIPAL FUND
NEW YORK MUNICIPAL MONEY MARKET FUND
SMALL CAP GROWTH FUND
STRATEGIC BOND FUND
U.S. GOVERNMENT INCOME FUND
The Securities and Exchange Commission has not approved the funds'
shares as an investment or determined whether this prospectus is accurate
or complete. Any statement to the contrary is a crime.
<PAGE>
- --------------------------------------------------------------------------------
CONTENTS
<TABLE>
<S> <C>
Fund goals, strategies and risks:
Asia Growth Fund........................................ 2
Capital Fund............................................ 4
Cash Management Fund.................................... 6
High Yield Bond Fund.................................... 8
International Equity Fund............................... 10
Investors Value Fund.................................... 12
Large Cap Growth Fund................................... 14
National Intermediate Municipal Fund.................... 16
New York Municipal Money Market Fund.................... 18
Small Cap Growth Fund................................... 20
Strategic Bond Fund..................................... 22
Balanced Fund........................................... 25
U.S. Government Income Fund............................. 28
More on the funds' investments.............................. 30
Management.................................................. 35
Choosing a share class to buy............................... 38
Buying shares and exchanging shares......................... 44
Redeeming shares............................................ 46
Other things to know about share transactions............... 48
Dividends, distributions and taxes.......................... 50
Financial highlights........................................ 51
</TABLE>
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THINGS YOU SHOULD KNOW BEFORE INVESTING
ABOUT THE FUNDS
<TABLE>
<CAPTION>
Equity Funds Fixed Income Funds Money Market Funds
- ------------ ------------------ ------------------
<S> <C> <C>
Asia Growth Fund High Yield Bond Fund Cash Management Fund
Balanced Fund Strategic Bond Fund New York Municipal Money
Small Cap Growth Fund National Intermediate Market Fund
Capital Fund Municipal Fund
International Equity Fund U.S. Government Income Fund
Large Cap Growth Fund
Investors Value Fund
</TABLE>
ABOUT MUTUAL FUND RISKS
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
Salomon Brothers Investment Series - 1
<PAGE>
- --------------------------------------------------------------------------------
ASIA GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks long-term capital appreciation.
OBJECTIVE
- -------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT The fund invests primarily in equity and equity-related
STRATEGY securities of 'Asian companies'. The fund considers Asian
companies to include companies that are organized under the
laws of any country in the Asian region other than Japan,
Australia and New Zealand. The fund also considers companies
to be 'Asian companies' if Salomon Brothers Assets
Management Asia Pacific Limited, the fund's subadviser,
determines that they: (i) 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; (ii) maintain at least 50% of their assets in one
or more of the Asian countries; or (iii) have securities
which are traded principally on the stock exchange in an
Asian country. The fund is not limited in its allocation of
assets among Asian countries. More than 25% of the fund's
assets may be invested in each of Hong Kong, Malaysia,
Singapore and Thailand and their currencies. Equity and
equity related securities include common and preferred
stock, bonds convertible into common and preferred stock,
equity-linked debt securities, and American, Global or other
types of Depositary Receipts.
- -------------------------------------------------------------------------------------
HOW THE In selecting portfolio securities, the subadviser seeks to
SUBADVISER identify specific industries and companies which offer the
SELECTS THE best relative potential for long-term capital appreciation
FUND'S across Asian markets. Individual country weights compared to
INVESTMENTS the benchmark (the Morgan Stanley Capital International All
Country Asia Free Ex-Japan Index) are managed tactically
using fundamental and quantitative analysis. In seeking to
identify individual companies within Asian industries, the
subadviser tends to focus on companies that have the
greatest growth potential and have strong cash flows.
In evaluating specific industries and country weighting, the
subadviser considers macro economic factors such as
government policies, market liquidity, industry
competitiveness and business trends in an effort to identify
an optimal allocation of assets among sectors and countries.
The subadviser then employs a combination of quantitative
and traditional fundamental analysis to identify individual
companies within these industries which exhibit strong
returns on equity, positive cash flows and favorable price-
earnings ratios.
- -------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund,
OF INVESTING IN or the fund may not perform as well as other investments, if
THE FUND any of the following occurs.
Investments in Asian The Asian securities markets decline.
companies involve a Economic, political or social instabilities significantly
substantial risk of disrupt the principal financial markets in the Asian Region.
loss. Factors creating volatility in one Asian country or emerging
The fund is not market negatively impact securities values or trading in
diversified, which countries in the region.
means that it can The U.S. dollar appreciates against the Asian currencies.
invest a higher One or more governments in the region imposes restrictions
percentage of its on currency conversion or trading.
assets in any one Asian economies grow at a slower rate than expected or
issuer than a experience a downturn or recession.
diversified fund. In changing markets the fund may not be able to sell
Being non-diversified securities in desired amounts or at prices it considers
may magnify the fund's reasonable.
losses from events The manager's judgment about the attractiveness, relative
affecting a particular value or potential appreciation of a particular sector or
issuer. stock proves to be incorrect.
The fund may experience higher than average turnover of
portfolio securities.
</TABLE>
Salomon Brothers Investment Series - 2
<PAGE>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year. Past performance
does not necessarily indicate how
the fund will perform in the future.
QUARTERLY RETURNS: Highest:
47.67% in 4th quarter 1999;
Lowest: - 28.96% in 2nd quarter
1998
[GRAPH]
% Total Return
-25.55 -13.10 94.92
97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class A shares
for each of the
calendar years
indicated. Class B, 2
and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
- -------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS,
REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year Since Inception
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Class A 5/6/96 83.62% 6.30%
Class B 5/6/96 88.30% 6.55%
- --------------------------------------------------------------------------------------
Class 2'D' 5/6/96 90.51% 6.98%
Class O 5/6/96 95.11% 8.29%
- --------------------------------------------------------------------------------------
MSCI Index * 64.67% - 3.28%
*Index comparison begins on 5/31/96.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of the
Morgan Stanley Capital
International All
Country Asia Free
Ex-Japan Index ('MSCI
Index'), a broad-based
unmanaged index of
Asian stocks.
'D'formerly Class C
</TABLE>
- --------------------------------------------------------------------------------
FEE TABLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- -----------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.80% 0.80% 0.80% 0.80%
- -----------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None
Other expenses 1.57% 1.59% 1.57% 1.52%
- -----------------------------------------------------------------------------------------
Total annual fund operating expenses 2.62% 3.39% 3.37% 2.32%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
</TABLE>
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager voluntarily
agreed to waive its
management fee and
reimbursed certain
expenses for the fiscal
year ended December 31,
1999, the actual total
operating expenses for
each class were:
Class A: 1.24%
Class B: 1.99%
Class 2: 1.99%
Class O: 0.97%
The manager may
discontinue this waiver
and reimbursement at
any time.
- --------------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be
Class A $825 $1,343 $1,885 $3,359
- -----------------------------------------------------------------------------------------
Class B (redemption at end of period) 842 1,342 1,965 3,427
Class B (no redemption) 342 1,042 1,765 3,427
- -----------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 536 1,126 1,837 3,721
Class 2 (no redemption) 436 1,126 1,837 3,721
- -----------------------------------------------------------------------------------------
Class O 235 724 1,240 2,656
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends
without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
Salomon Brothers Investment Series - 3
<PAGE>
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CAPITAL FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks capital appreciation through investment in
OBJECTIVE securities which the manager believes have above-average
capital appreciation potential.
- -------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT The fund invests primarily in equity securities of U.S.
STRATEGY companies. These companies may range in size from
established large capitalization companies (over $5 billion
in market capitalization) to small capitalization companies
(less than $1 billion in market capitalization) at the
beginning of their life cycles.
- -------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while
MANAGER diversifying the fund's investments across industries, which
SELECTS THE may help to reduce risk. The manager seeks to identify those
FUND'S companies which offer the greatest potential for capital
INVESTMENTS appreciation through careful fundamental analysis of each
company and its financial characteristics. The manager
evaluates companies of all sizes.
In selecting individual companies for investment, the
manager looks for the following:
Share prices which appear to undervalue the company's assets
or do not adequately reflect factors such as favorable
industry trends, lack of investor recognition or the
short-term nature of earnings declines.
Special situations such as existing or possible changes in
management, corporate policies, capitalization or regulatory
environment which may boost earnings or the market price of
the company's shares.
Growth potential due to technological advances, new products
or services, new methods of marketing or production, changes
in demand or other significant new developments which may
enhance future earnings.
- -------------------------------------------------------------------------------------
PRINCIPAL RISKS Equity investments may involve added risks. Investors could
OF INVESTING IN lose money on their investment in the fund, or the fund may
THE FUND not perform as well as other investments, if any of the
following occurs:
The U.S. stock market declines.
An adverse event, such as negative press reports about a
company in the fund's portfolio, depresses the value of the
company's stock.
The manager's judgment about the attractiveness, relative
value or potential appreciation of a particular sector or
stock proves to be incorrect.
Greater volatility of share price because of the fund's
ability to invest in small cap companies. Investing in small
capitalization companies involves a substantial risk of
loss. Compared to large cap companies, small cap companies
and the market for their equity securities are more likely
to:
Be more sensitive to changes in earnings results and
investor expectations.
Have more limited product lines, capital resources and
management depth.
Experience sharper swings in market values.
Be harder to sell at the times and prices the manager
believes appropriate.
Offer greater potential for gain and loss.
The fund is not diversified, which means that it can invest
a higher percentage of its assets in any one issuer than a
diversified fund. Being non-diversified may magnify the
fund's losses from events affecting a particular issuer.
</TABLE>
Salomon Brothers Investment Series - 4
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year. Past performance
does not necessarily indicate how
the fund will perform in the future.
QUARTERLY RETURNS: Highest:
22.50% in 4th quarter 1998;
Lowest: - 16.17% in 3rd quarter
1990
[GRAPH]
- -9.06 33.44 4.71 17.17 -14.16 34.88 33.34 26.76 23.83 23.44
90 91 92 93 94 95 96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class O shares
for each of the past 10
calendar years.
Class A, B and 2 shares
would have different
performance because of
their different
expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS, REDEMPTION
OF SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Inception Since
Class Date 1 Year 5 Years 10 Years Inception
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 11/1/96 16.03% n/a n/a 23.59%
Class B 11/1/96 17.22% n/a n/a 24.40%
- -------------------------------------------------------------------------
Class 2'D' 11/1/96 19.92% n/a n/a 24.59%
Class O n/a 23.44% 28.36% 16.11% n/a
- -------------------------------------------------------------------------
Russell 3000 Index n/a 20.90% 26.94% 17.68% n/a
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of the
Russell 3000 Index, a
broad-based unmanaged
capitalization weighted
index of large
capitalized companies.
'D'formerly Class C
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
FEE TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O CLASS Y
<S> <C> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None None
Maximum deferred sales charge on None 5.00% 1.00% None None
redemptions
- -----------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.80% 0.80% 0.80% 0.80% 0.80%
- -----------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None None
Other expenses 0.22% 0.22% 0.22% 0.21% 0.21%**
- -----------------------------------------------------------------------------------------------
Total annual fund operating expenses 1.27% 2.02% 2.02% 1.01% 1.01%**
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
**Based on estimated amounts for the fiscal year ending December 31, 2000.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
EXAMPLE
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $697 $955 $1,232 $2,021
- -------------------------------------------------------------------------------------------
Class B (redemption at end of period) 705 934 1,288 2,068
Class B (no redemption) 205 634 1,088 2,068
- -------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 403 727 1,177 2,425
Class 2 (no redemption) 303 727 1,177 2,425
- -------------------------------------------------------------------------------------------
Class O 103 322 558 1,236
Class Y 103 322 558 1,236
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends
without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
Salomon Brothers Investment Series - 5
<PAGE>
- --------------------------------------------------------------------------------
CASH MANAGEMENT FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks as high a level of current income as is
OBJECTIVE consistent with liquidity and stability of principal.
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests in high quality, U.S. dollar denominated
INVESTMENT short-term debt securities. The fund may invest in all types
STRATEGY of money market instruments including U.S. government
securities, short-term debt securities, commercial paper,
variable rate demand notes, obligations, mortgage-backed and
asset-backed securities and repurchase agreements. While the
fund invests primarily in securities of U.S. issuers, the
fund may also invest in U.S. dollar denominated obligations
of foreign governmental and corporate issuers. The debt
instruments in which the fund invests may have fixed or
variable rates of interest. The fund normally maintains at
least 25% of its assets in bank obligations.
MINIMUM CREDIT QUALITY: The fund invests primarily in
securities rated in the highest short term rating category,
or if unrated, of equivalent quality.
MAXIMUM MATURITY: The fund invests in securities having, or
are deemed to have, remaining maturities of 397 days or
less. The fund maintains a dollar-weighted average portfolio
maturity of 90 days or less.
- -------------------------------------------------------------------------------------
HOW THE In selecting investments for the funds, the manager looks
MANAGER for:
SELECTS THE Eligible issuers with the most desirable credit quality.
FUND'S The best relative values based on an analysis of yield,
INVESTMENTS price, interest rate sensitivity and credit quality.
Maturities consistent with the manager's outlook for
interest rates.
- -------------------------------------------------------------------------------------
PRINCIPAL RISKS Although the fund seeks to preserve the value of an
OF INVESTING IN investment at $1 per share, it is possible to lose money by
THE FUND investing in the fund, or the fund could underperform other
short term debt instruments or money market funds if any of
the following occurs:
There is no Interest rates rise sharply.
assurance that An issuer or guarantor of the fund's securities defaults, or
the Cash has its credit rating downgraded.
Management The manager's judgment about the relative value or credit
Fund will be able quality of a particular security proves to be incorrect.
to maintain a The value of the fund's foreign securities go down because
stable net asset of unfavorable government actions or political instability.
value of $1.00 Over time, a money market fund is likely to underperform
per share. other fixed income or equity investment options.
</TABLE>
Salomon Brothers Investment Series - 6
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year.
Past performance does not
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
1.21% in 2nd quarter 1991;
Lowest: 0.51% in 3rd quarter 1994
[GRAPH]
% Total Return
5.66 3.37 2.73 3.89 5.60 5.07 5.21 5.20 4.78
91 92 93 94 95 96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class O shares
for each of the
calendar years
indicated. Class A, B
and 2 shares may have
different performance
because of their
different expenses.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD AND
THE REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year 5 Years Since Inception
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Class A 1/3/95 4.80% n/a 5.04%
Class B 1/3/95 4.79% n/a 5.02%
- -------------------------------------------------------------------------------------------
Class 2'D' 1/3/95 4.80% n/a 5.02%
Class O 10/2/90 4.78% 5.16% 4.69%
The fund's 7-day effective yield as of December 31, 1999 was 5.67%.
COMPARATIVE
PERFORMANCE
The table indicates the
average annual total
return of each class
for the periods shown.
'D'formerly Class C
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
FEE TABLE
- ------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C>
Maximum sales charge on purchases None None None None
Maximum deferred sales charge on redemptions None None None None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.20% 0.20% 0.20% 0.20%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee None None None None
Other expenses 0.33% 0.33% 0.33% 0.33%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 0.53% 0.53% 0.53% 0.53%
- -------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $54 $170 $296 $665
- -------------------------------------------------------------------------------------------
Class B 54 170 296 665
Class 2 54 170 296 665
- -------------------------------------------------------------------------------------------
Class O 54 170 296 665
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends
without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 7
<PAGE>
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to maximize current income. As a secondary
OBJECTIVE objective, the fund seeks capital appreciation.
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in high yield fixed income
INVESTMENT securities issued by U.S. and foreign corporations and
STRATEGY foreign governments and their agencies and
instrumentalities. The fund will limit its investments in
emerging markets issuers to 35% of its assets.
CREDIT QUALITY: The fund invests primarily in fixed income
securities rated below investment grade by a recognized
rating agency or, if unrated, of equivalent quality as
determined by the manager. Below investment grade securities
are commonly referred to as 'junk bonds.'
MATURITY: The fund normally maintains an average portfolio
maturity of between 6 and 12 years. However, the fund may
invest in individual securities of any maturity.
- -------------------------------------------------------------------------------------
HOW THE Individual security selection is driven by the manager's
MANAGER economic view, industry outlook and rigorous credit
SELECTS THE analysis. The manager then selects those individual
FUND'S securities that appear to be most undervalued and to offer
INVESTMENTS the highest potential returns relative to the amount of
credit, interest rate, liquidity and other risk presented by
these securities. The manager allocates the fund's
investments across a broad range of issuers and industries,
which can help to reduce risk.
In evaluating the issuer's creditworthiness, the manager
employs fundamental analysis and considers the following
factors:
The strength of the issuer's financial resources.
The issuer's sensitivity to economic conditions and trends.
The issuer's operating history.
Experience and track record of issuer's management or
political leadership.
- -------------------------------------------------------------------------------------
PRINCIPAL Investors could lose money on their investment in the fund,
RISKS OF or the fund may not perform as well as other investments, if
INVESTING IN any of the following occurs:
THE FUND
Investments in The issuer of a security owned by the fund defaults on its
high yield obligation to pay principal and/or interest or has its
securities credit rating downgraded.
involve a Interest rates increase, causing the prices of fixed income
substantial risk securities to decline and reducing the value of the fund's
of loss. portfolio.
The manager's judgment about the attractiveness, value or
credit quality of a particular security proves to be
incorrect.
High yield securities are considered speculative and,
compared to investment grade securities, tend to have more
volatile prices and are more susceptible to the following
risks:
Increased price sensitivity to changing interest rates and
to adverse economic and business developments.
Greater risk of loss due to default or declining credit
quality.
Greater likelihood that adverse economic or company specific
events will make the issuer unable to make interest and/or
principal payments.
Negative market sentiment towards high yield securities
depresses the price and liquidity of high yield securities.
</TABLE>
Salomon Brothers Investment Series - 8
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year.
Past performance does not
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
6.19% in 3rd quarter 1996;
Lowest: - 13.26% in 3rd quarter
1998
[GRAPH]
% Total return
21.92 13.03 -7.05 7.03
96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class A shares
for each of the
calendar years
indicated. Class B, 2
and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS, REDEMPTION OF
SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year Since Inception
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A 2/22/95 1.98% 9.03%
Class B 2/22/95 1.45% 9.04%
- -------------------------------------------------------------------------------------
Class 2'D' 2/22/95 4.56% 9.15%
Class O 2/22/95 7.33% 10.36%
- -------------------------------------------------------------------------------------
SSB Index * 1.74% 9.00%
* Index comparison begins on 2/28/95.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of the
Salomon Smith Barney
High-Yield Market Index
('SSB Index'), a
broad-based unmanaged
index of high yield
securities.
'D'formerly Class C
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
FEE TABLE
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 4.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND
AS A % OF NET ASSETS)
Management fees 0.75% 0.75% 0.75% 0.75%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 0.75% None
Other expenses 0.29% 0.28% 0.31% 0.28%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 1.29% 2.03% 1.81% 1.03%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager voluntarily
agreed to waive a
portion of its
management fee for the
fiscal year ended
December 31, 1999, the
actual total operating
expenses for each class
were:
Class A: 1.27%
Class B: 2.02%
Class 2: 1.79%
Class O: 1.02%
The manager may
discontinue this waiver
at any time.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
EXAMPLE
- ----------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $600 $865 $1,149 $1,958
- ----------------------------------------------------------------------------------------
Class B (redemption at end of period) 706 937 1,293 2,090
Class B (no redemption) 206 637 1,093 2,090
- ----------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 382 664 1,070 2,205
Class 2 (no redemption) 282 664 1,070 2,205
- ----------------------------------------------------------------------------------------
Class O 105 328 569 1,259
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends
without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period.
Salomon Brothers Investment Series - 9
<PAGE>
- --------------------------------------------------------------------------------
INTERNATIONAL EQUITY FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks long-term capital growth.
OBJECTIVE
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in equity and equity-related
INVESTMENT securities of non-U.S. issuers, including issuers in
STRATEGY developing countries, with an emphasis on established
companies with medium to large market capitalizations
($1 billion or more) and seasoned management teams. Equity
and equity related securities include common stock,
securities convertible into common stock, and trust or
limited partnership interests, and include securities
purchased directly or in the form of sponsored American
Depository Receipts, European Depository Receipts or other
similar securities representing common stock on non-U.S.
issuers.
- -------------------------------------------------------------------------------------
HOW THE In selecting portfolio securities, Citibank, N.A., the
SUBADVISER fund's subadviser, employs a disciplined investment process
SELECTS THE that emphasizes individual security selection. The
FUND'S investment focus is on companies that participate in growth
INVESTMENTS industries and can deliver sustainable, above average growth
in earnings per share over a two to three year horizon.
Final security selection is a function of detailed industry
and company specific analysis and ongoing interviews with
the company's senior management. A strict valuation
discipline is employed to insure that the fund does not
overpay for earnings growth. The fund closely monitors the
investment on an ongoing basis for possible changes in
company or industry fundamentals. Turnover is typically low,
and the average holding period for a fund investment is
currently three years. The subadviser manages the fund's
portfolio compared to its benchmark, the MSCI EAFE'r' Index,
which is not hedged, and therefore, typically does not hedge
portfolio securities or currencies. The subadviser may,
however, engage in hedging strategies when it believes it is
desirable to do so. The fund seeks to reduce overall
portfolio risk by investing in a wide range of countries.
- -------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund,
OF INVESTING IN or the fund may not perform as well as other investments, if
THE FUND any of the following occurs:
Foreign securities markets decline.
The U.S. dollar appreciates against foreign currencies.
One or more foreign governments impose restrictions on
currency conversion or trading.
Non-U.S. economies grow at a slower rate than expected or
experience a downturn or recession.
The manager's judgment about the attractiveness, relative
value or potential appreciation of a particular sector or
stock proves to be incorrect.
Investing in non-U.S. issuers may involve unique risks
compared to investing in the securities of U.S. issuers.
These risks are more pronounced to the extent the fund
invests in issuers in countries with emerging markets or if
the fund invests significantly in one country. These risks
may include:
Less information about non-U.S. issuers or markets may be
available due to less rigorous disclosure and accounting
standards or regulatory practices.
Many non-U.S. markets are smaller, less liquid and more
volatile than U.S. markets. In a changing market, the
manager may not be able to sell the fund's portfolio
securities in amounts and at prices the manager considers
reasonable.
Economic, political and social developments significantly
disrupt the financial markets or interfere with the Fund's
ability to enforce its rights against foreign government
issuers.
Growth securities typically are sensitive to market
movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be
met, the prices of growth securities typically fall.
</TABLE>
Salomon Brothers Investment Series - 10
<PAGE>
PERFORMANCE
Because the fund commenced operations in 1999, the fund does not have a
sufficient operating history to depict its performance in the graphic and table
form.
The fund's total return will vary from year to year, and its performance will
vary compared with that of unmanaged indices. Although variations in the fund's
performance are an indication of the risks of investing in the fund, past
performance does not necessarily indicate how the fund will perform in the
future.
- --------------------------------------------------------------------------------
FEE TABLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.90% 0.90% 0.90% 0.90%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None
Other expenses 3.21% 3.21% 3.19% 3.15%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 4.36% 5.11% 5.09% 4.05%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
Because the manager has
voluntarily agreed to
waive its management
fee and reimburse
certain expenses for
the fiscal year ended
December 31, 1999, the
actual total operating
expenses for each class
are:
Class A: 1.75%
Class B: 2.50%
Class 2: 2.50%
Class O: 1.50%
The manager may
discontinue this waiver
and reimbursement at
any time.
</TABLE>
- -------------------------------------------------------------------------
EXAMPLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be
<S> <C> <C> <C> <C> <C>
Class A $ 987 $1,820 $2,663 $4,818
- -------------------------------------------------------------------------------------------
Class B (redemption at end of period) 1,011 1,830 2,748 4,886
Class B (no redemption) 511 1,530 2,548 4,786
- -------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 704 1,610 2,614 5,116
Class 2 (no redemption) 604 1,610 2,614 5,116
- -------------------------------------------------------------------------------------------
Class O 407 1,232 2,074 4,248
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 11
<PAGE>
- --------------------------------------------------------------------------------
INVESTORS VALUE FUND
<TABLE>
<S> <C>
INVESTMENT The primary investment objective of the fund is to seek
OBJECTIVE long-term growth of capital. Current income is a secondary
objective.
- -------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT The fund invests primarily in common stocks of established
STRATEGY U.S. companies. The fund may also invest in other equity
securities. To a lesser degree, the fund invests in income
producing securities such as debt securities.
- -------------------------------------------------------------------------------------
HOW THE The manager emphasizes individual security selection while
MANAGER diversifying the fund's investments across industries, which
SELECTS THE may help to reduce risk. The manager focuses on established
FUND'S large capitalization companies (over $5 billion in market
INVESTMENTS capitalization), seeking to identify those companies with
solid growth potential at reasonable values. The manager
employs fundamental analysis to analyze each company in
detail, ranking its management, strategy and competitive
market position.
In selecting individual companies for investment, the
manager looks for:
Long-term history of performance
Competitive market position
Competitive products and services
Strong cash flow
High return on equity
Strong financial condition
Experienced and effective management
Global scope
- -------------------------------------------------------------------------------------
PRINCIPAL Equity investments may involve added risks. Investors could
RISKS OF lose money on their investment in the fund, or the fund may
INVESTING IN not perform as well as other investments, if any of the
THE FUND following occurs:
U.S. stock markets decline.
An adverse event, such as an unfavorable earnings report,
negatively affects the stock price of a company in which the
fund invests.
Large capitalization stocks fall out of favor with
investors.
The manager's judgment about the attractiveness, growth
prospects or potential appreciation of a particular sector
or stock proves to be incorrect.
</TABLE>
Salomon Brothers Investment Series - 12
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year. Past performance
does not necessarily indicate how
the fund will perform in the future.
QUARTERLY RETURNS: Highest:
17.44% in 4th quarter 1998;
Lowest: - 14.05% in 3rd quarter
1990
[GRAPH]
% Total Return
- -6.49 29.30 7.42 15.19 -1.26 35.39 30.56 26.47 15.44 11.73
90 91 92 93 94 95 96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class O shares
for each of the past 10
years. Class A, B and 2
shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS
REDEMPTION OF SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Inception Since
Class Date 1 Year 5 Years 10 Years Inception
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Class A 1/3/95 5.08% n/a n/a 21.93%
Class B 1/3/95 5.90% n/a n/a 22.28%
- -------------------------------------------------------------------------
Class 2'D' 1/3/95 8.64% n/a n/a 22.26%
Class O n/a 11.73% 23.59% 15.59% n/a
- -------------------------------------------------------------------------
S&P 500 Index n/a 21.04% 28.55% 18.21% n/a
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of the
Standard & Poor's 500
Stock Index ('S&P 500
Index'), a broad-based
unmanaged index of
widely held common
stock.
'D'formerly Class C
- ----------------------------------------------------------------------------------------
</TABLE>
FEE TABLE
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- ------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.52% 0.52% 0.52% 0.52%
- ------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None
Other expenses 0.10% 0.09% 0.09% 0.11%
- ------------------------------------------------------------------------------------------
Total annual fund operating expenses 0.87% 1.61% 1.61% 0.63%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $659 $837 $1,029 $1,586
- ------------------------------------------------------------------------------------------
Class B (redemption at end of period) 664 808 1,076 1,623
Class B (no redemption) 164 508 876 1,623
- ------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 362 603 967 1,992
Class 2 (no redemption) 262 603 967 1,992
- ------------------------------------------------------------------------------------------
Class O 64 202 351 786
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the Fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 13
<PAGE>
- --------------------------------------------------------------------------------
LARGE CAP GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks long-term growth of capital.
OBJECTIVE
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in equity securities of U.S.
INVESTMENT large cap issuers that, at the time of purchase, have market
STRATEGY capitalizations within the top 1,000 stocks of publicly
traded companies listed in the United States equity market.
The fund's equity securities consist primarily of common
stocks. The fund may also invest in preferred stocks,
warrants and securities convertible into common stocks. The
fund may also invest up to 15% of its assets in securities
of foreign issuers.
- -------------------------------------------------------------------------------------
HOW THE The subadviser, Citibank, N.A., creates a diversified
MANAGER portfolio of well established large capitalization companies
SELECTS THE with a proven track record of consistent, above average
FUND'S earnings and revenue growth, solid prospects for continued
INVESTMENTS superior growth, and an effective management team committed
to these goals.
The subadviser incorporates quantitative analysis,
multi-factor screens and models, as well as fundamental
stock research to identify high quality, large companies
that exhibit the potential for sustainable growth. In
selecting individual companies for investment, the
subadviser screens companies on the following factors:
Earnings per share growth.
Earnings per share growth consistency.
Sales growth.
Return on shareholder equity.
Strength of balance sheet.
- -------------------------------------------------------------------------------------
PRINCIPAL Equity investments may involve added risks. Investors could
RISKS OF lose money on their investment in the fund, or the fund may
INVESTING IN not perform as well as other investments, if any of the
THE FUND following occurs:
U.S. stock markets decline.
An adverse event, such as an unfavorable earnings report,
negatively affects the stock price of a company in which the
fund invests.
Large capitalization stocks fall out of favor with
investors.
The manager's judgment about the attractiveness, growth
prospects or potential appreciation of a particular sector
or stock proves to be incorrect.
Growth securities typically are sensitive to market
movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be
met, the prices of growth securities typically fall.
</TABLE>
Salomon Brothers Investment Series - 14
<PAGE>
PERFORMANCE
Because the fund commenced operations in 1999, the fund does not have sufficient
operating history to depict its performance in the graphic and table form.
The fund's total return will vary from year to year, and its performance will
vary compared with that of unmanaged indices. Although variations in the fund's
performance are an indication of the risks of investing in the fund, past
performance does not necessarily indicate how the fund will perform in the
future.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
FEE TABLE
- ----------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- ---------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.75% 0.75% 0.75% 0.75%
- ----------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None
Other expenses 3.02% 2.98% 2.96% 3.13%
- ----------------------------------------------------------------------------------------------
Total annual fund operating expenses 4.02% 4.73% 4.71% 3.88%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
Because the manager has
voluntarily agreed to
waive its management
fee and reimburse
expenses for the fiscal
year ended
December 31, 1999 the
actual total operating
expenses for each class
were:
Class A: 1.44%
Class B: 2.21%
Class 2: 2.19%
Class O: 1.21%
The manager may
discontinue this waiver
and reimbursement at
any time.
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
EXAMPLE
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $956 $1,728 $1,322 $2,210
- -------------------------------------------------------------------------------------------
Class B (redemption at end of period) 974 1,725 1,380 2,259
Class B (no redemption) 473 1,425 1,180 2,159
- -------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 666 1,504 1,268 2,609
Class 2 (no redemption) 566 1,504 1,268 2,609
- -------------------------------------------------------------------------------------------
Class O 390 1,184 660 1,455
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 15
<PAGE>
- --------------------------------------------------------------------------------
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks a high level of income which is exempt from
OBJECTIVE regular federal income taxes.
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in 'municipal securities,' which
INVESTMENT are debt obligations issued by any state and its political
STRATEGY subdivisions, agencies and public authorities (together with
certain other governmental issuers such as Puerto Rico, the
Virgin Islands and Guam). The interest on these bonds is
exempt from regular federal income tax. As a result, the
interest rate on these bonds normally is lower than it would
be if the bonds were subject to federal taxation. The fund
may invest more than 25% of its assets in obligations whose
payments are from revenues of similar projects (such as
utilities or hospitals) or whose issuers share the same
geographic locations.
CREDIT QUALITY: The fund invests exclusively in municipal
obligations rated in one of the four highest rating
categories by a national rating organization at the time of
purchase, or, if unrated, of equivalent quality as
determined by the manager.
MATURITY: The fund normally maintains a market weighted
average portfolio maturity of between three and ten years.
However, the fund may invest in individual securities of any
maturity.
- -------------------------------------------------------------------------------------
HOW THE In selecting securities for the fund, the manager focuses
MANAGER upon developing a portfolio that is diversified among states
SELECTS THE and types of municipal securities and also the appropriate
FUND'S maturity allocation for the fund within a given market
INVESTMENTS environment. The manager:
Emphasizes investments in revenue bonds for essential
services (i.e., water, electric, power, sewer and select
transportation authority) and in general obligation bonds
of high-quality issuers.
Uses credit analysis to evaluate the relative attractiveness
of various securities and sectors.
Seeks geographic and issuer diversification.
- -------------------------------------------------------------------------------------
PRINCIPAL RISKS Investors could lose money on their investment in the fund,
OF INVESTING IN or the fund may not perform as well as other investments, if
THE FUND any of the following occurs:
Interest rates rise, causing the value of the fund's
portfolio to decline.
The issuer of a security owned by the fund defaults on its
obligation to pay principal and/or interest or has its
credit rating downgraded.
Municipal securities fall out of favor with investors.
New federal or state legislation adversely affects the
tax-exempt status of securities held by the fund or the
financial ability of the municipalities to repay these
obligations.
The issuer of municipal obligations may not be able to make
timely payments because of general economic downturns or
increased governmental costs.
The manager's judgment about the attractiveness, relative
value or income potential of a particular security proves to
be incorrect.
It is possible that some of the fund's income distributions
may be, and distributions of the fund's realized capital
gains will be, subject to federal taxation. The fund may
realize taxable gains on the sale of its securities or other
transactions, and some of the fund's income distributions
may be subject to the federal alternative minimum tax. In
addition, distributions of the fund's income and gains
generally will be subject to state and local taxation.
</TABLE>
Salomon Brothers Investment Series - 16
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year. Past performance
does not necessarily indicate how
the fund will perform in the future.
QUARTERLY RETURNS: Highest:
2.95% in 2nd quarter 1997;
Lowest: - 1.24% in 2nd quarter 1999
[GRAPH]
% Total Return
4.18 7.52 4.52 0.18
96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class A shares
for each of the full
calendar years
indicated. Class B, 2
and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS, REDEMPTION OF
SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
- -------------------------------------------------------------------------------------
Class Inception Date 1 Year Since Inception
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Class A 2/22/95 - 4.58% 4.15%
Class B 2/22/95 - 5.29% 3.98%
- -------------------------------------------------------------------------------------
Class 2'D' 2/22/95 - 2.29% 4.16%
Class O 2/22/95 0.51% 5.38%
- -------------------------------------------------------------------------------------
Lehman Index * 0.57% 5.61%
*Index comparison begins on 2/28/95.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of the
Lehman Brothers 1-10
Year Municipal Bond
Index ('Lehman Index'),
a broad-based unmanaged
index of municipal
bonds.
'D'formerly Class C
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
FEE TABLE
- -------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 4.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.50% 0.50% 0.50% 0.50%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 0.75% None
Other expenses 1.31% 1.28% 1.35% 1.36%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 2.06% 2.78% 2.60% 1.86%
*If you buy Class A shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager voluntarily
agreed to waive its
management fee and
reimbursed certain
expenses for the fiscal
year ended
December 31, 1999, the
actual total operating
expenses for each class
were:
Class A: 0.63%
Class B: 1.35%
Class 2: 1.16%
Class O: 0.41%
The manager may
discontinue this waiver
and reimbursement at
any time.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $674 $1,090 $1,531 $2,751
- ------------------------------------------------------------------------------------------
Class B (redemption at end of period) 781 1,162 1,669 2,873
Class B (no redemption) 281 862 1,469 2,873
- -------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 460 900 1,466 3,005
Class 2 (no redemption) 360 900 1,466 3,005
- -------------------------------------------------------------------------------------------
Class O 189 585 1,006 2,180
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends
without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 17
<PAGE>
- --------------------------------------------------------------------------------
NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks as high a level of current income exempt from
OBJECTIVE regular federal income tax and New York State and New York
City personal income taxes as is consistent with liquidity
and the stability of principal.
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in high-quality, short-term 'New
INVESTMENT York municipal securities,' which are debt obligations
STRATEGY issued by the State of New York and its political
subdivisions, agencies and public authorities (or certain
other governmental issuers such as Puerto Rico, the Virgin
Islands, and Guam.) The interest on these obligations is
exempt from regular federal income tax and New York State
and New York City personal income tax. As a result, the
interest rate on these obligations normally is lower than it
would be if the obligations were subject to taxation.
MINIMUM CREDIT QUALITY: The fund invests primarily in
securities rated in the two highest short-term rating
categories, or if unrated, of equivalent quality.
MAXIMUM MATURITY: The fund invests in securities having
remaining maturities of 397 days or less. The fund maintains
a dollar-weighted average portfolio maturity of 90 days or
less.
- -------------------------------------------------------------------------------------
HOW THE The manager selects securities primarily by identifying
MANAGER undervalued sectors and individual securities, while also
SELECTS THE selecting securities that it believes will benefit from
FUND'S changes in market conditions. In selecting individual
INVESTMENTS securities, the manager:
Uses fundamental credit analysis to estimate the relative
value and attractiveness of various opportunities in the New
York municipal bond market.
Identifies eligible issuers with the most desirable credit
quality.
Trades between general obligations and revenue bonds and
among various revenue bond sectors such as housing, hospital
and industrial development, based on their apparent
relative values.
Considers a security's maturity in light of the outlook for
the issuer and its sector and interest rates.
- -------------------------------------------------------------------------------------
PRINCIPAL Although the fund seeks to preserve the value of an
RISKS OF investment at $1 per share, it is possible to lose money by
INVESTING IN investing in the fund if any of the following occurs:
THE FUND
There is no assurance The fiscal condition of New York State or New York City
that the fund will be weakens. New York State and City have experienced
able to maintain a significant fiscal problems in the past.
stable net asset value Interest rates rise sharply.
of $1.00 per share An issuer or guarantor of the fund's securities defaults,
The fund is not has its credit rating downgraded or is unable to make timely
diversified, which payments because of general economic downturns or increased
means that it can governmental costs.
invest a higher New federal or state legislation adversely affects the
percentage of its tax-exempt status of securities held by the fund or the
assets in any one financial ability of the municipalities to repay these
issuer than a obligations.
diversified fund. The manager's judgment about the attractiveness, value or
However, the fund income potential of a particular security proves to be
complies with the incorrect.
Securities and It is possible that some of the fund's income distributions
Exchange Commission's may be, and distributions of the fund's realized capital
rule for money market gains will be, subject to federal taxation. The fund may
funds, including the realize taxable gains on the sale of its securities or other
diversification transactions, and some of the fund's income distribution may
requirement of that be subject to the federal alternative minimum tax. In
rule. addition, some of the fund's income distribution and all of
the fund's realized capital gains generally will be subject
to state and local taxation.
</TABLE>
Salomon Brothers Investment Series - 18
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year. Past performance
does not necessarily indicate how
the fund will perform in the future.
QUARTERLY RETURNS: Highest:
1.62% in 1st quarter 1991;
Lowest: .66% in 4th quarter 1993
[GRAPH]
% Total Return
4.75 3.12 2.34 2.68 3.74 3.30 3.45 3.19 2.93
91 92 93 94 95 96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class O shares
for the calendar years
indicated. Class A, B
and 2 shares may have
different performance
because of their
different expenses.
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS, REDEMPTION
OF SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year 5 Years 10 Years Since Inception
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------
Class A 11/1/96 2.93% n/a n/a 3.20%
Class B 11/1/96 2.93% n/a n/a 3.21%
- -----------------------------------------------------------------------------------------
Class 2'D' 11/1/96 2.93% n/a n/a 3.21%
Class O 10/2/90 2.93% 3.32% n/a 3.34%
The fund's 7-day yield as of December 31, 1999 was 4.57%.
COMPARATIVE
PERFORMANCE
The table indicates the
average annual total
return of each class
for the periods shown.
'D'formerly Class C
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
FEE TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases None None None None
Maximum deferred sales charge on redemptions None None None None
- -------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.20% 0.20% 0.20% 0.20%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee None None None None
Other expenses 0.21% 0.22% 0.20% 0.21%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 0.41% 0.42% 0.40% 0.41%
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be
<S> <C> <C> <C> <C> <C>
Class A $42 $132 $230 $518
- ------------------------------------------------------------------------------------------
Class B 43 135 235 530
Class 2 41 128 224 505
- ------------------------------------------------------------------------------------------
Class O 42 132 230 518
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 19
<PAGE>
- --------------------------------------------------------------------------------
SMALL CAP GROWTH FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks long-term growth of capital.
OBJECTIVE
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in equity securities of companies
INVESTMENT with market capitalizations at the time of purchase similar
STRATEGY to that of the companies included in the Russell 2000 Index.
The Russell 2000 Index includes companies with market
capitalizations below the top 1000 stocks of the equity
market. The Index is reconstituted annually, each June 30.
As of June 30, 1999, the date of the most recent
reconstitution, the market capitalization of companies
included in the Russell 2000 Index ranged from $80 million
to $2.6 billion.
- -------------------------------------------------------------------------------------
HOW THE The manager emphasizes companies which it believes have
MANAGER favorable growth prospects and potential for significant
SELECTS THE capital appreciation. In selecting individual companies for
FUND'S investment, the manager looks for:
INVESTMENTS
Companies that either occupy a dominant position in an
emerging industry or a growing market share in larger,
fragmented industries.
Favorable near-term sales and/or earnings trends.
High or improving return on capital.
Strong financial condition.
Experienced and effective management.
- -------------------------------------------------------------------------------------
PRINCIPAL While investing in equity securities historically has
RISKS OF produced greater average returns than investments in fixed
INVESTING IN income securities, equity securities may also involve added
THE FUND risks. Investors can lose money on their investment in the
fund, or the fund may not perform as well as other
investments, if any of the following occurs:
Small capitalization stocks fall out of favor with
Investing in investors.
small Recession or adverse economic trends adversely affects the
capitalization earnings or financial condition of small companies.
companies The manager's judgment about the attractiveness, growth
involves a prospects or potential appreciation of the fund's
substantial risk investments proves to be incorrect.
of loss Greater volatility of share price because of the fund's
focus on small cap companies. Compared to large cap
companies, small cap companies and the market for their
equity securities are more likely to:
Be more sensitive to changes in earnings results and
investor expectations.
Have more limited product lines, capital resources and
management depth.
Experience sharper swings in market values.
Be harder to sell at the times and prices the manager
believes appropriate.
Offer greater potential for gain and loss.
Growth securities typically are sensitive to market
movements because their market prices tend to reflect future
expectations. When it appears those expectations will not be
met, the prices of growth securities typically fall.
</TABLE>
Salomon Brothers Investment Series - 20
<PAGE>
<TABLE>
<S> <C> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year. Past performance
does not necessarily indicate how
the fund will perform in the future.
QUARTERLY RETURNS: Highest:
33.45% in 4th quarter 1999;
Lowest: 1.48% in 3rd quarter 1999
[GRAPH]
% Total Return
57.52
99
Calendar year ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class A shares
for each of the
calendar years
indicated. Class B, 2
and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS,
REDEMPTION OF SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF DISTRIBUTIONS
AND DIVIDENDS.
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEAR ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year Since Inception
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Class A 7/1/98 48.43% 43.55%
Class B 7/1/98 51.15% 45.92%
- --------------------------------------------------------------------------------
Class 2'D' 7/1/98 53.67% 47.30%
Class O 7/1/98 57.90% 49.65%
- --------------------------------------------------------------------------------
Russell 2000 Index n/a 21.26% 8.25%
Russell 2000 Growth n/a 43.09% 23.57%
Index
*Index comparisons begin on 6/30/98.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of
Russell 2000 Index, an
index which includes
companies with market
capitalizations below
the top 1,000 of stocks
of the equity market
and Russell 2000 Growth
Index, an index which
measures the
performance of those
Russell 2000 Index
companies with higher
price-to-book ratios
and higher forecasted
growth values.
'D'formerly Class C
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FEE TABLE
-----------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- ------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.80% 0.80% 0.80% 0.80%
- ------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None
Other expenses 0.35% 0.35% 0.38% 0.47%
- ------------------------------------------------------------------------------------------
Total Annual fund operating expenses 1.40% 2.15% 2.18% 1.27%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager voluntarily
agreed to waive its
management fee for the
fiscal year ended
December 31, 1999, the
actual total operating
expenses for each class
were:
Class A: 1.37%
Class B: 2.12%
Class 2: 2.14%
Class O: 1.24%
The manager may
discontinue this waiver
at any time.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $709 $993 $1,297 $2,158
- -------------------------------------------------------------------------------------------
Class B (redemption at end of period) 718 973 1,354 2,206
Class B (no redemption) 218 673 1,154 2,206
- -------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 419 775 1,258 2,588
Class 2 (no redemption) 319 775 1,258 2,588
- -------------------------------------------------------------------------------------------
Class O (redemption at end of period) 129 403 697 1,534
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 21
<PAGE>
- --------------------------------------------------------------------------------
STRATEGIC BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks a high level of current income. As a
OBJECTIVE secondary objective, the fund seeks capital appreciation.
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests primarily in a globally diverse portfolio
INVESTMENT of fixed income securities. The manager has broad discretion
STRATEGY to allocate the fund's assets among the following segments
of the global market for fixed income securities:
</TABLE>
<TABLE>
<S> <C> <C>
U.S. government obligations Mortgage and asset-backed securities
Investment and non-investment grade Investment and non-investment grade
U.S. and foreign corporate debt sovereign debt, including issuers
in emerging markets
</TABLE>
<TABLE>
<S> <C>
CREDIT QUALITY: The fund invests in fixed income securities
across a range of credit qualities and may invest a
substantial portion of the fund's assets in obligations
rated below investment grade by a recognized rating agency,
or, if unrated, of equivalent quality as determined by the
manager. Below investment grade securities are commonly
referred to as 'junk bonds'.
MATURITY: The fund has no specific average portfolio
maturity requirement, but generally anticipates maintaining
a range of 4.5 to 10 years. The fund may hold individual
securities of any maturity.
- -------------------------------------------------------------------------------------
HOW THE The manager uses a combination of quantitative models which
MANAGER seek to measure the relative risks and opportunities of each
SELECTS THE market segment based upon economic, market, political,
FUND'S currency and technical data and its own assessment of
INVESTMENTS economic and market conditions to create an optimal
risk/return allocation of the fund's assets among various
segments of the fixed income market. After the manager makes
its sector allocations, the manager uses traditional credit
analysis to identify individual securities for the fund's
portfolio.
In selecting corporate debt for investment, the manager
considers the issuer's:
Financial condition.
Sensitivity to economic conditions and trends.
Operating history.
Experience and track record of management.
In selecting foreign government debt for investment, the
manager considers the issuer's:
Economic and political conditions within the issuer's
country.
Overall and external debt levels and debt service ratios.
Access to capital markets.
Debt service payment history.
In selecting U.S. government and agency for investment
obligations and mortgage-backed securities for investment,
the manager considers the following factors:
Yield curve shifts.
Credit quality.
Changing prepayment patterns.
- -------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Investment Series - 22
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL RISKS Investors could lose money on their investment in the fund,
OF INVESTING IN or the fund may not perform as well as other investments, if
THE FUND any of the following occurs:
Interest rates go up, causing the prices of fixed-income
securities to decline and reducing the value of the fund's
investments.
The issuer of a security owned by the fund defaults on its
obligation to pay principal and/or interest or has its
credit rating downgraded.
During periods of declining interest rates, the issuer of a
security may exercise its option to prepay principal earlier
than scheduled, forcing the fund to reinvest in lower
yielding securities. This is known as call or prepayment
risk.
During periods of rising interest rates, the average life of
certain types of securities may be extended because of
slower than expected principal payments. This may lock in a
below market interest rate, increase the security's
duration and reduce the value of the security. This is
known as extension risk.
The manager's judgment about the attractiveness, relative
value or potential appreciation of a particular sector or
security proves to be incorrect.
To the extent the fund invests significantly in asset-backed
and mortgage-related securities, its exposure to prepayment
and extension risks may be greater than other investments in
fixed income securities. Mortgage derivatives held by the
fund may have especially volatile prices and may have a
disproportionate effect on the fund's share price.
Investments in High yield securities are considered speculative with
high yield respect to the issuer's ability to pay interest and
securities principal and are susceptible to default or decline in
involve a market value due to adverse economic and business
substantial risk developments. The market values for high yield securities
of loss. tend to be very volatile, and these securities are less
liquid than investment grade debt securities. For these
reasons, your investment in the fund is subject to increased
price sensitivity to changing interest rates and a greater
risk of loss due to default or declining credit quality.
Also, negative market sentiment towards high yield
securities depresses the price and liquidity of high yield
securities. This negative perception could last for a
significant period of time.
Investing in non-U.S. issuers may involve unique risks
compared to investing in the securities of U.S. issuers.
These risks are more pronounced to the extent the fund
invests in issuers in countries with emerging markets or if
the fund invests significantly in one country. These risks
may include:
Less information about non-U.S. issuers or markets may be
available due to less rigorous disclosure and accounting
standards or regulatory practices.
Many non-U.S. markets are smaller, less liquid and more
volatile than U.S. markets. In a changing market, the
manager may not be able to sell the fund's portfolio
securities in amounts and at prices the manager considers
reasonable.
Economic, political and social developments significantly
disrupt the financial markets or interfere with the Fund's
ability to enforce its rights against foreign government
issuers.
</TABLE>
Salomon Brothers Investment Series - 23
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year.
Past performance does not
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
5.65 in 4th quarter 1999;
Lowest: - 3.47% in 3rd quarter 1998
[GRAPHIC]
% Total Return
14.05 11.23 1.05 4.96
96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class A shares
for each of the
calendar years
indicated. Class B, 2
and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS, REDEMPTION OF
SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year Since Inception
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------------
Class A 2/22/95 - 0.04% 8.66%
Class B 2/22/95 - 0.63% 8.61%
- --------------------------------------------------------------------------------
Class 2'D' 2/22/95 2.52% 8.75%
Class O 2/22/95 5.26% 10.01%
- --------------------------------------------------------------------------------
SSB Big Index * - 0.84% 7.05%
*Index Comparison begins on 2/28/95.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of the
Salomon Smith Barney
Broad Investment Grade
Bond Index ('SSB Big
Index'), a broad-based
unmanaged index of
corporate bonds.
'D'formerly Class C
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
FEE TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 4.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- ------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.75% 0.75% 0.75% 0.75%
- ------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 0.75% None
Other expenses 0.44% 0.44% 0.46% 0.44%
- ------------------------------------------------------------------------------------------
Total annual fund operating expenses 1.44% 2.19% 1.96% 1.19%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager voluntarily
agreed to waive a
portion of its
management fee for the
fiscal year ended
December 31, 1999, the
actual total operating
expenses for each class
were:
Class A: 1.24%
Class B: 1.99%
Class 2: 1.76%
Class O: 0.99%
The manager may
discontinue this waiver
at any time.
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
EXAMPLE
- ----------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C> <C>
Your costs would be
Class A $ 615 $ 909 $1,225 $ 2,117
- -----------------------------------------------------------------------------------------
Class B (redemption at end of period) 722 985 1,375 2,256
Class B (no redemption) 222 685 1,175 2,256
- -----------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 397 709 1,147 2,362
Class 2 (no redemption) 297 709 1,147 2,362
- -----------------------------------------------------------------------------------------
Class O 121 378 654 1,443
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without
a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period.
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 24
<PAGE>
- --------------------------------------------------------------------------------
BALANCED FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to obtain above average income (compared to a
OBJECTIVE portfolio invested in equity securities). The fund's
secondary objective is to take advantage of opportunities
for growth of capital and income.
- -------------------------------------------------------------------------------------
PRINCIPAL The fund invests in a broad range of equity and fixed income
INVESTMENT securities of both U.S. and foreign issuers. The fund varies
STRATEGY its allocations between equity and fixed income securities
depending on the manager's view of economic and market
conditions, fiscal and monetary policy and security values.
However, under normal market conditions at least 40% of the
fund's assets are allocated to equity securities.
CREDIT QUALITY: The fund's investments in fixed-income
securities are primarily investment grade but the fund may
invest up to 20% of its assets in nonconvertible fixed
income securities rated below investment grade by a
recognized rating agency or in unrated securities of
equivalent quality. Securities rated below investment grade
are commonly referred to as 'junk bonds.'
MATURITY: The fund's investments in fixed-income securities
may be of any maturity.
- -------------------------------------------------------------------------------------
HOW THE In selecting stocks for investment, the manager applies a
MANAGER bottom-up analysis, focusing on companies with:
SELECTS THE Large market capitalizations.
FUND'S Favorable dividend yields and price to earnings ratios.
INVESTMENTS Stocks that are less volatile than the market as a whole
Strong balance sheets.
A catalyst for appreciation and restructuring potential,
product innovation or new development.
The manager considers both macroeconomic and issuer specific
factors in selecting debt securities for its portfolio. In
assessing the appropriate maturity, rating and sector
weighting of the fund's portfolio, the manager considers a
variety of macroeconomic factors that are expected to
influence economic activity and interest rates. These
factors include fundamental economic indicators, Federal
Reserve monetary policy and the relative value of the U.S.
dollar compared to other currencies. Once the manager
determines the preferable portfolio characteristic, the
manager selects individual securities based upon the terms
of the securities (such as yields compared to U.S.
Treasuries or comparable issuers), liquidity and rating,
sector and issuer diversification. The manager also employs
fundamental research and due diligence to assess an
issuer's:
Credit quality taking into account financial condition and
profitability.
Future capital needs.
Potential for change in rating and industry outlook.
The competitive environment and management ability.
</TABLE>
Salomon Brothers Investment Series - 25
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL While investing in a mix of equity and debt securities can
RISKS OF bring added benefits, it may also involve additional risks.
INVESTING IN Investors could lose money in the fund or the fund's
THE FUND performance could fall below other possible investments if
any of the following occurs:
U.S. stock markets decline.
An adverse event, such as an unfavorable earnings report,
negatively affects the stock price of a company in which the
fund invests.
Large capitalization stocks fall out of favor with
investors.
The manager's judgment about the attractiveness, growth
prospects or potential appreciation of a particular sector
or stock proves to be incorrect.
The fund also has risks associated with investing in bonds.
The fund could underperform other investments if:
Interest rates go up, causing the prices of fixed-income
securities to decline and reducing the value of the fund's
investments.
The issuer of a debt security owned by the fund defaults on
its obligation to pay principal or interest or has its
credit rating downgraded.
During periods of declining interest rates, the issuer of a
security may exercise its option to prepay earlier than
scheduled, forcing the fund to reinvest in lower yielding
securities. This is known as call or prepayment risk.
During periods of rising interest rates, the average life of
certain types of securities may be extended because of
slower than expected principal payments. This may lock in a
below market interest rate, increase the security's
duration and reduce the value of the security. This is
known as extension risk.
</TABLE>
Salomon Brothers Investment Series - 26
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year.
Past performance does not
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
7.98% in 2nd quarter 1999;
Lowest: - 7.23% in 3rd quarter 1999
[GRAPH]
% Total return
18.33 19.05 6.36 3.21
96 97 98 99
Calendar years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class A shares
for each of the
calendar years
indicated. Class B, 2
and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS,
REDEMPTION OF SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year Since Inception
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------
Class A 9/11/95 - 2.72% 10.79%
Class B 9/11/95 - 2.46% 11.13%
- -----------------------------------------------------------------------------
Class 2'D' 9/11/95 0.44% 11.22%
Class O 9/11/95 3.42% 12.70%
- -----------------------------------------------------------------------------
S&P 500 Index 9/11/95 21.04% 26.62%
SSB Big Index * - 0.84% 5.94%
*Index comparison begins on 9/30/95.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of each
class for the periods
shown to that of the
Standard & Poor's 500
Stock Index ('S&P 500
Index'), a broad-based
unmanaged index of
widely held common
stocks and the Salomon
Smith Barney Broad
Investment Grade Bond
Index ('SSB Big
Index'), a broad-based
unmanaged index of
corporate bonds.
'D'formerly Class C
</TABLE>
<TABLE>
<CAPTION>
FEE TABLE
- -------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR
INVESTMENT CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C>
Maximum sales charge on purchases 5.75%* None 1.00% None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- ------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.55% 0.55% 0.55% 0.55%
- -------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 1.00% None
Other expenses 0.37% 0.37% 0.37% 0.37%
- -------------------------------------------------------------------------------------------
Total annual fund operating expenses 1.17% 1.92% 1.92% 0.92%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager voluntarily
agreed to waive a
portion of its
management fee for the
fiscal year ended
December 31, 1999, the
actual total operating
expenses for each class
were:
Class A: 0.95%
Class B: 1.70%
Class 2: 1.70%
Class O: 0.70%
The manager may
discontinue this waiver
at any time.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
Your costs would be $ 687 $ 925 $1,182 $1,914
Class A
- -------------------------------------------------------------------------------------------
Class B (redemption at end of period) 695 903 1,237 1,963
Class B (no redemption) 195 603 1,037 1,960
- -------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 393 697 1,126 2,321
Class 2 (no redemption) 293 697 1,126 2,321
- -------------------------------------------------------------------------------------------
Class O 94 293 509 1,131
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends
without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 27
<PAGE>
- --------------------------------------------------------------------------------
U.S. GOVERNMENT INCOME FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to obtain a high level of current income.
OBJECTIVE
- -------------------------------------------------------------------------------------
PRINCIPAL INVESTMENT Under normal circumstances, the fund invests in debt
STRATEGY securities and mortgage-backed securities issued or
guaranteed by the U.S. government, its agencies or
instrumentalities. The fund may also invest in private pools
of mortgages the payment of principal and interest of which
is guaranteed by the U.S. government, its agencies or
instrumentalities. Agency and instrumentality securities may
be backed by the full faith and credit of the U.S. Treasury,
by the right of the issuer to borrow from the U.S.
government or only by the credit of the issuer itself.
DURATION: The fund normally maintains an average portfolio
effective duration of two to four years. Duration is an
approximate measure of the sensitivity of the market value
of the fund's portfolio to changes in interest rates.
- -------------------------------------------------------------------------------------
HOW THE The manager focuses on identifying undervalued sectors and
MANAGER securities. Specifically, the manager:
SELECTS THE Monitors the spread between U.S. Treasury and Government
FUND'S agency or instrumentality issuers and purchases agency and
INVESTMENTS instrumentality issues which it believes will provide a
total return advantage.
Determines sector or maturity weightings based on
intermediate and long-term assessments of the economic
environment and relative value factors based on interest
rate outlook.
Uses research to uncover inefficient sectors of the
government and mortgage markets and adjusts portfolio
positions to take advantage of new information.
Measures the potential impact of supply/demand imbalances,
yield curve shifts and changing prepayment patterns to
identify individual securities that balance potential
return and risk.
- -------------------------------------------------------------------------------------
PRINCIPAL Investors could lose money on their investment in the fund
RISKS OF or the fund's performance could fall below other possible
INVESTING IN investments if any of the following occurs:
THE FUND Interest rates increase, causing the prices of fixed-income
securities to decline and reducing the value of the fund's
investments.
As interest rates decline, the issuers of mortgage-related
securities held by the fund may pay principal earlier than
scheduled, forcing the fund to reinvest in lower yielding
securities. This is called prepayment or call risk.
As interest rates increase, slower than expected principal
payments may extend the average life of fixed income
securities, locking in below-market interest rates and
reducing the value of these securities. This is called
extension risk.
Increased volatility in share price to the extent the fund
holds mortgage derivative securities because of their
imbedded leverage or unusual interest rate reset terms.
The manager's judgment about interest rates or the
attractiveness, value or income potential of a particular
security proves incorrect.
Payments of principal and interest on mortgage pools issued
by government related organizations are not guaranteed by
the U.S. government. Although mortgage pools issued by U.S.
agencies are guaranteed with respect to payments of
principal and interest, such guarantee does not apply to
losses resulting from declines in the market value of such
securities.
</TABLE>
Salomon Brothers Investment Series - 28
<PAGE>
<TABLE>
<S> <C>
PERFORMANCE
The bar chart indicates the risks of
investing in the fund by showing
changes in the fund's performance
from year to year. Past performance
does not necessarily indicate how
the fund will perform in the future.
QUARTERLY RETURNS: Highest:
4.30% in 3rd quarter 1998;
Lowest: - 1.20% in 3rd quarter 1996
[GRAPH]
% Total return
3.59 7.86 7.63 1.52
96 97 98 99
Calendar Years ended December 31
TOTAL RETURN
The bar chart shows the
performance of the
fund's Class A shares
for each of the
calendar years
indicated. Class B, 2
and O shares would have
different performance
because of their
different expenses. The
performance information
in the chart does not
reflect sales charges,
which would reduce your
return.
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES IMPOSITION OF MAXIMUM SALES CHARGE APPLICABLE TO THE CLASS, REDEMPTION OF
SHARES AT THE END OF THE PERIOD AND THE REINVESTMENT OF DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Class Inception Date 1 Year Since Inception
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------
Class A 2/22/95 - 3.28% 5.09%
Class B 2/22/95 - 4.05% 5.04%
- -------------------------------------------------------------------------------------
Class 2'D' 2/22/95 - 0.99% 5.18%
Class O 2/22/95 1.76% 6.43%
- -------------------------------------------------------------------------------------
SSB Index * 2.01% 6.30%
*Index comparison begins on 2/28/95.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of the
fund for the periods
shown to that of the
Salomon Smith Barney
1-5 Year Treasury Bond
Index ('SSB Index'), a
broad-based unmanaged
index of U.S. Treasury
securities.
'D'formerly Class C
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
FEE TABLE
----------------------------------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT) CLASS A CLASS B CLASS 2 CLASS O
<S> <C> <C> <C> <C> <C>
Maximum sales charge on purchases 4.75%* None None None
Maximum deferred sales charge on redemptions None 5.00% 1.00% None
- ---------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS
A % OF NET ASSETS)
Management fees 0.60% 0.60% 0.60% 0.60%
- ---------------------------------------------------------------------------------------------
Distribution and service (12b-1) fee 0.25% 1.00% 0.75% None
Other expenses 0.82% 0.82% 0.85% 0.82%
- ---------------------------------------------------------------------------------------------
Total annual fund operating expenses 1.67% 2.42% 2.20% 1.42%
*If you buy Class A Shares in amounts of $50,000 or more the sales charge is lower.
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund. Because the
manager voluntarily
agreed to waive a
portion of its
management fee for the
fiscal year ended
December 31, 1999, the
actual total operating
expenses for each class
were:
Class A: 0.85%
Class B: 1.60%
Class 2: 1.37%
Class O: 0.60%
The manager may
discontinue this waiver
at any time.
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be
<S> <C> <C> <C> <C> <C>
Class A $637 $ 976 $1,339 $2,357
- -------------------------------------------------------------------------------------------------
Class B (redemption at end of period) 745 1,055 1,491 2,496
Class B (no redemption) 245 755 1,291 2,496
- -------------------------------------------------------------------------------------------------
Class 2 (redemption at end of period) 421 781 1,268 2,609
Class 2 (no redemption) 321 781 1,268 2,609
- -------------------------------------------------------------------------------------------------
Class O 145 449 776 1,702
The example assumes: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Investment Series - 29
<PAGE>
- --------------------------------------------------------------------------------
MORE ON THE FUNDS' INVESTMENTS
ADDITIONAL INVESTMENTS AND INVESTMENT TECHNIQUES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Each fund's investment ASIA GROWTH FUND
objective and its principal Although the fund intends to be fully invested in
investment strategies and equity securities of Asian companies, the fund may
risks are described under also invest up to 35% of its assets in fixed income
'Fund Goals and securities issued by U.S. and foreign governments,
Strategies.' their agencies or instrumentalities and supranational
entities. The fund may invest up to 10% of its assets
This section provides in non-convertible debt securities rated below
additional information investment grade, or, if unrated, of equivalent
about the funds' quality as determined by the subadvisor.
investments and certain
portfolio management BALANCED FUND
techniques the funds may The fund may invest up to 20% of its assets in
use. More information securities of foreign issuers.
about the funds'
investments and portfolio CAPITAL FUND
management techniques, The fund may invest in investment grade fixed-income
some of which entail risks, securities and may invest up to 20% of its net assets
is included in the statement in non-convertible debt securities rated below
of additional information investment grade or, if unrated, of equivalent
(SAI). quality as determined by the manager. The fund
emphasizes non-convertible debt securities that offer
Any policy or limitation for the appreciation potential of common stocks. The fund
a fund that is expressed as may invest without limit in convertible debt
a percentage of assets is securities. The fund may also invest up to 20% of its
considered only at the time assets in securities of foreign issuers.
of purchase of portfolio
securities. The policy will HIGH YIELD BOND FUND
not be violated if these
limitations are exceeded Although the fund invests primarily in high yield
because of changes in the securities, the fund may also invest up to 20% of its
market value of the fund's assets in equity and equity related securities.
assets or for any other
reason. INTERNATIONAL EQUITY FUND
Although the fund invests primarily in securities of
issuers organized in at least 3 countries other than
the U.S., the fund may invest up to 15% of its assets
in the securities of issuers located in the U.S.
Although the fund emphasizes its investments in
developed markets, it may also invest up to 15% of
its net assets in companies located in developing
countries. The fund may also invest in other
securities of non-U.S. issuers which the subadviser
believes provide an opportunity for appreciation,
such as convertible bonds, preferred stocks and
warrants. The fund's long-term convertible
investments will carry at least a Baa rating from
Moody's Investors Service, Inc. or a BBB rating from
Standard & Poor's Ratings Group at the time of
purchase or are determined by the subadviser to be of
equal quality.
INVESTORS VALUE FUND
The fund may invest up to 5% of its net assets in
non-convertible debt securities rated below
investment grade or, if unrated, of equivalent
quality as determined by the manager. The fund may
invest without limit in convertible debt securities.
The fund may also invest up to 20% of its assets in
securities of foreign issuers.
</TABLE>
Salomon Brothers Investment Series - 30
<PAGE>
LARGE CAP GROWTH FUND
The fund may invest up to 35% of its assets in equity
securities of companies with market capitalization
not within the top 1,000 stocks of the equity market.
The fund may invest up to 15% of its assets in
foreign equity securities.
NATIONAL INTERMEDIATE MUNICIPAL FUND
The fund may invest up to 20% of its assets in
securities that pay interest which is not exempt from
regular federal income tax.
NEW YORK MUNICIPAL MONEY MARKET FUND
The fund may invest up to 35% of its assets in
securities that pay interest which is not exempt from
New York State or city personal income tax and up to
20% of its assets in securities that pay interest
which is not exempt from federal income tax.
SMALL CAP GROWTH FUND
The fund may invest up to 35% of its assets in equity
securities of companies whose market capitalizations
exceed the market capitalization of companies
included in the Russell 2000 Index. The fund may also
invest up to 25% of its assets in non-convertible
bonds, notes and debt securities when the manager
believes that their total return potential equals or
exceeds the potential return of equity securities.
The fund may invest up to 20% of its total assets in
equity securities of foreign issuers.
STRATEGIC BOND FUND
Although the fund invests primarily in fixed-income
securities, the fund may also invest up to 20% of its
assets in equity and equity related securities. The
fund may invest up to 100% of its assets in foreign
currency denominated securities, including securities
of issuers located in emerging markets.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
EQUITY INVESTMENTS
Subject to its particular investment policies, each
Asia Growth Fund, Capital of these funds may invest in all types of equity
Fund, Investors Value Fund, securities. Equity securities include common stocks
International Equity Fund, traded on an exchange or in the over the counter
Large Cap Growth Fund, market, preferred stocks, warrants, rights,
Small Cap Growth Fund and convertible securities, depositary receipts, trust
Balanced Fund certificates, limited partnership interests, shares
of other investment companies and real estate
investment trusts.
- --------------------------------------------------------------------------------
FIXED INCOME INVESTMENTS Subject to its particular investment policies, each
fund may invest in fixed income securities. Fixed
All funds, but the following income investments include bonds, notes (including
funds only to a limited structured notes), mortgage-related securities,
extent: Asia Growth Fund, asset-backed securities, convertible securities,
Capital Fund, Investors Value Eurodollar and Yankee dollar instruments, loan
Fund, Large Cap Growth participation and assignments, preferred stocks and
Fund, International Equity money market instruments. Fixed income securities may
Fund and Small Cap Growth be issued by U.S. and foreign corporations or
Fund entities; U.S. and foreign banks; the U.S.
government, its agencies, authorities,
instrumentalities or sponsored enterprises; state and
municipal governments; supranational organizations;
and foreign governments and their political
subdivisions. Only certain of the funds may invest in
fixed income securities of foreign issuers. See
'Foreign and emerging markets investments' below.
</TABLE>
Salomon Brothers Investment Series - 31
<PAGE>
Fixed income securities may have all types of
interest rate payment and reset terms, including
fixed rate, adjustable rate, zero coupon, contingent,
deferred, payment in kind and auction rate features.
Cash Management Fund, Each of these funds may invest in mortgage-backed and
High Yield Bond Fund, asset-backed securities. Mortgage-related securities
Strategic Bond Fund, may be issued by private companies or by agencies of
Balanced Fund and U.S. the U.S. government and represent direct or indirect
Government Income Fund participations in, or are collateralized by and
payable from, mortgage loans secured by real
property. Asset-backed securities represent
participations in, or are secured by and payable
from, assets such as installment sales or loan
contracts, leases, credit card receivables and other
categories of receivables.
Certain debt instruments may only pay principal at
maturity or may only represent the right to receive
payments of principal or payments of interest on
underlying pools of mortgages or government
securities, but not both. The value of these types of
instruments may change more drastically than debt
securities that pay both principal and interest
during periods of changing interest rates. Interest
only mortgage backed securities are particularly
subject to prepayment risk. The fund may obtain a
below market yield or incur a loss on such
instruments during periods of declining interest
rates. Principal only instruments are particularly
subject to extension risk. For mortgage derivatives
and structured securities that have imbedded leverage
features, small changes in interest or prepayment
rates may cause large and sudden price movements.
Mortgage derivatives can also become illiquid and
hard to value in declining markets.
Strategic Bond Fund, Each of these funds may also enter into mortgage
Balanced Fund and U.S. dollar roll transactions to earn additional income.
Government Income Fund In these transactions, the fund sells a U.S. agency
mortgage-backed security and simultaneously agrees to
repurchase at a future date another U.S. agency
mortgage-backed security with the same interest rate
and maturity date, but generally backed by a
different pool of mortgages. The fund loses the right
to receive interest and principal payments on the
security it sold. However, the fund benefits from the
interest earned on investing the proceeds of the sale
and may receive a fee or a lower repurchase price.
The benefits from these transactions depend upon the
manager's ability to forecast mortgage prepayment
patterns on different mortgage pools. The fund may
lose money if, during the period between the time it
agrees to the forward purchase of the mortgage
securities and the settlement date, these securities
decline in value due to market conditions or
prepayments on the underlying mortgages.
- --------------------------------------------------------------------------------
CREDIT QUALITY If a security receives different ratings, a fund will
treat the securities as being rated in the highest
rating category. Credit rating criteria are applied
at the time a fund purchases a fixed income security.
A fund may choose not to sell securities that are
downgraded after their purchase below the fund's
minimum acceptable credit rating. Each fund's credit
standards also apply to counterparties to OTC
derivatives contracts.
Salomon Brothers Investment Series - 32
<PAGE>
INVESTMENT GRADE SECURITIES
Securities are investment grade if:
They are rated in one of the top four long-term
rating categories of a nationally recognized
statistical rating organization.
They have received a comparable short-term or other
rating.
They are unrated securities that the manager
believes are of comparable quality to investment
grade securities.
-------------------------------------------------------------------------------
<TABLE>
<S> <C>
HIGH YIELD, LOWER QUALITY Each of these funds may invest in fixed income
SECURITIES securities that are high yield, lower quality
securities rated by a rating organization below its
High Yield Bond Fund, top four long-term rating categories or unrated
Strategic Bond Fund and securities determined by the manager to be of
Balanced Fund. Each of the equivalent quality. The issuers of lower quality
following funds only to a bonds may be highly leveraged and have difficulty
limited extent: Asia Growth servicing their debt, especially during prolonged
Fund, Capital Fund and economic recessions or periods of rising interest
Investors Value Fund rates. The prices of lower quality securities are
volatile and may go down due to market perceptions of
deteriorating issuer creditworthiness or economic
conditions. Lower quality securities may become
illiquid and hard to value in down markets.
--------------------------------------------------------------------------------
MUNICIPAL OBLIGATIONS Each of these funds invests primarily in municipal
obligations, which are debt obligations issued by or
New York Municipal Money on behalf of states, cities, municipalities and other
Market Fund and National public authorities. The interest on these securities
Intermediate Municipal is exempt from regular federal income tax and, in
Fund some cases, state and local personal income tax. The
two principal classifications of municipal
obligations are 'general obligation' securities and
'revenue' securities. General obligation securities
are secured by the issuer's pledge of its full faith,
credit and taxing power for the payment of principal
and interest. Revenue securities are payable only
from the revenues derived from a particular facility
or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific
revenue source such as the user of a facility being
financed. Revenue securities may include private
activity bonds. Private activity bonds may be issued
by or on behalf of public authorities to finance
various privately operated facilities and are not
payable from the unrestricted revenues of the issuer.
As a result, the credit quality of private activity
bonds is frequently related directly to the credit
standing of private corporations or other entities.
The secondary market for municipal obligations may be
less liquid than for most taxable fixed income
securities which may limit the fund's ability to buy
and sell these obligations at times and prices the
manager believes would be advantageous. There may be
less information available about the financial
condition of an issuer of municipal obligations than
about issuers of other publicly traded securities.
Also, state and federal bankruptcy laws could hinder
the fund's ability to recover interest or principal
in the event of a default by the issuer.
- --------------------------------------------------------------------------------
FOREIGN AND EMERGING Each of these funds may invest in foreign securities,
MARKET INVESTMENTS although the foreign investments of Cash Management
Fund are limited to U.S.
</TABLE>
Salomon Brothers Investment Series - 33
<PAGE>
<TABLE>
<S> <C>
dollar denominated investments issued by foreign
All funds except National branches of U.S. banks and by U.S. and foreign
Intermediate Municipal Fund, branches of foreign banks.
New York Municipal Money
Market Fund and U.S. Investing in foreign issuers may involve unique risks
Government Income Fund compared to investing in the securities of U.S.
issuers. Some of these risks do not apply to larger
more developed countries. These risks are more
pronounced to the extent the fund invests in issuers
in countries with emerging markets or if the fund
invests significantly in one country. These risks may
include:
Less information about non-U.S. issuers or markets
may be available due to less rigorous disclosure and
accounting standards or regul atory practices.
Asia Growth Fund, High
Yield Bond Fund, Many non-U.S. markets are smaller, less liquid and
International Equity Fund, more volatile than U.S. markets. In a changing
Strategic Bond Fund and market, the manager may not be able to sell the
Balanced Fund may invest fund's portfolio securities in amounts and at prices
in emerging issuers. the manager considers reasonable.
The U.S. dollar may appreciate against non-U.S.
currencies or a foreign government may impose
restrictions on currency conversion or trading.
The economies of non-U.S. countries may grow at a
slower rate than expected or may experience a
downturn or recession.
Economic, political and social developments that
adversely affect the securities markets.
Foreign governmental obligations involve the risk of
debt moratorium, repudiation or renegotiation and
the fund may be unable to enforce its rights against
the issuers.
- --------------------------------------------------------------------------------
SOVEREIGN GOVERNMENT AND Each of these funds may invest in all types of fixed
SUPRANATIONAL DEBT income securities of governmental issuers in all
countries, including emerging markets. These
sovereign debt securities may include:
All funds except Cash
Management Fund, National Fixed income securities issued or guaranteed by
Intermediate Municipal Fund, governments, governmental agencies or
New York Municipal Money instrumentalities and political subdivisions located
Market Fund, Large Cap in emerging market countries.
Growth Fund, Small Cap
Growth Fund and U.S. Fixed income securities issued by government owned,
Government Income Fund controlled or sponsored entities located in emerging
market countries.
Interests in entities organized and operated for the
purpose of restructuring the investment
characteristics of instruments issued by any of the
above issuers.
Brady Bonds, which are debt securities issued under
the framework of the Brady Plan as a means for
debtor nations to restructure their outstanding
external indebtedness.
Fixed income securities issued by corporate issuers,
banks and finance companies located in emerging
market countries.
Participations in loans between emerging market
governments and financial institutions.
Fixed income securities issued by supranational
entities such as the World Bank or the European
Economic Community. A supranational entity is a
bank, commission or company established or
financially supported by the national governments of
one or more countries to promote reconstruction or
development.
</TABLE>
Salomon Brothers Investment Series - 34
<PAGE>
<TABLE>
<S> <C>
DERIVATIVES AND HEDGING Each of these funds may, but need not, use derivative
TECHNIQUES contracts, such as futures and options on securities,
securities indices or currencies; options on these
All funds except Cash futures; forward currency contracts; and interest
Management Fund, National rate or currency swaps. These funds do not use
Intermediate Municipal Fund, derivatives as a primary investment technique and
New York Municipal Money generally limit their use to hedging. However, these
Market Fund and U.S. funds may use derivatives for any of the following
Government Income Fund purposes:
To hedge against the economic impact of adverse
changes in the market value of its securities, due
to changes in stock market prices, currency exchange
rates or interest rates
As a substitute for buying or selling securities
To enhance the fund's return as a non-hedging
strategy that may be considered speculative
A derivative contract will obligate or entitle a fund
to deliver or receive an asset or cash payment that
is based on the change in value of one or more
securities, currencies or indices. Even a small
investment in derivative contracts can have a big
impact on a fund's stock market, currency and
interest rate exposure. Therefore, using derivatives
can disproportionately increase losses and reduce
opportunities for gains when stock prices, currency
rates or interest rates are changing. A fund may not
fully benefit from or may lose money on derivatives
if changes in their value do not correspond
accurately to changes in the value of the fund's
holdings. The other parties to certain derivative
contracts present the same types of credit risk as
issuers of fixed income securities. Derivatives can
also make a fund less liquid and harder to value,
especially in declining markets.
- --------------------------------------------------------------------------------
TEMPORARY DEFENSIVE Each fund may depart from its principal investment
INVESTING strategies in response to adverse market, economic or
political conditions by taking temporary defensive
positions in all types of money market and short-term
debt securities. If a fund takes a temporary
defensive position, it may be unable to achieve its
investment goal.
- --------------------------------------------------------------------------------
PORTFOLIO TURNOVER Each fund may engage in active and frequent trading
to achieve its principal investment strategies.
Frequent trading also increases transaction costs,
which could detract from a fund's performance.
--------------------------------------------------------------------------------
</TABLE>
MANAGEMENT
Salomon Brothers Asset Management Inc is the investment manager for each fund.
Together with its affiliates, the manager provides a broad range of fixed income
and equity investment advisory services to various individuals located
throughout the world. The manager's principal address is 7 World Trade Center,
New York, New York 10048. It is a wholly-owned subsidiary of Citigroup, Inc.
Citigroup businesses produce a broad range of financial services -- asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading -- and use diverse channels to make
them available to consumer and corporate customers around the world. Salomon
Brothers Asset Management Limited, an affiliate of the manager, provides
advisory services to the manager in connection with Strategic Income Fund's
transactions in currencies and non-dollar denominated debt securities. Its
principal address is Victoria Plaza, 111
Salomon Brothers Investment Series - 35
<PAGE>
Buckingham Palace Row, London SW1W 0SB England. Salomon Brothers Asia Pacific
Limited ('SBAM AP') is subadviser to the Asia Growth Fund and manages the Asia
Growth Fund's assets under the supervision of the manager. Its principal address
is Three Exchange Square, Hong Kong. Neither Salomon Brothers Asset Management
Limited or SBAM AP is compensated by the funds for its services. Citibank, N.A.
('Citibank') is subadviser to the Large Cap Growth Fund and International Equity
Fund and manages each fund's assets under the supervision of the manager. Its
principal address is 153 East 53rd Street, New York, New York. Citibank is a
wholly-owned subsidiary of Citigroup Inc. and managed more than $151 billion in
assets as of December 31, 1999.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
FUND PORTFOLIO MANAGER SINCE PAST 5 YEARS' BUSINESS EXPERIENCE
<S> <C> <C> <C> <C>
Capital Fund Ross S. Margolies January 1995 managing director of the manager
Robert M. Donahue, Jr. July 1998 director and equity analyst with the manager;
analyst at Gabelli & Company prior to 1997
- ----------------------------------------------------------------------------------------------------
High Yield Peter J. Wilby Inception managing director of the manager
Bond Fund Beth A. Semmel managing director of the manager
James E. Craige managing director of the manager
Investors John B. Cunningham July 1998 director of the manager
Value Fund Mark McAllister April 2000 director and equity analyst with the manager;
executive vice president and portfolio
manager at JLW Capital Mgmt. Inc. from March
1998 to May 1999. Prior to March 1998 was a
Vice President and equity analyst at Cohen &
Steers Capital Management
- ----------------------------------------------------------------------------------------------------
National Thomas A. Croak August 1998 vice president of the manager
Intermediate Robert E. Amodeo August 1998 director of the manager
Municipal
Fund
New York Charles K. Bardes August 1998 vice president of the manager
Municipal Thomas A. Croak August 1998 vice president of the manager
Money
Market Fund
- ----------------------------------------------------------------------------------------------------
Strategic Peter J. Wilby Inception managing director of the manager
Bond Roger Lavan Inception director of the manager
Fund David Scott Inception managing director of the manager
Balanced George J. Williamson July 1998 director of the manager
Fund
- ----------------------------------------------------------------------------------------------------
U.S. Roger Lavan Inception director of the manager
Government
Income Fund
THE PORTFOLIO
MANAGERS
The portfolio managers
are primarily
responsible for the
day-to-day operation of
the funds indicated
beside their names and
business experience.
</TABLE>
A team of individuals employed by the manager and SBAM AP manage the day to day
operations of the Small Cap Growth Fund and the Asia Growth Fund, respectively.
Two teams of individuals employed by Citibank manage the day to day operations
of the International Equity Fund and the Large Cap Growth Fund.
Salomon Brothers Investment Series - 36
<PAGE>
<TABLE>
<CAPTION>
y----------------------------------------------------------------------------------------------------
ACTUAL ACTUAL
MANAGEMENT MANAGEMENT
FEE PAID DURING THE FEE PAID DURING THE MOST
MOST RECENT FISCAL YEAR* RECENT FISCAL YEAR*
Asia Growth 0.00% New York Municipal 0.20%
Fund Money Market Fund
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------
Capital Fund 0.90% Small Cap Growth Fund 0.77%
Cash 0.20% Strategic Bond Fund 0.56%
Management
Fund
- ----------------------------------------------------------------------------------------------------
High Yield 0.74% Balanced Fund 0.33%
Bond Fund
International 0.00%
Equity Fund
- ----------------------------------------------------------------------------------------------------
Investors 0.52% U.S. Government 0.00%
Value Fund Income Fund
Large Cap 0.00%
Growth Fund
- ----------------------------------------------------------------------------------------------------
National 0.00%
Intermediate
Municipal Fund
*Fee may be less than the contractual rate due to expense limitations.
MANAGEMENT FEES
SBAM was established in
1987 and together with
SBAM affiliates in
London, Frankfurt,
Tokyo and Hong Kong,
provides a broad range
of fixed income and
equity investment
services to individuals
and institutional
clients throughout the
world. As of
December 31, 1999, SBAM
and its affiliates
managed approximately
$25.3 billion of
assets.
</TABLE>
The Investors Value Fund pays the manager a fee that varies based upon the
investment performance of the fund compared to the Standard and Poor's 500
Index. The base fee is determined as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
<S> <C>
First $350 million .650%
Next $150 million .550%
Next $250 million .525%
Next $250 million .500%
Over $1 billion .450%
</TABLE>
At the end of each calendar quarter for each percentage point of difference
between the investment performance of the class of shares of the Investors Value
Fund which has the lowest performance for the period and the S&P 500 Index over
the last prior 12 month period this base fee is adjusted upward or downward by
the product of (i) 1/4 of .01% multiplied by (ii) the average daily net assets
of the Investors Value Fund for the 12 month period. If the amount by which the
Investors Value Fund outperforms or underperforms the S&P 500 Index is not a
whole percentage point, a pro rata adjustment will be made. However, there will
be no performance adjustment unless the investment performance of the Investors
Value 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 0.025%,
which would occur if the Investor Fund's performance exceeds or is exceeded by
the S&P 500 Index by ten or more percentage points.
The Capital Fund pays the manager a fee of:
<TABLE>
<CAPTION>
------------------------------------------------------------
AVERAGE DAILY NET ASSETS ANNUAL FEE RATE
<S> <C>
First $100 million 1.00%
Next $100 million .75%
Next $200 million .625%
Over $400 million .50%
</TABLE>
Salomon Brothers Investment Series - 37
<PAGE>
<TABLE>
<S> <C>
CFBDS, Inc. a registered broker-dealer, serves as each DISTRIBUTOR
fund's distributor.
- -----------------------------------------------------------------------------
SSB Citi Fund Management LLC ('SSB Citi'), an affiliate of ADMINISTRATOR
the manager, serves as administrator for each fund. For its
services as administrator, each fund pays SSB Citi a fee at
an annual rate of 0.05% of the applicable fund's average
daily net assets. The Capital Fund, Investors Value Fund and
Small Cap Fund pay this fee to the manager, who in turns
pays SSB Citi.
- -----------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
CHOOSING A SHARE CLASS TO BUY
<TABLE>
<S> <C>
SHARE You can choose between three classes of shares: Class A, B
CLASSES or 2. In addition, certain investors may purchase Class Y
shares of the Capital Fund. If you already own Class O
shares of a fund, you may also be eligible to purchase
additional Class O shares. The classes have different sales
charges and expenses, allowing you to choose the class that
best meets your needs. When choosing which class of shares
to buy, you should consider:
How much you plan to invest
How long you expect to own the shares
The expenses paid by each class
Whether you qualify for any reduction or waiver of sales
charges
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
INVESTMENT Minimum initial investment amounts vary depending on the
MINIMUMS nature of your investment account.
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
ADDITIONAL
INITIAL INVESTMENT INVESTMENTS
CLASSES A, B, CLASS Y CLASSES A, B, CLASS Y
2, O 2, O
<S> <C> <C> <C> <C>
General $250 $2.5 Million $50 $1,000
- ----------------------------------------------------------------------------------------------------------
Individual Retirement Accounts, Self Employed $50 $2.5 Million $50 $1,000
Retirement Plans, Uniform Gift to Minor Accounts
Qualified Retirement Plans $50 $2.5 Million $50 $1,000
- ----------------------------------------------------------------------------------------------------------
Monthly Systematic Investment Plans $25 n/a $25 n/a
Pre-authorized Check Plan $25 n/a $25 n/a
</TABLE>
Qualified Retirement Plans are qualified under Section 403(b)(7) or
Section 401(a) of the Internal Revenue Code, including 401(k) plans
<TABLE>
<S> <C>
- ------------------------------------------------------------------------------------
COMPARING Your Financial Consultant can help you decide which class
CLASSES meets your goals. Your Financial Consultant may receive
different compensation depending upon which class you
choose.
- ------------------------------------------------------------------------------------
DISTRIBUTION The funds each have adopted Rule 12b-1 distribution plans
PLANS for their Class A, B and 2 shares. Under each plan, the fund
pays distribution and service fees. These fees are an
ongoing expense and over time, may cost you more than other
types of sales charges.
</TABLE>
Salomon Brothers Investment Series - 38
<PAGE>
- ---------------------------------------------------------------
Salomon Brothers Investment Series
ACCOUNT APPLICATION Please Note: A separate application must be used to open an
IRA account.
- --------------------------------------------------------------------------------
1. TYPE OF ACCOUNT (Please print) (Account will not be opened without Taxpayer
I.D. No. or Social Security No.)
[ ] INDIVIDUAL [ ] JOINT Social Security No. or Taxpayer I.D. No.
Name _________________________________ __________________________________
Joint Registrant (if any)(1),(2) Social Security No. or Taxpayer I.D. No.
Name _________________________________ __________________________________
(1) Use only the Social Security Number or Taxpayer Indentification Number of
the first listed joint tenant.
(2) For joint registrations, the account registrants will be joint tenants with
right of survivorship and not tenants in common unless tenants in common or
community property registrations are requested.
- --------------------------------------------------------------------------------
[ ] UNIFORM GIFT TO MINORS OR [ ] UNIFORM TRANSFER TO MINORS (where allowed by
law)
Name of Adult Custodian (only one permitted)
Name ______________________________________________
Minor's Date of Birth _____________________________
Name of Minor (only one permitted) Minor's Social Security No.
Name ___________________________________________ __________________________
(Account will not be opened without minor's Social Security No.)
__________________________________________
under the _______________________________ Uniform Gifts/Transfer to Minors Act.
State of Residence of Minor
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
[ ] CORPORATION [ ] PARTNERSHIP [ ] Social Security No. or Taxpayer I.D. No.
[ ] TRUST* [ ] OTHER ________________________________________
</TABLE>
(Account will not be opened without Taxpayer I.D. No. or Social Security No.)
______________________________________________
Name of Corporation, Partnership, or Other
_______________________________________________________________________________
Name(s) of Trustee(s) _________________________________________________________
*If a Trust, include date of trust instrument and list trustees
if they are to be named in the registration.
Date of the Trust Agreement ____________
- --------------------------------------------------------------------------------
2. MAILING ADDRESS
Street or P.O. Box _____________________________________________________________
_____________________________________________________________
City ______________________ State ____ Zip __________
Business Telephone ___________________ Home Telephone ________________________
- --------------------------------------------------------------------------------
3. INVESTMENT INFORMATION
METHOD OF INVESTMENT
[ ] I have enclosed a check for the minimum of $250 per Fund.
[ ] I have enclosed a check for the minimum of $25 per Fund and completed the
Automatic Investment Plan information in Section 10.
[ ] I purchased ___ shares of ____ through my broker on ___/___/___.
Confirm #____
PLEASE MAKE MY INVESTMENT IN THE FUNDS DESIGNATED BELOW:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS 2 SALOMON BROTHERS INVESTMENT SERIES INVESTMENT
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
Asia Growth Fund $
- ------- ------- ------- -----------------
International Equity Fund $
- ------- ------- ------- -----------------
Small Cap Growth Fund $
- ------- ------- ------- -----------------
Capital Fund $
- ------- ------- ------- -----------------
Large Cap Growth Fund $
- ------- ------- ------- -----------------
Investors Value Fund $
- ------- ------- ------- -----------------
Balanced Fund $
- ------- ------- ------- -----------------
High Yield Bond Fund $
- ------- ------- ------- -----------------
Strategic Bond Fund $
- ------- ------- ------- -----------------
National Intermediate Municipal Fund $
- ------- ------- ------- -----------------
U.S. Government Income Fund $
- ------- ------- ------- -----------------
New York Municipal Money Market Fund $
- ------- ------- ------- -----------------
Cash Management Fund $
- ------- ------- ------- -----------------
TOTAL INVESTMENT AMOUNT $
-----------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
4. REDUCED SALES CHARGE (Available for CLASS A Shares Only)
METHOD OF INVESTMENT
Are you a shareholder in another Salomon Brothers Investment Series
Fund? [ ] Yes [ ] No
[ ] I apply for Right of Accumulation reduced sales charges based on the
following Salomon Brothers Investment Series Fund accounts (excluding
Class B and Class 2 Shares).
Fund Account No. or Social Security No.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
LETTER OF INTENT
[ ] I agree to the Letter of Intent provisions contained in the Fund's
current Prospectus. During a 13-month period, I plan to invest a dollar
amount of at least:
[ ] $50,000 [ ] $100,000 [ ] $250,000 [ ] $500,000 [ ] $1,000,000
- --------------------------------------------------------------------------------
5. DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS
Dividends and capital gains will be reinvested in the same Fund if no other
option is selected.
<TABLE>
<S> <C>
DIVIDENDS CAPITAL GAINS
[ ] I wish to reinvest dividends in the same Fund. [ ] I wish to reinvest capital gains in the same
Fund.
[ ] I wish to have dividends paid in cash. [ ] I wish to have capital gains paid in cash.
</TABLE>
The AUTOMATIC DIVIDEND DIVERSIFICATION PROGRAM allows an investor to have
dividends and any other distributions from a Fund automatically used to purchase
shares of the same class of any other Fund. The receiving account must be in the
same name as your existing account.
[ ] Please reinvest dividends and capital gains from the ___ Fund to the
___ Fund.
OPTIONAL FEATURES
- --------------------------------------------------------------------------------
6. AUTOMATIC WITHDRAWAL PLAN
I would like to establish an Automatic Withdrawal in the amount of $_____ to be
executed on the __ day of the month (or the next business day if the selected
day falls on a weekend or holiday).
[ ] Monthly [ ] Quarterly [ ] Startup Month/Year:________________
Automatic Withdrawals will be made on or near the 10th day of the month if no
Date is selected.
A minimum account value of $10,000 in a single account is required to establish
a monthly withdrawal plan. For quarterly plans a minimum of $5,000 in a single
account is required.
For the Investors Value Fund and the Capital Fund, shareholders are required to
have a minimum value of $7,500 in a single account. A shareholder can arrange
for automatic distributions to be made monthly or quarterly for amounts not less
than $50 from each Fund.
<TABLE>
<S> <C>
Please mail checks to: Wire transfers to:
[ ] Address of Record (named in Section 2) [ ] Bank of Record (named in Section 10)
</TABLE>
Name __________________________________________________________________________
Address _______________________________________________________________________
City ___________________________________ State____ Zip__________
- --------------------------------------------------------------------------------
7. TELEPHONE REDEMPTION PRIVILEGE
Unless indicated below, I authorize the Transfer Agent to accept instructions
from any person to redeem shares in my account (s) by telephone, in accordance
with the procedures and conditions set forth in the Fund's current Prospectus.
Checks for redemption of proceeds will be sent by check via U.S. Mail to the
address of record, unless the information in Section 10 is completed for
redemption by wire of $500 or more.
[ ] I DO NOT want the Telephone Redemption Privilege.
- --------------------------------------------------------------------------------
8. SYSTEMATIC INVESTMENT PLAN
I would like to exchange shares in my ______________ Fund account, for which no
certificates have been issued, to:
$ ____________ into the _______________________________ Fund, Account # ________
$25 Minimum
$ ____________ into the _______________________________ Fund, Account # ________
$25 Minimum
$ ____________ into the _______________________________ Fund, Account # ________
$25 Minimum
The exchange will occur on or about the 15th of each month, beginning in the
month of_______
<PAGE>
- --------------------------------------------------------------------------------
9. TELEPHONE EXCHANGE PRIVILEGE
Unless indicated below, I authorize the Transfer Agent to accept instructions
from any person to exchange shares in my account(s) by telephone, in accordance
with the procedures and conditions set forth in the Funds' current prospectus.
[ ] I DO NOT want the Telephone Exchange Privilege.
- --------------------------------------------------------------------------------
10. AUTOMATIC INVESTMENT PLAN
The Automatic Investment Plan, which is available to shareholders of the Salomon
Brothers Investment Series Funds, makes
possible regular monthly purchases of Fund shares to allow dollar-cost
averaging. The Funds' transfer agent can arrange for an amount of money selected
by you ($25 minimum) to be deducted from your checking account and used to
purchase shares of a specified Salomon Brothers Investment Series Fund.
Please withdraw $______________ from my checking account (named in Section 11)
on the _______ day of the month for investment:
<TABLE>
<S> <C> <C>
[ ] Monthly [ ] Every alternate month [ ] Other
[ ] Quarterly [ ] Semianually
</TABLE>
No more than one investment will be processed per month.
$ ____________ into the ________________________________________________ Fund
$25 Minimum
$ ____________ into the ________________________________________________ Fund
$25 Minimum
$ ____________ into the ________________________________________________ Fund
$25 Minimum
If you are applying for the Telephone Redemption Privilege or Automatic
Investment Plan, please attach your voided check on
top of our sample below.
<TABLE>
<S> <C>
JOHN DOE 000
123 Main Street
Anywhere, USA 12345 ______________
__________________________________________________$
_______________________________________________________________________
_________________________________ ________________________
</TABLE>
- --------------------------------------------------------------------------------
11. BANK OF RECORD
Please attach a voided check in the space provided in Section 10.
<TABLE>
<S> <C>
Bank Name _________________________________________________________
Address _________________________________________________________
City ________________________________ State____ Zip __________
Bank ABA No. _________________________________________________________
Bank Account No. _________________________________________________________
Account Name _________________________________________________________
</TABLE>
<PAGE>
SIGNATURE AND DEALER INFORMATION
- --------------------------------------------------------------------------------
12. SIGNATURE AND TAXPAYER CERTIFICATION
The undersigned warrants that I (we) have full authority and, if a natural
person, I (we) am (are) of legal age to purchase shares pursuant to this
Application, and have received a current Prospectus for the Salomon Brothers
Investment Series Fund (s) in which I (we) am (are) investing. THE UNDERSIGNED
ACKNOWLEDGES THAT THE TELEPHONE EXCHANGE PRIVILEGE IS AUTOMATIC AND THAT I (WE)
MAY BEAR THE RISK OF LOSS IN THE EVENT OF FRAUDULENT USE OF THE PRIVILEGE. If I
(we) do not want the Telephone Exchange Privilege, I (we) have so indicated on
this Application.
UNDER THE INTEREST AND DIVIDEND TAX COMPLIANCE ACT OF 1983, THE FUND IS REQUIRED
TO HAVE THE FOLLOWING CERTIFICATION:
UNDER THE PENALTY OF PERJURY, I CERTIFY THAT:
(1) THE NUMBER SHOWN ON THIS FORM IS MY CORRECT TAXPAYER IDENTIFICATION NUMBER
(OR I AM WAITING FOR A NUMBER TO BE ISSUED TO ME), AND
(2) I AM NOT SUBJECT TO BACKUP WITHHOLDING BECAUSE: (a) I AM EXEMPT FROM BACKUP
WITHHOLDING; OR (b) I HAVE NOT BEEN NOTIFIED BY THE INTERNAL REVENUE SERVICE
THAT I AM SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF A FAILURE TO REPORT ALL
INTEREST OR DIVIDENDS OR; (c) THE IRS HAS NOTIFIED ME THAT I AM NO LONGER
SUBJECT TO BACKUP WITHHOLDING.
CERTIFICATION INSTRUCTIONS -- YOU MUST CROSS OUT ITEM (2) ABOVE IF YOU HAVE
BEEN NOTIFIED BY THE IRS THAT YOU ARE CURRENTLY SUBJECT TO BACKUP WITHHOLDING
BECAUSE OF UNDERREPORTING OF INTEREST OR DIVIDENDS ON YOUR TAX RETURN. FOR REAL
ESTATE TRANSACTIONS, ITEM (2) DOES NOT APPLY. FOR MORTGAGE INTEREST PAID, THE
ACQUISITION OR ABANDONMENT OF SECURED PROPERTY, CONTRIBUTIONS TO AN INDIVIDUAL
RETIREMENT ACCOUNT (IRA), AND GENERALLY PAYMENTS OTHER THAN INTEREST AND
DIVIDENDS, YOU ARE NOT REQUIRED TO SIGN THE CERTIFICATION, BUT YOU MUST PROVIDE
YOUR CORRECT TAXPAYER IDENTIFICATION NUMBER.
[ ] Exempt from Backup Withholding (i.e., exempt entity as described in
Application Instructions)
[ ] Nonresident alien [form W-8 attached] Country of Citizenship _____________
THE INTERNAL REVENUE SERVICE DOES NOT REQUIRE YOUR CONSENT TO ANY PROVISION OF
THIS DOCUMENT OTHER THAN THE CERTIFICATIONS REQUIRED TO AVOID BACKUP
WITHHOLDING.
Authorized signature _____________________ Title ________________ Date _________
Authorized signature _____________________ Title ________________ Date _________
- --------------------------------------------------------------------------------
13. FOR DEALER USE ONLY (Please print)
We hereby authorize CFBDS, Inc. to act as our agent in connection with
transactions authorized by the Application and agree to notify CFBDS, Inc. of
any purchases made under a Letter of Intent or Right of Accumulation. If this
Application includes a Telephone Exchange Privilege authorization, a Telephone
Redemption Privilege authorization or an Automatic Withdrawal Plan request, we
guarantee the signature(s) above.
Dealer's Name _________________________________________________________________
Main Office Address ___________________________________________________________
Dealer Number ______________ Branch # _________ Rep # ___________________
Representative's Name _________________________________________________________
Branch Address ________________________________________________________________
Telephone No. _________________________________________________________________
Authorized Signature of Dealer ________________________ Title ________________
If desired, I elect to have third party statements sent to the following
address:
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
- --------------------------------------------------------------------------------
CUSTOMER SERVICE
For customer service, including account information, transfers and Fund prices,
you may call
1-800-446-1013
between 9:00 a.m. and 5:00 p.m. Eastern Standard Time.
- --------------------------------------------------------------------------------
MAILING INSTRUCTIONS
<TABLE>
<S> <C> <C>
Mail your completed account application and OR (for overnight and express mail delivery)
check made payable to Salomon Brothers
Funds to:
SALOMON BROTHERS INVESTMENT SERIES SALOMON BROTHERS INVESTMENT SERIES
C/O PFPC C/O PFPC
P.O. BOX 9764 4400 COMPUTER DRIVE
PROVIDENCE, RI 02940 - 9764 WESTBOROUGH MA 01581-5120
</TABLE>
SBPROAPP 5/00
<PAGE>
SIGNATURE CARD
CASH MANAGEMENT FUND
NEW YORK MUNICIPAL MONEY MARKET FUND
Boston Safe Deposit and Trust Company
ACCOUNT NUMBER
- -------------------------------------------------------------------------------
ACCOUNT NAME(S) AS REGISTERED
- -------------------------------------------------------------------------------
AUTHORIZED SIGNATURE(S) -- Individuals must sign as their names appear in
account registration
1 ______________________________________________________________________________
2 ______________________________________________________________________________
3 ______________________________________________________________________________
4 ______________________________________________________________________________
[ ] Check if all signatures are required
[ ] Check if only one signature is required Date ___________________
[ ] Check if combination of signatures is required and specify number and/or
individual(s)
SUBJECT TO CONDITION ON REVERSE SIDE
THE PAYMENT OF FUNDS IS AUTHORIZED BY THE SIGNATURE(S) APPEARING ON REVERSE
SIDE.
By executing this signature card, I (we) hereby authorize Boston Safe Deposit
and Trust Company ('Bank') to honor checks drawn by me (us) on my (our)
Account in the Investment Company ('Fund') indicated on the reverse side of
this form with payment therefore to be made by redeeming sufficient full and
fractional shares in that Account without a signature guarantee.
If this card is signed by more than one person, all checks will require only
one of the signatures appearing on the reverse side if the option of 'only one
signature is required' has been selected.
Checks may not be written for amounts less than $500 or such other minimum or
maximum as may from time to time be established by the Fund. Shares for which
certificates have been issued may not be redeemed by check. No redemption of
shares purchased by check will be permitted pursuant to this Check Redemption
Service until 15 days after such shares were credited to the shareholder's
account. The Bank reserves the right to dishonor checks in amounts exceeding
the value of the shareholder's account at the time the check is presented for
payment.
Neither the Bank nor the Fund shall incur any liability for honoring my (our)
redemption checks, or for effecting redemptions pursuant to the Check
Redemption Service or for returning checks which have not been honored. The
Bank and the Fund shall be liable only for their own negligence.
I (we) understand and agree that this Check Redemption Service is in all
respects subject to the procedures, rules and regulations of the Bank
governing checking accounts, and also to the terms and conditions in the
Fund's current Prospectus and Statement of Additional Information, and that
the Bank and the Fund reserve the right to change, modify or terminate the
Service at any time upon written notification mailed to my (our) address of
record.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
CLASS Y
(CAPITAL
CLASS A CLASS B CLASS 2 CLASS O FUND ONLY)
<S> <C> <C> <C> <C> <C>
KEY FEATURES Initial sales No initial sales Initial sales Only available No initial or
charge charge charge is lower to existing deferred sales
You may qualify Deferred sales than Class A Class O charge
for reduction charge declines Deferred sales shareholders Must invest at
or waiver of over time charge for only No initial or least $2.5 million
initial sales Converts to 1 year deferred sales Lower expenses than
charge Class A after 7 Higher annual charge the other classes
Lower annual years expenses than Lower annual
expenses than Higher annual Class A expenses than
Class B and expenses than the other
Class 2 Class A classes
- -------------------------------------------------------------------------------------------------------------------------------
INITIAL SALES Up to None 1.00% None None
CHARGE 5.75%/4.75%*,
reduced or
waived for large
purchases and
certain
investors. No
charge for
purchases of $1
million or more
DEFERRED SALES 1%** on Up to 5.00%** 1%** if you None None
CHARGE purchases of $1 charged when you redeem within 1
million or more redeem shares. year of purchase
if you redeem The charge is
within 1 year of reduced over
purchase time and there
is no deferred
sales charge
after 6 years
- -------------------------------------------------------------------------------------------------------------------------------
ANNUAL 0.25%*** of 1.00%*** of 0.75%/1.00%*** None None
DISTRIBUTION AND average daily average daily of average daily
SERVICE FEES net assets net assets net assets
EXCHANGEABLE Class A shares Class B shares Class 2 shares Class O shares No exchange-
INTO** of any of the of any of the of any of the of any of the ability
other funds other funds other funds other funds
</TABLE>
* Class A shares of all of the funds except for the money market funds (Cash
Management Fund and New York Municipal Money Market Fund) are offered either
with a 5.75% (International Equity, Balanced, Large Cap Growth, Small Cap
Growth, Asia Growth, Investors Value and Capital Funds) or 4.75% (National
Intermediate Municipal, U.S. Government Income, High Yield Bond and Strategic
Bond Funds) initial sales charge.
** Class A shares of the money market funds are not subject to a sales charge at
the time of purchase. If you subsequently exchange shares of either of the money
market funds for shares of another fund, a sales charge may be payable on Class
A shares. Class B and Class 2 shares of the money market funds are not subject
to a deferred sales charge unless the shares are obtained by exchange of shares
from another fund which was acquired subject to a deferred sales charge. If you
subsequently exchange Class B or Class 2 shares of a money market fund for
shares of another fund, a deferred sales charge may become applicable in the
case of Class B and an initial and a deferred sales charge may become applicable
in the case of Class 2 shares. The period during which the shares are held in
the money market funds are excluded from the holding period for determining the
deferred sales charge and conversion to Class A shares.
*** All of the funds except for the money market funds pay a service fee with
respect to Class A shares of 0.25% of average daily net assets and a service and
distribution fee with respect to Class B shares of 1.00% of average daily net
assets. All of the funds except for the money market funds pay a service and
distribution fee with respect to Class 2 shares of either 0.75% (High Yield
Bond, National Intermediate Municipal, Strategic Bond and U.S. Government Income
Funds) or 1.00% (International Equity Asia Growth, Capital, Investors Value,
Small Cap Growth, Balanced and Large Cap Growth Funds) of average daily net
assets.
Salomon Brothers Investment Series - 39
<PAGE>
- --------------------------------------------------------------------------------
CLASS A SHARES
No sales charge is imposed on the sale of Class A shares of Cash Management Fund
or New York Municipal Money Market Fund. The table below indicates the sales
charge on Class A shares of Asia Growth Fund, Capital Fund, International Growth
Fund, Investors Value Fund, Large Cap Growth Fund, Small Cap Growth Fund and
Balanced Fund.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
sales charge as sales charge as
Amount of investment % of offering price % of net amount
<S> <C> <C>
Less than $50,000 5.75% 6.10%
- -----------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 4.00% 4.17%
- -----------------------------------------------------------------------------
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1 million 2.25% 2.30%
- -----------------------------------------------------------------------------
$1 million or more* -0- -0-
</TABLE>
* You do not pay an initial sales charge when you buy $1 million or more of
Class A shares. However, if you redeem these Class A shares within one year of
purchase, you will pay a deferred sales charge of 1%.
The following table indicates the sales charge on Class A Shares of High Yield
Fund, National Intermediate Municipal Fund, Strategic Bond Fund and U.S.
Government Income Fund.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
sales charge as sales charge as
Amount of investment % of offering price % of net amount
<S> <C> <C>
Less than $50,000 4.75% 4.99%
- -----------------------------------------------------------------------------
$50,000 but less than $100,000 4.50% 4.71%
$100,000 but less than $250,000 4.00% 4.17%
- -----------------------------------------------------------------------------
$250,000 but less than $500,000 2.75% 2.83%
$500,000 but less than $1 million 2.25% 2.30%
- -----------------------------------------------------------------------------
$1 million or more* -0- -0-
</TABLE>
*You do not pay an initial sales charge when you buy $1 million or more of
Class A shares. However, if you redeem these Class A shares within one year of
purchase, you will pay a deferred sales charge of 1%.
QUALIFYING FOR REDUCED CLASS A SALES CHARGES. There are several ways you can
combine multiple purchases of Class A shares of the funds (excluding shares of
the Cash Management Fund or the New York Municipal Money Market Fund) to take
advantage of the breakpoints in the sales charge schedule.
Accumulation privilege -- lets you add the current value of Class A shares of
the funds already owned by you or your spouse and your children under the age of
21 (except for Cash Management Fund and New York Municipal Money Market Fund) to
the amount of your next purchase of Class A shares for purposes of calculating
the sales charge. You must notify the transfer agent in writing of all share
accounts to be considered in exercising this right of accumulation.
Group purchase -- lets you combine the current value of Class A shares
purchased by employees (and partners) of the same employer as a group for
purposes of calculating the initial sales charge. To be eligible, all purchases
CLASS A SALES
CHARGE
You buy Class A
shares at the
offering price,
which is the net
asset value plus a
sales charge. You
pay a lower sales
charge as the size
of your investment
increases to certain
levels called
breakpoints. You do
not pay a sales
charge on the
fund's distributions
or dividends that
you reinvest in
additional Class A
shares.
To learn more
about the
accumulation
privilege, letters of
intent, waivers for
certain investors
and other options
to reduce your
sales charge, ask
your Financial
Consultant or
consult the SAI.
Salomon Brothers Investment Series - 40
<PAGE>
must be made pursuant to an employer or partnership sanctioned plan meeting
certain requirements set forth in the SAI.
Letter of intent -- lets you purchase Class A shares of the funds over a
13-month period and pay the same sales charge, if any, as if all shares had been
purchased at once. All Class A shares (excluding Class A shares of the Cash
Management Fund and New York Municipal Money Market Fund) previously purchased
and still beneficially owned by you or your 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 sales charge reduction. The effective date of
a letter of intent may be back-dated up to 90 days so 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.
WAIVERS FOR CERTAIN CLASS A INVESTORS. Class A initial sales charges are waived
for certain types of investors, including:
directors and officers of any fund sponsored by Citigroup or any of its
subsidiaries and their immediate families (i.e., spouse, children, mother or
father).
employees of the manager and their immediate families, or any full-time employee
or registered representative of the distributor or of broker-dealers having
dealer agreements with the distributor ('Selling Broker') and their
immediate families (or any trust, pension, profit sharing or other benefit plan
for the benefit of such persons).
any full-time employee of a bank, savings and loan, credit union or other
financial institution that utilizes a Selling Broker to clear purchases of the
funds' shares and their immediate families.
participants in certain 'wrap-fee,' or asset allocation programs or other fee
based arrangements sponsored by broker-dealers and other financial institutions
that have entered into agreements with the distributor.
any accounts established on behalf of registered investment advisers or their
clients by broker-dealers that charge a transaction fee and that have entered
into agreements with the distributor.
separate accounts used to fund certain unregistered variable annuity contracts
or Section 403(b) or 401(a) or (k) accounts.
Salomon Brothers Investment Series - 41
<PAGE>
- --------------------------------------------------------------------------------
CLASS B SHARES
<TABLE>
<S> <C>
CLASS B DEFERRED You buy Class B shares at net asset value without paying an
SALES CHARGE initial sales charge. However, if you redeem your Class B
shares within six years of purchase, you will pay a deferred
sales charge. Class B shares of the Cash Management Fund and
New York Municipal Money Market Fund are not subject to a
deferred sales charge if they were not acquired upon exchange
for Class B shares of another fund.
</TABLE>
CLASS B CDSC TABLE
<TABLE>
<CAPTION>
The deferred sales --------------------------------------------------------------------------
charge decreases as DEFERRED SALES CHARGE AS A
the number of PERCENTAGE OF DOLLAR
years since your YEAR(S) SINCE PURCHASE ORDER AMOUNT SUBJECT TO CHARGE
purchase increases.
<S> <C> <C>
1st year 5 %
1 year or more but less than 2 years 4 %
2 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>
<TABLE>
<S> <C>
CALCULATION OF DEFERRED SALES CHARGE. The deferred sales
charge is based on the net asset value at the time of purchase
or redemption, whichever is less, and therefore you do not pay
a sales charge on amounts representing appreciation. In
addition, you do not pay a deferred sales charge on shares
exchanged for shares of another fund, shares representing
reinvested distributions and dividends or shares no longer
subject to the deferred sales charge. All purchases during a
month are deemed to have been made on the last day of that
month for purposes of determining the contingent deferred
sales charge.
If you want to Shares are redeemed in this order:
learn more about Shares that represent appreciation
additional deferred Shares representing reinvested distributions and dividends
sales charges and Other shares that are not subject to the deferred sales
waivers of deferred charge
sales charges, Class B shares held longest
contact your Deferred sales charges are not imposed at the time you
Financial exchange shares for shares of another fund.
Consultant or DEFERRED SALES CHARGE WAIVERS. The deferred sales charge for
consult the SAI. each share class will generally be waived in connection with:
Redemptions made following the death or disability (as
defined in the Internal Revenue Code) of a shareholder.
Redemptions effected pursuant to each fund's right to
liquidate a shareholder's account if the aggregate net asset
value of the shares held in the account is less than the
applicable minimum account size.
A tax-free return of an excess contribution to any retirement
plan.
Exchanges.
Automatic cash withdrawals in amounts equal to or less than
12% annually or 2% monthly of their initial account balances
(see automatic withdrawal plan in the SAI).
Redemptions of shares in connection with mandatory
post-retirement distributions from retirement plans or IRAs.
Redemption proceeds from other funds that are reinvested
within 60 days of the redemption (see reinstatement privilege
in the SAI).
</TABLE>
Salomon Brothers Investment Series - 42
<PAGE>
Certain redemptions of shares of a fund in connection with
lump-sum or other distributions made by eligible retirement
plans.
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 the distributor or the manager.
CLASS B CONVERSION. After seven years, Class B shares
automatically convert into Class A shares. This helps you
because Class A shares have lower annual expenses. Class B
shares of the Cash Management Fund and New York Municipal
Money Market Fund do not convert to Class A shares because
they have the same annual expenses. Your Class B shares will
convert to Class A shares as follows:
<TABLE>
<S> <C> <C>
--------------------------------------------------------------------------
SHARES ISSUED AT INITIAL SHARES ISSUED ON SHARES ISSUED UPON
PURCHASE REINVESTMENT OF EXCHANGE FROM ANOTHER
DISTRIBUTIONS AND FUND
DIVIDENDS
Seven years after the In same proportion that On the date the shares
date of purchase the number of Class B originally acquired
shares converting is to would have converted
total Class B shares you into Class A shares
own
</TABLE>
MONEY MARKET FUNDS. The periods of time that your shares are
held in the Cash Management Fund or the New York Municipal
Money Market Fund are excluded for determining the holding
period for conversion and calculation of the deferred sales
charge.
PURCHASES PRIOR TO SEPTEMBER 14, 1998. Class B shares of a
fund purchased prior to September 14, 1998 will continue to be
subject to the deferred sales charge schedules and conversion
features in effect at the time such purchase was made. Shares
purchased with reinvested dividend or capital gain
distributions relating to shares purchased prior to September
14, 1998 will be subject to the deferred sales charge
schedules and conversion features in effect at the time the
original shares were purchased. Shares of a fund acquired as a
result of an exchange of shares purchased prior to September
14, 1998 will also be subject to the deferred sales charge
schedules and conversion features in effect at the time the
original shares were purchased.
- --------------------------------------------------------------------------------
CLASS 2 SHARES
You buy Class 2 shares at the offering price, which is the net asset value plus
a sales charge of 1% (1.01% of the net amount invested). In addition, if you
redeem your Class 2 shares within one year of purchase, you will pay a deferred
sales charge of 1%. The periods of time that your shares are held in the Cash
Management Fund or the New York Municipal Money Market Fund are excluded for
purposes of determining your holding period for the deferred sales charge.
Effective September 14, 1998, Class C shares were renamed Class 2 shares.
PURCHASES PRIOR TO SEPTEMBER 14, 1998. Class 2 shares of a fund purchased prior
to September 14, 1998 will continue to be subject to the deferred sales charge
schedules in effect at the time such purchase was made. Shares purchased with
reinvested dividend or capital gain distributions relating to shares purchased
prior to September 14, 1998 will be subject to the deferred sales charge
schedules in effect at the time the original shares were purchased. Shares of a
fund acquired as a result of an exchange of shares purchased prior to September
14, 1998 will also be subject to the deferred sales charge schedules in effect
at the time the original shares were purchased.
Salomon Brothers Investment Series - 43
<PAGE>
- --------------------------------------------------------------------------------
CLASS Y SHARES
You buy Class Y shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $2.5 million initial
investment requirement.
- --------------------------------------------------------------------------------
BUYING SHARES AND EXCHANGING SHARES
BUYING SHARES Shares of each fund may be initially purchased through PFPC
BY MAIL Global Fund Services, Inc. ('PFPC' or the 'transfer agent')
by completing a Purchase Application and forwarding it to the
You may make transfer agent. Shares may also be purchased from selected
subsequent dealers in accordance with procedures established by the
purchases by mail dealer.
or, if you elect,
by telephone Subsequent investments may be made by mailing a check to the
transfer agent, along with the detachable stub from your
Statement of Account (or a letter providing the account
number) or through a selected dealer. If an investor's
purchase check is not collected, the purchase will be
cancelled and the transfer agent will charge a $10 fee to the
shareholder's account. There is a ten day hold on all checks
and no redemptions are allowed until the proceeds from the
check clears.
Write the transfer agent at the following address:
[name of fund]
c/o PFPC
P.O. Box 9764
Providence, RI 02940-9764
- --------------------------------------------------------------------------------
BUYING SHARES Subsequent investments may also be made by wiring funds to the
BY WIRE transfer agent. Prior notification by telephone is not
required. You should instruct the wiring bank to transmit the
specified amount in federal funds to:
Boston Safe Deposit and Trust
Company
Boston, MA
ABA No. 011-001-234
Account #142743
Attn: [name of fund]
Name of Account:
Account # (as assigned):
To ensure prompt credit to their accounts, investors or their
dealers should call (800) 446-1013 with a reference number for
the wire. Shareholders should note that their bank may charge
a fee in connection with transferring money by bank wire.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ALL FUNDS EXCEPT CASH PURCHASE IS EFFECTIVE
MANAGEMENT FUND AND
NEWYORK MUNICIPAL MONEYMARKET FUND
If order and federal funds or
check is received by its agent On that day
before 4:00 p.m. Eastern time:
Payment wired in federal
funds or check received If order and federal funds or
check is received by its agent On the business day following
after the receipt close of receipt
New York Stock Exchange:
</TABLE>
Salomon Brothers Investment Series - 44
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
CASH MANAGEMENT FUND PURCHASE IS EFFECTIVE DIVIDENDS BEGIN
AND NEW YORK MUNICIPAL
MONEY MARKET FUND
<S> <C> <C> <C>
If order and federal
funds or check is At noon, Eastern time
received by its agent on, that day On that day
before noon, Eastern
time:
Payment wired in federal
funds or check received
If order and federal At close of New York On the next business
funds or check is Stock Exchange on day after
received by its agent that day effectiveness
after noon, Eastern
time:
</TABLE>
SYSTEMATIC You may authorize the transfer agent to automatically transfer
INVESTMENT funds on a periodic basis (monthly, alternative months,
PLAN quarterly) from a regular bank account or other financial
institution to buy shares of a fund. On or about the 10th 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 order to set up a plan, your bank
must be a member of the Automated Clearing House.
Amounts transferred should be at least $25 monthly.
If you do not have sufficient funds in your bank account on a
transfer date, the transfer agent may charge you a fee.
For more information, contact your Financial Consultant or
consult the SAI.
- --------------------------------------------------------------------------------
EXCHANGE You may exchange shares of any fund for shares of the same
PRIVILEGE class of another fund.
Your fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
Shares are eligible for exchange commencing 30 days after
purchase.
Generally, your Class A shares will not be subject to an
initial sales charge at the time of the exchange. A sales
charge, if applicable, will be imposed upon Class A shares of
a fund issued upon exchange for Class A shares of Cash
Management Fund or New York Municipal Money Market Fund
unless you acquired the shares of the Cash Management Fund or
New York Municipal Money Market Fund through an exchange of
shares with respect to which you had previously paid a sales
charge.
If you exchange Class B shares of a fund, those shares will
not be subject to a contingent deferred sales charge at the
time of the exchange but those shares will be subject to any
applicable contingent deferred sales charge upon ultimate
redemption. Your deferred sales charge (if any) will continue
to be measured from the date of original purchase. In the
case of Class B shares of Cash Management Fund or New York
Municipal Money Market Fund that are not subject to a
deferred sales charge at the time of exchange, these shares
will be subject to the contingent deferred sales charge of
the acquired fund. Any deferred sales charge and conversion
period excludes the time the shares were held in the Cash
Management Fund or the New York Municipal Money Market Fund.
Generally, if you exchange Class 2 shares of a fund, those
shares will not be subject to an initial or deferred sales
charge at the time of exchange but those shares will be
subject to any applicable contingent deferred sales
Salomon Brothers Investment Series - 45
<PAGE>
charge upon ultimate redemption. Your deferred sales charge
(if any) will continue to be measured from the date of
original purchase. In the case of Class 2 shares of Cash
Management Fund or New York Municipal Money Market Fund with
respect to which a sales charge has not been applicable, those
shares will be subject to an initial sales charge of 1.00% at
the time of exchange and will be subject to the contingent
deferred sales charge of the acquired fund. Any deferred sales
charges exclude the time the shares were held in the Cash
Management Fund and the New York Municipal Money Market Fund.
You may exchange shares by telephone if you elect telephone
exchanges on your Purchase Application. Telephone exchanges
are subject to the same limitations as telephone redemptions.
- --------------------------------------------------------------------------------
SYSTEMATIC You may request that shares of any class of a fund be
EXCHANGE 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 instruction provided in your Purchase
Application or in the Systematic Investing Application.
- --------------------------------------------------------------------------------
REDEEMING SHARES
<TABLE>
<S> <C>
You may redeem some or all of your shares by sending your REDEMPTIONS BY MAIL
redemption request in proper form to:
PFPC Global Fund Services, Inc.
c/o PFPC
P.O. Box 9764
Providence, RI 02940-9764.
The written request for redemption must be in good order. Generally, a properly
This means that you have provided the following completed Redemption
information. Your request will not be processed without Form with any required
this information. signature guarantee is
Name of the fund all that is required
Account number for a redemption. In
Dollar amount or number of shares to redeem some cases, however,
Signature of each owner exactly as account is registered other documents may be
Other documentation required by the transfer agent necessary.
To be in good order, your request must include a signature
guarantee if:
The proceeds of the redemption exceed $50,000
The proceeds are not paid to the record owner(s) at the
record address
The shareholder(s) has had an address change in the past
45 days
The shareholder(s) is a corporation, sole proprietor,
partnership, trust or fiduciary
You can obtain a signature guarantee from most banks,
dealers, brokers, credit unions and federal savings and
loans, but not from a notary public.
- -------------------------------------------------------------------------------------
You may redeem shares by fax only if a signature guarantee REDEMPTIONS BY FAX
or other documentary evidence is not required. Redemption
requests should be properly signed by all owners of the
account and faxed to the transfer agent at (508) 871-9503.
If fax redemptions are not available for any reason, you
may use the fund's redemption by mail procedure described
above.
</TABLE>
Salomon Brothers Investment Series - 46
<PAGE>
<TABLE>
<S> <C>
- -------------------------------------------------------------------------------------
In all cases, your redemption price is the net asset value REDEMPTION PAYMENTS
next determined after your request is received in good ANY REQUEST THAT YOUR
order. Redemption proceeds normally will be sent within REDEMPTION PROCEEDS BE
seven days. However, if you recently purchased your shares SENT TO A DESTINATION
by check, your redemption proceeds will not be sent to you OTHER THAN YOUR BANK
until your original check clears which may take up to 15 ACCOUNT OR ADDRESS OF
days. Your redemption proceeds can be sent by check to your RECORD MUST BE IN
address of record or by wire transfer to a bank account WRITING AND MUST
designated on your application. INCLUDE SIGNATURE
If shares of Cash Management Fund or New York Municipal GUARANTEES
Money Market Fund are redeemed before noon, Eastern time,
you will not receive that day's dividends. You will receive
that day's dividends if you redeem after noon, Eastern
time.
- -------------------------------------------------------------------------------------
You may transmit your redemption request to selected REDEMPTIONS THROUGH
dealers with which the distributor has entered into sales SELECTED DEALERS
agreements for the purchase of shares of the funds.
Redemption orders received by these dealers before the New
York Stock Exchange closes and which are transmitted to the
transfer agent prior to the close of its business day are
effective that day. With respect to the Cash Management
Fund and the New York Municipal Money Market Fund,
redemption requests received by the dealer and transmitted
to the transfer agent by 12:00 noon, eastern time, on any
day the New York Stock Exchange is open, will generally be
effected on that same day. It is the responsibility of the
dealer to transmit orders on a timely basis to the transfer
agent. The dealer may charge you a fee for executing your
order.
- -------------------------------------------------------------------------------------
You may redeem shares by wire in amounts of $500 or more if REDEMPTIONS BY WIRE
redemption by wire has been elected on your Purchase
Application. A signature guarantee is not required on this
type of redemption request. To elect this service after
opening your account, call the transfer agent at (800)
446-1013 for more information. To redeem by wire, you may
either:
Telephone the redemption request to the transfer agent at
(800) 446-1013
Mail the request to the transfer agent at the address
listed above
Proceeds of wire redemptions of $500 or more will be wired
to the bank which is indicated on your Purchase Application
or by letter which has been properly guaranteed. With
respect to the Cash Management Fund and New York Municipal
Money Market Fund, if the transfer agent receives the wire
request by 12:00 noon, eastern time, on any day the New
York Stock Exchange is open, the redemption proceeds
generally will be transmitted to your bank that same day.
Checks for redemption proceeds of less than $500 will be
mailed to your address of record. You should note that your
bank may charge you a fee in connection with money by wire.
- -------------------------------------------------------------------------------------
You may redeem shares by telephone if you elect the REDEMPTIONS BY
telephone redemption option on your Purchase Application, TELEPHONE
and the proceeds must be mailed to your address of record.
In addition, you must be able to provide proper
identification information. You may not redeem by telephone
if your address has changed within the past 45 days or if
your shares are in certificate form. Telephone redemption
requests may be made by calling the transfer agent at (800)
446-1013 between 9:00 a.m. and 4:00 p.m. eastern time on
any day the New York Stock Exchange is open. If telephone
redemptions are not available for any reason, you may use
the fund's regular redemption procedure described above.
- -------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Investment Series - 47
<PAGE>
<TABLE>
<S> <C>
You can arrange for the automatic redemption of a portion AUTOMATIC CASH
of your shares on a monthly or quarterly basis. To qualify, WITHDRAWAL PLAN
you must own shares of the fund with a value of at least
$10,000 for monthly withdrawals and $5,000 for quarterly
withdrawals ($7,500 in the case of the Investors Value Fund
and the Capital Fund) and each automatic redemption must be
at least $250 if made monthly.
- -------------------------------------------------------------------------------------
Check writing is available for Class A and Class O CHECKWRITING PRIVILEGE
shareholders of the Cash Management Fund and the New York
Municipal Money Market Fund only. You must elect the
redemption by check option on your Purchase Application.
The redemption of shares may be made using redemption
checks provided by the transfer agent. There is no charge
for this service. The check must be for amounts of $500 or
more. You will continue to earn dividends on the shares
redeemed until the check clears the banking system. A fee
of $10 will be charged if there are insufficient funds to
cover the amount of the check.
</TABLE>
- --------------------------------------------------------------------------------
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
<TABLE>
<S> <C>
Small account balances If your account falls below $500 ($250 in the case of an IRA
or self-employed retirement plan) due to redemption of fund
shares, the fund may ask you to bring your account up to the
minimum requirement. If your account is still below $500
after 30 days, the fund may close your account and send you
the redemption proceeds.
- -------------------------------------------------------------------------------------
Share price You may buy, exchange or redeem fund shares at the net asset
value, adjusted for any applicable sales charge, next
determined after receipt of your request in good order. Each
fund's net asset value is the value of its assets minus its
liabilities. Net asset value is calculated separately for
each class of shares. Each fund calculates its net asset
value every day the New York Stock Exchange is open. All of
the funds except Cash Management Fund and New York Municipal
Money Market Fund calculates its net asset value when
regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time). Cash Management Fund and New York Municipal
Money Market Fund each calculates its net asset value at
12:00 noon, Eastern time.
The funds generally value their securities based on market
prices or quotations. The funds' currency conversions are
done when the London stock exchange closes, which is 12 noon
eastern time. When market prices are not available, or when
the manager believes they are unreliable or that the value
of a security has been materially affected by events
occurring after a foreign exchange closes, the funds may
price those securities at fair value. Fair value is
determined in accordance with procedures approved by the
funds' board. A fund that uses fair value to price
securities may value those securities higher or lower than
another fund that uses market quotations to price the same
securities. International markets may be open on days when
U.S. markets are closed and the value of foreign securities
owned by a fund could change on days when you cannot buy or
redeem shares.
Cash Management Fund and New York Municipal Money Market
Fund each uses the amortized cost method to value its
portfolio securities. Using this method, the fund constantly
amortizes over the remaining life of a security the
difference between the principal amount due at maturity and
the cost of the security to the fund.
</TABLE>
Salomon Brothers Investment Series - 48
<PAGE>
<TABLE>
<S> <C>
In order to buy, redeem or exchange shares at that day's
price, you must place your order with the transfer agent
before the New York Stock Exchange closes. If the New York
Stock Exchange closes early, you must place your order prior
to the actual closing time. Otherwise, you will receive the
next business day's price.
Members of the funds' selling group must transmit all orders
to buy, exchange or redeem shares to the funds' transfer
agent before the agent's close of business.
- -------------------------------------------------------------------------------------
Each fund has the right to:
Suspend the offering of shares.
Waive or change minimum and additional investment amounts.
Reject any purchase or exchange order.
Change, revoke or suspend the exchange privilege.
Suspend telephone transactions.
Suspend or postpone redemptions of shares on any day when
trading on the New York Stock Exchange is restricted, or as
otherwise permitted by the Securities and Exchange
Commission.
- -------------------------------------------------------------------------------------
Redemptions in kind Each fund may make payment for fund shares wholly or in part
by distributing portfolio securities to the shareholders.
The redeeming shareholder must pay transaction costs to sell
these securities.
</TABLE>
Salomon Brothers Investment Series - 49
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
The funds normally pay dividends and distribute capital gains, if any, as
follows:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
DIVIDENDS INCOME DIVIDEND CAPITAL GAIN DISTRIBUTIONS
FUND DECLARED DISTRIBUTIONS DISTRIBUTIONS MOSTLY FROM
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Asia Growth annually annually annually gain
Fund
Capital Fund annually annually annually gain
Cash daily monthly annually* income
Management (to share-
Fund holders of
record at
12:00 noon)
- ---------------------------------------------------------------------------------
High Yield Bond daily monthly annually income
Fund
International annually annually annually gain
Equity Fund
- ---------------------------------------------------------------------------------
Investors Value quarterly quarterly annually gain
Fund
Large Cap Growth annually annually annually gain
Fund
- ---------------------------------------------------------------------------------
National daily monthly annually income
Intermediate
Municipal Fund
New York daily monthly annually* income
Municipal (to share-
Money Market holders of
Fund record at
12:00 noon)
- ---------------------------------------------------------------------------------
Small Cap annually annually annually gain
Growth Fund
Strategic Bond daily monthly annually income
Fund
- ---------------------------------------------------------------------------------
Balanced daily monthly annually both
Fund
U.S. Government daily monthly annually income
Income Fund
</TABLE>
DIVIDENDS
AND
DISTRIBUTIONS
Annual distributions
of income and capital
gains normally take
place at the end of
the year in which the
income or gain is
realized or the
beginning of the next
year.
*Each money market fund anticipates that it will normally not earn or
distribute any long-term capital gains.
The funds may pay additional distributions and dividends at other times if
necessary for a fund to avoid a federal tax. Capital gains distributions and
dividends are reinvested in additional fund shares of the same class that you
hold. You do not pay a sales charge on reinvested distributions or dividends.
Alternatively, you can instruct your Financial Consultant, dealer
representative or the transfer agent to have your distributions and/or
dividends paid in cash. You can change your choice at any time to be effective
as of the next distribution or dividend, except that any change given to the
transfer agent less than five days before the payment date will not be
effective until the next distribution or dividend is made.
Salomon Brothers Investment Series - 50
<PAGE>
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
TRANSACTION FEDERAL INCOME TAX STATUS
<S> <C>
Redemption or exchange of shares Usually capital gain or loss (except for a money
market fund, no gain, and loss only to the
extent of any deferred sales charge); long-term
only if shares owned more than one year
- -----------------------------------------------------------------------------------------
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
- -----------------------------------------------------------------------------------------
Dividends Ordinary income (for all funds except the
municipal bond funds)*
</TABLE>
TAXES
In general, redeeming
shares, exchanging
shares and receiving
distributions (whether
in cash or additional
shares) are all taxable
events.
*National Intermediate Municipal Fund and New York Municipal Money Market Fund
intend to distribute the interest they earn on tax-exempt municipal bonds as
'exempt-interest' dividends. These dividends are excludable from gross income
for federal income tax purposes but may be subject to state and local income
tax, except that the latter fund's exempt-interest dividends paid from interest
on New York municipal securities will be exempt from New York State and New
York City personal income taxes. Their distributions from other sources, if
any, would be taxable as described above.
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when a fund is about to declare a capital gain distribution or a
taxable dividend, because it will be taxable to you even though it may actually
be a return of a portion of your investment.
After the end of each year, the funds will provide you with information about
the distributions and dividends that you received and any redemptions of shares
during the previous year. If you do not provide a fund with your correct
taxpayer identification number and any required certifications, you may be
subject to back-up withholding of 31% of your distributions, dividends (other
than exempt-interest dividends), and, except for a money market fund,
redemption proceeds. Because each shareholder's circumstances are different and
special tax rules may apply, you should consult your tax adviser about your
investment in a fund.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each share for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by PricewaterhouseCoopers LLP,
independent auditors, whose report, along with the funds' financial statements,
are included in the annual report (available upon request). As of the close of
business on December 31, 1994, all existing shares of the Cash Management Fund
and the Investors Value Fund were reclassified as Class O shares. As of the
close of business on October 31, 1996, all existing shares of the New York
Municipal Money Market Fund and the Capital Fund were reclassified as Class O
shares. As of the close of business on September 14, 1998, all existing Class C
shares of all of the funds were reclassified as Class 2 shares.
Salomon Brothers Investment Series - 51
<PAGE>
ASIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------
1999 1998 1997 1996(1) 1999 1998 1997 1996(1)
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 6.50 $ 7.48 $10.32 $10.00 $ 6.42 $ 7.44 $10.31 $ 10.00
------- ------- ------- ------- ------- ------- ------- -------
Net investment income (loss)(3) -- 0.10 0.03 0.05 (0.06) 0.05 (0.05) 0.01
Net gain (loss) on investments
(both realized and unrealized 6.17 (1.08) (2.59) 0.47 6.05 (1.07) (2.57) 0.46
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations 6.17 (0.98) (2.56) 0.52 5.99 (1.02) (2.62) 0.47
------- ------- ------- ------- ------- ------- ------- -------
Dividends from net investment
income -- -- (0.03) (0.05) -- -- 0.00 (0.01)
Distributions from net realized
gain on investments -- -- (0.25) (0.15) -- -- (0.25) (0.15)
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions -- -- (0.28) (0.20) -- -- (0.25) (0.16)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period $12.67 $ 6.50 $ 7.48 $10.32 $12.41 $ 6.42 $ 7.44 $ 10.31
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net assets, end of period
(thousands) $7,108 $4,385 $6,491 $3,693 $10,658 $5,256 $5,738 $ 3.163
Total return(4) 94.9% -13.1% -25.6% +5.2% 93.3% -13.7% -26.1% +4.7%
Ratios to average net assets:
Expenses 1.24% 1.24% 1.24% 1.24%(5) 1.99% 1.99% 1.99% 1.99%(5)
Net investment income -0.01% 1.48% 0.27% 0.90%(5) -0.74% 0.77% -0.48% 0.20%(5)
Portfolio turnover rate 248% 436% 294% 119% 248% 436% 294% 119%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment loss per share and
expense ratios would have been:
Net investment loss per share $(0.12) $(0.07) $(0.23) $(0.18) $(0.12) $(0.11) $(0.30) $ (0.23)
Expense ratio 2.62% 3.79% 3.81% 5.50%(5) 3.39% 4.55% 4.56% 6.25%(5)
</TABLE>
--------------------------------------------------
CAPITAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1999 1998 1997 1996(2) 1999 1998 1997 1996(2)
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $22.92 $21.15 $19.88 $21.98 $22.63 $ 21.01 $19.90 $ 21.98
------- ------- ------- ------- -------- ------- -------
Net investment income (loss) 0.15* 0.14 0.00 0.01(3) (0.04)* 0.09 (0.07) (0.02)(3)
Net gain (loss) on investments
(both realized and unrealized) 4.99 4.64 5.10 1.54 4.92 4.45 5.01 1.56
------- ------- ------- ------- ------- -------- ------- -------
Total from investment operations 5.14 4.78 5.10 1.55 4.88 4.54 4.94 1.54
------- ------- ------- ------- ------- -------- ------- -------
Dividends from net investment
income (0.18) (0.18) -- (0.15) (0.06) (0.09) -- (0.12)
Distributions from net realized
gain on investments (2.59) (2.83) (3.83) (3.50) (2.59) (2.83) (3.83) (3.50)
Distributions in excess of net
realized gains -- -- -- -- -- -- -- --
------- ------- ------- ------- ------- -------- ------- -------
Total dividends and distributions (2.77) (3.01) (3.83) (3.65) (2.65) (2.92) (3.83) (3.62)
------- ------- ------- ------- ------- -------- ------- -------
Net asset value, end of period $25.29 $22.92 $21.15 $19.88 $24.86 $ 22.63 $21.01 $ 19.90
------- ------- ------- ------- ------- -------- ------- -------
------- ------- ------- ------- ------- -------- ------- -------
Net assets, end of period
(thousands) $29,814 $11,425 $5,589 $ 344 $79,678 $ 22,294 $3,820 $ 219
Total return(4) +23.1% +23.7% +26.4% +7.7% 22.2% +22.6% +25.6% +7.6%
Ratios to average net assets:
Expenses 1.27% 1.34% 1.46% 1.88%(5) 2.02% 2.09% 2.20 2.73%(5)
Net investment income (loss) 0.61% 0.81% -0.10% 0.18%(5) -0.16% 0.17% -0.94 -0.66%(5)
Portfolio turnover rate 126% 141% 159% 191% 126% 141% 159% 191%
</TABLE>
--------------------------------------------------
(1) May 6, 1996, commencement of investment operations, through December 31,
1996.
(2) November 1, 1996, commencement of investment operations, through
December 31, 1996.
(3) Per share information calculated using the average shares outstanding
method.
(4) 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.
(5) Annualized.
* Per share amounts have been calculated using the average shares method.
Salomon Brothers Investment Series - 52
<PAGE>
ASIA GROWTH FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ---------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
1999 1998 1997 1996(1) 1999 1998 1997 1996(1)
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
$ 6.42 $ 7.44 $10.30 $10.00 $ 6.54 $ 7.50 $10.32 $ 10.00
- ------- ------- ------- ------- ------- -------
(0.06) 0.05 (0.05) 0.01 0.02 0.12 0.05 0.07
6.05 (1.07) (2.56) 0.45 6.20 (1.08) (2.59) 0.46
- ------- ------- ------- ------- ------- ------- -------
5.99 (1.02) (2.61) 0.46 6.22 (0.96) (2.54) 0.53
- ------- ------- ------- ------- ------- ------- -------
-- -- 0.00 (0.01) -- -- (0.03) (0.06)
-- -- (0.25) (0.15) -- -- (0.25) (0.15)
- ------- ------- ------- ------- ------- ------- -------
-- -- (0.25) (0.16) -- -- (0.28) (0.21)
- ------- ------- ------- ------- ------- ------- ------- -------
$12.41 $ 6.42 $ 7.44 $10.30 $12.76 $ 6.54 $ 7.50 $ 10.32
- ------- ------- ------- ------- ------- ------- ------- -------
- ------- ------- ------- ------- ------- ------- ------- -------
4,227
$ $2,291 $1,643 $ 246 $1,343 $1,354 412 $ 124
93.3% -13.7% -26.0% +4.6% 95.1% -12.8% -25.3% +5.3%
1.99% 1.99% 1.99% 2.00%(5) 0.97% 0.99% 0.99% 0.99%(5)
- -0.76% 0.80% -0.47% 0.08%(5) 0.23% 1.90% 0.51% 1.21%(5)
248% 436% 294% 119% 248% 436% 294% 119%
-------
$(0.11) $(0.11) $(0.30) $(0.20) $(0.11) $(0.04) $(0.20) $ (0.18)
3.37% 4.55% 4.56% 6.26%(5) 2.32% 3.55% 3.56% 5.25%(5)
</TABLE>
--------------------------------------------------
CAPITAL FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ----------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996(2) 1999 1998 1997 1996(2) 1995
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$22.69 $21.02 $19.91 $ 21.98 $ 22.99 $ 21.23 $ 19.88 $ 18.67 $ 15.62
- ------- ------- ------- -------- -------- -------- -------- -------- --------
(0.04)* 0.07 (0.06) (0.02)(3) 0.22* 0.21 0.05 0.13(2) 0.14
4.91 4.47 5.00 1.57 5.00 4.62 5.13 5.70 5.27
- ------- ------- ------- -------- -------- -------- -------- -------- --------
4.87 4.54 4.94 1.55 5.22 4.83 5.18 5.83 5.41
- ------- ------- ------- -------- -------- -------- -------- -------- --------
(0.07) (0.04) -- (0.12) (0.19) (0.24) -- (0.15) (0.14)
(2.59) (2.83) (3.83) (3.50) (2.59) (2.83) (3.83) (4.47) (2.22)
-- -- -- -- -- -- -- -- --
- ------- ------- ------- -------- -------- -------- -------- -------- --------
(2.66) (2.87) (3.83) (3.62) (2.78) (3.07) (3.83) (4.62) (2.36)
- ------- ------- ------- -------- -------- -------- -------- -------- --------
$24.90 $22.69 $21.02 $ 19.91 $ 25.43 $ 22.99 $ 21.23 $ 19.88 $ 18.67
- ------- ------- ------- -------- -------- -------- -------- -------- --------
- ------- ------- ------- -------- -------- -------- -------- -------- --------
24,830
$ $6,369 $2,385 $ 130 $215,308 $194,973 $175,470 $135,943 $102,429
+22.2% +22.6% +25.6% +7.7% 23.4% +23.8% +26.8% +33.3% +34.9%
2.02% 2.09% 2.21% 2.45%(5) 1.01% 1.08% 1.22% 1.38% 1.36%
- -0.18% 0.09% -0.91% -0.50%(5) 0.91% 0.96% 0.26% 0.67% 0.74%
126% 141% 159% 191% 126% 141% 159% 191% 217%
</TABLE>
--------------------------------------------------
Salomon Brothers Investment Series - 53
<PAGE>
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- ------ -------- --------
Net investment income 0.047 0.050 0.051 0.050 0.044 0.047 0.050 0.051 0.050
Dividends from net investment
income (0.047) (0.050) (0.051) (0.050) (0.044) (0.047) (0.050) (0.051) (0.050)
-------- -------- -------- -------- -------- -------- ------ -------- --------
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------- -------- ------ -------- --------
-------- -------- -------- -------- -------- -------- ------ -------- --------
Net assets, end of period
(thousands) $ 20,702 $ 26,793 $ 18,246 $ 8,175 $ 1,756 $ 20,476 $17,374 $ 4,151 $ 3,920
Total return(3) +4.8% +5.2% +5.2% +5.1% +4.5% +4.8% +5.2% +5.2% +5.1%
Ratios to average net assets:
Expenses 0.53% 0.55% 0.55% 0.55% 0.55% 0.53% 0.55% 0.55% 0.55%
Net investment income 4.65% 5.02% 5.11% 4.95% 5.42% 4.72% 4.95% 5.10% 4.95%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment
income per share and expense
ratios would have been:
Net investment income per
share -- $ 0.049 $ 0.049 $ 0.047 $ 0.037 -- $0.049% $ 0.049 $ 0.047
Expense ratio -- 0.67% 0.70% 0.82% 1.35% -- 0.67% 0.70% 0.82%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------
YEAR
ENDED
DECEMBER
31,
--------
1995(1)
<S> <C>
Net asset value, beginning of
period $ 1.000
--------
Net investment income 0.043
Dividends from net investment
income (0.043)
--------
Net asset value, end of period $ 1.000
--------
--------
Net assets, end of period
(thousands) $ 2,238
Total return(3) +4.4%
Ratios to average net assets:
Expenses 0.55%
Net investment income 5.38%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment
income per share and expense
ratios would have been:
Net investment income per
share $ 0.037
Expense ratio 1.34%
</TABLE>
--------------------------------------------------
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(2) 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of
period $ 9.89 $ 11.74 $ 11.54 $ 10.53 $ 10.00 $ 9.87 $ 11.71 $ 11.53 $ 10.53
-------- -------- -------- -------- -------- ---------- -------- -------- --------
Net investment income 1.01* 1.05 1.06 1.10 0.92 0.94* 0.97 0.98 1.02
Net gain on investment (both
realized and unrealized) (0.36) (1.84) 0.38 1.11 0.67 (0.36) (1.84) 0.37 1.11
-------- -------- -------- -------- -------- ---------- -------- -------- --------
Total from investment
operations 0.65 (0.79) 1.44 2.21 1.59 0.58 (0.87) 1.35 2.13
-------- -------- -------- -------- -------- ---------- -------- -------- --------
Dividends from net investment
income (1.06) (1.06) (1.05) (1.10) (0.91) (0.97) (0.97) (0.98) (1.03)
Distributions from net
realized gain on investments -- -- (0.19) (0.10) (0.15) -- -- (0.19) (0.10)
-------- -------- -------- -------- -------- ---------- -------- -------- --------
Total dividends and
distributions (1.06) (1.06) (1.24) (1.20) (1.06) (0.97) (0.97) (1.17) (1.13)
-------- -------- -------- -------- -------- ---------- -------- -------- --------
Net asset value, end of
period $ 9.48 $ 9.89 $ 11.74 $ 11.54 $ 10.53 $ 9.48 $ 9.87 $ 11.71 $ 11.53
-------- -------- -------- -------- -------- ---------- -------- -------- --------
-------- -------- -------- -------- -------- ---------- -------- -------- --------
Net assets, end of period
(thousands) $125,568 $145,730 $169,721 $ 65,935 $ 10,789 $ 311,832 $327,661 $329,672 $106,797
Total return(3) +7.0% -7.1% +13.0% +21.9% +16.6% +6.3% -7.8% +12.2% +21.2%
Ratios to average net assets:
Expenses 1.27% 1.24% 1.24% 1.24% 1.24%(4) 2.02% 1.99% 1.99% 1.99%
Net investment income 10.46% 9.58% 8.66% 9.38% 10.58%(4) 9.74% 8.87% 7.90% 8.49%
Portfolio turnover rate 65% 66% 79% 85% 109% 65% 66% 79% 85%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment
income per share and expense
ratios would have been:
Net investment income per
share $ 1.01* $ 1.04 $ 1.04 $ 1.09 $ 0.87 $ 0.94 $ 0.96 $ 0.97 $ 1.01
Expense ratio 1.29% 1.32% 1.34% 1.50% 1.80%(4) 2.03% 2.07% 2.09% 2.24%
</TABLE>
<TABLE>
<CAPTION>
CLASS B
-------
YEAR
ENDED
DECEMBER
31,
1995(2)
--------
<S> <C>
Net asset value, beginning of
period $ 10.00
--------
Net investment income 0.85
Net gain on investment (both
realized and unrealized) 0.68
--------
Total from investment
operations 1.53
--------
Dividends from net investment
income (0.85)
Distributions from net
realized gain on investments (0.15)
--------
Total dividends and
distributions (1.00)
--------
Net asset value, end of
period $ 10.53
--------
--------
Net assets, end of period
(thousands) $ 10,108
Total return(3) +15.7%
Ratios to average net assets:
Expenses 1.96%(4)
Net investment income 9.53%(4)
Portfolio turnover rate 109%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment
income per share and expense
ratios would have been:
Net investment income per
share $ 0.80
Expense ratio 2.51%(4)
</TABLE>
--------------------------------------------------
(1) January 3, 1995, commencement of investment operations, through
December 31, 1995.
(2) February 22, 1995, commencement of investment operations, through December
31, 1995.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the 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.
(4) Annualized.
* Per share amounts have been calculated using average shares method.
Salomon Brothers Investment Series - 54
<PAGE>
CASH MANAGEMENT FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
-------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
0.047 0.050 0.051 0.050 0.043 0.047 0.050 0.051 0.050 0.055
(0.047) (0.050) (0.051) (0.050) (0.043) (0.047) (0.050) (0.051) (0.050) (0.055)
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
$ 1,932 $ 2,741 $ 1,806 $ 435 $ 183 $ 9,034 $ 8,066 $19,872 $14,225 $ 6,684
+4.8% +5.2% +5.2% +5.1% +4.4% +4.8% +5.2% +5.2% +5.1% +5.6%
0.53% 0.55% 0.55% 0.55% 0.55% 0.53% 0.55% 0.55% 0.55% 0.55%
4.67% 4.98% 5.16% 4.95% 5.40% 4.67% 5.08% 5.10% 4.95% 5.46%
-- $ 0.049 $ 0.049 $ 0.047 $ 0.036 -- $ 0.049 $ 0.049 $ 0.047 $ 0.047
-- 0.67% 0.70% 0.82% 1.34% -- 0.67% 0.70% 0.82% 1.34%
</TABLE>
--------------------------------------------------
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(2) 1999 1998 1997 1996 1995(2)
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 9.86 $ 11.70 $ 11.52 $ 10.53 $ 10.00 $ 9.89 $ 11.75 $ 11.53 $ 10.54 $ 10.00
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
0.96* 0.97 0.99 1.02 0.85 1.04* 1.09 1.08 1.16 0.95
(0.35) (1.84) 0.36 1.10 0.68 (0.36) (1.86) 0.40 1.05 0.67
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
0.61 (0.87) 1.35 2.12 1.53 0.68 (0.77) 1.48 2.21 1.62
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
(0.97) (0.97) (0.98) (1.03) (0.85) (1.09) (1.09) (1.07) (1.12) (0.93)
-- -- (0.19) (0.10) (0.15) -- -- (0.19) (0.10) (0.15)
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
(0.97) (0.97) (1.17) (1.13) (1.00) (1.09) (1.09) (1.26) (1.22) (1.08)
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
$ 9.50 $ 9.86 $ 11.70 $ 11.52 $ 10.53 $ 9.48 $ 9.89 $ 11.75 $ 11.53 $ 10.54
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
- ------- ------- ------- ------- ------- ------- ---------- ------- ------- -------
$84,527 $86,596 $76,042 $13,773 $ 1,274 $13,537 $ 8,936 $ 2,386 $ 393 $ 7,854
+6.6% -7.8% +12.2% +21.1% +15.8% +7.3% -6.9% +13.4% +22.0% +16.8%
1.79% 1.99% 1.99% 1.99% 1.98%(3) 1.02% 1.01% 0.99% 0.99% 1.00%(3)
9.95% 8.89% 7.87% 8.43% 9.61%(3) 10.76% 10.85% 8.93% 10.64% 10.59%(3)
65% 66% 79% 85% 109% 65% 66% 79% 85% 109%
$ 0.96* $ 0.96 $ 0.98 $ 1.01 $ 0.80 $ 1.04* $ 1.08 $ 1.07 $ 1.13 $ 0.90
1.81% 2.07% 2.08% 2.24% 2.54%(3) 1.03% 1.09% 1.09% 1.24% 1.55%(3)
</TABLE>
--------------------------------------------------
Salomon Brothers Investment Series - 55
<PAGE>
INVESTORS VALUE FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 22.04 $ 21.11 $ 18.89 $ 16.62 $ 13.61 $ 21.87 $ 21.00 $ 18.86
------- ------- ------- ------- ------- ------- ------- -------
Net investment income 0.21 0.19 0.16 0.19 0.19 0.04 0.05 0.04
Net gain (loss) on investments (both realized and
unrealized) 2.29 2.91 4.64 4.63 4.55 2.26 2.85 4.58
------- ------- ------- ------- ------- ------- ------- -------
Total from investment operations 2.50 3.10 4.80 4.82 4.74 2.30 2.90 4.62
------- ------- ------- ------- ------- ------- ------- -------
Dividends from net investment income (0.13) (0.17) (0.21) (0.22) (0.23) (0.03) (0.03) (0.11)
Distributions from net realized gain on investments (3.71) (2.00) (2.37) (2.33) (1.50) (3.71) (2.00) (2.37)
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and distributions (3.84) (2.17) (2.58) (2.55) (1.73) (3.74) (2.03) (2.48)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of year $ 20.70 $ 22.04 $ 21.11 $ 18.89 $ 16.62 $ 20.43 $ 21.87 $ 21.00
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
Net assets, end of year (thousands) $32,817 $50,953 $57,105 $10,905 $ 441 $81,759 $75,189 $49,786
Total return(3) 11.5% +15.2% +26.2% +30.3% +35.3% 10.6% +14.3% +25.3%
Ratios to average net assets
Expenses 0.87% 0.88% 0.95% 1.06% 0.94% 1.61% 1.63% 1.70%
Net investment income 0.90% 0.87% 0.86% 0.94% 1.41% 0.16% 0.18% 0.12%
Portfolio turnover rate 66% 74% 62% 58% 86% 66% 74% 62%
<CAPTION>
CLASS B
---------------
YEAR ENDED
DECEMBER 31,
----------------
1996 1995(1)
-----------------
<S> <C> <C>
Net asset value, beginning of year $16.61 $13.61
------ ------
Net investment income 0.08 0.10
Net gain (loss) on investments (both realized and
unrealized) 4.60 4.54
------ ------
Total from investment operations 4.68 4.64
------ ------
Dividends from net investment income (0.10) (0.14)
Distributions from net realized gain on investments (2.33) (1.50)
------ ------
Total dividends and distributions (2.43) (1.64)
------ ------
Net asset value, end of year $18.86 $16.61
------ ------
------ ------
Net assets, end of year (thousands) $9,433 $ 716
Total return(3) +29.2% +34.5%
Ratios to average net assets
Expenses 1.82% 1.71%
Net investment income 0.21% 0.63%
Portfolio turnover rate 58% 86%
</TABLE>
--------------------------------------------------
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1999 1998 1997 1996 1995(2) 1999 1998 1997
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.61 $10.62 $10.35 $10.43 $10.00 $10.57 $10.59 $10.33
------ ------ ------ ------ ------ ------ ------ ------
Net investment income 0.48* 0.47 0.48 0.48 0.40 0.38* 0.39 0.40
Net gain (loss) on investment (both realized and
unrealized) (0.46) -- 0.28 (0.06) 0.46 (0.43) -- 0.28
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations 0.02 0.47 0.76 0.42 0.86 (0.05) 0.39 0.68
------ ------ ------ ------ ------ ------ ------ ------
Dividends from net investment income (0.48) (0.48) (0.48) (0.48) (0.40) (0.41) (0.41) (0.40)
Distributions in excess of net investment income -- -- -- -- -- -- -- (0.01)
Distributions from net realized gain on investments -- -- (0.01) (0.02) (0.03) -- -- (0.01)
------ ------ ------ ------ ------ ------ ------ ------
Total dividends and distributions (0.48) (0.48) (0.49) (0.50) (0.43) (0.41) (0.41) (0.42)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period $10.15 $10.61 $10.62 $10.35 $10.43 $10.11 $10.57 $10.59
------ ------ ------ ------ ------ ------ ------ ------
------ ------ ------ ------ ------ ------ ------ ------
Net assets, end of period (thousands) $4,460 $2,545 $1,063 $ 696 $ 569 $4,087 $2,763 $1,295
Total return(3) 0.2% +4.5% +7.5% +4.2% +8.7% (0.5)% +3.7% +6.7%
Ratios to average net assets:
Expenses 0.63% 0.75% 0.75% 0.75% 0.75%(4) 1.35% 1.50% 1.50%
Net investment income 4.44% 4.28% 4.53% 4.62% 4.63%(4) 3.70% 3.54% 3.75%
Portfolio turnover rate 4% 8% 1% 19% 29% 4% 8% 1%
Before applicable waiver of management fee, expenses
absorbed by SBAM and credits earned on custodian cash
balances, net investment income per share and expense
ratios would have been:
Net investment income per share $ 0.33* $ 0.37 $ 0.36 $ 0.35 $ 0.32 $ 0.23* $ 0.29 $ 0.28
Expense ratio 2.06% 1.67% 1.82% 2.02% 1.71%(4) 2.78% 2.42% 2.57%
<CAPTION>
CLASS B
---------------
YEAR ENDED
DECEMBER 31,
----------------
1996 1995(2)
----------------
<S> <C> <C>
Net asset value, beginning of period $10.42 $10.00
------ ------
Net investment income 0.40 0.34
Net gain (loss) on investment (both realized and
unrealized) (0.06) 0.45
------ ------
Total from investment operations 0.34 0.79
------ ------
Dividends from net investment income (0.41) (0.34)
Distributions in excess of net investment income -- --
Distributions from net realized gain on investments (0.02) (0.03)
------ ------
Total dividends and distributions (0.43) (0.37)
------ ------
Net asset value, end of period $10.33 $10.42
------ ------
------ ------
Net assets, end of period (thousands) $ 702 $ 432
Total return(3) +3.4% +8.0%
Ratios to average net assets:
Expenses 1.50% 1.50%(4)
Net investment income 3.88% 3.85%(4)
Portfolio turnover rate 19% 29%
Before applicable waiver of management fee, expenses
absorbed by SBAM and credits earned on custodian cash
balances, net investment income per share and expense
ratios would have been:
Net investment income per share $ 0.27 $ 0.25
Expense ratio 2.77% 2.45%(4)
</TABLE>
--------------------------------------------------
(1) January 3, 1995, commencement of investment operations, through
December 31, 1995.
(2) February 22, 1995, commencement of investment operations, through December
31, 1995.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
onthe 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.
(4) Annualized.
* Per share amounts have been calculated using the average shares method.
Salomon Brothers Investment Series - 56
<PAGE>
INVESTORS VALUE FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- -----------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 21.88 $ 21.01 $ 18.86 $16.61 $13.61 $ 22.05 $ 21.13 $ 18.90 $ 16.61 $ 13.63
- ------- ------- ------- ------ ------ -------- -------- -------- -------- --------
0.03* 0.05 0.04 0.07 0.09 0.26* 0.25 0.24 0.25 0.27
2.30 2.84 4.59 4.60 4.55 2.31 2.90 4.60 4.62 4.48
- ------- ------- ------- ------ ------ -------- -------- -------- -------- --------
2.33 2.89 4.63 4.67 4.64 2.57 3.15 4.84 4.87 4.75
- ------- ------- ------- ------ ------ -------- -------- -------- -------- --------
(0.04) (0.02) (0.11) (0.09) (0.14) (0.22) (0.23) (0.24) (0.25) (0.27)
(3.71) (2.00) (2.37) (2.33) (1.50) (3.71) (2.00) (2.37) (2.33) (1.50)
- ------- ------- ------- ------ ------ -------- -------- -------- -------- --------
(3.75) (2.02) (2.48) (2.42) (1.64) (3.93) (2.23) (2.61) (2.58) (1.77)
- ------- ------- ------- ------ ------ -------- -------- -------- -------- --------
$ 20.46 $ 21.88 $ 21.01 $18.86 $16.61 $ 20.69 $ 22.05 $ 21.13 $ 18.90 $ 16.61
- ------- ------- ------- ------ ------ -------- -------- -------- -------- --------
- ------- ------- ------- ------ ------ -------- -------- -------- -------- --------
$17,883 $17,680 $11,701 $1,959 $ 306 $662,248 $650,916 $608,401 $518,361 $428,950
+10.7% +14.3% +25.2% +29.3% +34.5% 11.7% +15.4% +26.5% +30.6% +35.4%
1.61% 1.63% 1.70% 1.80% 1.68% 0.63% 0.63% 0.69% 0.76% 0.69%
0.15% 0.18% 0.13% 0.23% 0.66% 1.16% 1.15% 1.15% 1.36% 1.67%
66% 74% 62% 58% 86% 66% 74% 62% 58% 86%
</TABLE>
--------------------------------------------------
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- ------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(2) 1999 1998 1997 1996 1995(2)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$10.57 $10.59 $10.33 $10.42 $10.00 $10.60 $ 10.61 $ 10.34 $10.46 $10.00
- ------ ------ ------ ------ ------ ------ ------- ------- ------ ------
0.41* 0.39 0.40 0.40 0.34 0.49* 0.48 0.50 0.50 0.42
(0.44) -- 0.28 (0.06) 0.45 (0.44) 0.01 0.28 (0.07) 0.46
- ------ ------ ------ ------ ------ ------ ------- ------- ------ ------
(0.03) 0.39 0.68 0.34 0.79 0.05 0.49 0.78 0.43 0.88
- ------ ------ ------ ------ ------ ------ ------- ------- ------ ------
(0.41) (0.41) (0.40) (0.41) (0.34) (0.50) (0.50) (0.50) (0.50) (0.42)
-- -- (0.01) -- -- -- -- -- -- --
-- -- (0.01) (0.02) (0.03) -- -- (0.01) (0.02) (0.03)
- ------ ------ ------ ------ ------ ------ ------- ------- ------ ------
(0.41) (0.41) (0.42) (0.43) (0.37) (0.50) (0.50) (0.51) (0.52) (0.45)
- ------ ------ ------ ------ ------ ------ ------- ------- ------ ------
$10.13 $10.57 $10.59 $10.33 $10.42 $10.15 $ 10.60 $ 10.61 $10.34 $10.43
- ------ ------ ------ ------ ------ ------ ------- ------- ------ ------
- ------ ------ ------ ------ ------ ------ ------- ------- ------ ------
$2,183 $2,291 $ 514 $ 468 $ 271 $2,544 $ 8,211 $11,286 $9,786 $9,675
(0.3)% +3.7% +6.7% +3.4% +8.0% 0.5% +4.8% +7.8% +4.3% +9.0%
1.16% 1.50% 1.50% 1.50% 1.50%(4) 0.41% 0.50% 0.50% 0.50% 0.50%(4)
3.91% 3.51% 3.81% 3.88% 3.85%(4) 4.75% 4.58% 4.79% 4.88% 4.86%(4)
4% 8% 1.00% 19% 29.0% 4% 8% 1% 19% 29.0%
$ 0.26* $ 0.29 $ 0.28 $ 0.27 $ 0.25 $ 0.34* $ 0.38 $ 0.39 $ 0.37 $ 0.34
2.60 2.42% 2.57% 2.77% 2.46%(4) 1.86% 1.42% 1.57% 1.77% 1.46%(4)
</TABLE>
--------------------------------------------------
Salomon Brothers Investment Series - 57
<PAGE>
NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------
1999 1998 1997 1996(1) 1999 1998 1997 1996(1)
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- ------- ------- ------- -------
Net investment income 0.029 0.031 0.034 0.006 0.029 0.031 0.034 0.006
Dividends from net investment income (0.029) (0.031) (0.034) (0.006) (0.029) (0.031) (0.034) (0.006)
------- ------- ------- ------- ------- ------- ------- -------
Net asset value, end of period $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
Net assets, end of period (thousands) $ 5,810 $ 5,372 $ 3,808 $ 360 $ 258 $ 25 $ 25 $ 25
Total return(2) 2.9% +3.2% +3.5% +0.6% 2.9% +3.2% +3.5% +0.6%
Ratios to average net assets:
Expenses 0.41% 0.41% 0.50% 0.38%(3) 0.42% 0.42% 0.43% 0.40%(3)
Net investment income 2.85% 3.15% 3.39% 3.56%(3) 2.99% 3.21% 3.32% 3.40%(3)
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned on
custodian cash balances, net investment income
per share and expense ratios would have been:
Net investment income per share -- -- -- $ 0.006 -- -- -- $ 0.006
Expense ratio -- -- -- 0.39%(3) -- -- -- 0.41%(3)
</TABLE>
-------------------------------------------
(1) November 1, 1996, commencement of investment operations, through
December 31, 1996.
(2) 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. Total return calculated for a period of less than one year
is not annualized.
(3) Annualized.
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-----------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1999 1998(1) 1999 1998(1)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period 11.59 10.00 11.55 10.00
-------- ------
Net investment loss (0.07) (0.02) (0.17) (0.06)
Net gain on investments (both realized and unrealized) 6.63 1.61 6.55 1.61
-------- ------
Total from investment operations 6.56 1.59 6.38 1.55
-------- ------
Dividends from net investment income -- -- -- --
Distributions from net realized gain on investments (0.92) -- (0.92) --
-------- ------ --------
Total dividends and distributions (0.92) -- (0.92) --
-------- ------ --------
Net asset value, end of period $ 17.23 $11.59 $ 17.01 $11.55
-------- ------ --------
-------- ------ --------
Net assets, end of period (thousands) $167,281 $3,205 $124,560 $3,850
Total return(2) 57.5% +15.9% 56.2% +15.5%
Ratios to average net assets:
Expenses 1.37% 1.50%(3) 2.12% 2.25%(3)
Net investment income - 0.52% - 0.51%(3) - 1.23% - 1.21%(3)
Portfolio turnover rate 142% 96% 142% 96%
Before applicable waiver of management fee, expenses
absorbed by SBAM and credits earned on cash
balances, net investment income per share and
expense ratios would have been:
Net investment loss per share $ (0.08) $(0.06) $ (0.17) $(0.10)
Expense ratio 1.40% 2.30%(3) 2.15% 3.05%(3)
</TABLE>
-------------------------------------------
(1) July 1, 1998 commencement of investment operations, through December 31,
1998.
(2) 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.
(3) Annualized.
Salomon Brothers Investment Series - 58
<PAGE>
NEW YORK MUNICIPAL MONEY MARKET FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
--------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1999 1998 1997 1996(1) 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------- -------- -------- -------- --------
0.029 0.031 0.034 0.006 0.029 0.031 0.034 0.032 0.037
(0.029) (0.031) (0.034) (0.006) (0.029) (0.031) (0.034) (0.032) (0.037)
------- ------- ------- ------- -------- -------- -------- -------- --------
$ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
------- ------- ------- ------- -------- -------- -------- -------- --------
------- ------- ------- ------- -------- -------- -------- -------- --------
$ 33 $ 153 $ 25 $ 25 $168,701 $195,584 $305,419 $273,734 $226,549
2.9% +3.2% +3.5% +0.6% 2.9% +3.2% +3.5% +3.3% +3.7%
0.40% 0.34% 0.47% 0.40%(3) 0.41% 0.43% 0.47% 0.53% 0.43%
2.78% 3.13% 3.40% 3.40%(3) 2.85% 3.14% 3.39% 3.25% 3.67%
-- -- -- $ 0.006 -- -- -- $ 0.032 $ 0.037
-- -- -- 0.41%(3) -- -- -- 0.53% 0.45%
</TABLE>
-------------------------------------------
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
---------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1999 1998(1) 1999 1998(1)
---------------------------------------------------------------------
<S> <C> <C> <C> <C>
11.56 10.00 11.60 10.00
------- ------ ------ ------
(0.17) (0.06) (0.06) (0.01)
6.57 1.62 6.67 1.61
------- ------ ------ ------
6.40 1.56 6.61 1.60
------- ------ ------ ------
-- -- -- --
(0.92) -- (0.92) --
------- ------ ------ ------
(0.92) -- (0.92) --
------- ------ ------ ------
$ 17.04 $11.56 $17.29 $11.60
------- ------ ------ ------
------- ------ ------ ------
$14,285 $1,471 $ 67 $ 67
------- ------ ------ ------
56.3% +15.6% 57.9% +16.0%
2.14% 2.25%(3) 1.24% 1.25%(3)
- 1.22% - 1.35%(3) - 0.49 - 0.18%(3)
1.42% 96% 1.42% 96%
$ (0.17) $(0.10) $(0.06) $(0.05)
2.18% 3.05%(3) 1.27% 2.05%(3)
</TABLE>
-------------------------------------------
Salomon Brothers Investment Series - 59
<PAGE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 10.19 $ 10.94 $ 10.83 $ 10.53 $ 10.00 $ 10.18 $ 10.93 $ 10.82
------- ------- ------- ------- ------- ------- -------- -------
Net investment income 0.88* 0.76 0.76(3) 0.87(3) 0.84 0.81* 0.69* 0.67(3)
Net gain (loss) on investments (both
realized and unrealized) (0.41) (0.65) 0.41 0.55 0.78 (0.41) (0.66) 0.41
------- ------- ------- ------- ------- ------- -------- -------
Total from investment operations 0.47 0.11 1.17 1.42 1.62 0.40 0.03 1.08
------- ------- ------- ------- ------- ------- -------- -------
Dividends from net investment
income (0.85) (0.85) (0.89) (0.94) (0.85) (0.77) (0.77) (0.80)
Dividends in excess of net
investment income -- -- -- (0.01) -- -- -- --
Distributions from net realized gain
on investments -- (0.01) (0.17) (0.17) (0.24) -- (0.01) (0.17)
------- ------- ------- ------- ------- ------- -------- -------
Total dividends and distributions (0.85) (0.86) (1.06) (1.12) (1.09) (0.77) (0.78) (0.97)
------- ------- ------- ------- ------- ------- -------- -------
Net asset value, end of period $ 9.81 $ 10.19 $ 10.94 $ 10.83 $ 10.53 $ 9.81 $ 10.18 $ 10.93
------- ------- ------- ------- ------- ------- -------- -------
------- ------- ------- ------- ------- ------- -------- -------
Net assets, end of period
(thousands) $18,571 $21,995 $17,150 $ 8,345 $ 513 $69,289 $ 67,928 $47.921
Total return(4) 5.0% +1.1% +11.2% +14.1% +16.8% 4.2% +0.3% +10.4%
Ratios to average net assets:
Expenses 1.24% 1.24% 1.24% 1.24% 1.23%(5) 1.99% 1.99% 1.99%
Net investment income 8.94% 7.11% 6.99% 8.09% 9.51%(5) 8.20% 6.37% 6.12%
Portfolio turnover rate 114% 109% 184% 122% 161% 114% 109% 184%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per share $ 0.86* $ 0.74 $ 0.73 $ 0.79 $ 0.76 $ 0.79* $ 0.67 $ 0.64
Expense ratio 1.44% 3.78% 3.81% 5.50% 2.11%(5) 2.19% 2.18% 2.28%
<CAPTION>
CLASS B
-----------------
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995(1)
-----------------
<S> <C> <C>
Net asset value, beginning of period $ 10.53 $ 10.00
------- -------
Net investment income 0.79(3) 0.76
Net gain (loss) on investments (both
realized and unrealized) 0.53 0.79
------- -------
Total from investment operations 1.32 1.55
------- -------
Dividends from net investment
income (0.85) (0.78)
Dividends in excess of net
investment income 0.01 --
Distributions from net realized gain
on investments (0.17) (0.24)
------- -------
Total dividends and distributions (1.03) (1.02)
------- -------
Net asset value, end of period $ 10.82 $ 10.53
------- -------
------- -------
Net assets, end of period
(thousands) $14.291 $ 1,879
Total return(4) +13.0% +16.1%
Ratios to average net assets:
Expenses 1.98% 1.97%(5)
Net investment income 7.34% 8.75%(5)
Portfolio turnover rate 122% 161%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per share $ 0.71 $ 0.69
Expense ratio 2.73% 2.85%(5)
</TABLE>
--------------------------------------------------
BALANCED FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1999 1998 1997 1996 1995(2) 1999 1998 1997
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 13.11 $ 13.13 $ 11.82 $ 10.55 $ 10.00 $ 13.08 $ 13.12 $ 11.82
------- ------- ------- ------- ------- ------- -------- -------
Net investment income(3) 0.50 0.56 0.55 0.54 0.15 0.40 0.45 0.45
Net gain on investments (both
realized and unrealized) (0.08) 0.26 1.65 1.35 0.52 (0.08) 0.26 1.65
------- ------- ------- ------- ------- ------- -------- -------
Total from investment operations 0.42 0.82 2.20 1.89 0.67 0.32 0.71 2.10
------- ------- ------- ------- ------- ------- -------- -------
Dividends from net investment
income (0.50) (0.55) (0.53) (0.52) (0.11) (0.42) (0.46) (0.44)
Distributions from net realized gain
on investments (0.22) (0.29) (0.36) (0.10) (0.01) (0.22) (0.29) (0.36)
------- ------- ------- ------- ------- ------- -------- -------
Total dividends and distributions (0.72) (0.84) (0.89) (0.62) (0.12) (0.64) (0.75) (0.80)
------- ------- ------- ------- ------- ------- -------- -------
Net asset value, end of period $ 12.81 $ 13.11 $ 13.13 $ 11.82 $ 10.55 $ 12.76 $ 13.08 $ 13.12
------- ------- ------- ------- ------- ------- -------- -------
------- ------- ------- ------- ------- ------- -------- -------
Net assets end of period
(thousands) $35,386 $51,443 $53,024 $21,109 $ 3,658 $97,656 $120,816 $87,549
Total return(4) 3.2% +6.4% +19.1% +18.3% +6.7% 2.4% 5.5% +18.2%
Ratios to average net assets:
Expenses 0.95% 0.85% 0.77% 0.75% 0.74%(5) 1.70% 1.60% 1.52%
Net investment income 3.97% 4.17% 4.29% 4.81% 4.82%(5) 3.03% 3.41% 3.54%
Portfolio turnover rate 34% 63% 70% 76% 16% 34% 63% 70%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per share $ 0.47 $ 0.51 $ 0.49 $ 0.44 0.13 $ 0.37 $ 0.41 $ 0.39
Expense ratio 1.17% 1.17% 1.24% 1.61% 1.45%(5) 1.92% 1.92% 1.99%
<CAPTION>
CLASS B
---------------
YEAR ENDED
DECEMBER 31,
---------------
1996 1995(2)
----------------
<S> <C> <C>
Net asset value, beginning of period $ 10.54 $ 10.00
------- -------
Net investment income(3) 0.45 0.13
Net gain on investments (both
realized and unrealized) 1.35 0.51
------- -------
Total from investment operations 1.80 0.64
------- -------
Dividends from net investment
income (0.42) (0.09)
Distributions from net realized gain
on investments (0.10) (0.01)
------- -------
Total dividends and distributions (0.52) (0.10)
------- -------
Net asset value, end of period $ 11.82 $ 10.54
------- -------
------- -------
Net assets end of period
(thousands) $28,043 $ 5,378
Total return(4) +17.4% +6.4%
Ratios to average net assets:
Expenses 1.50% 1.49%(5)
Net investment income 4.06% 4.06%(5)
Portfolio turnover rate 76% 16%
Before applicable waiver of
management fee, expenses
absorbed by SBAM and credits
earned on custodian cash
balances, net investment income
per share and expense ratios
would have been:
Net investment income per share $ 0.36 $ 0.11
Expense ratio 2.36% 2.19%(5)
</TABLE>
--------------------------------------------------
(1) February 22, 1995, commencement of investment operations through December
31, 1995.
(2) September 11, 1995, commencement of investment operations, through December
31, 1995.
(3) Per share information calculated using the average shares outstanding
method.
(4) 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.
(5) Annualized.
* Per share amounts have been calculated using the average shares method.
Salomon Brothers Investment Series - 60
<PAGE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.18 $ 10.94 $ 10.82 $ 10.53 $ 10.00 $ 10.18 $ 10.93 $ 10.82 $ 10.53 $ 10.00
- ------- ------- ------- ------- ------- ------- ------- -------
0.83* 0.69 0.66(3) 0.78(3) 0.77 0.91* 0.77 0.78(3) 0.92(3) 0.87
(0.40) (0.67) 0.43 0.54 0.78 (0.41) (0.63) 0.41 0.51 0.77
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.43 0.02 1.09 1.32 1.55 0.50 0.14 1.19 1.43 1.64
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.77) (0.77) (0.80) (0.85) (0.78) (0.88) (0.88) (0.91) (0.96) (0.87)
-- -- -- (0.01) -- -- -- -- (0.01) --
-- (0.01) (0.17) (0.17) (0.24) -- (0.01) (0.17) (0.17) (0.24)
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.77) (0.78) (0.97) (1.03) (1.02) (0.88) (0.89) (1.08) (1.14) (1.11)
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 9.84 $ 10.18 $ 10.94 $ 10.82 $ 10.53 $ 9.80 $ 10.18 $ 10.93 $ 10.82 $ 10.53
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$22,857 $27,327 $20,220 $ 4,575 $ 411 $ 594 $ 498 $ 649 $ 3,817 $ 9,763
4.5% +0.2% +10.5% +13.1% +16.1% 5.3% +1.3% +11.5% +14.2% +17.0%
1.76% 1.99% 1.99% 1.98% 1.99%(5) 0.99% 0.99% 0.96% 1.00% 0.99%(5)
8.43% 6.37% 6.09% 7.26% 8.77%(5) 9.30% 7.37% 7.22% 8.65% 9.74%(5)
114% 109% 184% 122% 161% 114% 109% 184% 122% 161%
$ 0.81* $ 0.67 $ 0.63 $ 0.70 $ 0.70 $ 0.89* $ 0.75 $ 0.75 $ 0.84 $ 0.79
1.96% 2.18% 2.28% 2.72% 2.87%(4) 1.19% 1.18% 1.25% 1.74% 1.87%(4)
</TABLE>
--------------------------------------------------
BALANCED FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
- --------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995(1)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 13.11 $ 13.15 $ 11.85 $ 10.56 $ 10.00 $ 13.18 $ 13.20 $ 11.88 $ 10.57 $ 10.00
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.41 0.45 0.45 0.46 0.14 0.54 0.59 0.59 0.57 0.17
(0.09) 0.26 1.65 1.35 0.51 (0.09) 0.26 1.65 1.39 0.52
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.32 0.71 2.10 1.81 0.65 0.45 0.85 2.24 1.96 0.69
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.42) (0.46) (0.44) (0.42) (0.08) (0.53) (0.58) (0.56) (0.55) (0.11)
(0.22) (0.29) (0.36) (0.10) (0.01) (0.22) (0.29) (0.36) (0.10) (0.01)
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.64) (0.75) (0.80) (0.52) (0.09) (0.75) (0.87) (0.92) (0.65) (0.12)
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 12.79 $ 13.11 $ 13.15 $ 11.85 $ 10.56 $ 12.88 $ 13.18 $ 13.20 $ 11.88 $ 10.57
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
- ------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$21,030 $29,458 $21,085 $ 3,445 $ 445 $ 1,460 $ 1,523 $ 1,227 $ 213 $ 4,494
2.4% +5.5% +18.1% +17.5% +6.5% 3.4% +6.6% +19.3% +19.0% +6.9%
1.70% 1.60% 1.52% 1.50% 1.51%(5) 0.70% 0.60% 0.52% 0.50% 0.51%(5)
3.04% 3.41% 3.52% 4.07% 4.26%(5) 4.00% 4.41% 4.60% 5.13% 5.30%(5)
34% 63% 70% 76% 16% 34% 63% 70% 76% 16%
$ 0.38 $ 0.41 $ 0.39 $ 0.36 $ 0.11 $ 0.51 $ 0.55 $ 0.53 $ 0.47 $ 0.15
1.92% 1.92% 1.99% 2.36% 2.22%(5) 0.92% 0.92% 1.00% 1.36% 1.22%
</TABLE>
Salomon Brothers Investment Series - 61
<PAGE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS A CLASS B
-------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995(1)
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period $10.28 $10.20 $10.07 $10.32 $10.00 $ 10.29 $ 10.20 $10.06 $10.32 $10.00
------ ------ ------ ------ ------ ------- ------- ------ ------ ------
Net investment income 0.54* 0.55 0.58 0.54 0.49 0.49* 0.48 0.51 0.46 0.43
Net gain (loss) on investment (both
realized and unrealized) (0.39) 0.21 0.19 (0.19) 0.43 (0.42) 0.21 0.19 (0.20) 0.43
------ ------ ------ ------ ------ ------- ------- ------ ------ ------
Total from investment operations 0.15 0.76 0.77 0.35 0.92 0.07 0.69 0.70 0.26 0.86
------ ------ ------ ------ ------ ------- ------- ------ ------ ------
Dividends from net investment income (0.59) (0.57) (0.54) (0.54) (0.49) (0.51) (0.49) (0.46) (0.46) (0.43)
Distributions from net realized gain
on investments -- (0.11) (0.10) (0.06) (0.10) -- (0.11) (0.10) (0.06) (0.10)
Distributions in excess of net
investment income -- -- -- -- (0.01) -- -- -- -- (0.01)
------ ------ ------ ------ ------- ------- ------ ------ ------
Total dividends and distributions (0.59) (0.68) (0.64) (0.60) (0.60) (0.51) (0.60) (0.56) (0.52) (0.54)
------ ------ ------ ------ ------ ------- ------- ------ ------ ------
Net asset value, end of period $ 9.84 $10.28 $10.20 $10.07 $10.32 $ 9.85 $ 10.29 $10.20 $10.06 $10.32
------ ------ ------ ------ ------ ------- ------- ------ ------ ------
------ ------ ------ ------ ------ ------- ------- ------ ------ ------
Net assets, end of period
(thousands) $5,771 $6,744 $1,320 $1,188 $ 278 $16,109 $15,315 $2,531 $1,266 $ 572
Total return(2) +1.5% +7.6% +7.9% +3.6% +9.5% +0.7% +6.9% +7.2% +2.7% +8.8%
Ratios to average net assets:
Expenses 0.85% 0.85% 0.85% 0.84% 0.85%(3) 1.60% 1.60% 1.60% 1.59% 1.60%(3)
Net investment income 5.34% 4.98% 5.77% 5.22% 5.67%(3) 4.85% 4.20% 4.96% 4.51% 4.85%(3)
Portfolio turnover rate 96% 173% 261% 365% 230% 96% 173% 261% 365% 230%
Before applicable waiver of
management fee, expenses absorbed
by SBAM and credits earned on
custodian cash balances, net
investment income per share and
expense ratios would have been:
Net investment income per share $ 0.45* $ 0.47 $ 0.47 $ 0.38 $ 0.40 $ 0.40* $ 0.39 $ 0.39 $ 0.30 $ 0.34
Expense ratio 1.67% 1.63% 2.02% 2.21% 1.90%(3) 2.42% 2.39% 2.77% 2.96% 2.64%(3)
</TABLE>
--------------------------------------------------
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999(4)
-----------------------------------------------------------------
CLASS A CLASS B CLASS 2 CLASS O
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Net asset value, beginning of period 10.00 10.00 10.00 10.00
------ ------ ------ ------
Net investment income (0.03) (0.04) (0.04) (0.02)
Net gain (loss) on investment (both realized and
unrealized) 2.52 2.51 2.50 2.51
------ ------ ------ ------
Total from investment operations 2.49 2.47 2.46 2.49
------ ------ ------ ------
Dividends from net investment income -- -- -- --
Distributions from net realized gain on
investments -- -- -- --
Distributions in excess of net investment income -- -- -- --
------ ------ ------ ------
Total dividends and distributions -- -- -- --
------ ------ ------ ------
Net asset value, end of period $12.49 $12.47 $12.46 $12.49
------ ------ ------ ------
------ ------ ------ ------
Net assets, end of period (thousands) $2,538 $3,863 $2,441 $1,262
Total return(2) 24.9% 24.7% 24.6% 24.9%
Ratios to average net assets(3):
Expenses 1.75% 2.50% 2.50% 1.50%
Net investment income - 1.39% - 2.30% - 2.13% - 0.83%
Portfolio turnover rate 1% 1% 1% 1%
Before applicable waiver of management fee,
expenses absorbed by SBAM and credits earned on
custodian cash balances, net investment income
per share and expense ratios would have been(3):
Net investment income per share $(0.05) $(0.05) $(0.05) $(0.05)
Expense ratio 4.36% 5.11% 5.09% 4.05%
</TABLE>
--------------------------------------------------
(1) February 22, 1995, commencement of investment operations, through December
31, 1995.
(2) 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.
(3) Annualized.
(4) For the period from October 25, 1999 (inception) to December 31, 1999.
(5) For the period from October 25, 1999 (inception) to December 31, 1999.
(6) For the period from October 26, 1999 (inception) to December 31, 1999.
(7) Amount represents less than $0.01 per share.
* Per share amounts have been calculated using the average shares method.
Salomon Brothers Investment Series - 62
<PAGE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
CLASS 2 CLASS O
-------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995(1) 1999 1998 1997 1996 1995(1)
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 10.28 $ 10.19 $ 10.05 $ 10.32 $ 10.00 $ 10.29 $ 10.19 $ 10.06 $ 10.32 $ 10.00
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.49* 0.48 0.51 0.46 0.43 0.57* 0.57 0.61 0.56 0.52
(0.40) 0.21 0.19 (0.21) 0.43 (0.40) 0.23 0.18 (0.20) 0.42
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
0.09 0.69 0.70 0.25 0.86 0.17 0.80 0.79 0.36 0.94
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.51) (0.49) (0.46) (0.46) (0.43) (0.61) (0.59) (0.56) (0.56) (0.52)
-- (0.11) (0.10) (0.06) (0.10) -- (0.11) (0.10) (0.06) (0.10)
-- -- -- -- (0.01) -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(0.51) (0.60) (0.56) (0.52) (0.54) (0.61) (0.70) (0.66) (0.62) (0.62)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 9.86 $ 10.28 $ 10.19 $ 10.05 $ 10.32 $ 9.85 $ 10.29 $ 10.19 $ 10.06 $ 10.32
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
$ 5,351 $ 4,715 $ 751 $ 422 $ 273 $ 3,294 $ 3,330 $ 9,553 $ 9,375 $ 9,552
+0.9% +6.9% +7.0% +2.7% +8.8% +1.8% +8.1% +8.1% +3.7% +9.7%
1.37% 1.60% 1.59% 1.60% 1.60%(3) 0.60% 0.60% 0.60% 0.60% 0.60%(3)
4.91% 4.25% 4.94% 4.51% 4.92%(3) 5.65% 5.52% 6.01% 5.53% 5.92%(3)
96% 173% 261% 365% 230% 96% 173% 261% 365% 230%
$ 0.40* $ 0.39 $ 0.39 $ 0.31 $ 0.34 $ 0.48* $ 0.44 $ 0.49 $ 0.41 $ 0.42
2.20% 2.39% 2.76% 2.97% 2.64%(3) 1.42% 1.38% 1.77% 1.97% 1.64%(3)
</TABLE>
--------------------------------------------------
LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------------
CLASS A(5) CLASS B(5) CLASS 2(5) CLASS O(6)
---------------------------------------------------------------------------------
<S> <C> <C> <C>
10.00 10.00 10.00 10.00
----------- ----------- ----------- -----------
(0.01) (0.02) (0.02) 0.00(7)*
1.19 1.19 1.18 1.18
----------- ----------- ----------- -----------
$ 1.18 1.17 1.16 1.18
----------- ----------- ----------- -----------
-- -- -- --
-- -- -- --
-- -- -- --
----------- ----------- ----------- -----------
-- -- -- --
----------- ----------- ----------- -----------
$ 11.18 $ 11.17 $ 11.16 $ 11.18
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
$ 2,070 $ 6,243 $ 1,234 $ 1,917
11.8% 11.7% 11.6% 11.8%
1.44% 2.21% 2.19% 1.21%
- 0.37% - 1.17% - 1.14% - 0.11%
10% 10% 10% 10%
$ (0.07) $ (0.08) $ (0.08) $ (0.07)
4.02% 4.73% 4.71% 3.88%
</TABLE>
Salomon Brothers Investment Series - 63
<PAGE>
ADDITIONAL INFORMATION ABOUT THE FUNDS
SHAREHOLDER REPORTS
Annual and semiannual reports to shareholders provide additional information
about the funds' investments. These reports discuss the market conditions and
investment strategies that significantly affected each fund's performance during
its last fiscal period.
STATEMENT OF ADDITIONAL INFORMATION
The statement of additional information provides more detailed information about
each fund. It is incorporated by reference into (is legally a part of) this
combined prospectus. The funds send only one report to a household if more than
one account has the same address. Contact the transfer agent if you do not want
this policy to apply to you.
HOW TO OBTAIN ADDITIONAL INFORMATION
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting the transfer
agent at 1-800-446-1013, writing the funds at Seven World Trade Center, New
York, NY 10048 or calling your Financial Consultant.
You can also review the funds' shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get copies of these materials for a
fee by writing to the Public Reference section of the Commission, Washington,
D.C. 20549-6009. Information about the public reference room may be obtained at
1-800-SEC-0330. You can also obtain the same reports and information free from
the Commission's web site at http://www.sec.gov.
If someone makes a statement about the funds that is not in this prospectus, you
should not rely upon that information. Neither the funds nor the distributor is
offering to sell shares of the funds to any person to whom the funds may not
lawfully sell their shares.
(Investment Company Act file no. 811-06087, 811-02667, 811-14025)
[SALOMON BROTHERS ASSET MANAGEMENT LOGO]
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
1-800-SALOMON
WWW.SBAM.COM
SBPRO 4/00
20982 SAM0153 4/00
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
SALOMON BROTHERS INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) SALOMON
(800) 725-6666
Salomon Brothers Investment Series consists of Salomon Brothers Asia Growth Fund
(the 'Asia Growth Fund'), Salomon Brothers Capital Fund Inc (the 'Capital
Fund'), Salomon Brothers Cash Management Fund (the 'Cash Management Fund'),
Salomon Brothers High Yield Bond Fund (the 'High Yield Bond Fund'), Salomon
Brothers International Equity Fund ('International Equity Fund'), Salomon
Brothers Investors Value Fund Inc (the 'Investors Value Fund'), Salomon Brothers
Large Cap Growth Fund ('Large Cap Growth Fund'), Salomon Brothers National
Intermediate Municipal Fund (the 'National Intermediate Municipal Fund'),
Salomon Brothers New York Municipal Money Market Fund (the 'New York Municipal
Money Market Fund'), Salomon Brothers Small Cap Growth Fund (the 'Small Cap
Growth Fund'), Salomon Brothers Strategic Bond Fund (the 'Strategic Bond Fund'),
Salomon Brothers Balanced Fund (the 'Balanced Fund'), Salomon Brothers U.S.
Government Income Fund (the 'U.S. Government Income Fund') (each, a 'Fund' and
collectively, the 'Funds'). Each of the Funds, except for the Investors Value
Fund and the Capital 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 Investors Value Fund is a diversified open-end
management investment company incorporated in Maryland on April 2, 1958. The
Capital Fund is a non-diversified open-end management investment company
incorporated in Maryland on August 23, 1976. The Series Funds, Capital Fund and
Investors Value Fund are, individually, a 'Company,' or collectively, the
'Companies.'
This Statement of Additional Information (the 'SAI') is not a prospectus and is
only authorized for distribution only when preceded or accompanied by the Funds'
current Prospectus, dated April 28, 2000, (the 'Prospectus'). This SAI
supplements and should be read in conjunction with the Prospectus. Additional
information about the Funds' investments is available in the Fund's Annual and
Semi-Annual Reports to shareholders. The Prospectus and copies of the Reports
may be obtained without charge by writing the Funds at the address, or by
calling the toll-free telephone numbers, listed above.
TABLE OF CONTENTS
<TABLE>
<S> <C>
Additional Information on Fund Investments and Investment
Policies.................................................. 2
Additional Investment Activities and Risk Factors........... 20
Investment Restrictions and Limitations..................... 52
Management.................................................. 61
Principal Holders of Securities............................. 65
Investment Manager.......................................... 72
Portfolio Transactions...................................... 78
Net Asset Value............................................. 79
Additional Purchase Information............................. 81
Additional Redemption Information........................... 84
Additional Information Concerning Taxes..................... 84
Performance Information and Data............................ 91
Shareholder Services........................................ 99
Account Services............................................ 101
Capital Stock............................................... 101
Custodian and Transfer Agent................................ 102
Independent Accountants..................................... 103
Counsel..................................................... 103
Financial Statements........................................ 103
Special Investment Considerations Relating To New York
Municipal Obligations..................................... A-1
Description of Ratings...................................... B-1
</TABLE>
April 28, 2000
<PAGE>
ADDITIONAL INFORMATION ON PORTFOLIO INVESTMENTS
AND INVESTMENT POLICIES
The Prospectus describes each Fund's investment objective and key investment
policies. The discussion below provides additional information about each Fund's
investment policies and the types of securities and other instruments in which
each Fund may invest. 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').
ASIA GROWTH FUND
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 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').
More than 25% of the Fund's total assets may be denominated or quoted in the
currencies of Hong Kong, Malyasia, Singapore and Thailand. In this connection,
SBAM AP anticipates that up to 40% of the Fund's total assets may be invested in
Hong Kong. Under an agreement signed in 1984, Britain passed Hong Kong's
sovereignty to China effective July 1, 1997. The political, social and financial
ramifications of China's assumption of sovereignty over Hong Kong, and the
impact on the financial markets in Hong Kong, Asia or elsewhere, are uncertain.
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 Standard & Poor's Rating Group ('S&P') and Moody's Investors
Service, Inc. ('Moody's') with no minimum rating required or comparable unrated
securities, commonly known as 'junk bonds.' There is no limit on the amount of
the Fund's assets that can be invested in convertible securities rated below
investment grade. For additional information on these high yield debt
securities, which may involve a high degree of risk, see 'Additional Investment
Activities and Risk Factors -- High Yield Securities.'
In order to maintain liquidity, the Asia Growth Fund may hold and/or invest up
to 35% of its total assets in debt securities 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.'
2
<PAGE>
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 below, 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.
Descriptions of these strategies and of certain risks associated therewith are
contained herein.
The foregoing investment policies and activities are not fundamental policies
and may be changed by vote of the Fund's Board of Directors without the approval
of shareholders.
CAPITAL FUND
In seeking capital appreciation, the Capital Fund may purchase securities of
seasoned issuers, relatively smaller and newer companies as well as in new
issuers and may be subject to wide fluctuations in market value. Portfolio
securities may have limited marketability or may be widely and publicly traded.
The Fund will not concentrate its investments in any particular industry.
To meet operating expenses, to serve as collateral in connection with certain
investment techniques and to meet anticipated redemption requests, the Fund
generally holds a portion of its assets in short-term fixed income securities
(government obligations or investment grade debt securities) or cash or cash
equivalents. As described below, short-term investments may include repurchase
agreements with banks or brokers-dealers. When management deems it appropriate,
for temporary defensive purposes, the Fund may invest without limitation in
investment grade fixed-income securities or hold assets in cash or cash
equivalents. Investment grade debt securities are debt securities rated BBB or
better by S&P or Baa or better by Moody's, or if rated by other rating agencies
or if unrated, securities deemed by SBAM to be of comparable quality. See
'Appendix B: Description of Ratings.' 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 SBAM believes interest rates may decline.
There is no limit on the amount of the Fund's assets that can be invested in
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.'
The Capital 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 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. 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 below, the Fund may purchase Rule 144A securities. The
Fund's holding of Rule 144A securities which are liquid securities will not be
subject to the 10% limitation on investments in illiquid securities.
As indicated below under 'Investment Restrictions and Limitations,' the Fund may
from time to time lend portfolio securities to selected members of the NYSE.
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 below under 'Investment Restrictions and Limitations,' the Capital
Fund may invest in repurchase agreements in an amount up to 25% of its total
assets. The Fund enters into
3
<PAGE>
repurchase agreements with respect to securities in which it may otherwise
invest. For a description of repurchase agreements and their associated risks,
see 'Additional Investment Activities and Risk Factors -- Repurchase
Agreements.' In addition, in order to meet redemptions or to take advantage of
promising investment opportunities without disturbing an established portfolio,
the Fund may borrow up to an aggregate of 15% of the value of its total assets
taken at the time of borrowing. In addition, the Fund may borrow for temporary
or emergency purposes an aggregate amount which may not exceed 5% of the value
of its total assets at the time of borrowing. The Fund shall borrow only from
banks. Borrowings may be unsecured, or may be secured by not more than 15% of
the value of the Fund's total assets. As a matter of operating policy, however,
the Fund will not secure borrowings by more than 10% of the value of the Fund's
total assets. For a discussion of the risks associated with borrowings, see
'Additional Investment Activities and Risk Factors -- Borrowing.'
As a hedge against either a decline in the value of the securities included in
the Capital Fund's portfolio, or against an increase in the price of the
securities which it plans to purchase, or in order to preserve or maintain a
return or spread on a particular investment or portion of its portfolio or to
achieve a particular return on cash balances, or in order to increase income or
gain, the Capital Fund may use all of the 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.
The foregoing investment policies (other than the policy of the Capital Fund
with respect to the borrowing of money and the lending of portfolio securities)
are not fundamental policies and may be changed by vote of the Board of
Directors without the approval of shareholders.
CASH MANAGEMENT FUND
The types of obligations in which the Cash Management Fund may invest include:
(1) Securities issued or guaranteed by the U.S. government or by agencies or
instrumentalities thereof. The Fund will invest in such obligations only where
SBAM determines that the credit risk with respect to the issuer is minimal;
(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
(also known as the 'World Bank'), 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 397 days, the
term of the repurchase agreement will always be less than 397 days. For a
description of repurchase agreements and their associated risks, see 'Additional
Investment Activities and Risk Factors -- Repurchase Agreements.'
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, 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
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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 one NRSRO if only one NRSRO has rated the
security; or (ii) if not rated, deemed by SBAM to be of comparable quality to
commercial paper so rated.
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 397 days or less remaining to maturity and are of an
investment quality comparable to rated commercial paper in which the Fund may
invest.
The Fund will purchase obligations of supranational entities only if such
obligations, in the opinion of SBAM 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 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.
For a description of supranational obligations and their associated risks, see
'Additional Investment Activities and Risk Factors -- Obligations of
Supranational Entities.'
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 397 days upon compliance with certain
conditions contained in Rule 2a-7 promulgated under the 1940 Act, in which case
such obligations will be treated, in accordance with Rule 2a-7, as having
maturities not exceeding 397 days. For a further discussion of such obligations,
see 'Additional Investment Activities and Risk Factors -- Floating and Variable
Rate Instruments.'
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. Any
asset-backed securities held by the Fund must comply with its credit quality
requirements and be deemed to have a maturity of 397 days or less in accordance
with applicable regulations. For a further discussion of asset backed securities
and the risks associated therewith, see 'Additional Investment Activities and
Risk Factors -- Asset-Backed Securities.'
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
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<PAGE>
invest in illiquid lease obligations if such investments, together with all
other illiquid investments, would exceed 10% of the Fund's net assets. The Fund
may, however, invest without regard to such limitation in lease obligations
which SBAM, pursuant to guidelines which have been adopted by the Board of
Directors and subject to the supervision of the Board, determines to be liquid.
The 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 the Cash Management Fund's investment objective and the
Fund's policy to invest at least 25% of its assets in bank obligations, as
described above, the foregoing investment policies and activities are not
fundamental policies and may be changed by vote of the Board of Directors of the
Cash Management Fund without the approval of shareholders.
HIGH YIELD BOND FUND
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 SBAM to be of comparable
quality. 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 comparable to securities so rated.
The lower-rated bonds in which the Fund may invest are commonly referred to as
'junk bonds.' The Fund may also invest up to 35% of its total assets in foreign
fixed-income securities.
The High Yield Bond Fund may also invest in zero coupon securities and
pay-in-kind bonds, which involve special risk considerations. See 'Additional
Investment Activities and Risk Factors -- Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities.'
The High Yield Bond Fund may invest in fixed and floating rate loans ('Loans')
arranged through private negotiations between a corporate borrower or a foreign
sovereign entity and one or more financial institutions ('Lenders'). The Fund
may invest in such Loans in the form of participations in Loans
('Participations') and assignments of all or a portion of Loans from third
parties ('Assignments'). See 'Additional Investment Activities and Risk
Factors -- Loan Participations and Assignments.'
The High Yield Bond Fund may invest up to 20% of its assets in common stock,
convertible securities, warrants, preferred stock or other equity securities
when consistent with the Fund's objectives. The Fund will generally hold such
equity investments as a result of purchases of unit offerings of fixed-income
securities which include such securities or in connection with an actual or
proposed conversion or exchange of fixed-income securities, but may also
purchase equity securities not associated with fixed-income securities when, in
the opinion of the investment manager, such purchase is appropriate.
There may be times when, in SBAM's judgment, 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 may
employ alternative strategies, including investment of a substantial portion of
its 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
SBAM's determination, are of comparable quality; certificates of deposit,
banker's
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<PAGE>
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 SBAM's opinion, adverse conditions prevail in the
securities markets which make 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 herein, 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 foregoing investment policies, other than the High Yield Bond Fund's
investment objectives, are not fundamental policies and may be changed by vote
of the Fund's Board of Directors without the approval of shareholders.
INTERNATIONAL EQUITY FUND
The Fund seeks to achieve its objective by investing at least 65% of its assets
in equity and equity-related securities of issuers organized in at least three
countries other than the United States.
The Fund will invest in securities of non-U.S. issuers. These include securities
traded on an exchange or in over-the-counter markets located outside the U.S.
American Depository Receipts ('ADRs'), European Depository Receipts ('EDRs'),
Global Depository Receipts ('GDRs') and other forms of depositary receipts for
securities of non-U.S. issuers, securities of issuers located in developing
countries. Generally, ADRs, in registered form, are designed for use in U.S.
securities markets and EDRs and GDRs, in bearer form, are designed for use in
European and global securities markets.
The Fund may purchase securities that are not registered under the Securities
Act of 1933 ('Securities Act'), but can be offered and sold to 'qualified
institutional buyers' under Rule 144A under the Securities Act. However, the
Fund will not invest more than 15% of its assets in illiquid securities.
The Fund may also enter into repurchase agreements and reverse repurchase
agreements and lend its portfolio securities in an amount not exceeding 33 1/3%
of the value of its net assets.
The Fund may also use all of the investment strategies referred to under
'Additional Investment Activities and Risk Factors -- Derivatives.'
INVESTORS VALUE FUND
The Investors Value 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 Value Fund's assets that can be invested
in convertible securities rated below investment grade.
7
<PAGE>
For additional information on these high yield debt securities, which 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 Value 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 below, 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 Value Fund may lend portfolio securities to
brokers or dealers or other financial institutions. Such loans will not exceed
33 1/3% 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 Restrictions and Limitations' below, the
Investors Value 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.' In addition, in order to meet redemption
requests or as a temporary measure, the Fund may borrow up to an aggregate of 5%
of its total assets taken at cost or value, whichever is less. The Fund shall
borrow only from banks.
As a hedge against either a decline in the value of securities included in the
Investors Value Fund's portfolio or against an increase in the price of
securities which it plans to purchase or in order to preserve or maintain a
return or spread on a particular investment or portion of its portfolio or to
achieve a particular return on cash balances, or in order to increase income or
gain, the Investors Value 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.
Descriptions of these strategies and of certain risks are contained herein.
The foregoing investment policies, other than the Investors Value Fund's
investment objectives and the Fund's policies with respect to repurchase
agreements, borrowing of money and lending of portfolio securities, are not
fundamental policies and may be changed by vote of the Board of Directors
without the approval of shareholders.
LARGE CAP GROWTH FUND
The Fund seeks to achieve its objective by investing at least 65% of its assets
in equity securities of U.S. large cap issuers. However, the Fund may invest up
to 35% of its assets in smaller capitalized companies. See 'Additional
Investment Activities and Risk Factors -- Smaller Capitalized Companies' for a
discussion of risks. The Fund may purchase securities for which there is limited
trading market or which are subject to restrictions on resale to the public. The
Fund may not invest more than 15% of its assets 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 Fund's holding of Rule 144A
securities which are liquid securities will not be subject to this limitation.
The Fund may also enter into repurchase agreements and reverse repurchase
agreements and lend its portfolio securities in an amount not exceeding 33 1/3%
of the value of its net assets.
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The Fund may also use all of the investment strategies referred to under
'Additional Investment Activities and Risk Factors -- Derivatives.'
NATIONAL INTERMEDIATE MUNICIPAL FUND
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 'Additional
Information Concerning Taxes.'
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 in
SBAM's opinion, the retention of such obligation advisable.
The types of obligations in which the National Intermediate Municipal Fund may
invest include municipal bonds, municipal notes, municipal obligations, 'moral
obligation' securities, taxable high quality short-term money market instruments
and municipal commercial paper which are described below under 'New York
Municipal Money Market 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 IBCA, Inc.
('Fitch'), or determined by SBAM to be of comparable quality to bonds so rated.
A description of the ratings used by Moody's, S&P and Fitch is included in
Appendix B to this SAI.
The Fund may invest in municipal notes rated at the time of purchase MIG1, MIG2
(or VMIG-1 or VMIG-2, in the case of variable rate demand notes), P-2 or better
by Moody's, SP-2, A-2 or better by S&P, or F-2 or better by Fitch, or determined
by SBAM to be of comparable quality.
The Fund currently intends to invest substantially all of its assets in
obligations the interest on which is exempt from regular federal income taxes.
See 'Additional Information Concerning Taxes.' However, in order to maintain
liquidity, the Fund may invest up to 20% of its assets in taxable obligations,
including the following taxable high-quality short-term money market
instruments: obligations of the U.S. government or its agencies or
instrumentalities; commercial paper of issuers rated, at the time of purchase,
A-2 or better by S&P or P-2 or better by Moody's or which, in the opinion of the
investment manager, is of comparable quality; certificates of deposit, banker's
acceptances or time deposits of U.S. banks with total assets of at least $1
billion (including obligations of foreign branches of such banks) and of the 75
largest foreign commercial banks in terms of total assets (including domestic
branches of such banks), and repurchase agreements with respect to such
obligations. If at some future date, in SBAM's opinion, 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. 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 'Additional Investment Activities and Risk
Factors -- Floating and Variable Rate Instruments.'
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
9
<PAGE>
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 SBAM 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) 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 (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'.
The foregoing policies, other than the National Intermediate Municipal Fund's
investment objective, are not fundamental policies and may be changed by vote of
the Fund's Board of Directors without the approval of shareholders.
NEW YORK MUNICIPAL MONEY MARKET FUND
The types of obligations in which the New York Municipal Money Market Fund may
invest include (see 'Description of Ratings' in Appendix B):
(1) Municipal commercial paper that is rated 'P-1' or 'P-2' by Moody's or 'A-1'
or 'A-2' by S&P or, if not rated, is, in the opinion of SBAM based on guidelines
established by the Fund's Board of Directors, of comparable quality to rated
municipal commercial paper in which the Fund may invest (see 'Description of
Ratings' in Appendix B);
(2) Municipal notes that are rated 'MIG 1', 'MIG 2' (or 'VMIG 1' or 'VMIG 2' in
the case of variable rate demand notes), 'P-1', 'P-2' or 'Aa' or better by
Moody's or 'SP-1', 'SP-2', 'A-1', 'A-2' or 'AA' or better by S&P or, if not
rated, are, in the opinion of the investment manager based on guidelines
established by the Series Funds' Board of Directors, of investment quality
comparable to rated municipal notes in which the Fund may invest; and
(3) Municipal bonds which are rated 'Aa' or better by Moody's or 'AA' or better
by S&P or, if not rated, are, in the opinion of SBAM based on guidelines
established by the Series Funds' Board of Directors, of comparable quality to
rated municipal bonds in which the Fund may invest.
The New York Municipal Money Market Fund currently intends to invest
substantially all of its assets in obligations that are exempt from federal
income tax and from the personal income taxes
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<PAGE>
of the State of New York and its cities. See 'Additional Information Concerning
Taxes.' To the extent that the unavailability of suitable obligations for
investment by the Fund prevents it from investing substantially all of its
assets in such obligations, the Fund may purchase municipal obligations issued
by other states, their agencies and instrumentalities. Under normal market
conditions, however, the Fund will invest at least 65% of its total assets in
obligations that are exempt from federal income tax and from the personal income
taxes of the State of New York and its cities, as described above. In addition,
it is a fundamental policy of the Fund to invest, under normal market
conditions, at least 80% of its total assets in obligations that are exempt from
federal income tax. To the extent not so invested, the remaining 20% of the
Fund's assets may be invested in high quality, short-term money market
instruments, the income from which is subject to federal income tax. Taxable
money market instruments that may be purchased by the Fund include securities
issued or guaranteed as to principal and interest by the United States
government or by agencies or instrumentalities thereof; obligations issued or
guaranteed by United States banks with total assets of at least $1 billion
(including obligations of foreign branches of such banks) and by the 75 largest
foreign commercial banks in terms of total assets; high quality commercial paper
and other high quality short-term debt obligations; and obligations of the World
Bank, other supranational organizations and foreign governments and their
agencies and instrumentalities. For a discussion of the U.S. government
securities, bank obligations and World Bank and other supranational and foreign
government obligations in which the Fund may invest, see the description under
'Cash Management Fund' in this section of the SAI. The commercial paper that may
be purchased by the Fund consists of direct obligations of domestic and foreign
issuers which are (i) rated 'P-1' or 'P-2' by Moody's or 'A-1' or 'A-2' by S&P
or (ii) if not rated, are issued or guaranteed as to principal and interest by
issuers having an extensive debt security rating of 'Aa' or better by Moody's or
'AA' or better by S&P or are, in the opinion of SBAM, of comparable quality to
rated commercial paper in which the Fund may invest. The corporate debt
securities in which the Fund may invest will consist of non-convertible
corporate debt securities such as bonds and debentures which are rated 'Aa' or
better by Moody's or 'AA' or better by S&P or are, in the opinion of SBAM, of
comparable quality to rated debt securities in which the Fund may invest. The
Fund may also enter into repurchase agreements with respect to the taxable
obligations identified above. See 'Repurchase Agreements' under 'Additional
Investment Activities and Risk Factors.' Dividends paid by the Fund that are
attributable to interest derived from taxable money market instruments will be
taxable to investors.
If at some future date, in SBAM's opinion, adverse conditions prevail in the
market for obligations exempt from federal income tax and from the personal
income taxes of the State of New York and its cities, the New York Municipal
Money Market Fund may, for temporary defensive purposes, invest more than 35% of
its assets in municipal obligations issued by other states, their agencies or
instrumentalities or in taxable money market instruments. Moreover, if at some
future date, in the opinion of SBAM, adverse conditions in the market for
municipal securities generally should prevail, the Fund may temporarily invest
more than 20% of its assets in cash reserves or in taxable money market
instruments in order to maintain a defensive posture. To the extent that the
Fund deviates from its investment policies as a result of the unavailability of
suitable obligations or for other temporary defensive purposes, its investment
objective of seeking income exempt from federal income tax and the personal
income taxes of New York State and its cities may not be achieved.
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. Municipal commercial
paper that may be purchased by the New York Municipal Money Market 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 and other institutions.
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
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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. Municipal notes also include construction loan notes and project notes.
TANs, BANs and RANs are usually general obligations of the issuer. Project notes
are issued by local housing authorities to finance urban renewal and public
housing projects and are secured by the full faith and credit of the United
States Government.
The interest on private activity bonds issued after August 7, 1986 is an item of
tax preference for purposes of 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 Money Market Fund's portfolio may also include 'moral
obligation' securities, which are normally issued by special purpose public
authorities. If the issuer of moral obligation securities is unable to meet its
debt service obligations from current revenues, it may draw on a reserve fund,
the restoration of which is a moral commitment but not a legal obligation of the
state or municipality that created the issuer.
The New York Municipal Money Market Fund's classification as a 'non-diversified'
investment company means that the proportion of the Fund's assets that are
permitted to be invested in the securities of a single issuer is not limited by
the 1940 Act. However, beginning July 1, 1998, in accordance with Rule 2a-7 of
the 1940 Act, the Fund will limit its investments so that with regard to 75% of
total assets, no more than 5% of assets are invested in the securities of a
single issuer, and with respect to the remaining 25% of total assets, no more
than 5% of total assets are invested in the securities of a single issuer,
unless such securities meet certain credit quality requirements of Rule 2a-7.
Because the Fund has the ability, like many other single-state tax-free money
market funds, to invest a significant percentage of its assets in the securities
of a single issuer, an investment in the Fund may be riskier than an investment
in other types of money market funds.
Although New York State's financial operations improved during the most recent
years, both the City and other State localities continue to require significant
financial assistance from the State. In recent years, however, S&P upgraded the
State's rating from 'A-' to 'A,' and changed the outlook on the City's 'BBB+'
rating from 'stable' to 'positive.' New York City's rating was upgraded from
'Baa1' to 'A3' by Moody's in February of 1998. Both the State and the City face
fiscal challenges, including declining federal subsidization and a cyclical
economic base. If either New York State or any of its local governmental
entities is unable to meet its financial obligations, the income derived by the
Fund and its ability to preserve capital and liquidity could be adversely
affected. See 'Special Factors Affecting Investment in New York Municipal
Obligations' in Appendix A for further information.
From time to time the New York Municipal Money Market Fund may invest 25% or
more of its assets in municipal obligations that are related in other ways such
that an economic, business or political development or change affecting one such
obligation could also affect the other obligations; for example, municipal
obligations the interest on which is paid from revenues of similar types of
projects. In addition, from time to time, the Fund may invest 25% or more of its
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assets in industrial development bonds, which, although issued by industrial
development authorities, may be backed only by those assets and revenues of
non-governmental users.
Opinions relating to the validity of municipal obligations and to the exemption
of interest thereon from federal income tax and New York State and New York City
personal income taxes are rendered by bond counsel to the respective issuers at
the time of issuance. Neither the Fund nor SBAM will review the proceedings
relating to the issuance of municipal obligations or the basis for such
opinions.
The New York Municipal Money Market Fund may invest without limitation in
obligations that are guaranteed or have other credit support provided by a
foreign bank. The Fund's ability to receive payment with respect to any such
guarantee or other credit support may involve certain risks, such as future
political, social and economic developments, less governmental supervision and
regulation, market liquidity differences, the possible establishment of laws or
restrictions that might adversely affect the payment of the bank's obligations
under the guarantee or other credit support and the difficulty of obtaining or
enforcing a judgment against the bank.
Certain of the obligations that the New York Municipal Money Market 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 Money Market Fund may purchase participation certificates
issued by a bank, insurance company or other financial institution in
obligations that may otherwise be purchased by the Fund. For a further
discussion of participation certificates, see 'Additional Investment Activities
and Risk Factors -- Participation Certificates.'
The New York Municipal Money Market Fund may invest in 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 SBAM, pursuant to guidelines which have been adopted by the
Board of Directors and subject to the supervision of the Board, determines to be
liquid.
The New York Municipal Money Market 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.
The New York Municipal Money Market Fund may enter into standby commitments with
respect to securities held in its portfolio. Such transactions entitle the Fund
to 'put' its securities at an agreed upon price within a specified period of
time prior to their maturity date.
The New York Municipal Money Market Fund is not authorized to use the various
investment strategies referred to under 'Additional Investment Activities and
Risk Factors -- Derivatives.'
Except with respect to the New York Municipal Money Market Fund's investment
objective and the Fund's policy to invest at least 80% of its assets in
tax-exempt obligations, as described above, the foregoing investment policies
and activities are not fundamental policies and may be changed by vote of the
Board of Directors without the approval of shareholders.
See Appendix B for a description of special investment considerations relating
to New York Municipal Obligations.
SMALL CAP GROWTH FUND
The Small Cap Growth Fund will seek to meet its objective by investing primarily
in securities of companies with market capitalizations at the time of purchase
similar to that of companies included the Russell 2000 Index ('Small Cap
Companies'). Under normal market conditions the Small Cap Growth Fund will
invest at least 65% of its total assets in equity securities of Small Cap
Companies. The Small Cap Growth Fund also may invest up to 20% of its total
assets in equity securities of foreign issuers. The Small Cap Growth Fund may
continue to hold securities of
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a company whose market capitalization grows above the capitalization of a Small
Cap Company subsequent to purchase if the company continues to satisfy the other
investment policies of the Small Cap Growth Fund.
The Small Cap Growth Fund will limit its purchases of non-convertible debt
securities to investment grade obligations. For long-term debt obligations, this
includes securities that are rated Baa or better by Moody's or BBB or better by
S&P or Fitch or that are not rated but are considered by SBAM to be of
equivalent quality. See Appendix B to this Prospectus for a description of such
ratings.
To meet operating expenses, to serve as collateral in connection with certain
investment techniques and to meet anticipated redemption requests, the Small Cap
Growth Fund will generally hold a portion of its assets in short-term
fixed-income securities (government 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
SBAM deems it appropriate, during temporary defensive periods due to economic or
market conditions, the Small Cap Growth Fund may invest without limitation in
fixed-income securities or hold assets in cash or cash equivalents. To the
extent the Small Cap Growth Fund assumes a defensive position, it will not be
pursuing its investment objective of capital growth.
The Small Cap Growth Fund may enter into repurchase agreements, reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities, and may lend portfolio securities. The Small
Cap Growth Fund may engage in short sales of securities if it contemporaneously
owns or has the right to obtain at no additional cost securities identical to
those being sold short. The Small Cap Growth 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 Small Cap 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
Small Cap Growth 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 Small Cap Growth Fund may purchase Rule 144A securities.
The Small Cap Growth 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 Small Cap Growth Fund is currently authorized to use 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 Small Cap Growth Fund.
The Small Cap Growth Fund's ability to pursue certain of these strategies may be
limited by applicable regulations of the SEC, the Commodity Futures Trading
Commission ('CFTC') and the federal income tax requirements applicable to
regulated investment companies.
STRATEGIC BOND FUND
In pursuing the Strategic Bond Fund's investment objectives, the Fund reserves
the right to invest predominantly in medium or lower-rated securities, commonly
known as 'junk bonds.' Investments of this type involve significantly greater
risks, including price volatility and risk of default in the payment of interest
and principal, than higher-quality securities. Although the investment manager
does not anticipate investing in excess of 75% of the Strategic Bond Fund's
assets in domestic and developing country debt securities that are rated below
investment grade, the Strategic Bond Fund may invest a greater percentage in
such securities when, in SBAM's determination, the yield available from such
securities outweighs their additional risks. SBAM anticipates that under current
market conditions, a significant portion of the Fund's assets will be invested
in such securities. Certain of the debt securities in which the Strategic Bond
Fund may invest may be rated as low
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as 'C' by Moody's or 'D' by S&P or may be considered comparable to securities
having such ratings. See 'Additional Investment Activities and Risk
Factors -- High Yield Securities.'
The high yield sovereign debt securities in which the Strategic Bond Fund may
invest are U.S. dollar-denominated and non-dollar-denominated debt securities,
including Brady Bonds, that are issued or guaranteed by governments or
governmental entities of developing and emerging market countries. SBAM 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 'Brady Bonds.' SBAM anticipates that the Fund's investments in
sovereign debt will be concentrated in Latin American countries, including
Central and South American and Caribbean countries. SBAM 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 of 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. SBAM 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 'Additional Information Concerning Taxes.' 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 also 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. 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).
For a further description of these investments, see 'Additional Investment
Activities and Risk Factors.'
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 types and characteristics of the U.S. government obligations and mortgage
backed securities to be purchased by the Strategic Bond Fund are set forth under
'U.S. Government Income Fund' in this section of the SAI. In addition, the Fund
may purchase privately issued mortgage securities which are not guaranteed by
the U.S. government or its agencies or instrumentalities and may purchase
stripped mortgage securities, including interest-only and principal-only
securities. The Strategic Bond Fund does not currently intend to invest more
than 10% of its total assets in interest-only and principal-only securities.
Additional information with respect to securities to be purchased by the Fund is
set forth below in the section entitled 'Additional Investment Activities and
Risk Factors.'
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
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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 SBAM's opinion 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 (except that the short-term investment in securities for the
forward settlement of trades shall not count for purposes of this policy). If at
some future date, in the opinion of SBAM, 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
under 'Cash Management Fund' in this section of the SAI.
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. 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.
The foregoing investment policies, other than the Strategic Bond Fund's
investment objectives, are not fundamental policies and may be changed by vote
of the Fund's Board of Directors without the approval of shareholders.
BALANCED 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 SBAM to be of comparable quality. These securities are
commonly known as 'junk bonds.' There is no limit on the amount of the Balanced
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 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 Balanced Fund may invest in U.S.
Government securities and mortgage-backed securities, the types and
characteristics of which are set forth below in the discussion under 'U.S.
Government Income Fund' in this section of the SAI. 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 Balanced Fund
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<PAGE>
may invest in corporate asset-backed securities, the characteristics and risks
of which are described above under 'Cash Management Fund' in this section of the
SAI.
Other fixed income securities in which the Balanced Fund may invest include zero
coupon bonds, deferred interest bonds and bonds on which the interest is payable
in kind ('PIK bonds'). For additional information on zero coupon bonds and PIK
bonds, see 'Additional Investment Activities and Risk Factors -- Zero Coupon
Securities, PIK Bonds and Deferred Payment Securities.' Deferred interest bonds
are debt obligations which are issued or purchased at a significant discount
from face value and provide for a period of delay before the regular payment of
interest begins. The characteristics and related risks of these bonds are
similar to those of zero coupon bonds.
The Balanced Fund may invest up to 20% (and generally expects to invest between
10% and 20%) of its total assets in foreign securities (including American
Depositary Receipts). For a discussion of the risks associated with investment
in foreign securities, see 'Additional Investment Activities and Risk
Factors -- Foreign Securities.'
The Balanced 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 Balanced 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
enter into mortgage 'dollar rolls.' 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 Balanced 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 herein, 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 Balanced 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.
The foregoing investment policies, other than the Balanced Fund's investment
objectives, are not fundamental policies and may be changed by vote of the Board
of Directors without the approval of shareholders.
U.S. GOVERNMENT INCOME FUND
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;
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<PAGE>
(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
('FNMA'), commonly known as 'Fannie Maes'; 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.
(6) Repurchase agreements collateralized by any of the above.
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 two to four years. Duration is an
approximate measure of the sensitivity of the value of a fixed income security
to changes in interest rates. In general, the percentage change in a fixed
income security's value in response to changes in interest rates is a function
of that security's duration multiplied by the percentage point change in
interest rates. The Fund may, however, invest in securities of any maturity or
effective duration and accordingly, the composition and weighted average
maturity of the Fund's portfolio will vary from time to time, based upon the
investment manager's determination of how best to achieve the Fund's investment
objective. With respect to mortgage-backed securities in which the Fund invests,
average maturity and duration are determined by using mathematical models that
incorporate prepayment assumptions and other factors that involve estimates of
future economic parameters. These estimates may vary from actual results,
particularly during periods of extreme market volatility. In addition, the
average maturity and duration of mortgage-backed derivative securities may not
accurately reflect the price volatility of such securities under certain market
conditions.
From time to time, a significant portion of the Fund's assets may be invested in
mortgage-backed securities. The mortgage-backed securities in which the U.S.
Government Income Fund invests 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
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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'.
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. Shares of the Fund
are neither insured nor guaranteed by the U.S. government, its agencies or
instrumentalities. Neither the issuance by nor the guarantee of a U.S.
government agency for a security constitutes assurance that the security will
not significantly fluctuate in value or that the U.S. Government Income Fund
will receive the originally anticipated yield on the security.
The U.S. Government Income Fund may enter into repurchase agreements and reverse
repurchase agreements, may purchase securities on a firm commitment basis,
including when-issued securities and may lend portfolio securities. The Fund
does not currently intend to make loans of portfolio securities with a value in
excess of 33% of the value of its total assets. The Fund may also enter into
mortgage 'dollar rolls.' For a description of these investment practices and the
risks associated therewith, see 'Additional Investment Activities and Risk
Factors.'
The U.S. Government Income Fund may purchase securities for which there is a
limited trading market or which are subject to restrictions on resale to the
public. The Fund will not invest more than 15% of the value of its total assets
in illiquid securities, such as 'restricted securities' which are illiquid, and
securities that are not readily marketable. For further discussion of illiquid
securities and their associated risks, see 'Additional Investment Activities and
Risk Factors -- Restricted Securities and Securities with Limited Trading
Markets.'
The U.S. Government Income Fund is not currently authorized to use any of the
various investment strategies referred to under 'Additional Investment
Activities and Risk Factors -- Derivatives.' However, 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.
The foregoing investment policies, other than the U.S. Government Income Fund's
investment objective, are not fundamental policies and may be changed by vote of
the Fund's Board of Directors without the approval of shareholders.
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ADDITIONAL INVESTMENT ACTIVITIES AND RISK FACTORS
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 illiquidity of certain 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.
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. 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.
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
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private sector. In certain cases, the government owns or controls many
companies. Accordingly, government actions in the future could have a
significant effect on economic conditions in developing countries which could
affect private sector companies and consequently, the value of certain
securities held in a Fund's portfolio.
Certain markets are in only the earliest stages of development. There is also a
high concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a Fund and may have an adverse impact on the investment
performance of a Fund.
There generally is less governmental supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States. For
example, there may be no comparable provisions under certain foreign laws to
insider trading and similar investor protection securities laws that apply with
respect to securities transactions consummated in the United States. Further,
brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, different
legal standards may have an adverse impact on a Fund. For example, while the
potential liability of a shareholder in a U.S. corporation with respect to acts
of the corporation is generally limited to the amount of the shareholder's
investment, the notion of limited liability is less clear in certain emerging
market countries. Similarly, the rights of investors in emerging market
companies may be more limited than those of shareholders of U.S. corporations.
In some countries, banks or other financial institutions may constitute a
substantial number of the leading companies or companies with the most actively
traded securities. The Investment Company Act of 1940, as amended (the '1940
Act'), limits a Fund's ability to invest in any equity security of an issuer
which, in its most recent fiscal year, derived more than 15% of its revenues
from 'securities related activities,' as defined by the rules thereunder. These
provisions may also restrict a Fund's investments in certain foreign banks and
other financial institutions.
The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a Fund. For example, the Fund may be
required in some 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 occur on a timely basis, resulting in
a delay during which the Fund may be denied certain of its rights as an
investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a Fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a Fund are uninvested and
no return is earned thereon. The inability of a Fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a Fund to forego 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,' as defined in the 1940 Act, for a Fund, in which
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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.
OBLIGATIONS OF SUPRANATIONAL ENTITIES
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 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. Obligations of 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.
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. 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.
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.
In addition, many fixed-income securities contain call or buy-back features that
permit their issuers to call or repurchase the securities from their holders.
Such securities may present risks based on payment expectations. Although a Fund
would typically receive a premium if an issuer were to redeem a security, if an
issuer exercises such a 'call option' and redeems the security during a time of
declining interest rates, a Fund may realize a capital loss on its investment if
the security was purchased at a premium and a Fund may have to replace the
called security with a lower yielding security, resulting in a decreased rate of
return to the Fund.
Because the New York Municipal Money Market Fund and 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 Money Market Fund and
National Intermediate Municipal Fund to buy and sell municipal obligations may,
at any particular time and
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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.
HIGH YIELD SECURITIES
The High Yield Bond Fund and the Strategic Bond Fund may invest without
limitation in domestic and foreign 'high yield' securities, commonly known as
'junk bonds.' The Investors Fund, Capital Fund and Balanced Fund may invest
without limitation in convertible securities of this type and up to 5%, 20% 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 may have
poor prospects of ever attaining any real investment standing, may have a
current identifiable vulnerability to default or are in default, may be unlikely
to have the capacity to pay interest and repay principal when due in the event
of adverse business, financial or economic conditions, and/or to be in default
or not current in the payment of interest or principal. Such securities are
considered speculative with respect to the issuer's capacity to pay interest and
repay principal in accordance with the terms of the obligations. Accordingly, it
is possible that these types of factors could reduce the value of securities
held by a Fund with a commensurate effect on the value of the Fund's shares.
Changes 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 B. The ratings of
Moody's and S&P generally represent the opinions of those organizations as to
the quality of the securities that they rate. Such ratings, however, are
relative and subjective, are not absolute standards of quality, are subject to
change and do not evaluate the market risk or liquidity of the securities.
Ratings of a non-U.S. debt instrument, to the extent that those ratings are
undertaken, are related to evaluations of the country in which the issuer of the
instrument is located. Ratings generally take into account the currency in which
a non-U.S. debt instrument is denominated. Instruments issued by a foreign
government in other than the local currency, for example, typically have a lower
rating than local currency instruments due to the existence of an additional
risk that the government will be unable to obtain the required foreign currency
to service its foreign currency-denominated debt. In general, the ratings of
debt securities or obligations issued by a non-U.S. public or private entity
will not be higher than the rating of the currency or the foreign currency debt
of the central government of the country in which the issuer is located,
regardless of the intrinsic creditworthiness of the issuer.
The secondary markets for high yield securities are not as liquid as the
secondary markets for higher rated securities. The secondary markets for high
yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of a Fund holding such securities to dispose of
particular portfolio investments, 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
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particular security, it will become more difficult to value such Fund's
portfolio securities, and a greater degree of judgment may be necessary in
making such valuations. 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 values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated securities. In
addition, such securities present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and subordinated to the prior payment of
senior indebtedness. A Fund also may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of principal
or interest on its portfolio holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-U.S. corporate debt securities, but has undergone significant changes
in the past and may undergo significant changes in the future.
High yield 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, especially in emerging market countries, 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 or in which the
issuers are located. See ' -- Foreign Securities' above. The ability and
willingness of sovereign obligors in developing and emerging market countries or
the governmental authorities that control repayment of their external debt to
pay principal and interest on such debt when due may depend on general economic
and political conditions within the relevant country. Certain countries which a
Fund may invest, especially emerging market countries, have historically
experienced, and may continue to experience, high rates of inflation, high
interest rates, exchange rate trade difficulties and extreme poverty and
unemployment. Many of these countries are also characterized by political
uncertainty or instability. Additional factors which may influence the
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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, especially in emerging market
countries, 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 U.S. dollars, its ability to
make debt payments denominated in U.S. dollars could be adversely affected. If a
foreign sovereign obligor cannot generate sufficient earnings from foreign trade
to service its external debt, it may need to depend on continuing loans and aid
from foreign governments, commercial banks and multilateral organizations, and
inflows of foreign investment. The commitment on the part of these foreign
governments, multilateral organizations and others to make such disbursements
may be conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt. The risks enumerated above are
particularly heightened with regard to issuers in emerging market countries.
As a result of the foregoing, a governmental obligor, especially in an emerging
market country, may default on its obligations. If such an event occurs, a Fund
may have limited legal recourse against the issuer and/or guarantor. Remedies
must, in some cases, be pursued in the courts of the defaulting party itself,
and the ability of the holder of foreign sovereign debt securities to obtain
recourse may be subject to the political climate in the relevant country. In
addition, no assurance can be given that the holders of commercial bank debt
will not contest payments to the holders of other foreign sovereign debt
obligations in the event of default under their commercial bank loan agreements.
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which certain of the Funds may invest 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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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 E. Brady in 1989 as a mechanism for
debtor nations to restructure their outstanding external commercial bank
indebtedness. In restructuring its external debt under the Brady Plan framework,
a debtor nation negotiates with its existing bank lenders as well as
multilateral institutions such as the International Bank for Reconstruction and
Development (the 'World Bank') and the International Monetary Fund (the 'IMF').
The Brady Plan framework, as it has developed, contemplates the exchange of
external commercial bank debt for newly issued bonds known as 'Brady Bonds.'
Brady Bonds may also be issued in respect of new money being advanced by
existing lenders in connection with the debt restructuring. The World Bank
and/or the IMF support the restructuring by providing funds pursuant to loan
agreements or other arrangements which enable the debtor nation to collateralize
the new Brady Bonds or to repurchase outstanding bank debt at a discount. Under
these arrangements with the World Bank and/or the IMF, debtor nations have been
required to agree to the implementation of certain domestic monetary and fiscal
reforms. Such reforms have included the liberalization of trade and foreign
investment, the privatization of state-owned enterprises and the setting of
targets for public spending and borrowing. These policies and programs seek to
promote the debtor country's economic growth and development. Investors should
also recognize that the Brady Plan only sets forth general guiding principles
for economic reform and debt reduction, emphasizing that solutions must be
negotiated on a case-by-case basis between debtor nations and their creditors.
The investment manager believes that economic reforms undertaken by countries in
connection with the issuance of Brady Bonds may make the debt of countries which
have issued or have announced plans to issue Brady Bonds an attractive
opportunity for investment. However, there can be no assurance that SBAM's
expectations with respect to Brady Bonds will be realized.
Investors should recognize that Brady Bonds have been issued only recently, and
accordingly, do not have a long payment history. Brady Bonds which have been
issued to date are rated in the categories 'BB' or 'B' by S&P or 'Ba' or 'B' by
Moody's or, in cases in which a rating by S&P or Moody's has not been assigned,
are generally considered by the investment manager to be of comparable quality.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of 1%
above the then current six month London Inter-Bank Offered Rate ('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
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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 these Funds may invest are likely to be acquired at a discount, which
involves certain considerations discussed below under 'Additional Information
Concerning Taxes.'
U.S. GOVERNMENT OBLIGATIONS
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 ('Ginnie Maes')); (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
('Freddie Macs')). 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
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' above. 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.
Bank obligations that may be purchased by a Fund include certificates of
deposit, banker's acceptances and fixed time deposits. A certificate of deposit
is a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A bankers' acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
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Bank obligations may be general obligations of the parent bank or may be limited
to the issuing branch by the terms of the specific obligations or by government
regulation.
FLOATING AND VARIABLE RATE INSTRUMENTS
Certain Funds may invest in floating and variable rate obligations. Floating or
variable rate obligations bear interest at rates that are not fixed, but vary
with changes in specified market rates or indices, such as the prime rate, and
at specified intervals. Certain of the floating or variable rate obligations
that may be purchased by a Fund may carry a demand feature that would permit the
holder to tender them back to the issuer at par value prior to maturity. Such
obligations include variable rate master demand notes, which are unsecured
instruments issued pursuant to an agreement between the issuer and the holder
that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. A Fund will limit its purchases of floating
and variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. 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.
Certain of the floating or variable rate obligations that may be purchased by a
Fund may carry a demand feature that would permit the holder to tender them back
to the issuer of the instrument or to a third party at par value prior to
maturity. Some of the demand instruments purchased by a Fund are not traded in a
secondary market and derive their liquidity solely from the ability of the
holder to demand repayment from the issuer or third party providing credit
support. If a demand instrument is not traded in a secondary market, each Fund
will nonetheless treat the instrument as 'readily marketable' for the purposes
of its investment restriction limiting investments in illiquid securities unless
the demand feature has a notice period of more than seven days in which case the
instrument will be characterized as 'not readily marketable' and therefore
illiquid.
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. The pool of assets generally represents 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
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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.
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 Balanced Fund may, in addition,
purchase privately issued mortgage securities which are not guaranteed by the
U.S. government, its agencies or instrumentalities. It should be noted that new
types of mortgage-backed securities are developed and marketed from time to time
and that, consistent with its investment limitations, a Fund may invest in those
new types of mortgage-backed securities that the investment manager believes may
assist it in achieving its investment objective(s).
Background. Mortgage-backed securities were introduced in the 1970s when the
first pool of mortgage loans was converted into a mortgage pass-through
security. Since the 1970s, the mortgage-backed securities market has vastly
expanded and a variety of structures have been developed to meet investor needs.
Yield Characteristics. Interest and principal payments on mortgage-backed
securities are typically made monthly, and principal may be prepaid at any time
because the underlying mortgage loans or other assets generally may be prepaid
at any time. As a result, if a Fund purchases such a security at a premium, a
prepayment rate that is faster than expected will reduce yield to maturity,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield to maturity. Conversely, if a Fund purchases these
securities at a discount, faster than expected prepayments will increase, while
slower than expected prepayments will reduce, yield to maturity.
Prepayments on a pool of mortgage loans are influenced by a variety of economic,
geographic, social and other factors, including changes in mortgagors' housing
needs, job transfers, unemployment, mortgagors' net equity in the mortgaged
properties and servicing decisions. Generally, however, prepayments on fixed
rate mortgage loans will increase during a period of falling interest rates.
Accordingly, amounts available for reinvestment by a Fund are likely to be
greater during a period of relatively low interest rates and, as a result,
likely to be reinvested at lower interest rates than during a period of
relatively high interest rates. This prepayment effect has been particularly
pronounced during recent years as borrowers have refinanced higher interest rate
mortgages into lower interest rate mortgages available in the marketplace.
Mortgage-backed securities may decrease in value as a result of increases in
interest rates and may benefit less than other fixed income securities from
declining interest rates because of the risk of prepayment.
Guaranteed Mortgage Pass-Through Securities. The U.S. Government Income,
Strategic Bond and Balanced Fund 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,
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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, the Federal National Mortgage
Association ('Fannie Mae') and Freddie Mac.
Ginnie Mae Certificates. Ginnie Mae is a wholly-owned corporate instrumentality
of the United States within the Department of Housing and Urban Development. The
full faith and credit of the U.S. government is pledged to the payment of
amounts that may be required to be paid under any guarantee, but not as to the
market value of such securities. The Ginnie Mae Certificates will represent a
pro rata interest in one or more pools of the following types of mortgage loans:
(i) fixed rate level payment mortgage loans; (ii) fixed rate graduated payment
mortgage loans; (iii) fixed rate growing equity mortgage loans; (iv) fixed rate
mortgage loans secured by manufactured (mobile) homes; (v) mortgage loans on
multifamily residential properties under construction; (vi) mortgage loans on
completed multifamily projects; (vii) fixed rate mortgage loans as to which
escrowed funds are used to reduce the borrower's monthly payments during the
early years of the mortgage loans ('buydown' mortgage loans); (viii) mortgage
loans that provide for adjustments in payments based on periodic changes in
interest rates or in other payment terms of the mortgage loans; and (ix)
mortgage-backed serial notes. All of these mortgage loans will be Federal
Housing Administration Loans ('FHA Loans') or Veterans' Administration Loans
('VA Loans') and, except as otherwise specified above, will be fully amortizing
loans secured by first liens on one- to four-family housing units.
Fannie Mae Certificates. Fannie Mae is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. Each Fannie Mae Certificate will entitle the registered
holder thereof to receive amounts representing such holder's pro rata interest
in scheduled principal payments and interest payments (at such Fannie Mae
Certificate's pass-through rate, which is net of any servicing and guarantee
fees on the underlying mortgage loans), and any principal prepayments on the
mortgage loans in the pool represented by such Fannie Mae Certificate and such
holder's proportionate interest in the full principal amount of any foreclosed
or otherwise finally liquidated mortgage loan. The full and timely payment of
principal of and 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
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sale; (ii) payment of a claim by any mortgage insurer; or (iii) the expiration
of any right of redemption, whichever occurs later, but in any event no later
than one year after demand has been made upon the mortgagor for accelerated
payment of principal. The obligations of Freddie Mac under its guarantee are
obligations solely of Freddie Mac and are not backed by the full faith and
credit of the U.S. government.
Freddie Mac Certificates represent a pro rata interest in a group of mortgage
loans (a 'Freddie Mac Certificate group') purchased by Freddie Mac. The mortgage
loans underlying the Freddie Mac Certificates will consist of fixed rate or
adjustable rate mortgage loans with original terms to maturity of between ten
and thirty years, substantially all of which are secured by first liens on one-
to four-family residential properties or multifamily projects. Each mortgage
loan must meet the applicable standards set forth in the FHLMC Act. A Freddie
Mac Certificate group may include whole loans, participation interests in whole
loans and undivided interests in whole loans and participations comprising
another Freddie Mac Certificate group.
PRIVATELY-ISSUED MORTGAGE SECURITIES
The Strategic Bond Fund and Balanced 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 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.
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COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTICLASS PASS-THROUGH SECURITIES
The U.S. Government Income Fund and Strategic Bond Fund may invest in
collateralized mortgage obligations ('CMOs'). CMOs are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by GNMA, 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 Fund and Strategic Bond Fund may also invest in,
among others, parallel pay CMOs and Planned Amortization Class CMOs ('PAC
Bonds'). Parallel pay CMOs are structured to provide payments of principal on
each payment date to more than one class. These simultaneous payments are taken
into account in calculating the stated maturity date or final distribution date
of each class, which, as with other CMO structures, must be retired by its
stated maturity date or a final distribution date but may be retired earlier.
PAC Bonds are a type of CMO tranche or series designed to provide relatively
predictable payments of principal provided that, among other things, the actual
prepayment experience on the underlying mortgage loans falls within a predefined
range. If the actual prepayment experience on the underlying mortgage loans is
at a rate faster or slower than the predefined range or if deviations from other
assumptions occur, principal payments on the PAC Bond may be earlier or later
than predicted. The magnitude of the predefined range varies from one PAC Bond
to another; a narrower range increases the risk that prepayments on the PAC Bond
will be greater or smaller than predicted. Because of these features, PAC Bonds
generally are less subject to the risks of prepayment than are other types of
mortgage-backed securities.
STRIPPED MORTGAGE SECURITIES
The Strategic Bond Fund may purchase stripped mortgage securities which are
derivative multiclass mortgage securities. Stripped mortgage securities may be
issued by agencies or instrumentalities of the U.S. government, or by private
originators of, or investors in, mortgage loans, including savings and loan
associations, mortgage banks, commercial banks, investment banks and special
purpose
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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.
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 'Additional Information
Concerning Taxes.'
MORTGAGE ROLLS
The U.S. Government Income Fund, Strategic Bond Fund and Balanced Fund may enter
into mortgage 'dollar rolls' in which a Fund sells mortgage-backed securities
for delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type, coupon and maturity) securities on a specified
future date. During the roll period, a Fund foregoes principal and interest paid
on the mortgage-backed securities. A Fund is compensated by the difference
between the current sales price and the lower forward price for the future
purchase (often referred to as the 'drop') as well as by the interest earned on
the cash proceeds of the initial sale. 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 assets
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.
ADJUSTABLE RATE MORTGAGE SECURITIES
Unlike fixed rate mortgage securities, adjustable rate mortgage securities are
collateralized by or represent interests in mortgage loans with variable rates
of interest. These variable rates of interest reset periodically to align
themselves with market rates. A Fund will not benefit from increases in interest
rates to the extent that interest rates rise to the point where they cause the
current coupon of the underlying adjustable rate mortgages to exceed any maximum
allowable annual or
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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.
INVERSE FLOATING RATE OBLIGATIONS
Certain Funds may invest in inverse floating rate obligations, or 'inverse
floaters.' Inverse floaters have coupon rates that vary inversely at a multiple
of a designated floating rate (which typically is determined by reference to an
index rate, but may also be determined through a dutch auction or a remarketing
agent) (the 'reference rate'). Inverse floaters may constitute a class of
Collateralized Mortgage Obligations ('CMOs') with a coupon rate that moves
inversely to a designated index, such as LIBOR or COFI (Cost of Funds Index).
Any rise in the reference rate of an inverse floater (as a consequence of an
increase in interest rates causes a drop in the coupon rate while any drop in
the reference rate of an inverse floater causes an increase in the coupon rate.
In addition, like most other fixed income securities, the value of inverse
floaters will generally decrease as interest rates increase.
Inverse floaters exhibit substantially greater price volatility than fixed rate
obligations having similar credit quality, redemption provisions and maturity,
and inverse floater CMOs exhibit greater price volatility than the majority of
mortgage pass-through securities or CMOs. In addition, some inverse floater CMOs
exhibit extreme sensitivity to changes in prepayments. As a result, the yield to
maturity of an inverse floater CMO is sensitive not only to changes in interest
rates but also to changes in prepayment rates on the related underlying mortgage
assets.
SMALL CAPITALIZATION COMPANIES
Investments in Small Capitalization Companies may involve greater risks and
volatility than investments in larger companies. Small Capitalization Companies
may be at an earlier stage of development, may be subject to greater business
risks, may have limited product lines, reduced market liquidity for, and more
abrupt or erratic price movements in, the trading of their shares, limited
financial resources and less depth in management than more established
companies. In addition, Small Capitalization Companies may have difficulty
withstanding competition from larger more established companies in their
industries.
REAL ESTATE INVESTMENT TRUSTS
The Balanced Fund, Small Cap Growth Fund, Investors Value Fund, Capital Fund and
Large Cap Growth Fund may invest in equity REITs. REITs are entities which
either own properties or make construction or mortgage loans. Equity REITs may
also include operating or finance companies. Equity REITs own real estate
directly and the value of, and income earned by, the trust depends upon the
income of the underlying properties and the rental income they earn. Equity
REITs can also realize capital gains by selling properties that have appreciated
in value. The Capital Fund may only invest in equity REITs that are registered
under the 1933 Act and are readily marketable. The value of securities issued by
REITs are affected by tax and regulatory requirements and by perceptions of
management skill. The are also subject to heavy cash flow dependency, defaults
by borrowers or tenants, self-liquidation, the possibility of failing to qualify
for tax-free status under the Internal Revenue Code of 1986, as amended (the
'Code'), and failing to maintain exemption from the 1940 Act.
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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.
OTHER INVESTMENT COMPANIES
As indicated under 'Investment Restrictions and Limitations' below, a Fund may
from time to time invest in securities of other investment companies, subject to
the limits of the 1940 Act. Under the 1940 Act, a Fund may invest a maximum of
10% of its total assets in the securities of other investment companies. In
addition, not more than 5% of the Fund's total assets may be invested in the
securities of any one investment company and a Fund may not purchase more than
3% of the outstanding voting stock of such investment company.
The return on such investments will be reduced by the operating expenses,
including investment advisory and administration fees, of such investment funds,
and will be further reduced by Fund expenses, including management fees; that
is, there will be a layering of certain fees and expenses. Investment in
investment companies also may involve the payment of substantial premiums above
the value of such companies' portfolio securities. The Funds do not intend to
invest in such vehicles or funds unless the investment manager determines that
the potential benefits of such investment justify the payment of any applicable
premiums.
REPURCHASE AGREEMENTS
Each Fund may enter into repurchase agreements for cash management purposes. A
repurchase agreement is a transaction in which the seller of a security commits
itself at the time of the sale to repurchase that security from the buyer at a
mutually agreed upon time and price.
Each Fund will enter into repurchase agreements only with dealers, domestic
banks or recognized financial institutions which, in the opinion of SBAM based
on guidelines established by the Board of Directors, are deemed creditworthy.
SBAM 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.
SHORT SALES
The International Equity Fund, Large Cap Growth Fund and Small Cap Growth Fund
may from time to time sell securities short 'against the box.' If the Fund
enters into a short sale against the box, it will be required to set aside
securities equivalent in kind and amount to the securities sold short (or
securities convertible or exchangeable into such securities at no additional
cost to a Fund) and will be required to hold such securities while the short
sale is outstanding. A Fund will incur transaction costs, including interest
expense, in connection with opening, maintaining, and closing short sales
against the box. If the Fund engages in any short sales against the box, it will
incur the risk that the security sold short will appreciate in value after the
sale, with the result a Fund will lose the benefit of any such appreciation. A
Fund may make short sales both as a form
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of hedging to offset potential declines in long positions in similar securities
and in order to maintain portfolio flexibility.
LOANS OF PORTFOLIO SECURITIES
Each of the Funds, except the Cash Management Fund, New York Municipal Money
Market Fund and National Intermediate Municipal Fund, 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 or cash
equivalents 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. Each of the U.S. Government Income Fund, the High
Yield Bond Fund, the Strategic Bond Fund, the Balanced Fund, the Asia Growth
Fund, the Investors Value Fund and the Capital Fund did not lend any of its
portfolio securities during 1998 and with the exception of the Capital Fund and
the Investors Value Fund, each of these Funds has no present intention to do so.
The Small Cap Growth Fund has no present intention to lend any of its portfolio
securities.
RULE 144A SECURITIES
Certain Funds may purchase certain restricted securities ('Rule 144A
securities') for which there is a secondary market of qualified institutional
buyers, as defined in Rule 144A promulgated 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 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 resales under Rule 144A are liquid or illiquid. 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
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appropriate measures to enable a Fund to maintain sufficient liquidity for
operating purposes and to meet redemption requests.
PARTICIPATION CERTIFICATES
The New York Municipal Money Market 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.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES
Each 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, PIK BONDS AND DEFERRED PAYMENT SECURITIES
Certain of the Funds may invest in zero coupon securities, PIK 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 PIK bonds. PIK 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, PIK 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, PIK 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 limitation on investments in illiquid securities.
Current federal income tax law requires the holder of a zero coupon security,
certain PIK bonds, deferred payment securities and certain other securities
acquired at a discount (such as Brady
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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 SAI. Loan Participations typically will result in a Fund having
a contractual relationship only with the Lender, not with the borrower. A Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection with
purchasing Loan Participations, a Fund generally will have no right to enforce
compliance by the borrower with the terms of the Loan agreement relating to the
Loan, nor any rights of set-off against the borrower, and the Fund may not
benefit directly from any collateral supporting the Loan in which it has
purchased the Participation. As a result, a Fund will assume the credit risk of
both the borrower and the Lender that is selling the Participation. In the event
of the insolvency of the Lender selling a Participation, a Fund may be treated
as a general creditor of the Lender and may not benefit from any set-off between
the Lender and the borrower. A Fund will acquire Loan Participations only if the
Lender interpositioned between the Fund and the borrower is determined by SBAM
to be creditworthy. When a Fund purchases Assignments from Lenders, the Fund
will acquire direct rights against the borrower on the Loan, except that under
certain circumstances such rights may be more limited than those held by the
assigning Lender.
A Fund may have difficulty disposing of Assignments and Loan Participations. In
certain cases, the market for such instruments is not highly liquid, and
therefore the Funds anticipate that in such cases such instruments could be sold
only to a limited number of institutional investors. The lack of a highly liquid
secondary market may have an adverse impact on the value of such instruments and
will have an adverse impact on a Fund's ability to dispose of particular
Assignments or Loan Participations in response to a specific economic event,
such as deterioration in the creditworthiness of the borrower.
The Board of Directors has adopted policies and procedures for the purpose of
determining whether Assignments and Loan Participations are liquid or illiquid.
Pursuant to those policies and procedures, the Board of Directors has delegated
to SBAM the determination as to whether a particular Loan Participation or
Assignment is liquid or illiquid, requiring that consideration be given to,
among other things, the frequency of quotes, the number of dealers willing to
sell and the number of potential purchasers, the nature of the Loan
Participation or Assignment and the time needed to dispose of it and the
contractual provisions of the relevant documentation. The Board of Directors
periodically reviews purchases and sales of Assignments and Loan Participations.
To the extent that liquid Assignments and Loan Participation that a Fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of a Fund's assets invested in illiquid assets would
increase. SBAM, under the supervision of the Board of Directors, monitors Fund
investments in Assignments and Loan Participations and will consider appropriate
measures to enable a Fund to maintain sufficient liquidity for operating
purposes and to meet redemption requests.
In valuing a Loan Participation or Assignment held by a Fund for which a
secondary trading market exists, the Fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, a Fund's Loan Participations and Assignments will
be valued in accordance with procedures adopted by the Board of Directors,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the Loan and the Lender; (ii) the current interest rate; period
until next rate reset and maturity of the Loan; (iii) recent prices in the
market for similar Loans; and (iv) recent prices in the market for
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instruments of similar quality, rate, period until next interest rate reset and
maturity. See 'Net Asset Value.'
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.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS
Certain Funds may purchase securities for which there is a limited trading
market or which are subject to restrictions on resale to the public. If a Fund
were to assume substantial positions in securities with limited trading markets,
the activities of the Fund could have an adverse effect upon the liquidity and
marketability of such securities and the Fund might not be able to dispose of
its holdings in those securities at then current market prices. Circumstances
could also exist (to satisfy redemptions, for example) when portfolio securities
might have to be sold by a Fund at times which otherwise might be considered to
be disadvantageous so that the Fund might receive lower proceeds from such sales
than it had expected to realize. Investments in securities which are
'restricted' may involve added expenses to a 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 herein, 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 relatively recent development and there is no assurance that a liquid market
in Rule 144A securities will develop or be maintained. To the extent that the
number of qualified institutional buyers is reduced, a previously liquid Rule
144A security may be determined to be illiquid, thus increasing the percentage
of illiquid assets in a Fund's portfolio. SBAM, under the supervision of the
Board of Directors, is responsible for monitoring the liquidity of Rule 144A
securities and the selection of such securities. The Board of Directors
periodically reviews purchases and sales of such securities.
BORROWING
Each of the Funds may borrow in certain limited circumstances. See 'Investment
Restrictions and 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 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.
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NON-DIVERSIFICATION
The Asia Growth Fund, New York Municipal Money Market Fund and Capital Fund are
classified as 'non-diversified' funds 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 in order to
continue to qualify as a regulated investment company. In addition, beginning
July 1, 1998, the New York Municipal Money Market Fund will be required to
comply with the diversification requirements imposed by Rule 2a-7 of the 1940
Act. See 'Additional Information on Portfolio Investments and Investment
Policies -- New York Municipal Money Market Fund.' To the extent the Funds
invest a greater proportion of their assets in the securities of a smaller
number of issuers, each 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.
DERIVATIVES
Certain of the Funds may use various investment strategies described below to
hedge market risks (such as broad or specific market movements, interest rates
and currency exchange rates), to manage the effective maturity or duration of
debt instruments held by a Fund, or to seek to increase a Fund's income or gain.
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 SAI. Over time, however, techniques and instruments may change as new
instruments and strategies are developed or regulatory changes occur.
Subject to the constraints described above, a Fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, currencies, futures contracts, indices and other
financial instruments, and a Fund may enter into interest rate transactions,
equity swaps and related transactions, invest in indexed debt securities 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 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.
None of the Funds is a 'commodity pool' (i.e., a pooled investment vehicle which
trades in commodity futures contracts and options thereon and the operator of
which is registered with the CFTC), and Derivatives involving futures contracts
and options on futures contracts will be purchased, sold or entered into only
for bona fide hedging purposes, provided that a Fund may enter into such
transactions for purposes other than bona fide hedging if, immediately
thereafter, the sum of the amount of its initial margin and premiums on open
contracts and options would not exceed 5% of the liquidation value of the Fund's
portfolio, after taking into account unrealized profits and losses on existing
contracts provided, further, that, in the case of an option that is in-
the-money, the in-the-money amount may be excluded in calculating the 5%
limitation. The use of certain Derivatives in certain circumstances will require
that a Fund segregate cash or other liquid assets to the extent a Fund's
obligations are not otherwise 'covered' through ownership of the underlying
security, financial instrument or currency.
Derivatives involve special risks, including possible default by the other party
to the transaction, illiquidity and, to the extent the investment manager's view
as to certain market movements is incorrect, the risk that the use of
Derivatives could result in significantly greater losses than if it had not been
used. See 'Risk Factors' below. The degree of a Fund's use of Derivatives may be
limited by certain provisions of the Code. see 'Additional Information
Concerning Taxes.'
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Currency Transactions. A Fund may engage in currency transactions with
Counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A Fund may enter into currency
transactions only with Counterparties that the investment manager deems to be
creditworthy.
A Fund may enter into forward currency exchange contracts when the investment
manager believes that the currency of a particular country may suffer a
substantial decline against the U.S. dollar. In those circumstances, a Fund may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of that currency approximating the value of some or all of the Fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the Fund, which will generally arise in
connection with the purchase or sale of the Fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A Fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the Fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A Fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the Fund has or in which the Fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a Fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the Fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the Fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under 'Risk Factors.' If a Fund enters into a
currency hedging transaction, the Fund will comply with the asset segregation
requirements described below under 'Use of Segregated and Other Special
Accounts.'
Futures Contracts. A Fund may trade futures contracts: (1) on domestic and
foreign exchanges on currencies, interest rates and bond indices; and (2) on
domestic and, to the extent permitted by the CFTC, foreign exchanges on stock
indices. Futures contracts are generally bought and sold on the commodities
exchanges on which they are listed with payment of initial and variation margin
as described below. The sale of a futures contract creates a firm obligation by
the Fund, as seller, to deliver to the buyer the specific type of financial
instrument called for in the contract at a specific future time for a specified
price (or with respect to certain instruments, the net cash amount). None of the
Funds is a commodity pool, and each Fund, where permitted, will use futures
contracts and options thereon solely: (i) for bona fide hedging purposes; and
(ii) for other purposes in amounts permitted by the rules and regulations
promulgated by the CFTC. A Fund's use of financial futures contracts and options
thereon will in all cases be consistent with applicable
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regulatory requirements and in particular the rules and regulations of the CFTC.
Maintaining a futures contract or selling an option on a futures contract will
typically require the Fund to deposit with a financial intermediary, as security
for its obligations, an amount of cash or other specified assets ('initial
margin') that initially is from 1% to 10% of the face amount of the contract
(but may be higher in some circumstances). Additional cash or assets ('variation
margin') may be required to be deposited thereafter daily as the mark-to-market
value of the futures contract fluctuates. A Fund will not enter into a futures
contract or option thereon other than for bona fide hedging purposes if,
immediately thereafter, the sum of the amount of its initial margin and premiums
required to maintain permissible non-bona fide hedging positions in futures
contracts and options thereon would exceed 5% of the liquidation value of the
Fund's portfolio, after taking into account unrealized profits and losses on
existing contracts; however, in the case of an option that is in-the-money at
the time of the purchase, the in-the-money amount may be excluded in calculating
the 5% limitation. The value of all futures contracts sold by the Fund (adjusted
for the historical volatility relationship between the Fund and the contracts)
will not exceed the total market value of the Fund's securities. In addition,
the value of a Fund's long futures and options positions (futures contracts on
stock or bond indices, interest rates or foreign currencies and call options on
such futures contracts) will not exceed the sum of: (a) liquid assets segregated
for this purpose; (b) cash proceeds on existing investments due within thirty
days; and (c) accrued profits on the particular futures or options positions.
The segregation requirements with respect to futures contracts and options
thereon are described below under 'Use of Segregated and Other Special
Accounts.'
Interest Rate Futures Contracts. A Fund may enter into interest rate futures
contracts in order to protect it from fluctuations in interest rates without
necessarily buying or selling fixed income securities. An interest rate futures
contract is an agreement to take or make delivery of either: (i) an amount of
cash equal to the difference between the value of a particular index of debt
securities at the beginning and at the end of the contract period; or (ii) a
specified amount of a particular debt security at a future date at a price set
at time of the contract. For example, if a Fund owns bonds, and interest rates
are expected to increase, the Fund might sell futures contracts on debt
securities having characteristics similar to those held in the portfolio. Such a
sale would have much the same effect as selling an equivalent value of the bonds
owned by the Fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the futures
contracts to the Fund would increase at approximately the same rate, thereby
keeping the net asset value of each class of the Fund from declining as much as
it otherwise would have. A Fund could accomplish similar results by selling
bonds with longer maturities and investing in bonds with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a risk
management technique allows a Fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly when the investment manager expects that interest rates may decline, a
Fund may purchase interest rate futures contracts in an attempt to hedge against
having to make subsequently anticipated purchases of bonds at the higher prices
subsequently expected to prevail. Since the fluctuations in the value of
appropriately selected futures contracts should be similar to that of the bonds
that will be purchased, a Fund could take advantage of the anticipated rise in
the cost of the bonds without actually buying them until the market had
stabilized. At that time, a 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. In order to hedge against adverse market shifts or to increase income
or gain, certain Funds may purchase put and call options or write 'covered' put
and call options on futures
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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: (i) own the underlying investment subject to the option; (ii) own
securities convertible or exchangeable without the payment of any consideration
into the securities subject to the option; (iii) own a call option on the
relevant security or currency with an exercise price no higher than the exercise
price on the call option written or (iv) deposit with its custodian in a
segregated account liquid assets having a value equal to the excess of the value
of the security or index that is the subject of the call over the exercise
price. 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 liquid assets
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 below.
In all cases except for certain options on interest rate futures contracts, by
writing a call, a Fund will limit its opportunity to profit from an increase in
the market value of the underlying investment above the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
By writing a put, a Fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the Fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a Fund, the Fund may suffer an
economic loss equal to the difference between the price at which the Fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of a call option written by a Fund, the Fund may suffer an economic
loss equal to an amount not less than the excess of the investment's market
value at the time of the option exercise over the Fund's acquisition cost of the
investment, less the sum of the premium received for writing the option and the
positive difference, if any, between the call price paid to the Fund and the
Fund's acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts, in
purchasing a put option, a Fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
Fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the Fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a Fund may
purchase a put option in anticipation of a rise in interest rates, and purchase
a call option in anticipation of a fall in interest rates. By writing a covered
call option on interest rate futures contracts, a Fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a Fund will limit its opportunity to
profit from a rise in interest rates.
A Fund may choose to exercise the options it holds, permit them to expire or
terminate them prior to their expiration by entering into closing transactions.
A Fund may enter into a closing purchase transaction in which the Fund purchases
an option having the same terms as the option
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it had written or a closing sale transaction in which the Fund sells an option
having the same terms as the option it had purchased. A covered option writer
unable to effect a closing purchase transaction will not be able to sell the
underlying security until the option expires or the underlying security is
delivered upon exercise, with the result that the writer will be subject to the
risk of market decline in the underlying security during such period. Should a
Fund choose to exercise an option, the Fund will purchase in the open market the
securities, commodities or commodity futures contracts underlying the exercised
option.
Exchange-listed options on securities and currencies, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Frequently, rather
than taking or making delivery of the underlying instrument through the process
of exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
Index options are cash settled for the net amount, if any, by which the option
is 'in-the-money' (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised.
Put options and call options typically have similar structural characteristics
and operational mechanics regardless of the underlying instrument on which they
are purchased or sold. Thus, the following general discussion relates to each of
the particular types of options discussed in greater detail below. In addition,
many Derivatives involving options require segregation of Fund assets in special
accounts, as described below under 'Use of Segregated and Other Special
Accounts.'
A put option gives the purchaser of the option, upon payment of a premium, the
right to sell, and the writer of the obligation to buy, the underlying security,
index, currency or other instrument at the exercise price. A Fund's purchase of
a put option on a security, for example, might be designed to protect its
holdings in the underlying instrument (or, in some cases, a similar instrument)
against a substantial decline in the market value of such instrument by giving
the Fund the right to sell the instrument at the option exercise price. A call
option, upon payment of a premium, gives the purchaser of the option the right
to buy, and the seller the obligation to sell, the underlying instrument at the
exercise price. A Fund's purchase of a call option on a security, financial
futures contract, index, currency or other instrument might be intended to
protect the Fund against an increase in the price of the underlying instrument
that it intends to purchase in the future by fixing the price at which it may
purchase the instrument. An 'American' style put or call option may be exercised
at any time during the option period, whereas a 'European' style put or call
option may be exercised only upon expiration or during a fixed period prior to
expiration. Exchange-listed options are issued by a regulated intermediary such
as the Options Clearing Corporation ('OCC'), which guarantees the performance of
the obligations of the parties to the options. The discussion below uses the OCC
as an example, but is also applicable to other similar financial intermediaries.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
A Fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4)
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interruption of the normal operations of the OCC or an exchange, (5) inadequacy
of the facilities of an exchange or the OCC to handle current trading volume or
(6) a decision by one or more exchanges to discontinue the trading of options
(or a particular class or series of options), in which event the relevant market
for that option on that exchange would cease to exist, although any such
outstanding options on that exchange would continue to be exercisable in
accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'Counterparties' and
individually referred to as a 'Counterparty') through a direct bilateral
agreement with the Counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties and security, are determined by negotiation of the
parties. It is anticipated that any Portfolio authorized to use OTC options will
generally only enter into OTC options that have cash settlement provisions,
although it will not be required to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a Counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the Fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the Fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the investment manager must assess the creditworthiness of each such
Counterparty or any guarantor or credit enhancement of the Counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A Fund
will enter into OTC option transactions only with U.S. Government securities
dealers recognized by the Federal Reserve Bank of New York as 'primary dealers,'
or broker-dealers, domestic or foreign banks, or other financial institutions
that the investment manager deems to be creditworthy. In the absence of a change
in the current position of the staff of the SEC, OTC options purchased by a Fund
and the amount of a Fund's obligation pursuant to an OTC option sold by the Fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid.
If a Fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the Fund or will
increase the Fund's income. Similarly, the Sale of put options can also provide
gains for a Fund.
A Fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a Fund must be
'covered' (that is, the Fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the Fund
will receive the option premium to help protect it against loss, a call sold by
a Fund will expose the Fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the Fund to hold a security or instrument
that it might otherwise have sold.
A Fund reserves the right to purchase or sell options on instruments and indices
which may be developed in the future to the extent consistent with applicable
law, the Fund's investment objective and the restrictions set forth herein.
A Fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a Fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
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(a) Options on Stocks and Stock Indices. A Fund may purchase put and call
options and write covered put and call options on stocks and stock indices
listed on domestic and foreign securities exchanges in order to hedge against
movements in the equity markets or to increase income or gain to the Fund. In
addition, the Fund may purchase options on stocks that are traded over-the-
counter. Options on stock indices are similar to options on specific securities.
However, because options on stock indices do not involve the delivery of an
underlying security, the option represents the holder's right to obtain from the
writer cash in an amount equal to a fixed multiple of the amount by which the
exercise price exceeds (in the case of a put) or is less than (in the case of a
call) the closing value of the underlying stock index on the exercise date.
Currently, options traded include the Standard & Poor's 100 Index of Composite
Stocks, Standard & Poor's 500 Index of Composite Stocks (the 'S&P 500 Index'),
the New York Stock Exchange ('NYSE') Composite Index, the American Stock
Exchange ('AMEX') Market Value Index, the National Over-the-Counter Index and
other standard broadly based stock market indices. Options are also traded in
certain industry or market segment indices such as the Oil Index, the Computer
Technology Index and the Transportation Index. Stock index options are subject
to position and exercise limits and other regulations imposed by the exchange on
which they are traded.
If the investment manager expects general stock market prices to rise, a Fund
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If the stock index does rise, the price of the
particular equity securities intended to be purchased may also increase, but
that increase would be offset in part by the increase in the value of the Fund's
index option or futures contract resulting from the increase in the index. If,
on the other hand, the investment manager expects general stock market prices to
decline, it might purchase a put option or sell a futures contract on the index.
If that index does decline, the value of some or all of the equity securities in
a Fund's portfolio may also be expected to decline, but that decrease would be
offset in part by the increase in the value of the Fund's position in such put
option or futures contract.
(b) Options on Currencies. A Fund may invest in options on currencies traded on
domestic and foreign securities exchanges in order to hedge against currency
exchange rate risks or to increase income or gain, as described above in
'Forward Currency Exchange Contracts.'
(c) Options on Futures Contracts. A Fund may purchase put and call options and
write covered put and call options on futures contracts on stock indices,
interest rates and currencies traded on domestic and, to the extent permitted by
the CFTC, foreign exchanges, in order to hedge all or a portion of its
investments or to increase income or gain and may enter into closing
transactions in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected. An option on a stock index
futures contract, interest rate futures contract or currency futures contract,
as contrasted with the direct investment in such a contract, gives the purchaser
the right, in return for the premium paid, to assume a position in the
underlying contract at a specified exercise price at any time on or before the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account. The potential loss related to the purchase of an option on a
futures contract is limited to the premium paid for the option (plus transaction
costs). While the price of the option is fixed at the point of sale, the value
of the option does change daily and the change would be reflected in the net
asset value of the Fund.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the Fund.
If the Fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
Interest Rate and Equity Swaps and Related Transactions. Certain Funds may enter
into interest rate and equity swaps and may purchase or sell (i.e., write)
interest rate and equity caps, floors and collars. A Fund expects to enter into
these transactions in order to hedge against either a
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decline in the value of the securities included in the Fund's portfolio, or
against an increase in the price of the securities which it plans to purchase,
or in order to preserve or maintain a return or spread on a particular
investment or portion of its portfolio or to achieve a particular return on cash
balances, or in order to increase income or gain. Interest rate and equity swaps
involve the exchange by a Fund with another party of their respective
commitments to make or receive payments based on a notional principal amount.
The purchase of an interest rate or equity cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined level, to receive payments
on a contractually-based principal amount from the party selling the interest
rate or equity cap. The purchase of an interest rate or equity floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
rate, to receive payments on a contractually-based principal amount from the
party selling the interest rate or equity floor. A collar is a combination of a
cap and a floor which preserve a certain return within a predetermined range of
values.
A Fund may enter into interest rate and equity swaps, caps, floors and collars
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
and equity swaps on a net basis (i.e., the two payment streams are netted out),
with the Fund receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of a Fund's obligations
over its entitlements with respect to each interest rate or equity swap will be
accrued on a daily basis, and an amount of liquid assets having an aggregate net
asset value at least equal to the accrued excess will be maintained in a
segregated account by the Fund's custodian in accordance with procedures
established by the Board of Directors. If a Fund enters into an interest rate or
equity swap on other than a net basis, the Fund will maintain a segregated
account in the full amount accrued on a daily basis of the Fund's obligations
with respect to the swap. A Fund will only enter into interest rate and equity
swap, cap, floor or collar transactions with counterparties the investment
manager deems to be creditworthy. The investment manager will monitor the
creditworthiness of counterparties to its interest rate and equity swap, cap,
floor and collar transactions on an ongoing basis. If there is a default by the
other party to such a transaction, a Fund will have contractual remedies
pursuant to the agreements related to the transaction. The swap market has grown
substantially in recent years with a large number of banks and investment
banking firms acting both as principals and agents utilizing standardized swap
documentation. The investment manager has determined that, as a result, the swap
market is liquid. Caps, floors and collars are more recent innovations for which
standardized documentation has not yet been developed and, accordingly, they are
less liquid than swaps. To the extent a Fund sells caps, floors and collars it
will maintain in a segregated account cash and/or, cash equivalents or other
liquid high grade debt securities having an aggregate net asset value at least
equal to the full amount, accrued on a daily basis, of the Fund's obligations
with respect to the caps, floors or collars. The use of interest rate and equity
swaps is a highly specialized activity which involves investment techniques and
risks different from those associated with ordinary portfolio securities
transactions. If the investment manager is incorrect in its forecasts of market
values, interest rates and other applicable factors, the investment performance
of a Fund would diminish compared with what it would have been if these
investment techniques were not utilized. Moreover, even if the investment
manager is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the asset or liability being hedged.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace, (3)
dealer undertakings to make a market, (4) the nature of the security (including
any demand or tender features), and (5) the nature of the marketplace for trades
(including the ability to assign or offset the Fund's rights and obligations
relating to the investment). Such determination will govern whether a swap will
be deemed within the percentage restriction on investments in securities that
are not readily marketable.
A Fund will maintain liquid assets in a segregated custodial account to cover
its current obligations under swap agreements. If a Fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the Fund's accrued
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obligations under the swap agreement over the accrued amount the Fund is
entitled to receive under the agreement. If a Fund enters into a swap agreement
on other than a net basis, it will segregate assets with a value equal to the
full amount of the Fund's accrued obligations under the agreement. See 'Use of
Segregated and Other Special Accounts' below.
There is no limit on the amount of interest rate and equity swap transaction
that may be entered into by a Fund. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate and equity swaps is limited to the
net amount of payments that a Fund is contractually obligated to make, if any.
The effective use of swaps and related transactions by a Fund may depend, among
other things, on the Fund's ability to terminate the transactions at times when
the investment manager deems it desirable to do so. Because swaps and related
transactions are bilateral contractual arrangements between a Fund and
counterparties to the transactions, the Fund's ability to terminate such an
arrangement may be considerably more limited than in the case of an exchange
traded instrument. To the extent a Fund does not, or cannot, terminate such a
transaction in a timely manner, the Fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction. If the other party to a swap defaults, a Fund's
risk of loss is the net amount of payments that the Fund contractually is
entitled to receive, if any. A Fund may purchase and sell caps, floors and
collars without limitation, subject to the segregated account requirement
described above.
Indexed Securities. A Fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign currency-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
Combined Transactions. A Fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts), multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions, instead of a single Derivative, as part of a single or combined
strategy when, in the judgment of the investment manager, it is in the best
interests of the Fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a Fund based on
the investment manager's judgment that the combined strategies will reduce risk
or otherwise more effectively achieve the desired portfolio management goal, it
is possible that the combination will instead increase the risks or hinder
achievement of the Fund management objective.
Risk Factors. Derivatives have special risks associated with them, including
possible default by the Counterparty to the transaction, illiquidity and, to the
extent the investment manager's view as to certain market movements is
incorrect, the risk that the use of the Derivatives could result in losses
greater than if they had not been used. Use of put and call options could result
in losses to a Fund, force the sale or purchase of portfolio securities at
inopportune times or for prices higher than (in the case of put options) or
lower than (in the case of call options) current market values, or cause a Fund
to hold a security it might otherwise sell.
The use of futures and options transactions entails certain special risks. In
particular, the variable degree of correlation between price movements of
futures contracts and price movements in the related securities position of a
Fund could create the possibility that losses on the hedging
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instrument are greater than gains in the value of the Fund's position. In
addition, futures and options markets could be illiquid in some circumstances
and certain over-the-counter options could have no markets. As a result, in
certain markets, a Fund might not be able to close out a transaction without
incurring substantial losses. Although a Fund's use of futures and options
transactions for hedging should tend to minimize the risk of loss due to a
decline in the value of the hedged position, at the same time it will tend to
limit any potential gain to the Fund that might result from an increase in value
of the position. There is also the risk of loss by a Fund of margin deposits in
the event of bankruptcy of a broker with whom the Fund has an open position in a
futures contract or option thereon. Finally, the daily variation margin
requirements for futures contracts create a greater ongoing potential financial
risk than would purchases of options, in which case the exposure is limited to
the cost of the initial premium. However, because option premiums paid by a Fund
are small in relation to the market value of the investments underlying the
options, buying options can result in large amounts of leverage. The leverage
offered by trading in options could cause a Fund's net asset value to be subject
to more frequent and wider fluctuation than would be the case if the Fund did
not invest in options.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a Fund may depend, among other things, on a Fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a Fund does not, or cannot, terminate such a transaction in
a timely manner, a Fund may suffer a loss in excess of any amounts that it may
have received, or expected to receive, as a result of entering into the
transaction.
Currency hedging involves some of the same risks and considerations as other
transactions with similar instruments. Currency transactions can result in
losses to a Fund if the currency being hedged fluctuates in value to a degree or
in a direction that is not anticipated. Further, the risk exists that the
perceived linkage between various currencies may not be present or may not be
present during the particular time that the Fund is engaging in proxy hedging.
Currency transactions are also subject to risks different from those of other
portfolio transactions. Because currency control is of great importance to the
issuing governments and influences economic planning and policy, purchases and
sales of currency and related instruments can be adversely affected by
government exchange controls, limitations or restrictions on repatriation of
currency, and manipulations or exchange restrictions imposed by governments.
These forms of governmental actions can result in losses to a Fund if it is
unable to deliver or receive currency or monies in settlement of obligations and
could also cause hedges it has entered into to be rendered useless, resulting in
full currency exposure as well as incurring transaction costs. Buyers and
sellers of currency futures contracts are subject to the same risks that apply
to the use of futures contracts generally. Further, settlement of a currency
futures contract for the purchase of most currencies must occur at a bank based
in the issuing nation. Trading options on currency futures contracts is
relatively new, and the ability to establish and close out positions on these
options is subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
that country's economy.
Because the amount of interest and/or principal payments which the issuer of
indexed debt securities is obligated to make is linked to the prices of other
securities, securities indices, currencies, or other financial indicators, such
payments may be significantly greater or less than payment obligations in
respect of other types of debt securities. As a result, an investment in indexed
debt securities may be considered speculative. Moreover, the performance of
indexed securities depends to a great extent on the performance of and may be
more volatile than the security, currency, or other instrument to which they are
indexed, and may also be influenced by interest rate changes in the United
States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may
decline substantially if the issuer's creditworthiness deteriorates.
Losses resulting from the use of Derivatives will reduce a Fund's net asset
value, and possibly income, and the losses can be greater than if Derivatives
had not been used.
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Risks of Derivatives Outside the United States. When conducted outside the
United States, Derivatives may not be regulated as rigorously as in the United
States, may not involve a clearing mechanism and related guarantees, and will be
subject to the risk of governmental actions affecting trading in, or the prices
of, foreign securities, currencies and other instruments. In addition, the price
of any foreign futures or foreign options contract and, therefore, the potential
profit and loss thereon, may be affected by any variance in the foreign exchange
rate between the time an order is placed and the time it is liquidated, offset
or exercised. The value of positions taken as part of non-U.S. Derivatives also
could be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the Fund's ability to act
upon economic events occurring in foreign markets during nonbusiness hours in
the United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
Use of Segregated and Other Special Accounts. Use of many Derivatives by a Fund
will require, among other things, that the Fund segregate liquid assets with its
custodian, or a designated sub-custodian, to the extent the Fund's obligations
are not otherwise 'covered' through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
obligation by a Fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of liquid assets at least
equal to the current amount of the obligation must be segregated with the
custodian or subcustodian in accordance with procedures established by the Board
of Directors. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. A call option on securities written by a Fund, for example, will
require the Fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid high grade debt obligations sufficient to purchase and deliver
the securities if the call is exercised. A call option sold by a Fund on an
index will require the Fund to own portfolio securities that correlate with the
index or to segregate liquid high grade debt obligations equal to the excess of
the index value over the exercise price on a current basis. A put option on
securities written by a Fund will require the Fund to segregate liquid high
grade debt obligations equal to the exercise price. Except when a Fund enters
into a forward contract in connection with the purchase or Sale of a security
denominated in a foreign currency or for other non-speculative purposes, which
requires no segregation, a currency contract that obligates the Fund to buy or
sell a foreign currency will generally require the Fund to hold an amount of
that currency or liquid securities denominated in that currency equal to the
Fund's obligations or to segregate liquid high grade debt obligations equal to
the amount of the Fund's obligations.
OTC options entered into by a Fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the Fund will not
be required to do so. As a result, when a Fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options. OCC-
issued and exchange-listed options sold by a Fund other than those described
above generally settle with physical delivery, and the Fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a Fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating liquid assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. A Fund will accrue the net amount
of the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will segregate with
its custodian, or designated sub-custodian, an amount of liquid assets having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of liquid assets with a value equal to the Fund's net
obligation, if any.
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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.
PORTFOLIO TURNOVER
Purchases and Sales of portfolio securities may be made as considered advisable
by the investment manager in the best interests of the shareholders. Each Fund
intends to limit portfolio trading to the extent practicable and consistent with
its investment objectives. Each Fund's portfolio turnover rate may vary from
year to year, as well as within a year. Short-term gains realized from portfolio
transactions are taxable to shareholders as ordinary income. In addition, higher
portfolio turnover rates can result in corresponding increases in portfolio
transaction costs for a Fund. See 'Portfolio Transactions.'
With respect to each of the Cash Management Fund and New York Municipal 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 Cash Management Fund and the New York Municipal Money Market Fund may
dispose of any portfolio security prior to its maturity if such disposition and
reinvestment of the proceeds are expected to enhance yield consistent with the
investment manager's judgment as to a desirable portfolio maturity structure or
if such disposition is believed to be advisable due to other circumstances or
considerations. Subsequent to its purchase, a portfolio security may be assigned
a lower rating or cease to be rated. Such an event would not require the
disposition of the instrument, but the investment manager will consider such an
event in determining whether the Cash Management Fund and the New York Municipal
Money Market Fund should continue to hold the security. The policy of each of
the Cash Management Fund and the New York Municipal Money Market Fund regarding
dispositions of portfolio securities and its policy of investing in securities
deemed to have maturities of 397 days or less will result in high portfolio
turnover. A higher rate of portfolio turnover results in increased transaction
costs to the Cash Management Fund and the New York Municipal Money Market Fund
in the form of dealer spreads.
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INVESTMENT RESTRICTIONS AND LIMITATIONS
Unless otherwise indicated, the investment restrictions described below are
fundamental investment 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; and (ii) each Fund's investment
objective(s) as described in the Prospectus, the other policies and percentage
limitations referred to in this SAI and in the Prospectus are not fundamental
policies of the Funds and may be changed by vote of each Company's Board of
Directors without shareholder approval.
If a percentage restriction on investment or utilization of assets in a
fundamental policy or restriction set forth below is adhered to at the time a
transaction is effected, a later change in percentage ownership of a security or
kind of security resulting from changing market values or a similar type of
event will not be considered a violation of such policy or restriction.
INVESTMENT RESTRICTIONS
ASIA GROWTH FUND, HIGH YIELD BOND FUND, INTERNATIONAL GROWTH FUND, LARGE CAP
GROWTH FUND, NATIONAL INTERMEDIATE MUNICIPAL FUND, SMALL CAP GROWTH FUND,
STRATEGIC BOND FUND, BALANCED FUND, AND U.S. GOVERNMENT INCOME FUND. Each of the
Asia Growth Fund, High Yield Bond Fund, National Intermediate Municipal Fund,
Small Cap Growth Fund, Strategic Bond Fund, Balanced Fund and U.S. Government
Income Fund may not:
(1) underwrite securities of other issuers, except to the extent that the
purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a Fund's investment program may be deemed to be an
underwriting;
(2) purchase or sell real estate, although a Fund may purchase and sell
securities of companies which deal in real estate, may purchase and sell
marketable securities which are secured by interests in real estate and may
invest in mortgages and mortgage-backed securities;
(3) purchase or sell commodities or commodity contracts except that a Fund
may engage in hedging and derivative transactions to the extent permitted by
its investment policies as stated in the Prospectus and this Statement of
Additional Information;
(4) make loans, except that (a) a Fund may purchase and hold debt securities
in accordance with its investment objective(s) and policies, (b) a Fund may
enter into repurchase agreements with respect to portfolio securities,
subject to applicable limitations of its investment policies, (c) a Fund may
lend portfolio securities with a value not in excess of one-third of the
value of its total assets, provided that collateral arrangements with
respect to options, forward currency and futures transactions will not be
deemed to involve loans of securities, and (d) delays in the settlement of
securities transactions will not be considered loans;
(5) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(6) Issue senior securities except as may be permitted by the 1940 Act.
In addition, each of the Asia Growth Fund, High Yield Bond Fund, National
Intermediate Municipal Fund, Strategic Bond Fund, Balanced Fund and U.S.
Government Income Fund may not:
(7) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin
payments in connection with purchases or sales of futures contracts);
(8) sell securities short (except for short positions in a futures contract
or forward contract);
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<PAGE>
(9) 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;
(10) 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;
(11) except with respect to the Asia Growth Fund, purchase the securities of
any issuer if by reason thereof the value of its investment in all
securities of that issuer will exceed 5% of the value of the issuer's total
assets;
(12) except with respect to the Asia Growth Fund purchase securities of
issuers which it is restricted from selling to the public without
registration under the 1933 Act if by reason thereof the value of its
aggregate investment in such classes of securities will exceed 10% of its
total assets, provided, however, that this limitation shall not apply to
Rule 144A securities;
(13) 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;
(14) 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;
(15) invest in warrants (other than warrants acquired by a Fund as part of a
unit or attached to securities at the time of purchase) if, as a result, the
investments (valued at the lower of cost or market) would exceed 5% of the
value of the Fund's net assets or if, as a result, more than 2% of the
Fund's net assets would be invested in warrants that are not listed on AMEX
or NYSE; or
(16) invest for the purpose of exercising control over the management of any
company.
Investment restrictions (1) through (6) described above are fundamental policies
of each of the Asia Growth Fund, High Yield Bond Fund, National Intermediate
Municipal Fund, Small Cap Growth Fund, Strategic Bond Fund, U.S. Government
Income Fund, International Equity Fund and Large Cap Growth Fund. Restrictions
(7) through (16) are non-fundamental policies.
In addition to the above fundamental restrictions, the High Yield Bond Fund,
National Intermediate Municipal Fund, Small Cap Growth Fund, Strategic Bond
Fund, Balanced Fund, and U.S. Government Income Fund, International Equity Fund
and Large Cap Growth Fund may not:
(1a) 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;
(2a) borrow money (including entering into reverse repurchase agreements),
except for temporary or emergency purposes and then not in excess of 10%
(33 1/3% in the case of the International Equity Fund and Large Cap Growth
Fund measured at all times not simply at the time of borrowing) 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
53
<PAGE>
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
(3a) invest more than 25% of the total assets of each Fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased by
a Fund), provided, however, that each Fund may invest all or substantially
all of its assets in another registered investment company having
substantially the same investment objective(s) and policies and
substantially the same investment restrictions as those with respect to such
Fund.
For purposes of investment limitations (1a) and (3a) above, both the borrower
under a Loan and the Lender selling a Participation will be considered an
'issuer.' See 'Additional Investment Activities and Risk Factors -- Loan
Participations and Assignments.'
For the purposes of the investment restrictions applicable to the National
Intermediate Municipal Fund, the identification of the issuer of a municipal
obligation depends on the terms and conditions of the obligation. If the assets
and revenues of an agency, authority, instrumentality, or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the subdivision,
such subdivision would be regarded as the sole issuer. Similarly, in the case of
a private activity bond, if the bond is backed only by the assets and revenues
of the non-governmental user, such non-governmental user would be regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guarantee may be considered a separate security
and treated as an issue of such government or entity in accordance with
applicable regulations.
In addition to the fundamental restrictions numbers (1) through (5) above, the
Asia Growth Fund may not:
(1b) 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 (the Fund will not purchase
additional securities at any time its borrowing exceed 5% of total assets);
or
(2b) 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).
INVESTMENT RESTRICTIONS
CAPITAL FUND. The Capital Fund may not:
(1) hold more than 25% of the value of its total assets in the securities of
any single company or in the securities of companies in any one industry. As
to 50% of the value of its total assets, the Fund's investment in any one
security other than United States Government obligations will not exceed 5%
of the value of its total assets and as to this 50%, the Fund will not
invest in more than 10% of the outstanding voting securities of any one
issuer;
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<PAGE>
(2) borrow money or pledge or mortgage its assets, except as described under
'Additional Information on the Fund's Investment Policies' 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) underwrite securities, except in instances where the Fund has acquired
portfolio securities which it may not be free to sell publicly without
registration under the 1933 Act ('restricted securities'); in such
registrations the Fund may technically be deemed an 'underwriter' for
purposes of the 1933 Act. No more than 10% of the value of Fund's total
assets may be invested in illiquid securities;
(4) make loans other than through (a) the lending of its portfolio
securities in accordance with the procedures described under 'Additional
Investment Activities and Risk Factors -- Loans of Portfolio Securities' in
this Statement of Additional Information, or (b) entering into repurchase
agreements in an amount up to an aggregate of 25% of its total assets, but
this restriction shall not prevent the Fund from buying a portion of an
issue of bonds, debentures or other obligations which are liquid, or from
investing up to an aggregate of 10% (including investments in other types of
illiquid securities) of the value of its total assets in portions of issues
of bonds, debentures or other obligations of a type privately placed with
financial institutions and which are illiquid;
(5) invest more than 10% of the value of the Fund's total assets in
securities of unseasoned issuers, including their predecessors, which have
been in operation for less than three years, and equity securities which are
not readily marketable;
(6) invest in companies for the purpose of exercising control or management.
(The Fund may on occasion be considered part of a control group of a
portfolio company by reason of the size or manner of its investment, in
which event the securities of such portfolio company held by the Fund may
not be publicly saleable unless registered under the Securities Act of 1933
or pursuant to an available exemption thereunder.);
(7) purchase securities on margin (except for such short-term credits as are
necessary for the clearance of transactions and except that the Fund may
make deposits in connection with transactions in options on securities) or
make short sales of securities (except for sales 'against the box', i.e.,
when a security identical to one owned by the Fund, or which the Fund has
the right to acquire without payment of additional consideration, is
borrowed and sold short);
(8) purchase or sell real estate, interests in real estate, interests in
real estate investment trusts, or commodities or commodity contracts;
however, the Fund (a) may purchase interests in real estate investment
trusts or companies which invest in or own real estate if the securities of
such trusts or companies are registered under the Securities Act of 1933 and
are readily marketable and (b) may enter into futures contracts, including
futures contracts on interest rates, stock indices and currencies, and
options thereon, and may engage in forward currency contracts and buy, sell
and write options on currencies;
(9) 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. Any such purchase will be made only in the open market where no
profit to a sponsor or dealer results from the purchase, except for the
customary broker's commission. This restriction shall not apply to
investment company securities received or acquired by the Fund pursuant to a
merger or plan of 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; that is, there will be a
layering of certain fees and expenses.);
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<PAGE>
(10) purchase or hold securities of an issuer if one or more persons
affiliated with the Fund or with SBAM owns beneficially more than 1/2 of 1%
of the securities of that issuer and such persons owning more than 1/2 of 1%
of such securities together own beneficially more than 5% of the securities
of such issuer;
(11) buy portfolio securities from, or sell portfolio securities to, any of
the Fund's officers, directors or employees of its investment manager or
distributor, or any of their officers or directors, as principals;
(12) purchase or sell warrants; however, the Fund may invest in debt or
other securities which have warrants attached (not to exceed 10% of the
value of the Fund's total assets). Covered options with respect to no more
than 10% in value of the Fund's total assets will be outstanding at any one
time; or
(13) invest in interest in oil, gas or other mineral exploration or
development programs.
(14) Issue senior securities except as may be permitted by the 1940 Act.
INVESTMENT RESTRICTIONS
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;
(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;
(6) purchase any securities which would cause more than 25% of the value of
its total assets at the time of such purchase to be invested in securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no limitation with respect to
investment in obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities, with respect to bank obligations or with
respect to repurchase agreements collateralized by any of such obligations
(the fundamental policy of the Fund to invest at least 25% of its assets in
bank obligations is described in the Prospectus);
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<PAGE>
(7) 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);
(8) 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;
(9) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions);
(10) sell securities short;
(11) purchase or sell commodities or commodity contracts, including futures
contracts;
(12) invest for the purposes of exercising control over management of any
company;
(13) 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;
(14) 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;
(15) 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);
(16) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases; or
(17) purchase warrants.
(18) Issue senior securities except as may be permitted by the 1940 Act.
With respect to the Cash Management Fund, for the purpose of applying the above
percentage restrictions and the percentage investment limitations set forth
above to receivables-backed obligations, the special purpose entity issuing the
receivables-backed obligations and/or one or more of the issuers of the
underlying receivables will be considered an issuer in accordance with
applicable regulations.
INVESTMENT RESTRICTIONS
INVESTORS VALUE FUND. The Investors Value 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 (i) in order to meet redemption requests or (ii) as
a temporary measure for extraordinary or emergency purposes and, in the case
of both (i) and (ii), only from banks and only in an aggregate amount not to
exceed 5% of its total assets taken at cost or value, whichever is less, or
mortgage or pledge any of its assets and except that for purposes of this
restriction, collateral arrangements with respect to the writing of options
on stocks and stock indices, the purchase and sale of futures contracts and
options on futures contracts, and forward currency contracts are not deemed
a pledge of assets or a borrowing of money;
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(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 in an
amount up to 33 1/3% of its total assets, provided that the borrower may not
be affiliated, directly or indirectly, with the Fund and (b) the Fund may
enter into repurchase agreements in an amount up to an aggregate of 25% of
its total assets;
(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;
(5) 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;
(6) act as underwriter of securities of other issuers;
(7) 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;
(8) buy securities from, or sell securities to, any of its officers,
directors, employees, investment manager or distributor, as principals;
(9) 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;
(10) 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;
(11) Issue senior securities except as may be permitted by the 1940 Act.
(12) invest in warrants (other than warrants acquired by the Investors Value
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 Value Fund's net assets or if,
as a result, more than 2% of the Investors Value Fund's net assets would be
invested in warrants that are not listed on AMEX or NYSE;
(13) invest in oil, gas and other mineral leases, provided, however, that
this shall not prohibit the Investors Value Fund from purchasing publicly
traded securities of companies engaging in whole or in part in such
activities; or
(14) purchase or sell real property (including limited partnership
interests) except to the extent described in investment restriction number 6
above.
Investment restrictions (1) through (11) described above are fundamental
policies of the Investors Value Fund. Restrictions (12) through (14) are
non-fundamental policies of the Investors Value Fund.
INVESTMENT RESTRICTIONS
NEW YORK MUNICIPAL MONEY MARKET FUND. The New York Municipal Money Market Fund
may not:
(1) invest more than 10% of the value of its net assets in securities which
are illiquid, including repurchase agreements having notice periods of more
than seven days, fixed time deposits subject to withdrawal penalties and
having notice periods of more than seven days and securities that would be
illiquid by virtue of legal or contractual restrictions on resale;
58
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(2) purchase any securities which would cause more than 25% of the value of
its total assets to be invested in securities of one or more issuers
conducting their principal business activities in the same industry,
provided that there is no limitation with respect to investment in (a)
obligations issued or guaranteed by the United States Government, its
agencies or instrumentalities or by any state or territory, any possessions
of the United States, or any of their authorities, agencies,
instrumentalities or political subdivisions, (b) bank obligations, or (c)
repurchase agreements with respect to any such obligations;
(3) borrow money except as a temporary measure from banks for extraordinary
or emergency purposes, and in no event in excess of 15% of the value of its
total assets, except that for the purpose of this restriction, short-term
credits necessary for settlement of securities transactions are not
considered borrowings (the Fund will not purchase any securities at any time
while such borrowings exceed 5% of the value of its total assets);
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in excess
of 20% of the value of its total assets, and then only to secure borrowings
permitted by (3) above;
(5) invest more than 5% of the current value of its total assets in the
securities of any one issuer, other than obligations issued or guaranteed by
the United States Government, its agencies or instrumentalities; however, up
to 50% of the value of the total assets of the Fund may be invested without
regard to this limitation so long as no more than 25% of its total assets
are invested in the securities of any one issuer;
(6) own more than 10% of the outstanding voting stock or other securities,
or both, of any one issuer (other than securities of the United States
government or any agency or instrumentality thereof);
(7) 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;
(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);
(9) sell securities short;
(10) purchase or sell commodities or commodity contracts, including futures
contracts:
(11) invest for the purpose of exercising control over management of any
company;
(12) 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;
(13) 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;
(14) 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);
(15) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases; or
(16) purchase warrants.
(17) Issue senior securities except as may be permitted by the 1940 Act.
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For purposes of the investment limitations applicable to the New York Municipal
Money Market 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 any agency, authority, instrumentality or other political
subdivision are separate from those of the government creating the subdivision
and the obligation is backed only by the assets and revenues of the subdivision,
such subdivision would be regarded as the sole issuer. Similarly, in the case of
a private activity bond, if the bond is backed only by the assets and revenues
of the non-governmental user, such non-governmental user would be regarded as
the sole issuer. If in either case the creating government or another entity
guarantees an obligation, the guarantee may be considered a separate security
and may be treated as an issue of such government or entity in accordance with
applicable regulations.
* * * * *
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 the
Board of Directors. The Board of Directors approves all significant agreements
between the Funds and the persons or companies that furnish services to the
Fund, including agreements with its distributor, investment manager,
administrator, custodian and transfer agent. The Funds' day-to-day operations
are delegated to the investment manager and administrator.
DIRECTORS AND OFFICERS
The directors and executive officers of each Company 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.
'Interested directors' of the Fund (as defined in the 1940 Act) are indicated by
an asterisk.
SERIES FUNDS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ---------------- ------------------------------------
<S> <C> <C>
Charles F. Barber................. Director and Consultant. Formerly, Chairman of the
66 Glenwood Drive Chairman of Audit Board of ASARCO Incorporated.
Greenwich, CT 06830 Committee
Age: 83
Carol L. Colman .................. Director and President of Colman Consulting
Colman Consulting Co., Inc. Audit Committee
278 Hawley Road Member
North Salem, NY 10560
Age: 54
Daniel P. Cronin ................. Director and Vice President and General Counsel of
Pfizer, Inc. Audit Committee Pfizer International Inc. Senior Assisting
235 East 42nd Street Member General Counsel of Pfizer, Inc.
New York, NY 10017
Age: 54
Heath B. McLendon* ............... Director, Managing Director, Salomon Smith Barney,
Age: 66 Chairman and Inc. ('SSB'); President and Director, SSB
President Citi Fund Management LLC ('SSB Citi') and
Travelers Investment Adviser, Inc. ('TIA')
Peter J. Wilby ................... Executive Vice Managing Director of SBAM and SSB since
Age: 41 President January 1996. Prior to January 1996,
Director of SBAM and SSB.
Beth A. Semmel ................... Executive Vice Managing Director of SBAM and SSB since
Age: 39 President January 1999. Director of SBAM and SSB
since January 1996. From May 1993 to
December 1995, Vice President of SBAM and
SSB.
Maureen O'Callaghan .............. Executive Vice Director, SBAM and SSB since January 1998.
Age: 36 President Vice President of SBAM and SSB from
October 1988 to December 1997.
James E. Craige .................. Executive Vice Managing Director of SBAM and SSB since
Age: 32 President January 1999. Director of SBAM and SSB
since January 1998. Vice President, SBAM
and SSB from 1992 to December 1997.
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ---------------- ------------------------------------
<S> <C> <C>
Thomas K. Flanagan ............... Executive Vice Managing Director of SBAM and SSB since
Age: 47 President January 1999. Director, SBAM and SSB since
1991.
Nancy Noyes ...................... Vice President Director of SBAM and SSB since January
Age: 40 1996. From August 1992 to January 1996,
Vice President of SBAM and SSB.
Robert E. Amodeo ................. Executive Vice Director of SBAM and SSB since January
Age: 35 President 1999. Vice President of SBAM and SSB from
January 1996. Prior to that served as an
assistant portfolio manager.
Charles K. Bardes ................ Executive Vice Vice President of SBAM and SSB since
Age: 40 President January 1997. From June 1988 to January
1997 served as portfolio manager at SBAM.
Thomas Croak ..................... Executive Vice Vice President of SBAM and SSB since
Age: 38 President January 1995. Prior to 1995 was Vice
President of SSB.
George Williamson ................ Executive Vice Director of SBAM and SSB since January
Age: 66 President 1999. Prior to January 1996, Vice
President of SBAM and SSB.
Lewis E. Daidone ................. Executive Vice Managing Director of SSB since 1990.
Age: 42 President and
Treasurer
Christina T. Sydor ............... Secretary Managing Director of SSB; General Counsel
Age: 46 and Secretary of SSB Citi and TIA
Anthony Pace ..................... Controller Vice President of SSB since 1995.
Age: 34
</TABLE>
INVESTORS VALUE FUND AND CAPITAL FUND
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ---------------- ------------------------------------
<S> <C> <C>
Charles F. Barber................. Director and Consultant. Formerly, Chairman of the
66 Glenwood Drive Chairman of Audit Board of ASARCO Incorporated.
Greenwich, CT 06830 Committee
Age: 83
Andrew L. Breech ................. Director and President of Dealer Operating Control
2120 Wilshire Boulevard Chairman, Proxy Service, Inc.
Suite 400 Committee
Santa Monica, CA 90403
Age: 47
Carol L. Colman .................. Director and President of Colman Consulting
Colman Consulting Co., Inc. Audit Committee
278 Hawley Road Member
North Salem, NY 10560
Age: 54
William R. Dill .................. Director and Consultant; formerly President, Boston
25 Birch Lane Member of Architectural Center; formerly, President,
Cumberland Foreside, ME 04110 Nominating Anna Maria College; Consultant.
Age: 69 Committee
</TABLE>
62
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ---------------- ------------------------------------
<S> <C> <C>
Clifford M. Kirtland, Jr. ........ Director and Member of Advisory Committee, Noro-
9 North Parkway Square Member of the Moseley Partners. Formerly, Director of
4200 Northside Pkwy, N.W. Proxy Committee Oxford Industries, Shaw Industries, Inc.
Atlanta, GA 30327 and Graphic Industries, Inc. Formerly,
Age: 76 Chairman and President of Cox
Communications Inc.
Robert W. Lawless ................ Director and President and Chief Executive Officer,
2877 East 35th Street Member of Proxy University of Tulsa. Formerly, President
Tulsa, OK 74105 Committee and Chief Executive Officer of Texas Tech
Age: 63 University and Texas Tech University
Health Sciences Center.
Heath B. McLendon* ............... Director and Managing Director, SSB; President and
Age: 66 President Director, SSB Citi and ('TIA')
Louis P. Mattis .................. Director and Consultant. Formerly, Chairman and
P.O. Box #6535 Member of President of Sterling Winthrop Inc., a
SnowMass Village, CO 81615 Nominating pharmaceutical company.
Age: 58 Committee
Thomas F. Schlafly ............... Director, Audit Of counsel to Blackwell Sanders Peper
8 Portland Place Committee Member Martin LLP (law firm) and President of The
St. Louis, MO 63108 and Nominating Saint Louis Brewery, Inc.
Age: 51 Committee Member
Ross S. Margolies ................ Executive Vice Managing Director of SBAM and SSB since
Age: 41 President January 1998. Director of SBAM and SSB
since June 1992.
Robert Donahue ................... Vice President Director of SBAM and SSB since 1999, Vice
Age: 32 (Capital Fund President of SBAM and SSB from 1997 and
only) prior to 1997 was an associate of SBAM and
SSB. Prior to 1997 research analyst at
Gabelli & Company.
John B. Cunningham ............... Vice President Director of SBAM and SSB since 1991.
Age: 35 (Investors Value
Fund only)
Lewis E. Daidone ................. Executive Vice Managing Director of SSB since 1990.
Age: 42 President and
Treasurer
Christina T. Sydor ............... Secretary Managing Director of SSB; General Counsel
Age: 46 and Secretary of SSB Citi and TIA
Anthony Pace ..................... Controller Vice President of SSB since 1995.
Age: 34
</TABLE>
COMPENSATION TABLE
The following table provides information concerning the compensation paid during
the fiscal year ended December 31, 1999 to each director of the Companies. The
Companies do not provide any pension or retirement benefits to directors. In
addition, no remuneration was paid during the fiscal year ended December 31,
1999 by the Companies to officers of any Company, including to Mr. McLendon, who
is affiliated with SBAM. Accordingly, Mr. McLendon is an 'interested person,' as
defined in the 1940 Act.
63
<PAGE>
SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE SERIES FROM OTHER FUNDS
NAME FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- ---- ----- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber....................... $9,600 $125,500(15) $135,100(16)*
Carol L. Colman......................... 9,600 44,625(6) 54,225(7)
Daniel P. Cronin........................ 9,600 40,600(6) 50,200(7)
</TABLE>
- ---------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
* In addition, Mr. Barber received $18,375 in deferred compensation from
investment companies advised by affiliates of SBAM.
INVESTORS VALUE FUND
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE FROM OTHER FUNDS
NAME FUND ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- ---- ---- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber........................ $9,750 $125,350(15) $135,100(16)*
Andrew L. Breech......................... 9,000 17,875(3) 26,875(4)
Carol L. Colman.......................... 9,750 44,475(6) 54,225(7)
William R. Dill.......................... 9,000 17,875(3) 26,875(4)
Clifford M. Kirtland, Jr................. 9,000 19,250(3) 28,250(4)
Robert W. Lawless........................ 9,750 19,250(3) 29,000(4)
Louis P. Mattis.......................... 8,250 17,750(2) 26,000(3)
Thomas F. Schlafly....................... 9,000 19,250(2) 28,250(3)
</TABLE>
- ---------
(A) The numbers in parenthesis indicate the applicable number of investment
company directorships held by that director.
* In addition, Mr. Barber received $18,375 in deferred compensation from
investment companies advised by affiliates of SBAM.
CAPITAL FUND
<TABLE>
<CAPTION>
AGGREGATE TOTAL COMPENSATION
COMPENSATION PAID TO DIRECTORS
FROM THE FROM OTHER FUNDS
NAME FUND ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- ---- ---- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber........................ $8,000 $127,100(15) $135,100(16)*
Andrew L. Breech......................... 7,250 19,625(3) 26,875(4)
Carol L. Colman.......................... 8,000 46,225(6) 54,225(7)
William R. Dill.......................... 7,250 19,625(3) 26,875(4)
Clifford M. Kirtland, Jr................. 8,000 20,250(3) 28,250(4)
Robert W. Lawless........................ 8,000 21,000(3) 29,000(4)
Louis P. Mattis.......................... 7,250 18,750(2) 26,000(3)
Thomas F. Schlafly....................... 8,000 20,250(2) 28,250(3)
</TABLE>
- ---------
(A) The number in parenthesis indicates the applicable number of investment
company directorships held by that director.
* In addition, Mr. Barber received $18,375 in deferred compensation from
investment companies advised by affiliates of SBAM.
The members of each Company's Board of Directors who are not 'interested
persons,' as defined in the 1940 Act, receive a fee for each meeting of the
Board of Directors and committee meetings attended and are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings. The Directors
who are 'interested persons,' as defined in the 1940 Act, do not receive
64
<PAGE>
compensation from their respective Funds but are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings.
As of March 23, 2000 the officers and Directors of the Funds owned 5.5% of the
outstanding Class O shares of the Balanced Fund and owned 2.2% of the
outstanding Class A shares of the Strategic Bond Fund.
As of March 23, 2000 directors and officers of the Investors Value Fund and the
Capital Fund, individually and as a group, beneficially owned less than 1% of
the outstanding shares of their respective Funds.
PRINCIPAL HOLDERS OF SECURITIES
The following lists shareholders of record who held 5% or more of the
outstanding securities of the Funds as of March 23, 2000. Shareholders who own
greater than 25% of the outstanding shares of a class of shares are deemed to be
'control persons,' as defined in the 1940 Act of such class.
<TABLE>
<CAPTION>
FUND CLASS SHAREHOLDER HELD
---- ----- ----------- ----
<S> <C> <C> <C>
Asia Growth Fund. O Salomon Smith Barney Inc. 61.78%
00111181257
333 West 34th St., 3rd Fl.
New York, NY 10001
Salomon Smith Barney Inc. 10.74
00111181132
333 West 34th St., 3rd Fl.
New York, NY 10001
A Bear Stearns Securities Corp. 6.13
FBO 220-93103-13
1 Metrotech Center North
Brooklyn, NY 11201-3859
B MLPF&S For the Sole Benefit of Its 5.26
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
2 MLPF&S For the Sole Benefit of Its 11.18
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
Wendel & Co A/C 439857 10.64
c/o The Bank of New York
Mutual Fund Reorg. Dept.
P.O. Box 1066
Wall Street Station
New York, NY 10268
Capital Fund........................... O State Street Bank & Trust TTEE 46.67
FBO Travelers Group 401K Savings
388 Greenwich Str., 35th Fl.
New York, NY 10013
Hugheson Limited 6.55
c/o Butterfield House
P.O. Box 705 George Town
Grand Cayman, Cayman Islands
British West Indies
A MLPF&S For the Sole Benefit of Its 6.97
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND CLASS SHAREHOLDER HELD
---- ----- ----------- ----
<S> <C> <C> <C>
First Clearing Corporation 5.36%
A/C 2762-8943
Peter DePaul Irrevocable Family Trust #1
Andrea Naticchione
1750 Walton Road
Blue Bell, PA 19422-2303
B MLPF&S For the Sole Benefit of Its 7.69
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
2 MLPF&S For the Sole Benefit of Its 9.60
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
Cash Management Fund................... O Turtle & Co. 53.94
Sweep Account
P.O. Box 9427
Boston, MA 02209
Salomon Brothers Hong Kong Ltd. 11.23
Pension/Savings Plan
Three Exchange Square
21st Fl.
Hong Kong
A Northstar Advantage Funds 43.99
FBO Class A Shareholders
300 1st Stamford Place
Stamford, CT 06902
Dean Witter for the Benefit of 21.60
The Wells Fargo Bank Loan Collateral
P.O. Box 250
Church Street Station
New York, NY 10008-0250
B Northstar Advantage Funds 59.48
FBO Class B Shareholders
300 1st Stamford Place
Stamford, CT 06902
2 Northstar Advantage Funds 34.38
FBO Class C Shareholders
300 1st Stamford Place
Stamford, CT 06902
Vikram H. Kaji TTEE 20.26
Mercer OB/GYN M/P/P Plan
1900 Yardley Rd.
Yardley, PA 19067
Vikram H. Kaji TTEE 17.22
Kaji Family Trust
1900 Yardley Rd.
Yardley, PA 19067
2 Dean Witter For the Benefit of 6.15
Kedvill Inc.
P.O. Box 250
Church Street Station
New York, NY 1008-0250
</TABLE>
66
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND CLASS SHAREHOLDER HELD
---- ----- ----------- ----
<S> <C> <C> <C>
International Equity Fund.............. O Salomon Brothers Holding Co. Inc. 98.01%
Attn: Robert Szigeti
38th Fl.
7 World Trade Center
New York, NY 10048
A Salomon Smith Barney Inc. 30.42
00120638204
333 West 34th St. -- 3rd Fl.
New York, NY 10001
2 Salomon Smith Barney Inc. 5.58
00179402660
333 West 34th St. -- 3rd Fl.
New York, NY 10001
High Yield Bond Fund................... O State Street Bank & Trust TTEE 90.68
FBO Travelers Group 401K Savings
388 Greenwich St. 35th Fl.
New York, NY 10013
B MLPF&S For the Sole Benefit of Its 8.16
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
2 MLPF&S For the Sole Benefit of Its 10.32
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
Investors Value Fund................... A Centurion Trust Company FBO 9.14
Omnibus/Centurion Capital Mgmt.
2425 E. Camelback Rd. Ste. 530
Phoenix, AZ 85016-4200
B MLPF&S For the Sole Benefit of Its 5.26
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
Large Cap Growth....................... O Salomon Brothers Holding Co. Inc. 98.85
Attn: Robert Szigeti
38th Fl.
7 World Trade Center
New York, NY 10048
A MLPF&S For the Sole Benefit of Its 8.30
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
A Kristin K. McDonald 7.57
Exec. for Estate of
Kim M. Kinney
112 Saddle Ridge Road
Chapel Hill, NC 27514-1417
2 Salomon Smith Barney Inc. 9.58
00154665606
333 West 34th St. -- 3rd Fl.
New York, NY 10001
</TABLE>
67
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND CLASS SHAREHOLDER HELD
---- ----- ----------- ----
<S> <C> <C> <C>
Salomon Smith Barney Inc. 5.24%
00154665628
333 West 34th St. -- 3rd Fl.
New York, NY 10001
National Intermediate Muni Fund........ O Salomon Brothers Holding Co. Inc. 86.07
Attn: Robert Szigeti
38th Fl.
7 World Trade Center
New York, NY 10048
Longin P. Diakow 6.00
448 New Haven Avenue
Derby, CT 06418
A Citicorp Leasing Inc. 49.20
FBO Chesterfield Management Inc.
3300 West Foxridge Ln.
Muncie, IN 47804
Fiserv Securities, Inc. 9.15
FAO 70237853
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
B MLPF&S For the Sole Benefit of Its 29.95
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
Katherine G. Savidge 7.77
4619 Groveland
Royal Oak, MI 48073
2 Robert S. Weinberger 43.11
Patrice A. Apodaca TTEES
Weinberger Apodaca Family Trust
DTD 2/2/99
1407 High Bluff Dr.
Newport Beach, CA 92660
MLPF&S For the Sole Benefit of Its 7.30
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
Dain Rauscher Inc. FBO 5.70
Florence L. Moore TTEE
or Janis M. Drake Co-TTEE
Florence L. Moore Trust
U/A DTD 10/15/1990
17143 133rd Ave. NE Apt. 272
NY Muni Money Market................... O Les J. Lieberman 6.90
1 West 81st Street Apt. 16D
New York, NY 10024
Morton M. Bass 6.00
185 Great Neck Road
Great Neck, NY 11021
Sandra Atlas Bass 5.96
185 Great Neck Road
Great Neck, NY 11021
</TABLE>
68
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND CLASS SHAREHOLDER HELD
---- ----- ----------- ----
<S> <C> <C> <C>
A Donald S. Macleod 18.21%
33 Breezewood Common
E. Amherst, NY 14051
James S. Peterson 11.45
45 Sutton Pl. So. Apt. 5B
New York, NY 10022
Robert J. King 10.76
4963 Walnut Cove Dr.
Canandaigua, NY 14424
Eugene Tesoriero 9.16
Orlando Tesoriero JTWROS
35 Convent Rd.
Syosset, NY 11791
Marvin Finestone 7.51
194 Roby Lane
Rochester, NY 14618
Joseph Victor Lipschutz & 6.96
Madeline Lipschutz JTRWROS
32 Carling Drive
New Hyde Park, NY 11040-3721
Anthony F. Cirelli 6.77
Nine Mule Cirelli JTWROS
65 Underhill Avenue
Locust Valley, NY 11560
B Salomon Brothers Holding Co. Inc. 92.00
Attn: Robert Szigeti
38th Fl.
7 World Trade Center
New York, NY 10048
Philip Baltz 8.00
Christina Grdovic JTWROS
325 East 52nd St.
New York, NY 10022
2 Salomon Brothers Holding Co. Inc. 64.01
Attn: Robert Szigeti
38th Fl.
7 World Trade Center
New York, NY 10048
Timothy S. Harris 20.62
2 Buena Vista Ave.
Queensbury, NY 12804
Carmen V. Medici Jr. 15.36
Karen L. Medici JTWROS
23 Michaelangelo St.
Latham, NY 12110
Small Cap Growth Fund.................. O Anthony E. Viola & 16.07
Elaine M. Viola JTTEN
P.O. Box 261
Calverton, NY 11933
First Union Securities, Inc. 13.81
A/C 6712-5921
Morris Rotskoff TR
111 East Kilbourne Avenue
Milwaukee, WI 53202
Albert G. Flor 9.63
308 NW 1st Street
P.O. Box #472
New Richland, MN 56072-0472
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND CLASS SHAREHOLDER HELD
---- ----- ----------- ----
<S> <C> <C> <C>
BSDT Custodian for 8.80%
The IRA A/C of Rodney M. Wishnow
731 Hillside Dr.
Long Beach, CA 90815
Jenlibrilo Inc. 8.51
c/o Linda Rotskoff
12340 Shoreridge Dr. B
Maryland Hts., MO 63043
Franz Moos 8.17
77-39 81st St.
Glendale, NY 11385
BSDT Cust Ira FBO 5.62
Vicki L. Zimmerman
1917 Trout Valley Road
Champaign, IL 61821
Milton Honig 8.62
3240 Henry Hudson Pkwy.
Bronx, NY 10463
Strategic Bond Fund.................... O BSDT Custodian for 54.89
Walter G. Chandoha
HR 10 Ret. Plan
50 Springhill Road
Annandale, NJ 08801
Kathleen Pappas 15.38
36 Hilltop Road
Winstead, CT 06098
Salomon Smith Barney Inc. 11.18
00120380023
333 West 34th St. -- 3rd Floor
New York, NY 10001
Maurice Michiels 7.19
8 Navigator
Salem, SC 29676
B MLPF&S For the Sole Benefit of Its 11.26
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
2 MLPF&S For the Sole Benefit of Its 7.03
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
Balanced Fund.......................... O Henry Owen Inc. Employees Pension 42.20
c/o Bond Beebe
Attn: W. Caldwell
7315 Wisconsin Ave. Suite 20W
Bethesda, MD 20814
Peter S. Blumberg 11.10
Marilyn Rose Cane Co-Execs
Est. of Howard G. Blumberg
2133 Harbor Wy.
Weston, FL 33326
BSDT Ira R/O Cust FBO 8.09
Dean Betzios
147-30 46th Ave.
Flushing, NY 11535
</TABLE>
70
<PAGE>
<TABLE>
<CAPTION>
PERCENTAGE
FUND CLASS SHAREHOLDER HELD
---- ----- ----------- ----
<S> <C> <C> <C>
2 MLPF&S For the Sole Benefit of Its 8.65%
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
U.S. Government Fund................... O Salomon Brothers Holding Co. Inc. 89.29
Attn: Robert Szigeti
38th Fl.
7 World Trade Center
New York, NY 10048
A Fiserv Securities, Inc. 14.23
FAO 74593645
Attn: Mutual Funds Dept.
One Commerce Square
2005 Market Street, Suite 1200
Philadelphia, PA 19103
Salomon Smith Barney Inc. 13.12
00153A00299
333 West 34th St. -- 3rd Floor
New York, NY 10001
B MLPF&S For the Sole Benefit of Its 10.05
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
2 MLPF&S For the Sole Benefit of Its 9.50
Customers
Attn: Fund Administration
4800 Deer Lake Drive East, 3rd Fl.
Jacksonville, FL 32246-0000
</TABLE>
71
<PAGE>
INVESTMENT MANAGER
Each Fund retains SBAM to act as its investment manager. SBAM serves as the
investment manager to numerous individuals and institutions and other investment
companies. SBAM is an indirect wholly owned subsidiary of Salomon Smith Barney
Holdings Inc, which in turn is a wholly owned subsidiary of Citigroup Inc
('Citigroup').
The management contract between SBAM and each respective Fund provides that SBAM
shall manage the operations of the Fund, subject to policies 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
statements 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 connection with SBAM's service as investment manager to the Strategic Bond
Fund, Salomon Brothers Asset Management Limited ('SBAM Limited'), whose business
address is Victoria Plaza, 111 Buckingham Palace Road, London SW1W OSB, England,
provides certain advisory services to SBAM relating to currency transactions and
investments in non-dollar-denominated debt securities for the benefit of the
Strategic Bond Fund pursuant to a subadvisory consulting agreement. At no
additional expense to the Strategic Bond Fund, SBAM pays SBAM Limited, as full
compensation for all services provided under the subadvisory consulting
agreement, a fee in an amount equal to the fee payable to SBAM under its
management contract with respect to the Strategic Bond Fund multiplied by the
current value of the net assets of the portion of the assets of the Strategic
Bond Fund as SBAM shall allocate and divided by the current value of the net
assets of the Strategic Bond Fund. SBAM Limited is an indirect, wholly-owned
subsidiary of Citigroup. 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 SBAM AP as sub-adviser
to the Asia Growth Fund (the 'Asia Subadvisory Agreement'). Subject to the
supervision of SBAM, SBAM AP will have responsibility for the day-to-day
management of the Fund's portfolio. SBAM AP is compensated at no additional cost
to the Asia Growth Fund. Like SBAM, SBAM AP is a wholly-owned subsidiary of
Citigroup. 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 Advisers Act. Pursuant to a sub-administration agreement, SBAM
has retained SBAM Limited to provide certain administrative services to SBAM
relating to the Asia Growth Fund (the 'Subadministration Agreement').
Pursuant to a sub-advisory agreement, SBAM has retained Citibank, N.A.,
('Citibank') as sub-adviser to each of the International Equity Fund and the
Large Cap Growth Fund. Subject to the supervision of SBAM, Citibank will have
responsibility for the day-to-day management of each Fund's portfolio. Citibank
is compensated by SBAM at no additional cost to either Fund. Citibank is a
wholly-owned subsidiary of Citigroup.
Investment decisions for a particular Fund are made independently from those of
other funds or accounts managed by SBAM, SBAM AP, SBAM Limited or Citibank. 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
72
<PAGE>
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.
As compensation for its services, SBAM receives, on behalf of each Fund other
than the Investors Fund, as described below, a monthly management fee, at annual
rate based upon the average daily net assets of the Fund as follows: .20% for
the Cash Management Fund and the New York Municipal Money Market Fund; .50% for
the National Intermediate Municipal Fund; .60% for the U.S. Government Income
Fund; .75% for the High Yield Bond Fund and the Strategic Bond Fund; .55% for
the Balanced Fund, .80% for the Small Cap Growth Fund, .80% for the Asia Growth
Fund, .75% for the Large Cap Growth Fund and .90% for the International Equity
Fund. SBAM receives from the Capital Fund a management fee payable monthly, at
an annual rate of 1.00% of average daily net assets up to $100 million, .75% on
the next $100 million, .625% on the next $200 million and .50% on average daily
net assets in excess of $400 million. For the last three fiscal years ended
December 31, 1999, the SBAM has received the following amounts as management
fees and has reimbursed the Funds for expenses in the following amounts:
<TABLE>
<CAPTION>
EXPENSES
GROSS FEES WAIVER REIMBURSED
---------- ------ ----------
<S> <C> <C> <C>
ASIA GROWTH FUND
Year Ended December 31, 1997................................ $ 102,243 $102,243 $226,260
Year Ended December 31, 1998................................ $ 118,451 $118,451 $259,926
Year Ended December 31, 1999................................ $ 130,437 $130,437 $ 95,204
CAPITAL FUND
Year Ended December 31, 1997................................ $1,505,753 $ 0 $ 0
Year Ended December 31, 1998................................ $1,802,144 $ 0 $ 0
Year Ended December 31, 1999................................ $2,249,402 $ 0 $ 0
CASH MANAGEMENT FUND
Year Ended December 31, 1997................................ $ 60,655 $ 44,023 $ 0
Year Ended December 31, 1998................................ $ 83,335 $ 49,237 $ 0
Year Ended December 31, 1999................................ $ 101,230 $ 0 $ 0
HIGH YIELD BOND FUND
Year Ended December 31, 1997................................ $2,878,280 $371,931 $ 0
Year Ended December 31, 1998................................ $4,580,614 $486,909 $ 0
Year Ended December 31, 1999................................ $4,225,238 $ 70,864 $ 0
NATIONAL INTERMEDIATE MUNICIPAL FUND
Year Ended December 31, 1997................................ $ 64,592 $ 64,592 $ 71,682
Year Ended December 31, 1998................................ $ 76,542 $ 76,542 $ 64,152
Year Ended December 31, 1999................................ $ 77,615 $ 77,615 $145,888
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1997................................ $ 490,138 $ 0 $ 0
Year Ended December 31, 1998................................ $ 500,852 $ 0 $ 0
Year Ended December 31, 1999................................ $ 358,215 $ 0 $ 0
SMALL CAP GROWTH FUND
Year Ended December 31, 1998................................ $ 22,970 $ 22,970 $ 0
Year Ended December 31, 1999................................ $ 974,700 $ 41,511 $ 0
STRATEGIC BOND FUND
Year Ended December 31, 1997................................ $ 430,840 $167,097 $ 0
Year Ended December 31, 1998................................ $ 781,161 $198,435 $ 0
Year Ended December 31, 1999................................ $ 876,952 $232,842 $ 0
BALANCED FUND
Year Ended December 31, 1997................................ $ 585,841 $505,682 $ 0
Year Ended December 31, 1998................................ $1,082,153 $642,186 $ 0
Year Ended December 31, 1999................................ $1,016,948 $406,903 $ 0
U.S. GOVERNMENT INCOME FUND
Year Ended December 31, 1997................................ $ 77,327 $ 77,327 $ 73,598
Year Ended December 31, 1998................................ $ 117,976 $117,976 $ 36,217
Year Ended December 31, 1999................................ $ 185,197 $185,197 $ 69,013
</TABLE>
73
<PAGE>
The Investors Value 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.......................................... .650%
Next $150 million........................................... .550%
Next $250 million........................................... .525%
Next $250 million........................................... .500%
Over $1 billion............................................. .450%
</TABLE>
This fee may be increased or decreased based on the performance of the Investors
Value 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 Value 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 Value Fund for
the one year period preceding the end of the calendar quarter. If the amount by
which the Investors Value 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 Value 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
1/4 is of .10%, which would occur if the Investor Value Fund's performance
exceeds or is exceeded by the S&P 500 Index by ten or more percentage points.
The performance adjustment will be paid quarterly based on a rolling one year
period.
For purposes of determining the performance adjustment, the investment
performance of the Investors Value 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
Value 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 Value 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 April 30, 1997, the Investors Value Fund paid SBAM the following Base
Fee: based on the following annual percentages of the Fund's average daily net
assets .500% on the first $350 million, .400% on the next $150 million, .375% on
the next $250 million, .350% on the next $250 million and .300% on the amount in
excess of $1 billion. SBAM was paid $4,071,946, $3,800,265 and $3,360,670 in
management fees for the years ended December 31, 1999, 1998 and 1997,
respectively.
74
<PAGE>
The management contract for each of the Series Funds provides that it will
continue for an initial two year period and thereafter for successive annual
periods, and the management contract for each of the Investors Value Fund and
the Capital Fund provides that it will continue for successive annual periods;
provided that, with respect to each such contract, such continuance is
specifically approved at least annually: (a) by the vote of a majority of the
directors not parties to the management contract or 'interested persons' of such
parties, as defined in the 1940 Act, cast in person at a meeting called for the
specific purpose of voting on such management contract and (b) either by the
Board of Directors or a majority of the outstanding voting securities. The
management contract may be terminated on 60 days' written notice by either party
and will terminate automatically if assigned.
Under the terms of the management contract between each Fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
Fund (including, with respect to the Asia Growth Fund, the imposition of certain
Hong Kong tax liabilities on the Fund), unless such losses or damages are
attributable to the wilful misfeasance, bad faith or gross negligence on either
the part of SBAM or its affiliate or from reckless disregard by it of its
obligations and duties under the Management Contract ('disabling conduct'). In
addition, the Asia Growth Fund will indemnify SBAM and its affiliates and hold
each of them harmless against any losses or damages, including the imposition of
certain Hong Kong tax liabilities on the Fund, not resulting from disabling
conduct.
Rule 17j-1 under the 1940 Act requires all registered investment companies and
their investment advisers and principal underwriters to adopt written codes of
ethics and institute procedures designed to prevent 'access persons' (as defined
in Rule 17j-1) from engaging in any fraudulent, deceptive or manipulative
trading practices. The Board of Directors for the Series Fund, the Investors
Value Fund and the Capital Fund have each adopted a code of ethics (the 'Fund
Code') that incorporates personal trading policies and procedures applicable to
access persons of each Fund, which includes officers, directors and other
specified persons who may make, participate in or otherwise obtain information
concerning the purchase or sale of securities by the Fund. In addition, the Fund
Code attaches and incorporates personal trading policies and procedures
applicable to access persons of the investment manager and if applicable, any
sub-adviser to each Fund, which policies serve as such adviser's code of ethics
(the 'Adviser Code'). The Fund and Adviser Codes have been designed to address
potential conflict of interests that can arise in connection with the personal
trading activities of investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally permitted
to engage in personal securities transactions, provided that a transaction does
not involve securities that are being purchased or sold, are being considered
for purchase or sale, or are being recommended for purchase or sale by or for a
Fund. In addition, the Adviser Code contains specified prohibitions and blackout
periods for certain categories of securities and transactions, including a
prohibition on short-term trading and purchasing securities during an initial
public offering. The Adviser Code, with certain exceptions, also requires that
access persons obtain preclearance to engage in personal securities
transactions. Finally, the Fund and Adviser Codes require access persons to
report all personal securities transactions periodically.
75
<PAGE>
ADMINISTRATOR
SSB Citi Fund Management LLC ('SSB Citi'), located at 388 Greenwich Street, New
York, New York 10013, provides certain administrative services to each Fund
except the Small Cap Growth Fund for which SBAM (in its capacity as
administrator, together with SSB Citi, the 'Administrator'), provides certain
administrative services. Prior to January 1, 1999, such administrative services
were provided by Investors Bank and Trust Company ('IBT'). For the last three
fiscal years ended December 31, 1999, the Funds have paid the following amounts
as administration fees:
<TABLE>
<CAPTION>
ADMINISTRATION
FEE PAID
--------
<S> <C>
ASIA GROWTH FUND
Year Ended December 31, 1997................................ $ 60,000
Year Ended December 31, 1998................................ $ 59,860
CASH MANAGEMENT FUND
Year Ended December 31, 1997................................ $ 24,396
Year Ended December 31, 1998................................ $ 33,334
HIGH YIELD BOND FUND
Year Ended December 31, 1997................................ $307,163
Year Ended December 31, 1998................................ $486,909
NATIONAL INTERMEDIATE MUNICIPAL FUND
Year Ended December 31, 1997................................ $ 10,335
Year Ended December 31, 1998................................ $ 12,247
NEW YORK MUNICIPAL MONEY MARKET FUND
Year Ended December 31, 1997................................ $196,133
Year Ended December 31, 1998................................ $200,341
SMALL CAP GROWTH FUND
July 1, 1998 (commencement of operations) to
December 31, 1998........................................... $ 1,436
STRATEGIC BOND FUND
Year Ended December 31, 1997................................ $ 45,981
Year Ended December 31, 1998................................ $ 83,324
BALANCED FUND
Year Ended December 31, 1997................................ $ 85,240
Year Ended December 31, 1998................................ $157,404
U.S. GOVERNMENT INCOME FUND
Year Ended December 31, 1997................................ $ 10,312
Year Ended December 31, 1998................................ $ 15,730
</TABLE>
DISTRIBUTOR
CFBDS, located at 21 Milk Street, Boston, Massachusetts 02109, serves as each
Fund's distributor pursuant to a distribution contract. CFBDS is a wholly owned
subsidiary of Signature Financial Group, Inc.
Rule 12b-1 promulgated under the 1940 Act (the 'Rule') 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 and the New York
Municipal Money Market 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.
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, is
presented 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
76
<PAGE>
for the purpose of voting on the Plan. Each Plan may be terminated with respect
to a Fund or any class thereof at any time by vote of a majority of the
Directors who are not 'interested persons' and have no direct or indirect
financial interest in the operation of the Plan or in any related agreement or
by vote of a majority of the shares of a Fund or class, as the case may be. For
the year ended December 31, 1999, the aggregate amount spent by the various
classes of each Fund under the applicable Plan was as follows:
<TABLE>
<CAPTION>
AMOUNT
SPENT ON
AMOUNTS PRINTING AMOUNT
AMOUNTS PAID TO COMPENSATION AMOUNT AND SPENT ON TOTAL
PAID TO SELECTED TO SALES SPENT ON MAILING OF MISCELLANEOUS AMOUNT
UNDERWRITERS DEALERS PERSONNEL ADVERTISING PROSPECTUS EXPENSES SPENT
------------ ------- --------- ----------- ---------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
ASIA GROWTH FUND
Class A........................ 12,894 12,881 72,457 7,561 8,392 75,033 189,218
Class B........................ 112,075 15,326 108,905 13,067 13,287 113,607 376,267
Class 2........................ 31,025 19,542 78,593 10,041 10,399 81,071 230,671
CAPITAL FUND
Class A........................ 48,645 47,973 101,929 10,658 9,683 95,937 314,825
Class B........................ 657,513 108,970 269,373 24,653 25,444 217,939 1,303,892
Class 2........................ 146,769 43,870 91,089 9,823 9,575 91,123 392,249
HIGH YIELD BOND FUND
Class A........................ 347,493 345,976 315,306 30,758 37,364 284,970 1,361,867
Class B........................ 5,225,816 739,713 746,026 82,928 81,261 713,640 7,589,384
Class 2........................ 729,371 524,938 270,470 31,908 34,537 259,863 1,851,087
INTERNATIONAL EQUITY FUND
Class A........................ 767 761 16,906 2,604 519 27,583 49,140
Class B........................ 4,400 1,091 26,522 3,922 782 41,549 78,266
Class 2........................ 3,313 89 19,068 3,161 630 33,491 59,752
INVESTORS VALUE FUND
Class A........................ 114,789 103,673 96,484 9,666 11,129 94,071 429,812
Class B........................ 1,366,476 184,352 307,717 35,130 36,113 303,724 2,233,512
Class 2........................ 184,622 112,326 104,283 12,880 13,676 103,014 530,801
LARGE CAP FUND
Class A........................ 782 763 19,342 3,007 599 31,853 56,346
Class B........................ 5,478 1,387 30,702 4,648 926 49,238 92,379
Class 2........................ 1,767 44 12,570 2,083 415 22,064 38,943
NATIONAL INTERMEDIATE FUND
Class A........................ 11,097 11,177 56,615 3,937 7,312 46,310 136,448
Class B........................ 43,309 7,148 115,902 9,963 11,065 128,217 315,604
Class 2........................ 21,062 8,348 80,463 15,763 12,871 85,499 224,006
SMALL CAP GROWTH FUND
Class A........................ 165,091 165,663 92,565 10,550 9,781 104,540 548,190
Class B........................ 600,673 120,452 223,005 27,314 18,875 287,675 1,277,994
Class 2........................ 68,190 33,780 98,227 11,124 12,221 100,136 323,678
STRATEGIC BOND FUND
Class A........................ 53,329 53,215 102,425 11,319 13,611 89,791 323,690
Class B........................ 1,067,295 154,089 301,386 33,716 33,714 298,331 1,888,531
Class 2........................ 204,988 163,854 65,948 7,351 7,862 67,162 517,165
BALANCED FUND
Class A........................ 105,945 105,892 141,888 15,177 18,151 131,889 518,942
Class B........................ 1,981,169 259,931 332,870 39,288 39,023 339,889 2,992,170
Class 2........................ 274,723 183,734 104,408 11,816 13,626 100,556 688,863
U.S. GOVERNMENT INCOME FUND
Class A........................ 16,797 16,985 83,243 13,983 11,971 84,842 227,821
Class B........................ 336,297 35,542 183,676 16,621 20,008 176,565 768,709
Class 2........................ 42,015 19,733 28,992 2,712 3,122 30,235 126,809
TOTAL COMMSSIONS PAID.......... 13,985,975 3,603,218 4,699,355 529,132 527,944 4,711,407 28,057,031
</TABLE>
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.
77
<PAGE>
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 the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a Fund may not
necessarily be paying the lowest price available. The purchase by a Fund of
Participations or Assignments may be pursuant to privately negotiated
transactions pursuant to which a Fund may be required to pay fees to the seller
or forego a portion of payments in respect of the Participation Agreement.
Notwithstanding the above, in compliance with Section 28(e) of the Securities
Exchange Act of 1934, the investment manager may select brokers who charge a
commission in excess of that charged by other brokers, if the investment manager
determines in good faith that the commission to be charged is reasonable in
relation to the brokerage and research services provided to the investment
manager by such brokers. Research services generally consist of research or
statistical reports or oral advice from brokers and dealers regarding particular
companies, industries or general economic conditions. The investment manager may
also have arrangements with brokers pursuant to which such brokers provide
research services to the investment manager in exchange for a certain volume of
brokerage transactions to be executed by such broker. While the payment of
higher commissions increases a Fund's costs, the investment manager does not
believe that the receipt of such brokerage and research services significantly
reduces its expenses as a Fund's investment manager. Arrangements for the
receipt of research services from brokers may create conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for a Fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts which the
investment manager manages may be used by the investment manager in servicing a
Fund. Not all of these research services are used by the investment manager in
managing any particular account, including the Funds.
Under the 1940 Act, 'affiliated persons' of 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,
each Fund may purchase securities from underwriting syndicates of which the
investment manager or any of its affiliates as defined in the 1940 Act, is a
member under certain conditions, in accordance with Rule 10f-3 promulgated under
the 1940 Act.
Each Fund contemplates that, consistent with the policy of obtaining the best
net results, brokerage transactions may be conducted through 'affiliated
broker/dealers,' as defined in the 1940 Act. Each Company's Board of Directors
has adopted procedures in accordance with Rule 17e-1 promulgated under the 1940
Act to ensure that all brokerage commissions paid to such affiliates are
reasonable and fair in the context of the market in which such affiliates
operate. Any such compensation will be paid in accordance with applicable SEC
regulations. For the fiscal years ended December 31, 1997, 1998 and 1999 the
Funds paid aggregate brokerage commissions, including affiliated brokerage
commissions, as follows:
78
<PAGE>
<TABLE>
<CAPTION>
BROKERAGE
AGGREGATE COMMISSIONS PAID
BROKERAGE BY THE FUNDS TO
COMMISSIONS PAID SALOMON SMITH BARNEY
---------------- --------------------
<S> <C> <C>
CAPITAL FUND
Year Ended December 31, 1997............. $ 730,485 $34,728***
Year Ended December 31, 1998............. $ 821,510 $28,068
Year Ended December 31, 1999............. $ 434,000 $12,018
INVESTORS VALUE FUND
Year Ended December 31, 1997............. $ 923,728 $68,538'D'
Year Ended December 31, 1998............. $1,485,163 $90,618
Year Ended December 31, 1999............. $1,393,000 $31,716
BALANCED FUND
Year Ended December 31, 1997............. $ 91,615 $ 300**
Year Ended December 31, 1998............. $ 66,681 $ 3,180
Year Ended December 31, 1999............. $ 72,439 $ 2,400
</TABLE>
- ---------
** Represents 0.3% of total brokerage commissions paid by the Balanced Fund,
and CFBDS executed 0.5% of the aggregate dollar amount of transactions
involving commissions during the fiscal year ended 1997, respectively.
*** Represents 4.8% of total brokerage commissions paid by the Capital Fund, and
CFBDS executed 5.4% of the aggregate dollar amount of transactions involving
commissions during the fiscal year ended 1997, respectively.
'D' Represents 7.4% of total brokerage commissions paid by the Investors Value
Fund, and CFBDS executed 7.6% of the aggregate dollar amount of
transactions involving commissions during the fiscal year ended 1997,
respectively.
NET ASSET VALUE
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. 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 and the New York Municipal Money Market 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, Martin Luther
King, Jr. 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.
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 closing price of such securities on their respective exchanges, except
that if the investment manager is of the opinion that such price would result in
an inappropriate value for a security, including as a result of an occurrence
subsequent to the time a value was so established then the fair value of those
securities may 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.
79
<PAGE>
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, each of the Cash Management Fund and the New York
Municipal Money Market 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 promulgated under the 1940 Act. While this
method provides certainty in valuation, it may result in periods during which
value, as determined by amortized cost, is higher or lower than the price the
Fund would receive if it sold the instrument. During such periods the yield to
investors in the Fund may differ somewhat from that obtained in a similar
company which uses market values for all its portfolio securities. For example,
if the use of amortized cost resulted in a lower (higher) aggregate portfolio
value on a particular day, a prospective investor in the Fund would be able to
obtain a somewhat higher (lower) yield than would result from investment in such
a similar company, and existing investors would receive less (more) investment
income. The purpose of using the amortized cost method of calculation is to
attempt to maintain a stable net asset value per share of $1.00.
The Board of Directors has established procedures reasonably designed, taking
into account current market conditions and the investment objective of the Cash
Management Fund and the New York Municipal Money Market Fund, 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 net asset value of the Cash
Management Fund or the New York Municipal Money Market Fund, as applicable,
based upon available market quotations or market equivalents and $1.00 per share
based on amortized cost, the Board of Directors will promptly consider what
action, if any, should be taken. The Board of Directors will also take such
action as they deem appropriate to eliminate or to reduce to the extent
reasonably practicable any material dilution or other unfair result which might
arise from differences between the two. Such action may include redemption in
kind, selling instruments prior to maturity to realize capital gains or losses
or to shorten the average maturity, withholding dividends, or utilizing a net
asset value per share as determined by using available market quotations.
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ADDITIONAL PURCHASE INFORMATION
TIMING OF PURCHASE ORDERS
Orders for the purchase of Fund shares (other than the Cash Management Fund and
the New York Municipal Money Market Fund) received by selected dealers by the
close of regular trading on the NYSE (currently, 4:00 p.m., New York time) on
any day that a Fund calculates its net asset value and either transmitted to
Salomon Smith Barney by the close of its business day (normally 5:00 p.m., New
York time) or transmitted by dealers to PFPC Global Investors Services, Inc.
('PFPC' or the 'Transfer Agent'), 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 and the New York Municipal Money Market 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 'Buying Shares and Exchanging Shares' in the Prospectus. It is the dealers'
responsibility to ensure that orders are transmitted on a timely basis to
Salomon Smith Barney or PFPC 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 'How to Open an Account and Purchase Shares' above
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.
CLASS A SHARES
Volume Discounts. The schedule of sales charges on Class A shares described in
each 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 Internal Revenue Code of 1986, as amended (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 Advisers Act) 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) 446-1013.
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 in the Prospectus 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
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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 a 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.
Sales Charge Reallowance. Purchases of Class A shares of a fund may be made at
each fund's respective net asset value per share plus the applicable sales
charge set forth in the Prospectus. Members of the selling group typically
receive up to 90% of the sales charge. Members of the selling group may from
time to time and for a limited period, receive 100% of the applicable sales
charge for the purchase of a fund's Class A shares.
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 2 shares and
shares purchased or held in the Cash Management Fund and/or the New York
Municipal Money Market Fund, and including the purchase being made, of any
purchaser is $50,000 or more. The reduced sales charge is subject to
confirmation of the shareholder's holdings through a check of appropriate
records. A Fund reserves the right to terminate or amend the combined right of
accumulation at any time after written notice to shareholders. For further
information regarding the combined right of accumulation, shareholders should
call (800) 446-1013.
Letter of Intent. For the purposes of determining which sales charge level set
forth in the Prospectus 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 or the New York
Municipal Money Market 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 in the Prospectus.
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.
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DISTRIBUTION FEES
Each class of each Fund (other than the Cash Management Fund and the New York
Municipal Money Market 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 2 Plan,' collectively, the 'Plans') adopted
pursuant to Rule 12b-1 promulgated under the 1940 Act, to pay Salomon Smith
Barney an annual service fee with respect to Class A, Class B and Class 2 shares
of the applicable Fund (other than the Cash Management Fund and the New York
Municipal Money Market Fund) at the rate of .25% of the value of the average
daily net assets of the respective class. Salomon Smith Barney is also paid an
annual distribution fee with respect to Class B shares of each Fund (other than
the Cash Management Fund and the New York Municipal Money Market Fund) at the
rate of .75% of the value of the average daily net assets of the respective
class. Salomon Smith Barney is also paid an annual distribution fee at the rate
of .50% and .75% of the value of the average daily net assets of the Bond Fund's
Class 2 shares and the Equity Fund's Class 2 shares, respectively. For this
purpose, the Balanced, Small Cap Growth, Asia Growth, Large Cap Growth,
International Equity, Investors Value and Capital Funds shall constitute 'Equity
Funds,' while the National Intermediate Municipal, U.S. Government Income, High
Yield Bond and Strategic Bond Funds shall constitute 'Bond Funds.' 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 Smith
Barney to selected securities dealers. The distribution fees are paid to Salomon
Smith Barney to compensate for activities primarily intended to result in the
sale of Class B and Class 2 shares.
The expenses incurred in connection with these activities include: costs of
printing and distributing the Funds' Prospectus, SAI and sales literature to
prospective investors; an allocation of overhead and other Salomon Smith Barney
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 Salomon Smith Barney'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 Salomon Smith Barney. Under the Plans, Salomon Smith Barney 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, CFBDS will pay broker-dealers at the time of
sale a commission of 4% of the purchase amount and a quarterly trail fee at an
annual rate of .25% which will begin to accrue immediately after settlement.
With respect to Class 2 shares of the Bond Funds, CFBDS will pay broker-dealers
at the time of sale a commission of 1.75% of the purchase amount and a quarterly
trail fee at an annual rate of .75% which will begin to accrue one year after
settlement. With respect to Class 2 shares of the Equity Funds, CFBDS will pay
broker-dealers at the time of sale a commission of 2.00% of the purchase amount
and a quarterly trail fee at an annual rate of 1.00% which will begin to accrue
one year after settlement. For this purpose, the Balanced, Small Cap Growth,
Asia Growth, Large Cap Growth, International Equity, Investors Value and Capital
Funds shall constitute 'Equity Funds,' while the National Intermediate
Municipal, U.S. Government Income, High Yield Bond and Strategic Bond Funds
shall constitute 'Bond Funds.' In addition, with respect to Class A shares,
CFBDS will pay broker-dealers at the time of sale a commission and a quarterly
trail commission at an annual rate of .25% which will begin to accrue
immediately after settlement.
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 Salomon Smith Barney and dealers in connection with the sale of shares will
be paid, in the case of Class A and Class 2 shares, from the proceeds of front
end sales charges
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and the ongoing service fees; and in the cases of Class B and Class 2 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 shares.
The Plans provide that Salomon Smith Barney 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 Smith Barney may waive receipt of fees under a
Plan while retaining the ability to be paid under such Plan thereafter. The fees
payable to Salomon Smith Barney under the Plans and payments by Salomon Smith
Barney to selected securities dealers are payable without regard to actual
expenses incurred.
Salomon Smith Barney 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, Salomon Smith Barney may also, from time to time, at
its expense or as an expense for which it may be compensated under a
distribution plan, if applicable, pay a bonus or other consideration or
incentives to dealers who sell a minimum dollar amount of shares of the Funds
during a specified period of time. In some instances, these incentives may be
offered only to certain dealers who have sold or may sell significant amounts of
shares. Any such bonus or incentive programs will not change the price paid by
investors for the purchase of the applicable Fund's shares or the amount that
any particular Fund will receive as proceeds from such sales. Dealers may not
use sales of the Funds' shares to qualify for any incentives to the extent that
such incentives may be prohibited by the laws of any state. Incentive payments
will be provided for out of the front end sales charges and CDSCs retained by
Salomon Smith Barney, any applicable Plan payments or Salomon Smith Barney's
other resources. Other than Plan payments, the Funds do not bear distribution
expenses.
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, certain Funds have 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.
Under the 1940 Act, a Fund may suspend the right of redemption or postpone the
date of payment upon redemption for any period during which the NYSE is closed,
other than customary weekend and holiday closings, or during which trading on
said Exchange 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.)
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,
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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; and (b) diversify its holdings so that, at the end of each quarter
of each taxable year: (i) at least 50% of the market value of a Fund's assets is
represented by cash, cash items, U.S. government securities, securities of other
RICs and other securities with such other securities limited, in respect of any
one issuer, to an amount not greater than 5% of the value of a Fund's assets and
10% of the outstanding voting securities of such issuer; and (ii) not more than
25% of the value of its assets is invested in the securities of any one issuer
(other than U.S. government securities or the securities of other RICs).
As a RIC, a Fund will not be subject to federal income tax on its 'net
investment income' (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends
paid) and 'net capital gain' (the excess of the Fund's net long-term capital
gain over net short-term capital loss), if any, that it distributes in each
taxable year to its shareholders, provided that it distributes 90% of its net
investment income for such taxable year, and with respect to the New York
Municipal Money Market Fund and the National Intermediate Municipal Fund, at
least 90% of its net tax-exempt income for such taxable year. However, 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
expects to designate amounts retained as undistributed net capital gain in a
notice to its shareholders who (i) will be required to include in income for
United States federal income tax purposes, as long-term capital gain, their
proportionate shares of the undistributed amount, (ii) will be entitled to
credit their proportionate shares of the 35% tax paid by a Fund on the
undistributed amount against their federal income tax liabilities and to claim
refunds to the extent such credits exceed their liabilities and (iii) will be
entitled to increase their tax basis, for federal income tax purposes, in their
shares by an amount equal to 65% of the amount of undistributed net capital gain
included 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 its capital gain
net income for the one-year period ending, as a general rule, on October 31 of
each year; and (c) 100% of the undistributed income and gains from the preceding
calendar year (if any) pursuant to the calculations in (a) and (b). For this
purpose, any income or gain retained by a Fund that is subject to corporate tax
will be considered to have been distributed by year-end.
All dividends and distributions to shareholders of a Fund of net investment
income will be taxable to shareholders whether paid in cash or reinvested in
additional shares. For federal income tax purposes, distributions of net
investment income which includes the excess of the Fund's net realized
short-term capital gains over net realized long-term capital losses, are taxable
to shareholders as ordinary income. A portion of such dividends may qualify for
the dividends received deduction available to corporations.
Distributions of net capital gain designated by a Fund as 'capital gain
dividends' will be taxable as long-term capital gain, whether paid in cash or
additional shares, regardless of how long the shares have been held by such
shareholders, and such distributions will not be eligible for the dividends
received deduction. In general, the maximum federal income tax rate imposed on
long-term capital gain of individuals with respect to capital assets held for
more than one year but less
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than 18 months is 28% and with respect to capital assets held for more than 18
months is 20%. The maximum federal income tax rate imposed on individuals with
respect to ordinary income (and short-term capital gain, which currently is
taxed at the same rates as ordinary income) will be 39.6%. With respect to
corporate taxpayers, long-term capital gain currently is taxed at the same
federal income tax rates as ordinary income and short-term capital gain.
Investors should consider the tax implications of buying shares shortly before
the record date of a distribution because distributions will be taxable even
though the net asset value of shares of a Fund is reduced by the distribution.
Funds investing in foreign securities or currencies may be required to pay
withholding or other taxes to foreign governments on dividends and interest. The
investment yield of a Fund investing in foreign securities or currencies will be
reduced by these foreign taxes. Shareholders will bear the cost of any foreign
taxes but may not be able to claim a foreign tax credit or deduction for these
foreign taxes. In addition, a Fund investing in securities of passive foreign
investment companies may be subject to 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.
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.
Certain Funds may engage in hedging or derivatives transactions involving
foreign currencies, forward contracts, options and futures contracts (including
options, futures and forward contracts on foreign currencies) and short sales.
See 'Additional Information on Portfolio Instruments and Investment
Policies -- Derivatives.' Such transactions will be subject to special
provisions of the Code that, among other things, may affect the character of
gains and losses realized by a Fund (that is, may affect whether gains or losses
are ordinary or capital), accelerate recognition of income of a Fund and defer
recognition of certain of a Fund's losses. These rules could therefore affect
the character, amount and timing of distributions to shareholders. In addition,
these provisions (1) will require a Fund to 'mark-to-market' certain types of
positions in its portfolio
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(that is, treat them as if they were closed out) and (2) may cause a Fund to
recognize income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the distribution requirement for
RIC qualification and avoid both the corporate level tax and the 4% excise tax.
Each Fund intends to monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when it
acquires any option, futures contract, forward contract or hedged investment in
order to mitigate the effect of these rules.
A Fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules
and to prevent disqualification of the Fund as a RIC under subchapter M of the
Code.
A Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-kind
bonds or in obligations such as investments in PIK bonds or in obligations such
as certain Brady Bonds or zero-coupon securities having original issue discount
(i.e., an amount equal to the excess of the stated redemption price of the
security at maturity over its issue price), or market discount (i.e., an amount
equal to the excess of the stated redemption price of the security over the
basis of such bond immediately after it was acquired) if the Fund elects to
accrue market discount on a current basis. In addition, income may continue to
accrue for federal income tax purposes with respect to a non-performing
investment. Any such income would be treated as income earned by a Fund and
therefore would be subject to the distribution requirements of the Code. Because
such income may not be matched by a corresponding cash distribution to a Fund,
such Fund may be required to borrow money or dispose of other securities to be
able to make distributions to its investors. In addition, if an election is not
made to currently accrue market discount with respect to a market discount bond,
all or a portion of any deduction for any interest expense incurred to purchase
or hold such bond may be deferred until such bond is sold or otherwise disposed.
A Fund may be subject to certain taxes, including without limitation, taxes
imposed by foreign countries with respect to its income and capital gains. If a
Fund qualifies as a RIC, certain distribution requirements are satisfied and
more than 50% of the value of the Fund's total assets at the close of any
taxable year consists of stock or securities of foreign corporations, which for
this purpose may include obligations of foreign governmental issuers, the Fund
may elect, for United States federal income tax purposes, to treat any foreign
country's income or withholding taxes paid by the Fund that can be treated as
income taxes under the United States income tax principles, as paid by its
shareholders.
If the Fund purchases shares in a 'passive foreign investment company' (a
'PFIC'), the Fund may be subject to U.S. federal income tax on a portion of any
'excess distribution' or gain from the disposition of such shares even if such
income is distributed as a taxable dividend by the Fund to its shareholders.
Additional charges in the nature of interest may be imposed on the Fund in
respect of deferred taxes arising from such distributions or gains. If the Fund
were to invest in a PFIC and elected to treat the PFIC as a 'qualified electing
fund' under the Code (a 'QEF'), in lieu of the foregoing requirements, the Fund
would be required to include in income each year a portion of the ordinary
earnings and net capital gain of the qualified electing fund, even if not
distributed to the Fund. Alternatively, under recently enacted legislation, the
Fund can elect to mark-to-market at the end of each taxable year its shares in a
PFIC; in this case, the Fund would recognize as ordinary income any increase in
the value of such shares, and as ordinary loss any decrease in such value to the
extent it did not exceed prior increases included in income. Under either
election, the Fund might be required to recognize in a year income in excess of
its distributions from PFICs and its proceeds from dispositions of PFIC stock
during that year, and such income would nevertheless be subject to the 90% and
excise tax distribution requirements.
TAXATION OF U.S. SHAREHOLDERS
The Prospectus describes each Fund's policy with respect to distribution of net
investment income and any net capital gain. 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
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of the forthcoming distribution, those shareholders 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. In the case of individuals, long-term
capital gain on securities held longer than one year, but not longer than 18
months, are taxed at a maximum rate of 28% and long-term gain on securities held
longer than 18 months are taxed at a maximum rate of 20%. Not later than 60 days
after the close of its taxable year the Fund will provide its shareholders with
a written notice designating the amounts of any ordinary income dividends or
capital gain dividends as well as the portions of its capital gain dividends
that will be eligible for the 28% and 20% rates. In the case of corporate
taxpayers, long-term capital gain is taxed at the same federal income tax rates
as ordinary income and short-term capital gain, the maximum 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 (i) 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 or
(ii) disallowed to the extent of any exempt interest dividends received by the
shareholder with respect to such shares.
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 and
the New York Municipal Money Market Fund) will qualify for the federal dividends
received deduction generally available to corporations. The dividends received
deduction for corporate shareholders may be disallowed or 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) during the 90 day period beginning on the date which is 45 days before
the date on which such share becomes ex-dividend with respect to such dividend
(during the 180 day period beginning 90 days before such date in the case of
certain preferred stock) or (3) subject to certain forms of hedges or short
sales. Moreover, the dividends received deduction may be disallowed or reduced
(1) if the corporate shareholder fails to satisfy the foregoing requirements
with respect to its shares of a Fund or (2) by application of Code. 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.
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 of 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 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.
THE NEW YORK MUNICIPAL MONEY MARKET FUND AND THE NATIONAL INTERMEDIATE MUNICIPAL
FUND
The New York Municipal Money Market 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
88
<PAGE>
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 Money Market 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 Money Market Fund, however,
are not excluded in determining New York State or New York City franchise taxes
on corporations and financial institutions. Further, gain from a sale or
redemption of shares of the New York Municipal Money Market Fund and the
National Intermediate Municipal Fund will be taxable to the shareholders as
capital gain even though the increase in value of such shares is attributable to
tax-exempt income. Under the Code, interest on indebtedness incurred or
continued to purchase or carry shares of the New York Municipal Money Market
Fund and the National Intermediate Municipal 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.
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
Money Market Fund and the National Intermediate Municipal Fund.
Because the New York Municipal Money Market 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. A portion may be subject to the alternative minimum tax,
however. Federal tax law imposes an alternative minimum tax with respect to both
corporations and individuals based on certain items of tax preference. Interest
on certain municipal obligations, such as bonds issued to make loans for housing
purposes or to private entities (but not to certain tax-exempt organizations
such as universities and non-profit hospitals) is included as an item of tax
preference in determining the amount of a taxpayer's alternative minimum taxable
income. To the extent the New York Municipal Money Market 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 Money
Market Fund and the National Intermediate Municipal Fund will annually supply
shareholders with a report indicating the percentage of Fund income attributable
to municipal obligations which may be 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 Money Market Fund or the National Intermediate Municipal
Fund, is included in calculating ACE.
Taxpayers that may be subject to the alternative minimum tax should consult
their tax advisers before investing in the New York Municipal Money Market Fund
or the National Intermediate Municipal Fund.
Shares of the New York Municipal Money Market 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
89
<PAGE>
individual retirement accounts ('IRAs'), 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 Money Market Fund and the National
Intermediate Municipal Fund may not be an appropriate investment for entities
that are 'substantial users' of facilities financed by private activity bonds or
'related persons' thereof. A 'substantial user' is defined under U.S. Treasury
Regulations to include a non-exempt person who regularly uses a part of such
facilities in his trade or business and, unless such facility, or part thereof,
is constructed, reconstructed or acquired specifically for the non-exempt
person, whose gross revenue derived with respect to the facilities financed by
the issuance of bonds is more than 5% of the total revenue derived by all users
of such facilities. 'Related persons' include certain related natural persons,
affiliated corporations, partnerships and their partners and S Corporations and
their shareholders. The foregoing is not a complete statement of all of the
provisions of the Code covering the definitions of 'substantial user' and
'related person.' For additional information, investors should consult their tax
advisers before investing in the New York Municipal Money Market 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 Money Market 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.
STATE AND LOCAL TAX MATTERS
Most states provide that a RIC 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 RIC to pass through to its shareholders
the state and local income tax exemptions available to direct owners of certain
types of U.S. government securities unless the regulated investment company
holds at least a required amount of U.S. government securities. Accordingly, for
residents of these states, distributions derived from a Fund's investment in
certain types of U.S. government securities may not be entitled to the
exemptions from state and local income taxes that would be available if the
shareholders had purchased U.S. government securities directly. Shareholders'
dividends attributable to a Fund's income from repurchase agreements generally
are subject to state and local income taxes, although states and regulations
vary in their treatment of such income. The exemption from state and local
income taxes does not preclude states from asserting other taxes on the
ownership of U.S. government securities. To the extent that a Fund invests to a
substantial degree in U.S. government securities which are subject to favorable
state and local tax treatment, shareholders of such Fund will be notified as to
the extent to which distributions from the Fund are attributable to interest on
such securities.
Hong Kong Tax Matters. The Asia Growth Fund would be subject to Hong Kong
profits tax, which is currently charged at the rate of 16.5% for corporations
and 15% for individuals, if, by virtue of the fact that SBAM AP is located in
Hong Kong, (a) the Fund or its agents were deemed to carry on a trade,
profession or business in Hong Kong and (b) profits from that trade, profession
or business were to arise in or be derived from Hong Kong. Hong Kong profits tax
will
90
<PAGE>
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.
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.
PERFORMANCE INFORMATION AND DATA
From time to time, a Fund may advertise its 'yield,' 'tax-equivalent yield,'
'effective yield,' 'distribution rate' 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 the Funds' Class A shares and Class 2 Shares (except
for the Cash Management Fund and the New York Municipal Money Market Fund, which
have no sales charge) include the maximum initial sales charge and for Class B
and Class 2 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.
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 sales
charge for the Class A shares or Class 2 shares (except for the Cash Management
Fund and the New York Municipal Money Market Fund, which have no sales charge)
or any applicable CDSC for Class B and Class 2 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.
From time to time the Cash Management Fund and the New York Municipal Money
Market Fund may make available information as to its 'yield' and 'effective
yield.' The 'yield' of the Cash Management Fund and the New York Municipal Money
Market Fund refers to the income
91
<PAGE>
generated by an investment in each such 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 in shares of the same class. The effective yield will be slightly
higher than the yield because of the compounding effect of this assumed
reinvestment.
Distribution rate differs from yield in that it is calculated by dividing the
annualization of the most recent month's distribution by the maximum offering
price at the end of the month.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of Fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such as
the S&P 500 Index or other industry or financial publications, including, but
not limited to, 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 yield of
the Cash Management Fund and the New York Municipal Money Market Fund may also
be compared to yields set forth in the weekly statistical release H.15(519) or
the monthly statistical release designated G.13(415) published by the Board of
Governors of the Federal Reserve System.
Yield and total return figures are calculated separately for Class A, Class B,
Class 2 and Class O shares of a Fund. In the examples below, 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.
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.
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:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-5 or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
In calculating the ending redeemable value, for Class A and Class 2 shares, the
current maximum front end sales charge (as a percentage of the offering price)
is deducted from the initial $1,000 payment, and for Class B and Class 2 shares,
the applicable CDSC imposed on redemption is deducted. The schedules of front
end sales charges and CDSCs due upon redemption are described under 'Choosing a
Class of Shares to Buy' in the Prospectus.
92
<PAGE>
The Cash Management Fund, New York Municipal Money Market Fund, Investors Value
Fund and Capital Fund implemented the Multiple Pricing System by reclassifying
the then existing shares of each such Fund as Class O shares of each such Fund.
This reclassification was effected in such a manner so that the shares of each
of the Cash Management Fund and the Investors Value Fund outstanding at
December 31, 1994, and shares of the New York Municipal Money Market Fund and
the Capital Fund outstanding at October 31, 1996, would be subject to identical
distribution and service fees both before and after the reclassification.
Effective September 14, 1998, Class C shares of each Fund were renamed Class 2
shares.
The percentages shown in the tables below reflect front end sales charges and
CDSCs, if any, currently payable by each class of shares under the Multiple
Pricing System, and are based on the fees and expenses actually paid by each
such Fund for the periods presented. The distribution and service fees currently
payable by each class of shares under the Multiple Pricing System are described
in the Prospectus.
The following tables set forth the average annual total returns for each class
of shares of each of the Asia Growth Fund, Capital Fund, High Yield Bond Fund,
Investors Value Fund, National Intermediate Fund, Small Cap Growth Fund,
Strategic Bond Fund, Balanced Fund, U.S. Government Income Fund, International
Equity Fund and Large Cap Growth Fund (in each case, after management fee waiver
and reimbursement of certain expenses), for certain periods of time ending
December 31, 1999 and reflect the effects of the maximum applicable front end
sales charges and any applicable CDSCs payable by an investor under the Multiple
Pricing System.
ASIA GROWTH FUND
<TABLE>
<CAPTION>
FROM MAY 6, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................... 6.30% 83.62%
Class B................................................... 6.55% 88.30%
Class 2................................................... 6.98% 90.51%
Class O................................................... 8.29% 95.11%
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
FROM NOVEMBER 1, 1996
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B
AND 2) THROUGH YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Class A.............. 23.59% 16.03% N/A N/A
Class B.............. 24.40% 17.22% N/A N/A
Class 2.............. 24.59% 19.92% N/A N/A
Class O.............. N/A 23.44% 28.36% 16.11%
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 9.03% 1.98%
Class B................................................ 9.04% 1.45%
Class 2................................................ 9.15% 4.56%
Class O................................................ 10.36% 7.33%
</TABLE>
93
<PAGE>
INVESTORS VALUE FUND
<TABLE>
<CAPTION>
FROM JANUARY 3, 1995
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B
AND 2) THROUGH YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Class A.............. 21.93% 5.08% N/A N/A
Class B.............. 22.28% 5.90% N/A N/A
Class 2.............. 22.26% 8.64% N/A N/A
Class O.............. N/A 11.73% 23.59% 15.59%
</TABLE>
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 4.15% -4.58%
Class B................................................ 3.98% -5.29%
Class 2................................................ 4.16% -2.29%
Class O................................................ 5.38% 0.51%
</TABLE>
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
FROM JULY 1, 1998
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A............................................... 43.55% 48.43%
Class B............................................... 45.92% 51.15%
Class 2............................................... 47.30% 53.67%
Class O............................................... 49.65% 57.90%
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 8.66% -0.04%
Class B................................................ 8.61% -0.63%
Class 2................................................ 8.75% 2.52%
Class O................................................ 10.01% 5.26%
</TABLE>
BALANCED FUND
<TABLE>
<CAPTION>
FROM SEPTEMBER 11, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A............................................... 10.79% -2.72%
Class B............................................... 11.13% -2.46%
Class 2............................................... 11.22% 0.44%
Class O............................................... 12.70% 3.42%
</TABLE>
94
<PAGE>
U.S. GOVERNMENT INCOME FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 5.09% -3.28%
Class B................................................ 5.04% -4.05%
Class 2................................................ 5.18% -0.99%
Class O................................................ 6.43% 1.76%
</TABLE>
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FROM OCTOBER 25, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
-----------------
<S> <C>
Class A..................................................... 17.72%
Class B..................................................... 19.70%
Class 2..................................................... 22.37%
Class O..................................................... 24.90%
</TABLE>
LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
FROM OCTOBER 25, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
-----------------
<S> <C>
Class A..................................................... 5.37%
Class B..................................................... 6.70%
Class 2..................................................... 9.50%
Class O..................................................... 11.80%
</TABLE>
As described in the Prospectus, each of the Funds, except the Investors Value
Fund and the Capital Fund, has been and still is subject to certain fee waivers
and expense reimbursements. Absent such waiver and reimbursement, the returns
shown above for such Funds would be lower.
The performance data quoted represents past performance; investment returns and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
AGGREGATE TOTAL RETURN
The 'aggregate total return' figures for each class of a Fund, as described
herein, represent the cumulative change in the value of an investment in Fund
shares of such class for the specified period and are computed by the following
formula:
AGGREGATE TOTAL RETURN = ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The following tables set forth the aggregate total return of each class of
shares of the Asia Growth Fund, Capital Fund, High Yield Bond Fund, Investors
Value Fund, National Intermediate Municipal Fund, Small Cap Growth Fund,
Strategic Growth Fund, Balanced Fund, U.S. Government Income Fund, International
Equity Fund and Large Cap Growth Fund (after management fee waiver and
reimbursement of certain expenses) and Class A, B and 2 shares of the Capital
Fund and Investors Value Fund for certain periods of time ending December 31,
1999
95
<PAGE>
and reflect the effects of the maximum applicable front end sales charges and
any applicable CDSCs payable by an investor under the Multiple Pricing System.
ASIA GROWTH FUND
<TABLE>
<CAPTION>
FROM MAY 6, 1996
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................... 25.01% 83.62%
Class B................................................... 26.09% 88.30%
Class 2................................................... 27.96% 90.51%
Class O................................................... 33.78% 95.11%
</TABLE>
CAPITAL FUND
<TABLE>
<CAPTION>
FROM NOVEMBER 1, 1996
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B
AND 2) THROUGH ONE YEAR ENDED FIVE YEARS ENDED TEN YEARS ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Class A............... 95.46% 16.03% N/A N/A
Class B............... 99.57% 17.22% N/A N/A
Class 2............... 100.51% 19.92% N/A N/A
Class O............... 5,266.54% 248.49% 345.35%
</TABLE>
HIGH YIELD BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 52.19% 1.98%
Class B................................................ 52.28% 1.45%
Class 2................................................ 53.01% 4.56%
Class O................................................ 61.45% 7.33%
</TABLE>
INVESTORS VALUE FUND
<TABLE>
<CAPTION>
FROM JANUARY 3, 1995
(COMMENCEMENT OF
OPERATIONS OF CLASS A, B FIVE YEARS ENDED TEN YEARS ENDED
AND 2) THROUGH YEAR ENDED DECEMBER 31, DECEMBER 31,
DECEMBER 31, 1999 DECEMBER 31, 1999 1999 1999
----------------- ----------------- ---- ----
<S> <C> <C> <C> <C>
Class A................. 169.26% 5.08% N/A N/A
Class B................. 173.06% 5.90% N/A N/A
Class 2................. 172.52% 8.64% N/A N/A
Class O................. 418.99% 11.73% 188.34% 325.90%
</TABLE>
NATIONAL INTERMEDIATE MUNICIPAL FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 21.84% -4.58%
Class B................................................ 20.88% -5.29%
Class 2................................................ 21.90% -2.29%
Class O................................................ 28.99% 0.51%
</TABLE>
96
<PAGE>
SMALL CAP GROWTH FUND
<TABLE>
<CAPTION>
FROM JULY 1, 1998
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A............................................... 72.07% 48.43%
Class B............................................... 76.35% 51.15%
Class 2............................................... 78.87% 53.67%
Class O............................................... 83.17% 57.90%
</TABLE>
STRATEGIC BOND FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 49.69% -0.04%
Class B................................................ 49.33% -0.63%
Class 2................................................ 50.28% 2.52%
Class O................................................ 58.92% 5.26%
</TABLE>
BALANCED FUND
<TABLE>
<CAPTION>
FROM SEPTEMBER 11, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A............................................... 55.46% -2.72%
Class B............................................... 57.54% -2.46%
Class 2............................................... 58.07% 0.44%
Class O............................................... 67.34% 3.42%
</TABLE>
U.S. GOVERNMENT FUND
<TABLE>
<CAPTION>
FROM FEBRUARY 22, 1995
(COMMENCEMENT OF
OPERATIONS) THROUGH YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1999
----------------- -----------------
<S> <C> <C>
Class A................................................ 27.30% -3.28%
Class B................................................ 26.96% -4.05%
Class 2................................................ 27.78% -0.99%
Class O................................................ 35.35% 1.76%
</TABLE>
INTERNATIONAL EQUITY FUND
<TABLE>
<CAPTION>
FROM OCTOBER 25, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
-----------------
<S> <C>
Class A..................................................... 17.72%
Class B..................................................... 19.70%
Class 2..................................................... 22.37%
Class O..................................................... 24.90%
</TABLE>
LARGE CAP GROWTH FUND
<TABLE>
<CAPTION>
FROM OCTOBER 25, 1999
(COMMENCEMENT OF
OPERATIONS) THROUGH
DECEMBER 31, 1999
-----------------
<S> <C>
Class A..................................................... 5.37%
Class B..................................................... 6.70%
Class 2..................................................... 9.50%
Class O..................................................... 11.80%
</TABLE>
97
<PAGE>
YIELD
With respect to the Cash Management Fund and the New York Municipal Money Market
Fund, yield quotations are expressed in annualized terms and may be quoted on a
compounded basis.
The current yield for each of the Cash Management Fund and the New York
Municipal 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 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, 1999 the annualized yield and
effective yield for each class of shares of the Cash Management Fund were 5.52%
and 5.67%, respectively. For the seven-day period ended December 31, 1999 the
annualized yield and effective yield for each class of shares of the New York
Municipal Money Market Fund were 4.48% and 4.57%, respectively. Because Class A,
B and C shares of the Cash Management Fund and the New York Municipal Money
Market Fund, like Class O shares, are not subject to any sales charges or
service or distribution fees, the yield and effective yield figures for each
class of shares of these Funds would be the same.
In periods of declining interest rates the yield of the Cash Management Fund and
the New York Municipal Money Market Fund will tend to be somewhat higher than
prevailing market rates on short-term obligations, and in periods of rising
interest rates the yield will tend to be somewhat lower. Also when interest
rates are falling, the inflow of net new money to the Cash Management Fund and
the New York Municipal Money Market Fund from the continuous sale of shares will
likely be invested in portfolio instruments producing lower yields than the
balance of these Funds' portfolios, thereby reducing these Funds' current
yields. 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:
Yield = 2[(a - b + 1)'pp'6 - 1]
-----
cd
Where: a = dividends and interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the
period
Under this formula, interest earned on debt obligations for purposes of 'a'
above, is calculated by (1) computing the yield to maturity of each obligation
held by the New York Municipal Bond Fund or the National Intermediate Municipal
Fund based on the market value of the obligation (including actual accrued
interest) at the close of business on the last day of each month, or, with
respect to obligations purchased during the month, the purchase price (plus
actual accrued interest), (2) dividing that figure by 360 and multiplying the
quotient by the market value of the obligation (including actual accrued
interest as referred to above) to determine the interest income on the
obligation in the Fund's portfolio (assuming a month of 30 days) and (3)
computing the total of the interest earned on all debt obligations during the
30-day or one month period. Any amounts representing sales charges will not be
included among these expenses; however, the New York Municipal Bond Fund and the
National Intermediate Municipal Fund will disclose the maximum sales charge as
well as any amount or specific rate of any nonrecurring account charges.
98
<PAGE>
Undeclared dividends, computed in accordance with Commission guidelines, may be
subtracted from the maximum offering price calculation required pursuant to 'd'
above.
The thirty day yield of the National Intermediate Municipal Fund at December 31,
1999 was 4.73% for Class A, 4.04% for Class B, 4.03% for Class 2 and 4.97% for
Class O.
The tax equivalent yield of each of the New York Municipal Money Market Fund and
the National Intermediate Municipal Fund is computed by dividing that portion of
the respective Fund's yield (computed as described above for each Fund) that is
tax-exempt by one minus the stated combined regular federal income and, in the
case of the New York Municipal Money Market 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 for Class O shares of the New York Municipal Money
Market Fund for the seven-day period ended December 31, 1999 was 4.57%. Because
Class A, B and 2 shares of the New York Municipal Money Market Fund, like Class
O Shares, are not subject to any sales charges or service or distribution fees,
the tax equivalent yield figures for Class A, B and 2 shares of the Fund would
be the same as those for Class O shares. The tax equivalent yield of the
National Intermediate Municipal Fund at December 31, 1999 was 7.83% for Class A,
6.69% for Class B, 6.67% for Class 2 and 8.23% for Class O.
Any quotation of performance stated in terms of yield (whether or not based on a
30-day period) will be given no greater prominence than the information
prescribed under 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.
SHAREHOLDER SERVICES
Exchange Privilege. Shareholders may exchange all or part of their Fund shares
for shares of the same class of other Funds in the Salomon Brothers Investment
Series, as indicated in the Prospectus, to the extent such shares are offered
for sale in the shareholder's state of residence.
The exchange privilege enables shareholders of a Fund to acquire shares in a
Fund with different investment objectives when they believe that a shift between
Funds is an appropriate investment decision. This privilege is available to
shareholders residing in any state in which the Fund shares being acquired may
legally be sold.
Exercise of the exchange privilege is treated as a sale and purchase for federal
income tax purposes and, depending on the circumstances, a short- or long-term
capital gain or loss may be realized. The price of the shares of the fund into
which shares are exchanged will be the new cost basis for tax purposes.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds immediately invested in shares of the Fund being acquired at a
price equal to the then current net asset value of such shares plus any
applicable sales charge.
All accounts involved in a telephone or telegram exchange must have the same
registration. If a new account is to be established, the dollar amount to be
exchanged must be at least as much as the minimum initial investment of the Fund
whose shares are being purchased. Any new account established by exchange will
automatically be registered in the same way as the account from which shares are
exchanged and will carry the same dividend option.
The exchange privilege is not designed for investors trying to catch short-term
savings in market prices by making frequent exchanges. A Fund reserves the right
to impose a limit on the number of exchanges a shareholder may make. Call or
write the applicable Fund for further details.
Automatic Withdrawal Plan. With respect to any Fund, an Automatic Withdrawal
Plan may be opened with an account having a minimum account value as described
in the Prospectus. All dividends and distributions on the shares held under the
Withdrawal Plan are automatically reinvested at net asset value in full and
fractional shares of the same class of a Fund. Withdrawal payments are made by
PFPC, as agent, from the proceeds of the redemption of such number of
99
<PAGE>
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 PFPC upon written notice.
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) 446-1013 for more information.
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 2
shares, if an investor redeems Class B or Class 2 shares and pays a CDSC upon
redemption, and then uses those proceeds to purchase Class B or Class 2 shares
of any Fund within 60 days, the Class B or Class 2 shares purchased will be
credited with any CDSC paid in connection with the prior redemption. There are
no restrictions on the number of times a shareholder may use the Reinstatement
Privilege.
Any gain recognized on a redemption or repurchase is taxable despite the
reinstatement in the Fund. Any loss realized as a result of the redemption or
repurchase may not be allowed as a deduction for federal income tax purposes but
may be applied, depending on the amount reinstated, to adjust the cost basis of
the shares acquired upon reinstatement. In addition, if the shares redeemed or
repurchased had been acquired within the 60 days preceding the redemption or
repurchase, the amount of any gain or loss on the redemption or repurchase may
have to be computed without regard to any sales charges incurred on the redeemed
or repurchased shares (except to the extent those sales charges exceed the sales
charges waived in connection with the reinstatement).
Self Employed Retirement Plans. The Funds offer a prototype retirement plan for
self-employed individuals. Under such plan, self-employed individuals may
contribute out of earned income to purchase Fund shares.
Boston Safe Deposit and Trust Company ('Boston Safe') has agreed to serve as
custodian and furnish the services provided for in the plan and the related
custody agreement. Boston Safe 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.
Individual Retirement Accounts. A prototype individual retirement account
('IRA') is available, which has been approved as to form by the 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.
Boston Safe has agreed to serve as custodian of the IRA and furnish the services
provided for in the custody agreement. Boston Safe will charge each IRA an
application fee as well as certain additional fees for its services under the
custody agreement. In accordance with IRS regulations, an individual may revoke
an IRA within seven calendar days after it is established.
Contributions in excess of allowable limits, premature distributions to an
individual who is not disabled before age 59 1/2 or insufficient distributions
after age 70 1/2 will generally result in substantial adverse tax consequences.
For information required for adopting an IRA, including information fees,
investors may obtain the form of custody agreement and related materials,
including disclosure materials, by calling (800) 446-1013. Consultation with a
financial adviser regarding an IRA is recommended.
100
<PAGE>
ACCOUNT SERVICES
Shareholders of each Fund are kept informed through semi-annual reports showing
current 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 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.
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 twelve
series of shares, each representing shares in one of twelve separate Funds;
namely, Asia Growth Fund, Cash Management Fund, High Yield Bond Fund,
Institutional Money Market Fund (formerly, the U.S. Treasury Securities Money
Market Fund), National Intermediate Municipal Fund, International Equity Fund,
Large Cap Growth Fund, New York Municipal Money Market Fund, Small Cap Growth
Fund, Strategic Bond Fund, Balanced Fund, and the U.S. Government Income 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.
The Investors Value 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.
The Capital Fund was incorporated in Maryland on August 23, 1976. The authorized
capital of the Fund consists of 25,000,000 shares having a par value of $.001
per share.
Although each Fund is offering only its own shares, it is possible that a Fund
could become liable for a misstatement in the Prospectus and the SAI about
another Fund. The Directors of the Series Funds, the Investors Value Fund and
the Capital Fund have considered this factor in approving the use of a combined
Prospectus and the SAI.
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. Under the corporate law of Maryland, the state of incorporation
of the Series Funds, the Investors Value Fund and the Capital Fund, and the
By-Laws of each of the Series Funds, the Investors Value Fund and the Capital
Fund, neither the Series Funds, the Investors Value Fund nor the Capital 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.
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
101
<PAGE>
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 Value Fund and Capital 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.
As used in this SAI 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.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, N.A. ('PNC'), located at Airport Business Center, International Court
2, 200 Stevens Drive, Lester, Pennsylvania 19133, currently serves as custodian
for each Fund except the Asia Growth Fund. The Chase Manhattan Bank, N.A.,
located at Chase Metrotech Center, Brooklyn, NY, serves as custodian for Asia
Growth Fund and together with PNC in its capacity as custodian, the
'Custodian'). The Custodian, among other things: maintains a custody account or
accounts in the name of each Fund; receives and delivers all assets for each
Fund upon purchase and upon sale or maturity; collects and receives all income
and other payments and distributions on account of the assets of each Fund; and
makes disbursements on behalf of each Fund. The custodian neither determines the
Funds' investment policies, nor decides which securities each 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. A Fund may
also periodically enter into arrangements with other qualified custodians with
respect to certain types of securities or other transactions such as repurchase
agreements or derivatives transactions.
PFPC Global Fund Services, Inc., located at P.O. Box 9764, Providence, RI
02940-9764, serves as each Fund's transfer agent. As a Fund's transfer agent,
PFPC: 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, PFPC
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.
102
<PAGE>
INDEPENDENT ACCOUNTANTS
PricewaterhouseCoopers LLP ('PricewaterhouseCoopers') provides audit services,
tax return preparation and assistance and consultation in connection with review
of Commission filings. The financial statements and financial highlights
incorporated by reference in the Prospectus and SAI have been so incorporated by
reference in reliance on the report of PricewaterhouseCoopers, independent
accountants, given on the authority of that firm as experts in auditing and
accounting. PricewaterhouseCoopers' address is 1177 Avenue of the Americas, New
York, New York 10036.
COUNSEL
Simpson Thacher & Bartlett serves as counsel to each Fund, and is located at 425
Lexington Avenue, New York, New York 10017-3909.
Piper Marbury Rudnick & Wolfe L.L.P. of Baltimore, Maryland has issued an
opinion regarding the valid issuance of shares being offered for sale pursuant
to the Funds' Prospectuses.
FINANCIAL STATEMENTS
The audited financial statements of each of Asia Growth Fund, Capital Fund, Cash
Management Fund, High Yield Bond Fund, Investors Value Fund, National
Intermediate Municipal Fund, New York Municipal Money Market Fund, Strategic
Bond Fund, Balanced Fund, U.S. Government Income Fund, Small Cap Growth Fund,
International Equity Fund and Large Cap Growth Fund for the fiscal year ended
December 31, 1999 contained in the 1999 Annual Report of the Investment Series,
are incorporated by reference into this SAI.
103
<PAGE>
APPENDIX A
SPECIAL INVESTMENT CONSIDERATIONS RELATING TO
NEW YORK MUNICIPAL OBLIGATIONS
Some of the significant financial considerations relating to the investments of
the New York Municipal Money Market Fund in New York municipal securities are
summarized below. The following information constitutes only a brief summary,
does not purport to be a complete description and is largely based on
information drawn from official statements relating to securities offerings of
New York municipal obligations available as of the date of this Statement of
Additional Information. The accuracy and completeness of the information
contained in such offering statements has not been independently verified.
NEW YORK STATE
New York State Financing Activities. There are a number of methods by which New
York State (the 'State') may incur debt. Under the State Constitution, the State
may not, with limited exceptions for emergencies, undertake long-term general
obligation borrowing (i.e., borrowing for more than one year) unless the
borrowing is authorized in a specific amount for a single work or purpose by the
New York State Legislature (the 'Legislature') and approved by the voters. There
is no limitation on the amount of long-term general obligation debt that may be
so authorized and subsequently incurred by the State. With the exception of
general obligation housing bonds (which must be paid in equal annual
installments or installments that result in substantially level or declining
debt service payments, within 50 years after issuance, commencing no more than
three years after issuance), general obligation bonds must be paid in equal
annual installments or installments that result in substantially level or
declining debt service payments, within 40 years after issuance, beginning not
more than one year after issuance of such bonds.
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
State-guaranteed bonds of the Port Authority of New York and New Jersey were
fully retired on December 31, 1996. State-guaranteed bonds issued by the Thruway
Authority were fully retired on July 1, 1995.
In February 1997, the Job Development Authority ('JDA') issued approximately $85
million of State-guaranteed bonds to refinance certain of its outstanding bonds
and notes in order to restructure and improve JDA's capital structure. Due to
concerns regarding the economic viability of its programs, JDA's loan and loan
guarantee activities had been suspended since the Governor took office in 1995.
As a result of the structural imbalances in JDA's capital structure, and
defaults in its loan portfolio and loan guarantee program incurred between 1991
and 1996, JDA would have experienced a debt service cash flow shortfall had it
not completed its recent refinancing. JDA anticipates that it will transact
additional refinancings in 1999, 2000 and 2003 to complete its long-term plan of
finance and further alleviate cash flow imbalances which are likely to occur in
future years. JDA recently resumed its lending activities under a revised set of
lending programs and underwriting guidelines.
A-1
<PAGE>
The State employs additional long-term financing mechanisms, lease-purchase and
contractual-obligation financing, which involve obligations of public
authorities or municipalities that are State-supported but not general
obligations of the State. Under these financing arrangements, certain public
authorities and municipalities have issued obligations to finance the
construction and rehabilitation of facilities or the acquisition and
rehabilitation of equipment and expect to meet their debt service requirements
through the receipt of rental or other contractual payments made by the State.
Although these financing arrangements involve a contractual agreement by the
State to make payments to a public authority, municipality or other entity, the
State's obligation to make such payments is generally expressly made subject to
appropriation by the Legislature and the actual availability of money to the
State for making the payments. The State has also entered into a
contractual-obligation financing arrangement with the New York Local Government
Assistance Corporation ('LGAC') to restructure the way the State makes certain
local aid payments.
The State participates in the issuance of Certificates of Participation ('COPs')
in a pool of leases entered into by the State's Office of General Services on
behalf of several State departments and agencies interested in acquiring
operational equipment, or in certain cases, real property. Legislation enacted
in 1986 established restrictions upon and centralized State control, through the
Comptroller and the Director of the Budget, over the issuance of COPs
representing the State's contractual obligation, subject to annual appropriation
by the Legislature and availability of money, to make installment or
lease-purchase payments for the State's acquisition of such equipment or real
property.
The State also employs moral obligation financing. Moral obligation financing
generally involves the issuance of debt by a public authority to finance a
revenue-producing project or other activity. The debt is secured by project
revenues and statutory provisions requiring the State, subject to appropriation
by the Legislature, to make up any deficiencies which may occur in the issuer's
debt service reserve fund. There has never been a default on any moral
obligation debt of any public authority although there can be no assurance that
such a default will not occur in the future.
Payments of debt service on State general obligation and State-guaranteed bonds
and notes are legally enforceable obligations of 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 although
there can be no assurance that such a default or call will not occur in the
future.
The proposed 1997-98 through 2002-2003 Capital Program and Financing Plan was
released with the 1998-99 Executive Budget on January 20, 1998. As part of the
Plan, changes were proposed to the State's 1997-98 borrowing plan, including:
delay of the issuance of COPs to finance welfare information systems through
1998-99 to permit a thorough assessment of needs; and the elimination of
issuances for the CEFAP to reflect the proposed conversion of that bond-financed
program pay-as-you-go financing.
In addition to the arrangements described above, State law provides for the
creation of State municipal assistance corporations, which are public
authorities established to aid financially troubled localities. The Municipal
Assistance Corporation for The City of New York ('MAC') was created to provide
financing assistance to New York City (the 'City'). 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. In 1995, the State
created the Municipal Assistance Corporation for the City of Troy ('Troy MAC').
The bonds issued by Troy MAC, however, do not include moral obligation
provisions.
The 1999-2000 State Financial Plan. The State's 1999-2000 fiscal year commenced
on April 1, 1999 and ends on March 31, 2000. A final State Budget for
the1999-2000 fiscal year has not yet been adopted by the Legislature. Governor
George E. Pataki submitted emergency appropriation
A-2
<PAGE>
legislation on March 30, 1999 to fund State obligations and scheduled local
assistance payments beginning April 1, 1999. The legislation provided $4.05
billion in appropriation authority to support various obligations, such as State
aid to local governments and State employee payrolls. On April 27, 1999,
Governor Pataki submitted another interim appropriation legislation, providing
$3.18 billion in appropriation authority, which became effective on April 26,
1999 and will end on May 9, 1999.
The State Financial Plan is projected to be balanced on a cash basis. However,
there can be no assurance that the State Financial Plan will continue to be in
balance. On February 12, 1999, the State issued a revised cash-basis Financial
Plan for the 1999-2000 fiscal year that reflected the Governor's amendments to
his 1999-2000 Executive Budget. The revised Financial Plan projects total
General Fund disbursements and transfers to other funds of $37.14 billion in
1999-2000, a net increase of $42 million over the amount estimated in the
Executive Budget. The revised estimate reflects $81 million in new funding for
school districts, $13 million for the Department of Law, $5 million to offset
the loss of budgeted federal funding in the Department of Corrections and $11
million in projected spending for other initiatives. These increases are
partially offset by $8 million in lower projected social service costs, $15
million from projected lower spending on fringe benefits for State employees and
$45 million in one-time savings from permanently deferring one month of
Supplemental Security Income payments.
The State also revised its receipts forecast for 1999-2000 in conjunction with
the Governor's 30-day amendments. The revised forecast projects total General
Fund receipts and transfers from other funds of $38.81 billion in 1999-2000, a
net increase of $146 million over the amount estimated in the Executive Budget.
Projected receipts in all categories have been raised, with the largest
increases in personal income taxes ($49 million), miscellaneous receipts ($35
million) and business taxes ($31 million). The State proposes reserving $100
million of these additional receipts to cover the potential costs in 1999-2000
of possible new collective bargaining agreements with State employee unions.
Most of the remaining receipts would finance the $42 million in net new spending
described above, with a balance of $4 million earmarked for the tax reduction
reserve that was proposed in the Executive Budget. The change in estimated
receipts for 1999-2000 is based primarily on a revised economic forecast.
The State now projects a closing General Fund balance of $2.47 billion in
1999-2000, an increase of $104 million from the Executive Budget estimate. The
change reflects a projected $100 million reserve for possible collective
bargaining costs in 1999-2000 and an additional $4 million earmarked for the tax
reduction reserve proposed in the Executive Budget. It should be noted that the
projected closing fund balance will change if, as expected, the State draws on
the reserve for collective bargaining in 1999-2000 to cover the initial costs of
possible new agreements.
Many complex political, social and economic forces influence the State's economy
and finances, which may in turn affect the State's Financial Plan. These forces
may affect the State unpredictably from fiscal year to fiscal year and are
influenced by governments, institutions and organizations that are not subject
to the State's control. The State Financial Plan is also necessarily based upon
forecasts of national and State economic activity. Economic forecasts, however,
have frequently failed to predict accurately the timing and magnitude of changes
in the national and the State economies.
Despite recent budgetary surpluses recorded by the State, State actions
affecting the level of receipts and disbursements, the relative strength of the
State and regional economy, actions of the federal government and other factors
have created structural budget gaps for the State. These gaps resulted from a
significant disparity between recurring revenues and the costs of maintaining or
increasing the level of support for State programs. To address a potential
imbalance in any given fiscal year, the State is 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. There can be no assurance, however, that the
Legislature will enact the Governor's proposals or 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. For example, the
fiscal effects of tax reductions adopted in the last several fiscal years
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(including 1998-99) are projected to grow more substantially beyond the
1999-2000 fiscal year, with the incremental annual cost of all currently enacted
tax reductions estimated at over $4 billion by the time they are fully effective
in State fiscal year 2002-03. These actions will place pressure on future budget
balance in New York State.
Projected Budget Gaps for 2000-01 and 2001-02. The revised Financial Plan
projects a budget gap of $1.14 billion in 2000-01, $30 million higher than the
Executive Budget estimate. The full annual cost of the additional school aid
proposed as an amendment to the 1999-2000 Executive Budget, offset in part by
higher projected receipts and lower estimated welfare spending, accounts for the
net increase. The projected gap for 2001-02 remains essentially unchanged from
the Executive Budget, declining by $5 million to $2.07 billion. The State has
reached a tentative agreement with the Civil Service Employees Association
(CSEA) on a new four-year labor contract. If this agreement is ratified by CSEA
and approved by the Legislature, and the terms of that contract applied to the
entire Executive Branch workforce, the State estimates that the budget gaps
would increase by $275 million in 2000-01 and $475 million in 2001-02.
Special Considerations. The Division of the Budget believes the projections of
receipts and disbursements in the revised Financial Plan, and the assumptions on
which they are based, are reasonable. The State continues to be subject to all
the risks described in the section entitled 'Special Considerations' in the
third quarterly update to the AIS. The Division of the Budget believes that the
revised economic and receipts forecast underlying the Financial Plan does not
materially alter the risks to the State described in the third quarterly update
to the AIS.
Outyear Projections of Receipts and Disbursements. In recent years, the State
has closed projected budget gaps of $5.0 billion (1995-96), $3.9 billion
(1996-97), $2.3 billion (1997-98) and less than $1 billion (1998-99). The State,
as a part of the 1998-99 Executive Budget projections submitted to the
Legislature in February 1998, projected a 1999-2000 General Fund budget gap of
approximately $1.7 billion and a 2000-01 gap of $3.7 billion. As a result of
changes made in the 1998-99 enacted budget, the 1999-2000 gap is now expected to
be roughly $1.3 billion, or about $400 million less than previously projected,
after application of reserves created as part of the 1998-99 budget process.
Such reserves would not be available against subsequent year imbalances. The
State projects budget gaps of $1.1 billion in 2000-01 and $2.08 billion in
2001-02. The gap estimates assume that the Legislature will enact the 1999-2000
Executive Budget and accompanying legislation in its entirety. The gaps also
assume $500 million in annual spending efficiencies, which is comparable to the
State's assumptions in previous years.
Sustained growth in the State's economy could contribute to closing projected
budget gaps over the next several years, both in terms of higher-than-projected
tax receipts and in lower-than-expected entitlement spending. however, the
State's projections in 1999-2000 currently assume actions to achieve $600
million in lower disbursements and $250 million in additional receipts from the
settlement of State claims against the tobacco industry. Consistent with past
practice, the projections do not include any costs associated with new
collective bargaining agreements after the expiration of the current round of
contracts at the end of the 1998-99 fiscal year.
The State plans to use the $1.79 billion tax reduction reserve to offset the
incremental loss of tax receipts beginning in 2000-01. The State Financial Plan
currently assumes that $589 million of the reserves, or about one-third of the
amount available, will be applied in 2000-01, with the remaining $1.2 billion
used in 2001-02. The State may alter how it apportions the reserves across the
outyears to ensure that enacted tax cuts go forward on schedule. General Fund
receipts fall to an estimated in $35.99 billion in 2000-01, reflecting the
incremental impact of already enacted tax reductions, the impact of prior refund
reserve transactions and the earmarking of receipts for dedicated highway
purposes. Receipts are projected to grow modestly to $36.02 billion in 2001-02,
again reflecting the impact of enacted tax cuts on normal receipts growth, as
well as the incremental impact of tax reductions recommended with the Budget.
The STAR program, which dedicates a portion of personal income tax receipts to
fund school tax reductions, has a significant impact on General Fund receipts.
General Fund receipts in 1999-2000 will reflect the next stage of the STAR
property tax reduction program as well as the continuing impact of earlier tax
reduction accomplishments. STAR is projected to reduce personal income tax
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revenues available to the General Fund by an estimated $1.3 billion in 2000-01.
In addition, this year's Executive Budget reflects several tax reduction
proposals that have only a modest impact on 1999-2000 receipts but will reduce
receipts by $1 billion when fully phased in. Disbursement projections for the
outyears currently assume additional outlays for school aid, Medicaid, welfare
reform, mental health community reinvestment and other multi-year spending
commitments in law.
Uncertainties with regard to the economy, as well as the outcome of certain
litigation now pending against the State, could produce adverse effects on the
State's projections of receipts and disbursements. For example, changes to
current levels of interest rates or deteriorating world economic conditions
could have an adverse effect on the State economy and produce results in the
current fiscal year that are worse than predicted. Similarly, adverse judgments
in legal proceedings against the State could exceed amounts reserved in the
1999-2000 Financial Plan for payment of such judgments and produce additional
unbudgeted costs to the State.
In recent years, including this year, the State has failed to adopt a budget
prior to the beginning of its fiscal year. A delay in the adoption of the
State's budget beyond the statutory April 1 deadline could delay the projected
receipt by the City of State aid, and there can be no assurance that State
budgets in future fiscal years will be adopted by the April 1 statutory
deadline.
Government Funds Comprising the State Financial Plan. Four governmental fund
types comprise the State Financial Plan: the General fund, the Special Revenue
Funds, the Capital Projects funds and the Debt Service funds.
General Fund. The General Fund is the principal operating fund of the State and
is used to account for all financial transactions, except those required to be
accounted for in another fund. It is the State's largest fund and receives
almost all State taxes and other resources not dedicated to particular purposes.
General Fund moneys are also transferred to other funds, primarily to support
certain capital projects and debt service payments in other fund types. In the
State's 1999-2000 fiscal year, the General Fund is expected by the State to
account for approximately 47 percent of all governmental funds disbursements and
70 percent of total State Funds disbursements.
After two years of record increases, General Fund spending for school aid is
projected at $9.99 billion in 1999-2000 (on a State fiscal year basis), an
increase of $292 million (3.0 percent) from the current year. Medicaid spending
is estimated to total $5.50 billion in 1999-2000, a modest decline of $87
million or 1.6 percent from 1998-99. Spending on welfare is projected at $1.49
billion, a decline of $47 million (2.7 percent) from 1998-99. Since 1994-95,
State spending on welfare has fallen by $709 million, or 32 percent, driven by
sweeping welfare changes initiated at the State and Federal levels and a large,
steady decline in the number of people receiving benefits. Local assistance
spending for Children and Families Services is projected at $864 million in
1999-2000, down $42 million (4.7 percent) from 1998-99. In Mental Health, the
State will spend $619 million in 1999-2000, an increase of $40 million (7
percent) over 1998-99, including $23 million in additional funding for the
Community Reinvestment Program. The spending increase of $17 million, to $576
million, for Mental Retardation and Developmental Disabilities reflects more
than $52 million in increased funding, net of growth of $35.6 million in Federal
offsets. Spending for all other local assistance programs will total $5.72
billion in 1999-2000, a decline of $226 million from 1998-99. Lower spending of
$175 million for legislative member items in 1999-2000 accounts for the majority
of the year-to-year change. State operations reflect the costs of running the
Executive, Legislative and Judicial branches of government. Spending in this
category is projected to increase by $225 million or 3.4 percent above 1998-99.
Personal service costs are projected to be $5.01 billion, an increase of $128
million from 1998-99. Nonpersonal service is projected to be $1.87 billion, with
the increase of $97 million used primarily to fund Year 2000 compliance and
related activities in the Office for Technology. Total spending in General State
Charges is projected to grow by $47 million (2.1 percent) in 1999-2000.
In 1999-2000, the Financial Plan assumes that $80 million in Community Projects
spending will occur, exhausting available appropriations for this fund. The
State will use the remaining balance ($146 million), against which there are no
appropriations as a result of the Governor's vetoes last year, to fund
operations in 1999-2000.
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Transfers in support of capital projects for 1999-2000 are estimated to total
$438 million and are comprised of two components: $188 million for direct
capital spending to finance a variety of recreational, educational and cultural
projects and $250 million for the second deposit to the Debt Reduction Reserve
Fund ('DRRF'). Other transfers decline by $71 million from 1998-99, as the
one-time transfers in the current year for the Lottery and Oil Spill Funds do
not recur in 1999-2000.
The 1999-2000 Financial Plan relies on $33 million in non-recurring resources,
the lowest level ever reported. In 1999-2000, the largest one-time resource will
consist of a $15 million loan repayment from the Long Island Power Authority.
The remaining amounts include various routine fund sweeps and transfers to the
General Fund that occur each year.
Special Revenue Funds. Special Revenue Funds are used to account for the
proceeds of specific revenue sources such as federal grants that are legally
restricted, either by the Legislature or outside parties, to expenditures for
specified purposes. Special Revenue Funds spending is projected at $30.54
billion in 1999-2000. This includes $8.61 billion from Special Revenue Funds
containing State revenues and $21.93 billion from funds containing Federal
grants, primarily for social welfare programs. Total disbursements for programs
supported by Federal grants account for approximately three-quarters of all
spending in the Special Revenue fund type. Federal Special Revenue Funds
disbursements are estimated at $21.93 billion, an increase of $222 million or
1.0 percent from 1998-99. The higher spending is primarily due to increases in
Education ($170 million), Children and Families ($123 million), Child Health
Plus ($96 million) and Labor ($89 million), offset by a decrease in Welfare
($259 million). The single largest program in this Fund group is Medicaid, which
comprises 61 percent of Federal aid spending. The Budget projects $13.55 billion
in total Federal Medicaid reimbursements, a decrease of $57 million from
1998-99. This decrease is primarily due to the cost containment measures
recommended with the Budget.
Disbursements in State Special Revenue Funds are projected at $8.61 billion, an
increase of $315 million or 3.8 percent from 1998-99. The STAR program, which
increases by $638 million from 1998-99, accounts for most of the year-to-year
growth. The elimination of medical provider assessments on April 1, 1999
partially offsets this growth.
Capital Projects Funds. Capital Projects Funds account for the financial
resources used in the acquisition, construction or rehabilitation of major State
capital facilities and for capital assistance grants to certain local
governments or public authorities. This fund type consists of the Capital
Projects Fund, which is supported by tax dollars transferred from the General
Fund and various other capital funds established to distinguish specific capital
construction purposes supported by other revenues.
Capital Projects Funds spending in fiscal year 1999-2000 is projected at $4.4
billion, an increase of $145 million from last year. The major components of
this expected growth were transportation and environmental programs, including
continued increased spending for 1996 Clean Water/Clean Air Bond Act projects
and higher projected disbursements from the Environmental Protection Fund (EPF).
Another significant component of this projected increase is in the area of
public protection, primarily for facility rehabilitation and construction of
additional prison capacity.
Debt Service Funds. 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. These Funds were expected to comprise 3.8 percent of total
governmental fund receipts and disbursements in the 1998-99 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 other
funds established to accumulate moneys for the payment of debt service. Total
disbursements from the Debt Service Fund type are estimated at $3.68 billion in
1999-2000, an increase of $384 million from 1998-99 levels. Of the increase,
$131 million was dedicated to transportation purposes, including debt service on
bonds issued for State and local highway and bridge programs financed through
the
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New York State Thruway Authority and supported by the Dedicated Highway and
Bridge Trust Fund. Another $80 million was for education purposes, including
State and City University programs financed through the Dormitory Authority of
the State of New York (DASNY). The remainder was for a variety of programs in
such areas as mental health and corrections and for general obligation
financings.
Prior Fiscal years. 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. A national recession, followed by the lingering economic
slowdown in the New York and regional economy, resulted in repeated shortfalls
in receipts and three budget deficits during those years. During its last six
fiscal years, however, the State has recorded balanced budgets on a cash basis,
with positive fund balances as described below. There can be no assurance,
however, that such trends will continue.
Fiscal Year 1998-99. The State ended its 1998-99 fiscal year on March 31, 1999
in balance on a cash basis, with a General Fund cash surplus as reported by DOB
of approximately $1.82 billion. The cash surplus was derived primarily from
lower than anticipated federal spending due largely to variations in the timing
of receipts from the federal government, lower than anticipated spending on
capital projects due to a variety of factors affecting the timing of
construction projects and timing delays in the start-up of new programs across
various state agencies. The State had an approximate closing balance in the
General Fund of $806 million: $473 million in the Tax Stabilization Reserve Fund
('TSRF'), after a fourth consecutive deposit of $73 million at the close of the
fiscal year; $107 million in the Contingency Reserve Fund ('CRF'), following a
planned $32 million deposit in 1998-99; and, approximately $226 million in the
Community Projects Fund. Final results for the 1998-99 fiscal year indicate
total General Fund spending of $36.6 billion.
Fiscal Year 1997-98. The State ended its 1997-98 fiscal year on March 31, 1998
in balance on a cash basis, with a General Fund cash surplus as reported by DOB
of approximately $2.04 billion. The cash surplus was derived primarily from
higher-than-anticipated receipts and lower spending on welfare, Medicaid and
other entitlement programs.
The General Fund had a closing balance of $638 million, an increase of $205
million from the prior fiscal year. The balance was held in three accounts
within the General Fund: the TSRF, the CRF and the CPF. The TSRF closing balance
was $400 million, following a required deposit of $15 million (repaying a
transfer made in 1991-92) and an extraordinary deposit of $68 million made from
the 1997-98 surplus. The CRF closing balance was $68 million, following a $27
million deposit from the surplus. The CPF, which finances legislative
initiatives, closed the fiscal year with a balance of $170 million, an increase
of $95 million. The General Fund closing balance did not include $2.39 billion
in the tax refund reserve account, of which $521 million was made available as a
result of the LGAC financing program and was required to be on deposit on March
31, 1998.
General Fund receipts and transfers from other funds for the 1997-98 fiscal year
(including net tax refund reserve account activity) totaled $34.55 billion, an
annual increase of $1.51 billion, or 4.57 percent over 1996-97. General Fund
disbursements and transfers to other funds were $34.35 billion, an annual
increase of $1.45 billion or 4.41 percent.
Fiscal year 1996-97. The State ended its 1996-97 fiscal year on March 31, 1997
in balance on a cash basis, with a General Fund cash surplus as reported by DOB
of approximately $1.42 billion. The cash surplus was derived primarily from
higher-than-expected revenues and lower-than-expected spending for social
services programs.
The General Fund closing fund balance was $433 million, an increase of $146
million from the 1995-96 fiscal year. Of that amount, $317 million was in the
TSRF, after a required deposit of $15 million and an additional deposit of $65
million in 1996-97. In addition, $41 million was deposited in the CRF. The
remaining $75 million reflected amounts then on deposit in the Community
Projects Fund. The General Fund closing fund balance did not include $1.86
billion in the tax refund reserve account, of which $521 million was made
available as a result of the LGAC financing program and was required to be on
deposit as of March 31, 1997.
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General Fund receipts and transfers from other funds for the 1996-97 fiscal year
totaled $33.04 billion, an increase of 0.7 percent from the previous fiscal year
(including net tax refund reserve account activity). General Fund disbursements
and transfers to other funds totaled $32.90 billion for the 1996-97 fiscal year,
an increase of 0.7 percent from the 1995-96 fiscal year.
Cash-Basis Results for the Non-General Funds Over the Last 3 Years. Activity in
the three other governmental funds has remained relatively stable over the last
three fiscal years, with federally-funded programs comprising approximately
two-thirds of these funds. The most significant change in the structure of these
funds has been the redirection of a portion of transportation-related revenues
from the General Fund to two new dedicated funds in the Special Revenue and
Capital Projects fund types. These revenues are used to support the capital
programs of the Department of Transportation and the MTA.
In the Special Revenue Funds, disbursements increased from $26.26 billion to
$27.65 billion over the last three years, primarily as a result of increased
costs for the federal share of Medicaid. Other activity reflected dedication of
taxes to a new fund for mass transportation, new lottery games, and new fees for
criminal justice programs.
Disbursements in the Capital Projects Funds declined from $3.97 billion to $3.56
billion over the last three years, as spending for miscellaneous capital
programs decreased, partially offset by increases for mental hygiene, health and
environmental programs. The composition of this Fund type's receipts also
changed as the dedicated transportation taxes began to be deposited, general
obligation bond proceeds declined substantially, federal grants remained stable,
and reimbursements from public authority bonds (primarily transportation
related) increased.
Activity in the Debt Service Funds reflected increased use of bonds during the
three-year period for improvements to the State's capital facilities and the
continued costs of the LGAC fiscal reform program. The increases were moderated
by the refunding savings achieved by the State over the last several years using
strict present value savings criteria. The growth in LGAC debt service was
offset by reduced short-term borrowing costs reflected in the General Fund.
GAAP-Basis Results. State law requires the State to update its projected
financial results on a GAAP-basis on or before September first of each year.
Projected GAAP-Basis Results for Fiscal Year 1999-2000. The State based its GAAP
projections on the cash estimates in the Financial Plan. As of January, 1999,
the General Fund GAAP Financial Plan for 1999-2000 projects total revenues of
$36.14 billion, total expenditures of $36.18 billion and net other financing
uses of $466 million. At the end of 1999-2000, the accumulated General Fund GAAP
surplus is now projected to be $616 million, an increase of $104 million over
the Executive Budget. The General Fund cash flow for 1999-2000 is projected to
have balances no lower than $2.36 billion in all months. Healthy balances early
in the year are largely the result of reserving or paying an additional $1.79
billion in personal income tax refunds associated with the 1998-99 surplus. The
projected balance in the General Fund in June is $42.5 billion. Balances at the
close of the second and third quarters of the fiscal year are projected to be
$5.57 billion and $5.13 billion, respectively. As a result of cash flow reforms
made in the 1990s, the State cannot normally issue short-term debt to meet its
cash flow needs throughout the year.
In 2000-01, the General Fund GAAP Financial Plan projects total revenues of
$35.l billion, total expenditures of $37.3 billion and net other financing uses
over sources of $328 million. In 2001-02, total revenues are projected at $35.7
billion, total expenditures at $39.2 billion and net other financing uses over
sources at $446 million. The GAAP operating projections in the outyears are
consistent with the projected cash-basis forecast, and would be positively
affected by actions enacted to close the projected cash imbalances during this
projection period.
GAAP-Basis Results for Fiscal Year 1998-99. In 1998-99, the General Fund GAAP
Financial Plan showed total revenues of $36.63 billion, total expenditures of
$36.07 billion and net other financing uses of $106 million.
On March 31, 1998, the State recorded, on a GAAP-basis, its first-ever,
accumulated positive balance in its General Fund. This 'accumulated surplus' was
$567 million. The improvement in the State's GAAP position was attributable, in
part, to the cash surplus recorded at the end of the
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State's 1997-98 fiscal year. Much of that surplus was reserved for future
requirements, but a portion was used to meet spending needs in 1998-99. Thus,
the State expected some deterioration in its GAAP position, but expected to
maintain a positive GAAP balance through the end of the current fiscal year.
The 1998-99 GAAP-basis General Fund Financial Plan showed expected tax revenues
of $33.1 billion and miscellaneous revenues of $2.6 billion to finance
expenditures of $36.1 billion and net financing uses of $156 million. The
General Fund accumulated surplus was projected to be $27 million at the end of
1998-99.
GAAP-Basis Results for Fiscal Year 1997-98. The State completed its 1997-98
fiscal year with a combined Governmental Funds operating surplus of $1.80
billion, which included an operating surplus in the General Fund of $1.56
billion, in Capital Projects Funds of $232 million and in Special Revenue Funds
of $49 million, offset in part by an operating deficit of $43 million in Debt
Service Funds.
General Fund. The State reported a General Fund operating surplus of $1.56
billion for the 1997-98 fiscal year, as compared to an operating surplus of
$1.93 billion for the 1996-97 fiscal year. As a result, the State reported an
accumulated surplus of $567 million in the General Fund for the first time since
it began reporting its operations on a GAAP-basis. The 1997-98 fiscal year
operating surplus reflects several major factors, including the cash-basis
operating surplus resulting from the higher-than-anticipated personal income tax
receipts, an increase in taxes receivable of $681 million, an increase in other
assets of $195 million and a decrease in pension liabilities of $144 million.
This was partially offset by an increase in payables to local governments of
$270 million and tax refunds payable of $147 million.
Revenues increased $617 million (1.8 percent) over the prior fiscal year, with
increases in personal income, consumption and use and business taxes. Decreases
were reported for other taxes, federal grants and miscellaneous revenues.
Personal income taxes grew $746 million, an increase of nearly 4.2 percent. The
increase in personal income taxes resulted from strong employment and wage
growth and the strong performance by the financial markets during 1997.
Consumption and use taxes increased $334 million or 5.0 percent as a result of
increased consumer confidence. Business taxes grew $28 million, an increase of
0.5 percent. Other taxes fell primarily because revenue for estate and gift
taxes decreased. Miscellaneous revenues decreased $380 million, or 12.7 percent,
due to a decline in receipts from the Medical Malpractice Insurance Association
and medical provider assessments.
Expenditures increased $137 million (0.4 percent) from the prior fiscal year,
with the largest increases occurring in State aid for education and social
services spending. education expenditures grew $391 million (3.6 percent) due
mainly to an increase in spending for municipal and community colleges. Social
services expenditures increased $233 million (2.6 percent) due mainly to program
growth. Increases in other State aid spending were offset by a decline in
general purpose aid of $235 million (27.8 percent) due to statutory changes in
the payment schedule. Increases in personal and non-personal service costs were
offset by a decrease in pension contribution of $660 million, a result of the
refinancing of the State's pension amortization that occurred in 1997.
Net other financing sources decreased $841 million (68.2 percent) due to the
nonrecurring use of bond proceeds ($769 million) provided by DASNY to pay the
outstanding pension amortization liability incurred in 1997.
Special Revenue, Debt Service and Capital Projects Funds. An operating surplus
of $49 million was reported for the Special Revenue Funds for the 1997-98 fiscal
year, which increased the accumulated fund balance to $581 million. Revenues
rose by $884 million over the prior fiscal year (3.3 percent) as a result of
increases in tax and federal grant revenues. Expenditures increased by $795
million (3.3 percent) as a result of increased costs for local assistance
grants. Net other financing uses decreased $105 million (3.3 percent).
Debt Service Funds ended the 1997-98 fiscal year with an operating deficit of
$43 million and, as a result, the accumulated fund balance declined to $1.86
billion. Revenues increased $246 million (10.6 percent) as a result of increases
in dedicated taxes. Debt service expenditures increased $341
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million (14.4 percent). Net other financing sources increased $89 million (401.3
percent) due primarily to savings achieved through advance refundings of
outstanding bonds.
An operating surplus of $232 million was reported in the Capital Projects Funds
for the State's 1997-98 fiscal year and, as a result, the accumulated deficit in
this fund type decreased to $381 million. Revenues increased $180 million (8.6
percent) primarily as a result of a $54 million increase in dedicated tax
revenues and an increase of $101 million in federal grants for transportation
and local waste water treatment projects. Net other financing sources increased
by $100 million primarily as a result of a decrease in transfers to certain
public benefit corporations engaged in housing programs.
GAAP-Basis Results for Fiscal Year 1996-97. The State completed its 1996-97
fiscal year with a combined governmental funds operating surplus of $2.1
billion, which included an operating surplus in the General Fund of $1.9
billion, in the Capital Projects Funds of $98 million and in the Special Revenue
Funds of $65 million, offset in part by an operating deficit of $37 million in
the Debt Service Funds.
General Fund. The State reported a General Fund operating surplus of $1.93
billion for the 1996-97 fiscal year, as compared to an operating surplus of $380
million for the prior fiscal year. The 1996-97 fiscal year GAAP operating
surplus reflects several major factors, including the cash basis operating
surplus, the benefit of bond proceeds which reduced the State's pension
liability, an increase in taxes receivable of $493 million, and a reduction in
tax refund liabilities of $196 million. This was offset by an increased payable
to local governments of $244 million.
Revenues increased $1.91 billion (nearly 6.0 percent) over the prior fiscal year
with increases in all revenue categories. Personal income taxes grew $620
million, an increase of nearly 3.6 percent, despite the implementation of
scheduled tax cuts. The increase in personal income taxes was caused by moderate
employment and wage growth and the strong financial markets during 1996.
Consumption and use taxes increased $179 million or 2.7 percent as a result of
increased consumer confidence. Business taxes grew $268 million, an increase of
5.6 percent, primarily as a result of the strong financial markets during 1996.
Other taxes increased primarily because revenues from estate and gift taxes
increased. Miscellaneous revenues increased $743 million, a 33.1 percent
increase, because of legislated increases in receipts from the Medical Local
Practice Insurance Association and from medical provider assessments.
Expenditures increased $830 million (2.6 percent) from the prior fiscal with the
largest increase occurring in pension contributions and State aid for education
spending. Pension contribution expenditures increased $514 million (198.2
percent), primarily because the State paid off its 1984-85 and 1985-86 pension
amortization liability. Education expenditures grew $351 million (3.4 percent),
due mainly to an increase in spending for support for public schools and
physically handicapped children, offset by a reduction in spending for municipal
and community colleges. Modest increases in other State aid spending was offset
by a decline in social services expenditures of $157 million (1.7 percent).
Social services spending continues to decline because of cost containment
strategies and declining caseloads.
Net other financing sources increased $475 million (62.6 percent), due mainly to
bond proceeds provided by the Documentary Authority of the State of New York
(DASNY) to pay the outstanding pension amortization, offset by elimination of
prior year LGAC proceeds.
Special Revenue, Debt Service and Capital Projects Funds. An operating surplus
of $65 million was reported for the Special Revenue Funds for the 1996-97 fiscal
year, increasing the accumulated fund balance to $532 million. Revenues
increased $583 million over the prior fiscal year (2.2 percent) as a result of
increases in tax and lottery revenues. Expenditures increased $384 million (1.6
percent) as a result of increased costs for departmental operations. Net other
financing sources decreased $275 million (8.0 percent), primarily because of
declines in amounts transferred to other funds.
Debt Service Funds ended the 1996-97 fiscal year with an operating deficit of
$37 million and, as a result, the accumulated fund balance declined to $1.90
billion. Revenues increased $102 million (4.6 percent) because of increases in
both dedicated taxes and mental hygiene patient fees. Debt
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service expenditures increased $47 million (2.0 percent). Net other financing
sources decreased $277 million (92.6 percent) due primarily to an increase in
payments on advance refundings.
An operating surplus of $98 million was reported in the Capital Projects Funds
for the State's 1996-97 fiscal year, and, as a result, the accumulated fund
deficit decreased to $614 million. Revenues increased $100 million (5.0 percent)
primarily because a larger share of the real estate transfer tax was shifted to
the Environmental Protection Fund and federal grant revenues increased for
transportation and local waste water treatment projects. Expenditures decreased
$359 million (10.0 percent) because of declines in capital grants for education,
housing and regional development programs and capital construction spending. Net
other financing sources decreased by $637 million as a result of a decrease in
proceeds from financing arrangements.
Due to changing economic conditions and information, public statements or
reports regarding the State Financial Plan and its constituent funds 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.
State Financial Plan Considerations. The economic and financial condition of the
State may be affected by various financial, social, economic and political
factors. These factors can be very complex, may vary from fiscal year to fiscal
year, and are frequently the result of actions taken not only by the State and
its agencies and instrumentalities, but also by entities, such as the federal
government, that are not under the control of the State. For example, various
proposals relating to federal tax and spending policies that are currently being
publicly discussed and debated could, if enacted, have a significant impact on
the State's financial condition in the current and future fiscal years. Because
of the uncertainty and unpredictability of the changes, their impact cannot, as
a practical matter, be included in the assumptions underlying the State's
projections at this time.
The State Financial Plan is based upon forecasts of national and State economic
activity developed through both internal analysis and review of State and
national economic forecasts prepared by commercial forecasting services and
other public and private forecasters. 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, the extent of
corporate and governmental restructuring, federal fiscal and monetary policies,
the level of interest rates, 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 current fiscal year that are worse
than predicted, with corresponding material and adverse effects on the State's
projections of receipts and disbursements.
Projections of total State receipts in the State Financial Plan are based on the
State tax structure in effect during the fiscal year and on assumptions relating
to basic economic factors and their historical relationships to State tax
receipts. In preparing projections of State receipts, economic forecasts
relating to personal income, wages, consumption, profits and employment have
been particularly important. The projection of receipts from most tax or revenue
sources is generally made by estimating the change in yield of such tax or
revenue source caused by economic and other factors, rather than by estimating
the total yield of such tax or revenue source from its estimated tax base. The
forecasting methodology, however, ensures that State fiscal year estimates for
taxes that are based on a computation of annual liability, such as the business
and personal income taxes, are consistent with estimates of total liability
under such taxes.
Projections of total State disbursements are based on assumptions relating to
economic and demographic factors, levels of disbursements for various services
provided by local governments (where the cost is partially reimbursed by the
State), and the results of various administrative and statutory mechanisms in
controlling disbursements for State operations. Factors that may affect the
level of disbursements in the fiscal year include uncertainties relating to the
economy of the nation
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and the State, the policies of the federal government, and changes in the demand
for and use of State services.
National and State Economic Outlooks. The information below summarizes the
national and State economic situation and outlook upon which projections of
receipts and certain disbursements were made for the 1998-99 Financial Plan.
U.S. Economy. Strong growth in 1998 in real Gross Domestic Product (GDP)
combined with a sharp drop in the inflation rate resulted in a moderate growth
rate of 4.8 percent for nominal GDP. For 1999, the State had projected that a
slowdown in real GDP growth will drop nominal GDP growth to 3.6 percent. It also
projected that further international and financial economic distress could
reduce U.S. economic growth even more than projected and that deflationary
pressures resulting from falling commodity prices and declining import prices
are balanced against domestic inflationary pressures caused by tight labor
markets resulting in subdued inflation and relatively stable short-and long-term
interest rates. Therefore, it had concluded that although employment growth will
remain fairly strong, income growth will slow and corporate profits will decline
modestly. However, following stronger-than-expected economic growth in the
fourth quarter of 1998, the State now forecasts that the national and State
economies will grow modestly faster in 1999 than projected in the Executive
Budget. Nationally, increases in consumption, investment, employment and income,
which led to better-than-expected growth as 1998 was ending, are now expected to
continue through the first half of 1999. Positive factors, such as high levels
of consumer confidence, productivity increases, low inflation and job growth,
have supported continued growth. The modestly higher growth rates in the revised
outlook will stabilize short- and long-term interest rates at somewhat higher
levels than had been anticipated at the time of the previous forecast. The
revised outlook for the federal funds rate now calls for no change during 1999,
as opposed to the continued decline that had been forecast in December.
There are uncertainties inherent in any economic forecast. Consumer or business
spending could be weaker than expected, due, perhaps to further significant
declines in corporate profits or equity values. Additionally, the international
economic and financial disruptions currently being felt around the globe could
worsen or take longer than anticipated to subside. The result could be a sharp,
additional reduction in domestic economic growth. Indeed, several private sector
forecasters have indicated a heightened risk of a national recession beginning
in 1999. Under that scenario, the FRB would be likely to lower short-term
interest rates faster and further than expected in an effort to reignite the
nation's economic engines. Alternatively, but less likely, the pace of US
economic growth could be faster if productivity or consumer spending becomes
stronger than anticipated, or if the economies of many of the countries of Asia
and Latin America recover more quickly than expected. If such growth, or a rapid
rise in labor, health or energy costs, awakens long-dormant inflationary
pressures, the FRB may reverse its current position and raise interest rates.
New York Economy. As with the U.S. economy forecast, the State had predicted,
paralleling the national trend, that a moderate slowdown in New York economic
growth was expected for 1999. It had stated that annual growth in total and
private-sector employment in 1999 was projected to fall below the 1998 pace,
although a continuation of international financial and economic turmoil may
result in a sharper slowdown than currently projected. Continued growth by the
business service sector was expected for 1999, although the growth rate would
slow from the 1998 pace. The State projected that the financial services sector
would see some retrenchment in employment as Wall Street adjusts to lower profit
levels and consolidation in the banking services industry continues and that
losses in manufacturing employment would increase as foreign economic weakness
and the strong dollar reduce both domestic and foreign demand for U.S.
manufactured goods. It also forecast that both wage and personal income growth
will recede from their 1998 rates of growth, partly due to a leveling out of
bonus payments by the financial sector. However, it now states that the economic
outlook of New York Stat is also expected to be brighter than anticipated in the
1999-2000 Executive Budget forecast, primarily due to the connection between the
State economy and the stronger-than-expected national economy. Stronger national
industrial output and exports have improved the outlook for New York's
goods-producing sector. Also, New York employment
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growth remained strong in the fourth quarter of 1998 and Wall Street related
activity remains stable. Growth of employment, wages and personal income is
expected to be modestly faster than in the Executive Budget forecast.
The forecast for New York is subject to the same uncertainties as the national
forecast, as well as some specific to New York. The securities industry is more
important to the New York economy than to the national economy and, therefore, a
large change in financial market performance during the forecast horizon could
result in wage and employment levels that are significantly different from those
embodied in the forecast.
New York is the third most populous state in the nation and has a relatively
high level of personal wealth. The State's economy is diverse, with a
comparatively large share of the nation's finance, insurance, transportation,
communications and services employment and a very small share of the nation's
farming and mining activity. The State's location and its excellent air
transport facilities and natural harbors have made it an important link in
international commerce. Travel and tourism constitute an important part of the
economy. Like the rest of the nation, New York has a declining proportion of its
work force engaged in manufacturing and an increasing proportion engaged in
service industries. The following paragraphs summarize the state of major
sectors of the New York economy:
Services: The services sector, which includes entertainment, personal
services, such as health care and auto repairs, and business-related
services, such as information processing, law and accounting, is the State's
leading economic sector. The services sector accounts for more than three of
every ten nonagricultural jobs in New York and has a noticeably higher
proportion of total jobs than does the rest of the nation.
Manufacturing: Manufacturing employment continues to decline in importance
in New York, as in most other states, and New York's economy is less reliant
on this sector than is the nation. The principal manufacturing industries in
recent years produced printing and publishing materials, instruments and
related products, machinery, apparel and finished fabric products,
electronic and other electric equipment, food and related products,
chemicals and allied products, and fabricated metal products.
Trade: Wholesale and retail trade is the second largest sector in terms of
nonagricultural jobs in New York but is considerably smaller when measured
by income share. Trade consists of wholesale businesses and retail
businesses, such as department stores and eating and drinking
establishments.
Finance, Insurance and Real Estate: New York City is the nation's leading
center of banking and finance and, as a result, this is a far more important
sector in the State than in the nation as a whole. Although this sector
accounts for under one-tenth of all nonagricultural jobs in the State, it
contributes over one-sixth of all non-farm labor and proprietors' income.
Agriculture: Farming is an important part of the economy of large regions of
the State, although it constitutes a very minor part of total State output.
Principal agricultural products of the State include milk and dairy
products, greenhouse and nursery products, apples and other fruits, and
fresh vegetables. New York ranks among the nation's leaders in the
production of these commodities.
Government: Federal, State and local government together are the third
largest sector in terms of nonagricultural jobs, with the bulk of the
employment accounted for by local governments. Public education is the
source of nearly one-half of total state and local government employment.
Relative to the nation, the State has a smaller share of manufacturing and
construction and a larger share of service-related industries. The State's
finance, insurance, and real estate share, as measured by income, is
particularly large relative to the nation. The State is likely to be less
affected than the nation as a whole during an economic recession that is
concentrated in manufacturing and construction, but likely to be more affected
during a recession that is concentrated in the service-producing sector.
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In the calendar years 1987 through 1996, the State's rate of economic growth was
somewhat slower than that of the nation. In particular, during the 1990-91
recession and post-recession period, the economy of the State, and that of the
rest of the Northeast, was more heavily damaged than that of the nation as a
whole and has been slower to recover. The total employment growth rate in the
State has been below the national average since 1987. The unemployment rate in
the State dipped below the national rate in the second half of 1981 and remained
lower until 1991; since then, it has been higher. According to data published by
the US Bureau of Economic Analysis, total personal income in the State has risen
more slowly than the national average since 1988.
State per capita personal income has historically been significantly higher than
the national average, although the ratio has varied substantially. Because the
City is a regional employment center for a multi-state region, State personal
income measured on a residence basis understates the relative importance of the
State to the national economy and the size of the base to which State taxation
applies.
Relevant News. On August 22, 1996, the President signed the Personal
Responsibility and Work Opportunity Reconciliation Act of 1996 (the '1996
Welfare Act'). This new law made significant changes to welfare and other
benefit programs. Major changes included conversion of AFDC into the TANF block
grant to states, new work requirements and durational limits on recipients of
TANF and limits on assistance provided to immigrants. City expenditures as a
result of welfare reform are estimated in the Financial Plan at $49 million in
fiscal year 1998, $45 million in fiscal year 1999, $38 million in fiscal year
2000 and $44 million in fiscal year 2001. In addition, the City's naturalization
initiative, CITIZENSHIP NYC, will assist immigrants made ineligible under
Federal law to regain eligibility for benefits, by helping them through the
application process for citizenship. The Financial Plan assumes that 75% of
those immigrants who otherwise would have lost benefits will become citizens,
resulting in projected savings to the City in public assistance expenditures of
$6 million in fiscal year 1999, $24 million in fiscal year 2000 and $25 million
in fiscal year 2001. Federal legislation enacted August 5, 1997, reinstated
eligibility for even more immigrants currently on the rolls than projected. The
outyear estimates made by OMB are preliminary and depend on a variety of
factors, which are impossible to predict, including the implementation of
workfare and child care programs modified by newly enacted State law, the impact
of possible litigation challenging the law, and the impact of adverse economic
developments on welfare and other benefit programs. In accordance with the
Federal welfare reform law, the Governor submitted a State plan to the Federal
government and such plan was deemed complete as of December 2, 1996. New York
State's welfare reform, bringing the State into compliance with the 1996 Welfare
Act and making changes to the Home Relief program, was signed into law on August
20, 1997. The Governor submitted an amended State plan to the Federal
government, reflecting these changes, on September 20, 1997. Implementation of
the changes at the State level will in part determine the possible costs or
savings to the City. it is expected that OMB's preliminary estimates of
potential costs will change, based on new policies to be developed by the State
and City with respect to benefits no longer funded as Federal entitlements.
On September 11, 1997, the State Comptroller released a report entitled 'The
1997-98 Budget: Fiscal Review and Analysis' in which he identified several risks
to the State Financial Plan and estimated that the State faces a potential
imbalance in receipts and disbursements of approximately $1.5 billion for the
State's 1998-99 fiscal year and approximately $3.4 billion for the State's 1999-
2000 fiscal year. The 1998-99 fiscal year estimate by the State Comptroller is
within the range discussed by the Division of the Budget in the section entitled
'Outyear Projections of Receipts and Disbursements' in the Annual Information
Statement of August 15, 1997. Any increase in the 1997-98 reserve for future
needs would reduce this imbalance further and, based upon results to date, such
an outcome is considered possible. In addition, the Comptroller identified risks
in future years from an economic slowdown and from spending and revenue actions
enacted as a part of the 1997-98 budget that will add pressure to future budget
balance. The Governor is required to submit a balanced budget each year to the
State Legislature.
On August 11, 1997 President Clinton exercised his line item veto powers to
cancel a provision in the Federal Balanced Budget Act of 1997 that would have
deemed New York State's health care
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provider taxes to be approved by the federal government. New York and several
other states have used hospital rate assessments and other provider tax
mechanisms to finance various Medicaid and health insurance programs since the
early 1980s. The State's process of taxation and redistribution of health care
dollars was sanctioned by federal legislation in 1987 and 1991. However, the
federal Health Care Financing Administration (HCFA) regulations governing the
use of provider taxes require the State to seek waivers from HCFA that would
grant explicit approval of the provider taxing system now in place. The State
filed the majority of these waivers with HCFA in 1995 but has yet to receive
final approval.
The Balanced Budget Act of 1997 provision passed by Congress was intended to
rectify the uncertainty created by continued inaction on the State's waiver
requests. A federal disallowance of the State's provider tax system could
jeopardize up to $2.6 billion in Medicaid reimbursement received through
December 31, 1998. The President's veto message valued any potential
disallowance at $200 million. The 1997-98 Financial Plan does not anticipate any
provider tax disallowance.
On October 9, 1997 the President offered a corrective amendment to the HCFA
regulations governing such taxes. The Governor has stated that this proposal
does not appear to address all of the State's concerns, and negotiations are
ongoing between the State and HCFA. In addition, the City of New York and other
affected parties in the health care industry have filed a lawsuit challenging
the constitutionality of the President's line item veto.
On July 31, 1997, the New York State Tax Appeals Tribunal delivered a decision
involving the computation of itemized deductions and personal income taxes of
certain high income taxpayers. By law, the State cannot appeal the Tribunal's
decision. The decision will lower income tax liability attributable to such
taxpayers for the 1997 and earlier open tax years, as well as on a prospective
basis.
Ratings Agencies. On October 6, 1998, Moody's Investors Service, Inc.
('Moody's') confirmed its New York State general obligation bond rating of
single-A2. On April 20, 1998, New York's general obligation bond ratings were
the lowest of any state, except Louisiana. Moody's had rated New York State at
A2, Standard & Poor's ('S&P') had given it an A and Fitch IBCA ('Fitch') had
assigned it an A-plus.
On August 28, 1997, S&P revised its ratings on the State's general obligation
bonds to A from A-, and, in addition, revised its ratings on the State's moral
obligation, lease purchase, guaranteed and contractual obligation debt. S&P
rated the State's general obligation bonds AA- from August 1987 to March 1990
and A+ from November 1982 to August 1987. In March 1990, S&P lowered its rating
of all of the State's general obligation bonds from AA- to A. 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. On April 26, 1993 S&P
revised the rating outlook assessment to stable. On February 14, 1994, S&P
revised its outlook on the State's general obligation bonds to positive and, on
August 5, 1996, confirmed its A- rating.
On February 10, 1997, Moody's confirmed its A2 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 January 6, 1992, Moody's reduced its ratings on
outstanding limited-liability State lease purchase and contractual obligations
from A to Baa1.
Authorities. The fiscal stability of the State is related in part to the fiscal
stability of its public authorities, which generally have responsibility for
financing, constructing and operating revenue-producing public benefit
facilities. Public 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
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obligations. As of September 30, 1996 there were 17 public authorities that had
outstanding debt of $100 million or more each, and the aggregate outstanding
debt, including refunding bonds, of all state public authorities was $75.4
billion.
There are numerous public authorities, with various responsibilities, including
those which finance, construct and/or operate revenue producing public
facilities. Public authority operating expenses and debt service costs are
generally paid by revenues generated by the projects financed or operated, such
as tolls charged for the use of highways, bridges or tunnels, rentals charged
for housing units and charges for occupancy at medical care facilities.
In addition, State legislation authorizes several financing techniques for
public authorities. Also, there are statutory arrangements providing for State
local assistance payments otherwise payable to localities to be made under
certain circumstances to public authorities. Although the State has no
obligation to provide additional assistance to localities whose local assistance
payments have been paid to public authorities under these arrangements, if local
assistance payments are so diverted, the affected localities could seek
additional State assistance.
Some authorities also receive monies from State appropriations to pay for the
operating costs of certain of their programs. As described below, the MTA
receives the bulk of this money in order to carry out mass transit and commuter
services.
The State's experience has been that if an Authority suffers serious financial
difficulties, both the ability of the State and the Authorities to obtain
financing in the public credit markets and the market price of the State's
outstanding bonds and notes may be adversely affected. The New York State HFA,
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.
Since 1980, the State has enacted several taxes -- including a surcharge on the
profits of banks, insurance corporations and general business corporations doing
business in the 12-county Metropolitan Transportation Region served by the MTA
and a special one-quarter of 1 percent regional sales and use tax -- that
provide revenues for mass transit purposes, including assistance to the MTA. In
addition, since 1987, State law has required that the proceeds of a one quarter
of 1% mortgage recording tax paid on certain mortgages in the Metropolitan
Transportation Region be deposited in a special MTA fund for operating or
capital expenses. Further, in 1993 the State dedicated a portion of the State
petroleum business tax to fund operating or capital assistance to the MTA. For
the 1997-98 fiscal year, total State assistance to the MTA is projected to total
approximately $1.2 billion, an increase of $76 million over the 1996-97 fiscal
year.
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State legislation accompanying the 1996-97 adopted State budget authorized the
MTA, TBTA and TA to issue an aggregate of $6.5 billion in bonds to finance a
portion of a new $12.17 billion MTA capital plan for the 1995 through 1999
calendar years (the '1995-99 Capital Program'). In July 1997, the Capital
Program Review Board approved the 1995-99 Capital Program. This plan supersedes
the overlapping portion of the MTA's 1992-96 Capital Program. This is the fourth
capital plan since the Legislature authorized procedures for the adoption,
approval and amendment of MTA capital programs and is designed to upgrade the
performance of the MTA's transportation systems by investing in new rolling
stock, maintaining replacement schedules for existing assets and bringing the
MTA system into a state of good repair. The 1995-99 Capital Program assumes the
issuance of an estimated $5.1 billion in bonds under this $6.5 billion aggregate
bonding authority. The remainder of the plan is projected to be financed through
assistance from the State, the federal government, and the City of New York, and
from various other revenues generated from actions taken by the MTA.
There can be no assurance that all the necessary governmental actions for future
capital programs will be taken, that funding sources currently identified will
not be decreased or eliminated, or that the 1995-99 Capital Program, or parts
thereof, will not be delayed or reduced. If the 1995-99 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 assistance.
Localities. Certain localities outside the City have experienced financial
problems and have requested and received additional State assistance during the
last several State fiscal years. The potential impact on the State of any future
requests by localities for additional assistance is not included in the
projections of the State's receipts and disbursements for the State's 1998-99
fiscal year.
Fiscal difficulties experienced by the City of Yonkers resulted in the
re-establishment of the Financial Control Board for the City of Yonkers by the
State in 1984. That Board is charged with oversight of the fiscal affairs of
Yonkers. Future actions taken by the State to assist Yonkers could result in
increased State expenditures for extraordinary local assistance.
Beginning in 1990, the City of Troy experienced a series of budgetary deficits
that resulted in the establishment of a Supervisory Board for the City of Troy
in 1994. The Supervisory Board's powers were increased in 1995, when Troy MAC
was created to help Troy avoid default on certain obligations. The legislation
creating Troy MAC prohibits the City of Troy from seeking federal bankruptcy
protection while Troy MAC bonds are outstanding.
Eighteen municipalities received extraordinary assistance during the 1996
legislative session through $50 million in special appropriations targeted for
distressed cities.
Municipal Indebtedness. Municipalities and school districts have engaged in
substantial short-term and long-term borrowings. In 1995, the total indebtedness
of all localities in the State other than the City was approximately $19.0
billion. A small portion (approximately $102.3 million) of that indebtedness
represented borrowing to finance budgetary deficits and was issued pursuant to
State enabling 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. Eighteen
localities had outstanding indebtedness for deficit financing at the close of
their fiscal year ending in 1995.
From time to time, 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
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of declining urban population, increasing expenditures and other economic trends
could adversely affect certain localities and require increasing State
assistance in the future.
Litigation. Certain litigation pending against the State or its officers or
employees could have a substantial or long-term adverse effect on State
finances. Among the more significant of these cases are those that involve: (i)
employee welfare benefit plans where plaintiffs are seeking a declaratory
judgment nullifying on the ground of federal preemption provisions of Section
2807-c of the Public Health Law and implementing regulations which impose a bad
debt and charity care allowance on all hospital bills and a 13 percent surcharge
on inpatient bills paid by employee welfare benefit plans; (ii) several
challenges to provisions of Chapter 81 of the Laws of 1995 which alter the
nursing home Medicaid reimbursement methodology; (iii) the validity of
agreements and treaties by which various Indian tribes transferred title to the
State of certain land in central and upstate New York; (iv) challenges to the
practice of using patients' Social Security benefits for the costs of care of
patients of State Office of Mental Health facilities; (v) an action against
State and City officials alleging that the present level of shelter allowance
for public assistance recipients is inadequate under statutory standards to
maintain proper housing; (vi) alleged responsibility of State officials to
assist in remedying racial segregation in the City of Yonkers; (vii) 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; (viii) challenges to the
promulgation of the State's proposed procedure to determine the eligibility for
and nature of home care services for Medicaid recipients; (ix) a challenge to
the constitutionality of petroleum business tax assessments authorized by Tax
Law SS 301; (x) an action for reimbursement from the State for certain costs
arising out of the provision of preschool services and programs for children
with handicapping conditions, pursuant to Sections 4410 (10) and (11) of the
Education Law; (xi) a challenge to the constitutionality of the Clean
Water/Clean Air Bond Act of 1996 and its implementing regulations; (xii) two
challenges to regulations promulgated by the Superintendent of Insurance that
established excess medical malpractice premium rates for the 1986-87 through
1996-97 fiscal years; and (xiii) an action to compel the State to enforce sales
and excise taxes imposed on tobacco products and motor fuel sold to non-Indian
customers on Indian reservations.
Adverse developments in the proceedings described above or the initiation of new
proceedings could affect the ability of the State to maintain balanced 1997-98
and 1998-99 State Financial Plans. In its Notes to its General Purpose Financial
Statements for the fiscal year ended March 31, 1997, the State reports its
estimated liability for awards and anticipated unfavorable judgments at $364
million. There can be no assurance that an adverse decision in any of the above
cited proceedings would not exceed the amount that the 1997-98 and 1998-99 State
Financial Plans reserve for the payment of judgments and, therefore, could
affect the ability of the State to maintain balanced plans.
NEW YORK CITY
The fiscal health of the State may also be particularly affected by the fiscal
health of the City, which continues to require significant financial assistance
from the State. Although the City has maintained balanced budgets in each of its
last seventeen fiscal years and is projected to achieve balanced operating
results for the 1999-2000 fiscal year, there can be no assurance that the gap
closing actions proposed in the Financial Plan can be successfully implemented
or that the City will maintain a balanced budget in future years without
additional state aid, revenue increases or expenditure reductions. Additional
tax increases and reductions in essential City services could also adversely
affect the City's economic base. The City depends on State aid both to enable
the City to balance its budget and to meet its cash requirements. There can be
no assurance that there will not be reductions in State aid to the City from
amounts currently projected; that State budgets will be adopted by the April 1st
Statutory deadline or interim appropriations enacted; or that any such
reductions or delays will not have adverse effects on the City's cash flow or
revenues. The State could also be affected by the ability of the City to market
its securities successfully in the public credit markets. The City has achieved
balanced operating results for each of its fiscal years
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since 1981 as reported in accordance with the then-applicable GAAP standards.
Current law requires the City to prepare four-year annual financial plans, which
are reviewed and revised on a quarterly basis and includes capital, revenue, and
expense projections and outlines proposed gap-closing for the years with
projected budget gaps. An annual financial report for its most recent completed
fiscal year is prepared at the end of October of each year. The City's current
Financial Plan projects a surplus in the 1999 fiscal year, before discretionary
transfers and budget gaps for each of the 2000, 2001 and 2002 fiscal years.
In response to the City's fiscal crisis in 1975, the State took action to assist
the City in returning to fiscal stability. Among these actions, the State
established the Municipal Assistance Corporation for the City of New York
('MAC') to provide financing assistance to the City. The State also enacted the
New York State Financial Emergency Act for The City of New York (the 'Financial
Emergency Act') which, among other things, established the New York State
Financial Control Board (the 'Control Board') to oversee the City's financial
affairs. The State also established the Office of the State Deputy Comptroller
for the City of New York ('OSDC') to assist the Control Board in exercising its
powers and responsibilities and a 'Control Period' from 1975 to 1986 during
which the City was subject to certain statutorily-prescribed fiscal-monitoring
arrangements. Although the Control Board terminated the Control Period in 1986
when certain statutory conditions were met, thus suspending certain Control
Board powers, the Control Board, MAC and OSDC continue to exercise various
fiscal-monitoring functions over the City, and upon the occurrence or
'substantial likelihood and imminence' of the occurrence of certain events,
including, but not limited to a City operating budget deficit of more than $100
million, the Control Board is required by law to reimpose a Control Period.
Currently, the City and its 'Covered Organizations' (i.e., those which receive
or may receive money from the City directly, indirectly or contingently) operate
under a four-year financial plan (the 'City Financial Plan'), which the City
prepares annually and updates periodically and which includes the City's capital
revenue and expense projections and outlines proposed gap-closing programs for
years with projected budget gaps. The City's projections set forth in the City
Financial Plan are based on various assumptions and contingencies, some of which
are uncertain and may not materialize. Unforeseen developments and 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.
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. Unforeseen developments and 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 staffs of the Control Board, OSDC and the City Comptroller issue periodic
reports on the City's financial plans which analyze the City's forecasts of
revenues and expenditures, cash flow, and debt service requirements for, and
financial plan compliance by, the City and its Covered Organizations. According
to recent staff reports, while economic recovery in New York City has been
slower than in other regions of the country, a surge in Wall Street
profitability resulted in increased tax revenues and generated a substantial
surplus for the City in fiscal year 1996-97. Although several sectors of the
City's economy have expanded recently, especially tourism and business and
professional services, City tax revenues remain heavily dependent on the
continued profitability of the securities industries and the course of the
national economy. These reports have also indicated that recent City budgets
have been balanced in part through the use of non-
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recurring resources; that the City Financial Plan tends to rely on actions
outside its direct control; that the City has not yet brought its long-term
expenditure growth in line with recurring revenue growth; and that the City is
therefore likely to continue to face substantial gaps between forecast revenues
and expenditures in future years that must be closed with reduced expenditures
and/or increased revenues. In addition to these monitoring agencies, the
Independent Budget Office ('IBO') has been established pursuant to the City
Charter to provide analysis to elected officials and the public on relevant
fiscal and budgetary issues affecting the City.
The 1999-2002 Financial Plan. For the 1997 fiscal year, the City had an
operating surplus, before discretionary transfers, and achieved balanced
operating results, after discretionary transfers, in accordance with GAAP. The
1997 fiscal year is the seventeenth year that the City has achieved an operating
surplus, before discretionary transfers, and balanced operating results, after
discretionary transfers.
The most recent quarterly modification to the City's financial plan for the 1998
fiscal year, submitted to the Control Board on June 23, 1998 (the '1998
Modification'), projects a balanced budget in accordance with GAAP for the 1998
fiscal year.
One June 26, 1998, the City released the Financial Plan for the 1999-2002 fiscal
years, which relates to the City and certain entities which receive funds from
the City. The Financial Plan reflects changes since the June 1997 Financial
Plan, including changes as a result of the City's expense and capital budgets
for the 1999 fiscal year, which were adopted in June, 1998, and changes
subsequent to the adopted budget. The Financial Plan projects revenues and
expenditures for the 1999 fiscal year balanced in accordance with GAAP, and
projects gaps of $1.9 billion, $2.7 billion and $2.3 billion for the 2000
through 2002 fiscal years, respectively, after implementation of a gap closing
program to reduce agency expenditures by approximately $380 million in each of
fiscal years 2000 through 2002.
Changes since the June 1997 Financial Plan include: (i) an increase in projected
tax revenue of $1.1 billion, $955 million, $897 million and $1.7 billion in the
1999 through 2002 fiscal years, respectively; (ii) a reduction in assumed State
aid of between $134 million and $142 million in each of the 1999 through 2002
fiscal years, reflecting the adopted budget for the State's 1998 fiscal year;
(iii) a delay in the assumed collection of $350 million of projected rent
payments for the City's airports in the 1999 fiscal year to fiscal years 2000
through 2002; (iv) a reduction in projected debt service expenditures totaling
$419 million, $204 million and $226 million in the 1999 through 2001 fiscal
years, respectively; (v) an increase in the Board of Education (the 'BOE')
spending of $345 million, $41 million, $73 million and $208 million in the 1999
through 2002 fiscal years, respectively; (vi) an increase in expenditures for
the City's proposed drug initiatives totaling between $167 million and $193
million in each of the 1999 through 2002 fiscal years; (vii) other agency net
spending initiatives totaling $679 million, $487 million, $492 million and $896
million in fiscal years 1999 through 2002, respectively; and (viii) increased
pension costs of $127 million in the 1999 fiscal year and reduced pension costs
of $254 million in fiscal years from additional agency actions totaling $1.1
billion, $936 million, $910 million and $962 million in fiscal years 1999
through 2002, respectively, including the approximately $380 million gap closing
program for each of fiscal years 2000 and 2002.
The 1998 Modification and the 1999-2002 Financial Plan include proposed
discretionary transfers in the 1998 fiscal year of approximately $2.0 billion to
pay certain debt service costs and subsidies due in the 1999 fiscal year, and a
proposed discretionary transfer in the 1999 fiscal year of $465 million to pay
debt service due in fiscal year 2000. In addition, the Financial Plan reflects
enacted and proposed tax reduction programs totaling $975 million, $1.172
billion and $1.259 billion in fiscal years 2000 through 2002, respectively,
including the elimination of the City sales tax on all clothing as of December
1, 1999, the expiration of the 12.5% personal income tax surcharge on December
31, 1998, the extension of current tax reductions for owners of cooperative and
condominium apartments starting in fiscal year 2000 and a personal income tax
credit for child care and for resident holders of Subchapter S corporations
starting in fiscal year 2000, which are subject to State legislative approval,
and reduction of the commercial rent tax commencing in fiscal year 2000.
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The Financial Plan assumes (i) approval by the Governor and the State
Legislature of the extension of the 14% personal income tax surcharge, which is
scheduled to expire on December 31, 1999, and which is projected to provide
revenue of $172 million, $500 million and $514 million in the 2000, 2001 and
2002 fiscal years, respectively, and the expiration of the 12.5% personal income
tax surcharge on December 31, 1998, the expiration of which is projected to
reduce revenue by $201 million, $546 million, $568 million and $593 million in
the 1999 through 2002 fiscal years, respectively; (ii) collection of the
projected rent payments for the City's airports, totaling $15 million, $365
million, $155 million and $185 million in the 1999 through 2002 fiscal years,
respectively, which may depend on the successful completion of negotiations with
The Port Authority of New York and New Jersey (the 'Port Authority') or the
enforcement of the City's rights under the existing leases through pending legal
actions; and (iii) State and Federal approval of the State and Federal
gap-closing actions assumed in the Financial Plan. The Financial Plan provides
no additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001. In addition, the economic and financial condition of
the City may be affected by various financial, social, economic and political
factors which could have a material effect on the City.
On June 5, 1998, the City Council adopted a budget which re-allocated
expenditures from those provided in the Executive Budget in the amount of $409
million. The re-allocated expenditures, which include $116 million from the
Budget Stabilization Account, $82 million from debt service, $45 million from
pension contributions, $54 million from social services spending and $112
million from other spending, were re-allocated to uses set forth in the City
Council's adopted budget. Such uses include a revised tax reduction program at a
revenue cost in the 1999 fiscal year of $45 million, additional expenditures for
various programs of $199 million and provision of $165 million to retire high
interest debt. The revised tax reduction program in the City Council's adopted
budget assumes the expiration of the 12.5% personal income tax surcharge, rather
than the implementation of the personal income tax reduction program proposed in
the Executive Budget.
On June 5, 1998, in accordance with the City Charter, the Mayor certified to the
City Council revised estimates of the City's revenues (other than property tax)
for fiscal year 1999. Consistent with this certification, the property tax levy
was estimated by the Mayor to require an increase to realize sufficient revenue
from this source to produce a balanced budget within generally accepted
accounting principles. On June 8, 1998, the City Council adopted a property tax
levy that was $237.7 million lower than the levy estimated to be required by the
Mayor. The City Council, however, maintained that the revenue to be derived from
the levy it adopted would be sufficient to achieve a balanced budget because the
property tax reserve for uncollectibles could be reduced. Property tax bills for
fiscal year 1999 were mailed by the City's Department of Finance at the rates
adopted by the City Council for fiscal year 1998, subject to later adjustment.
The City Charter provides for this procedure in the event, as is the case this
year, that budget adoption has not been completed by June 5.
On June 10, 1998, the Mayor vetoed $196 million of spending added in the expense
budget adopted by the City Council and $315 million added in the capital budget
adopted by the City Council. On June 16, 1998, the City Council voted to
override the Mayor's vetoes. for a description of the respective roles of the
Mayor and the City Council in the budget adoption process, see 'Section III:
Government and Financial Controls -- City Financial Management, Budgeting and
Controls.'
Collective Bargaining Agreements. The Financial Plan reflects the costs of the
settlements and arbitration awards with the United Federation of Teachers
('UFT'), a coalition of unions headed by District Council 37 of the American
Federation of State, County and Municipal Employees ('District Council 37') and
other bargaining units, which together represent approximately 97% of the City's
workforce, and assumes that the City will reach agreement with its remaining
municipal unions under terms which are generally consistent with such
settlements and arbitration awards. These contracts are approximately five years
in length and have a total cumulative net increase of 13%. Assuming the City
reaches similar settlements with its remaining municipal unions, the cost of all
settlements for all City-funded employees, as reflected in the Financial Plan,
would total
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$459 million and $1.2 billion in the 1998 and 1999 fiscal years, respectively,
and exceed $2 billion in every fiscal year after the 1999 fiscal year. See
'Section VII: 1999-2002 Financial Plan -- Assumptions -- Expenditure
Assumptions -- 1. Personal Service Costs'. The Financial Plan provides no
additional wage increases for City employees after their contracts expire in
fiscal years 2000 and 2001.
Assumptions. The Financial Plan assumes (i) approval by the Governor and the
State Legislature of the extension of the 14% personal income tax surcharge,
which is scheduled to expire on December 31, 1999 and the extension of which is
projected to provide revenue of $168 million, $507 million, and $530 million in
the 2000, 2001, and 2002 fiscal years, respectively, and of the extension of the
12.5% personal income tax surcharge, which is scheduled to expire on December
31, 1998 the extension of which is projected to provide revenue of $187 million,
$531 million and $554 million, and $579 million in the 1999 through 2002 fiscal
years, respectively; (ii) collection of the projected rent payments for the
City's airports, totaling $365 million, $175 million, $170 million, and $70
million in the 1999 through 2002 fiscal years, respectively, which may depend on
the successful completion of negotiations with the Port Authority or the
enforcement of the City's rights under the existing leases through pending legal
actions; and (iii) State approval of the repeal of the Wicks law relating to
contracting requirements for City construction projects and the additional State
funding assumed in the Financial Plan, and State and Federal approval of the
State and Federal gap-closing actions proposed by the City in the Financial
Plan. It is expected that the Financial Plan will engender public debate which
will continue through the time the budget is scheduled to be adopted in June
1998, and that there will be alternative proposals to reduce taxes (including
the 12.5% personal income tax surcharge) and increase in spending. Accordingly,
the Financial Plan may be changed by the time the budget for the 1999 fiscal
year is adopted. Moreover, the Financial Plan provides no additional wage
increases for City employees after their contracts expire in fiscal years 2000
and 2001. In addition, the economic and financial condition of the City may be
affected by various financial, social, economic and political factors which
could have a material effect on the City.
The City's Financial Plan is based on numerous additional 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 Financial Plan is subject to various other
uncertainties and contingencies relating to, among other factors, the extent, if
any, to which wage increases for City employees exceed the annual wage costs
assumed for the 1998 through 2002 fiscal years; continuation of projected
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
City Financial Plan and to take various other actions to assist the City; 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 City Financial Plan; the impact on the City revenues and
expenditures of Federal and State welfare reform and any future legislation
affecting Medicare or other entitlement programs; adoption of the City's budgets
by the City Council in substantially the forms submitted by the Mayor; the
ability of the City to implement proposed reductions in City personnel and other
cost reduction initiatives, and the success with which the City controls
expenditures; the impact of conditions in the real estate market on real estate
tax revenues; the City's ability to market its securities successfully in the
public credit markets; and unanticipated expenditures that may be incurred as a
result of the need to maintain the City's infrastructure. Certain of these
assumptions have been questioned by the City Comptroller and other public
officials.
The Governor presented his 1998-1999 Executive Budget to the Legislature on
January 20, 1998. In recent years, however, the State has failed to adopt a
budget prior to the beginning of the fiscal year. A prolonged delay in the
adoption of the State's budget beyond the statutory April 1 deadline without
interim appropriations could delay the projected receipt of State aid, and there
can be no assurance that State budgets in future fiscal years will be adopted by
the April 1 statutory deadline.
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City Employees. Substantially all of the City's full-time employees are members
of labor unions. The Financial Emergency Act requires that all collective
bargaining agreements entered into by the City and the Covered Organizations be
consistent with the City's current financial plan, except for certain awards
arrived at through impasse procedures. During a Control Period, and subject to
the foregoing exception, the Control Board would be required to disapprove
collective bargaining agreements that are inconsistent with the City's current
financial plan.
Under applicable law, the City may not make unilateral changes in wages, hours
or working conditions under any of the following circumstances: (i) during the
period of negotiations between the City and a union representing municipal
employees concerning a collective bargaining agreement; (ii) if an impasse panel
is appointed, then during the period commencing on the date on which such panel
is appointed and ending sixty days thereafter or thirty days after it submits
its report, whichever is sooner, subject to extension under certain
circumstances to permit completion of panel proceedings; or (iii) during the
pendency of an appeal to the Board of Collective Bargaining. Although State law
prohibits strikes by municipal employees, strikes and work stoppages by
employees of the City and the Covered Organizations have occurred.
The 1998-2002 Financial Plan projects that the authorized number of City-funded
employees whose salaries are paid directly from City funds, as opposed to
federal or State funds or water and sewer funds, will decrease from an estimated
level of 204,685 on June 30, 1998 to an estimated level of 203,987 by June 30,
2002, before implementation of the gap closing program outlined in the City
Financial Plan.
Contracts with all of the City's municipal unions expired in the 1995 and 1996
fiscal years. The City has reached settlements with unions representing
approximately 86% of the City's work force. The City Financial Plan reflects the
costs of the settlements and assumes similar increases for all other City-funded
employees. The terms of wage settlements could be determined through the impasse
procedure in the New York City Collective Bargaining Law, which can impose a
binding settlement.
The City's pension expenditures for the 1998 fiscal year are expected to
approximate $1.5 billion. In each of fiscal years 1999 through 2002, these
expenditures are expected to approximate $1.4 billion, $1.4 billion, $1.4
billion, and $1.3 billion, respectively. Certain of the systems may provide
pension benefits of 50% to 55% of 'final pay' after 20 to 25 years of service
without additional benefits for subsequent years of service. For the 1997 fiscal
year, the City's total annual pension costs, including the City's pension costs
not associated with the five major actuarial systems, plus Federal Social
Security tax payments by the City for the year, were approximately 19.04% of
total payroll costs. In addition, contributions are also made by certain
component units of the City and government units directly to the three cost
sharing multiple employer actuarial systems. The State Constitution provides
that pension rights of public employees are contractual and shall not be
diminished or impaired.
Reports on the City Financial Plan. 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, and it is expected that
the staff of the Control Board will issue a report on the 1998-2002 Financial
Plan in the near future. On February 26, 1998, the City Comptroller issued a
report on the 1998 fiscal year and the preliminary budget for the 1999 fiscal
year, as reflected in the 1997-2001 Financial Plan. With respect to the 1998
fiscal year, the report identified a possible surplus of between $71 million and
$293 million above the level projected in the City's plan. The report stated
that the additional surplus reflects the possibility of the receipt
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of an additional $225 million of tax revenues, and that the size of the possible
surplus depends primarily on whether the sale of the New York Coliseum for $200
million is completed. With respect to the 1999 fiscal year, the report
identified a possible gap of $153 million or a possible surplus of $269 million,
depending upon whether the State approves the extension of 12.5% personal income
tax surcharge and the amount of surplus for the 1998 fiscal year available for
debt service in the 1999 fiscal year.
The potential risks identified in the City Comptroller's report for the 1999
fiscal year include: (i) assumed payments from the Port Authority relating to
the City's claims for back rentals and an increase in future rentals, part of
which are the subject of the arbitration, totaling $335 million; (ii) State
approval of the 12.5% personal income tax surcharge beyond December 1, 1998,
which would generate $188 million in the 1999 fiscal year and which the Speaker
of the City Counsel has opposed; and (iii) the receipt of an additional $450
million of State and Federal aid assumed in the financial plan. The potential
risks are offset by potential additional resources for the 1999 fiscal year,
including the potential for an additional $150 million of State educational aid,
$150 million of additional debt service savings, $176 million in tax revenues if
the proposed sales tax reduction on clothing is not approved, $294 million of
higher than projected tax revenues and the availability in the 1999 fiscal year
of an additional $71 million to $293 million surplus from the 1998 fiscal year.
The report also noted that the City Comptroller will begin writing off
outstanding education-aid receivables that are 10 years past due, which are
estimated to be approximately $4 million in the 1998 fiscal year and $39 million
in the 1999 fiscal year, and which total $914 million for fiscal years 1989
through 1997. In addition, the report noted that City-funded expenditures for
the 1998 fiscal year are expected to exceed the ceiling established in the May
1996 agreement between the City and MAC, which would permit MAC to recover from
the City in the 1999 fiscal year an amount equal to such excess spending, up to
$125 million. Finally, the report noted that, while the City is in a relatively
strong financial position, its reliance on State and Federal aid to close its
budget gap for the 1999 fiscal year raises concerns, and that the City's
spending will again be under pressure in the event of an economic downturn. The
City Comptroller also noted (in a separate report on the City's capital debt)
that debt burden measures, such as annual debt service as a percentage of tax
revenues, debt per capita, and debt assessed value of real property, are
approaching historically high post-fiscal crises levels, which calls for
restraint in the City's capital program, while the City's infrastructure
requires additional resources.
Also on February 26, 1998, the staff of OSDC issued a report on the Financial
Plan. With respect to the 1998 fiscal year, the OSCD report noted that the
City's revenues could be $200 million greater than projected in the Financial
Plan. While noting a potential delay in the receipt of proceeds from the sale of
the New York Coliseum, the report projects that it is not likely that those
resources will be needed in the 1998 fiscal year. The report projected potential
budget gaps of $462 million, $2.6 billion, $2.7 billion, and $2.3 billion for
the 1999 through 2002 fiscal years, respectively, which include the gaps
projected in the Financial Plan for fiscal years 2000 through 2002 and the
additional net risks identified in the report totaling $762 million, $1.012
billion, $913 million, and $774 million for the 1999 through 2002 fiscal years,
respectively, which are reduced by the potential for greater than forecast
revenues and lower than forecast pension costs for fiscal years 2000 through
2002. The largest risks identified in the report relate to (i) the receipt of
projected Port Authority lease payments which are the subject of arbitration and
lease negotiations; (ii) City gap-closing proposals for additional State and
Federal assistance; and (iii) State approval of a three-year extension of the
City's 12.5% personal income tax surcharge. Additional risks identified in the
report include unfunded expenditures for project READ totaling $125 million for
each of the 2000 through 2002 fiscal years and the potential for additional
funding needs for the City's labor reserve, which total $104 million in the 1999
fiscal year and exceed $200 million in each of the 2000 through 2002 years, to
pay for collective bargaining increases for the Covered Organizations, which the
Plan assumes the Covered Organizations will pay instead of the City. The report
noted that these risks could be reduced if the Tax Reduction Program proposed in
the Financial Plan is not approved by the City Counsel and the State. The report
also noted that: (i) HHC faces potential budget gaps starting in the 1999 fiscal
year and reflecting the expected loss of revenues associated with the
implementation of Medicaid mandatory managed
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care; (ii) the Financial Plan assumes that the State will extend the 14%
personal income tax surcharge; (iii) the City faces potential liability for
State education aid owed from prior years which the City could be required to
write off if a plan is not reached to fund these claims; and (iv) the City might
be required to reimburse MAC up to $125 million on the 1999 fiscal year if the
City spending limits set forth in the May 1996 agreement with MAC are exceeded
in the 1998 fiscal year. However, the report noted that actual fiscal year 1998
spending will not be determined until October 1998, and in the interim, City and
MAC officials are discussing solutions to the reimbursement problem.
The OSDC report noted also that, while the City's financial outlook has improved
because of actions taken by the City, Federal, and State governments and record
securities industry performance, the staff remained concerned about the City's
dependence on the securities industry and whether the City will be able to
sustain a relatively high level of spending. The report noted that City-funded
spending is projected to grow by 7.2% in fiscal year 1998 and by 4.5% in fiscal
year 1999, while revenues are projected to grow by only 1.8% in fiscal year
1999. Moreover, the report noted that while the budget gaps for fiscal years
2000 through 2002 have been reduced, they are still large by historical
standards, and the budget makes no provisions for wage increases after the
expiration of current contacts, which, at the projected inflation rate, would
increase costs by $375 million in fiscal year 2001 and by $725 million in fiscal
year 2002. Finally, the report noted that the Asian financial and economic
crises could intensify and create greater impact on financial markets in the
U.S. economy than currently anticipated, or that the Federal Reserve Board could
raise interest rates, which could adversely affect the financial markets and the
City's financial condition.
On January 13, 1998, the IBO released a report setting forth its forecast for
the City's revenues and expenditures for the 1998 through 2001 fiscal years,
assuming continuation of current spending policies and tax laws. In the report,
the IBO forecasts that the City will end the 1998 fiscal year with a surplus of
$120 million, in addition to $514 million in the Budget Stabilization Account.
Additionally, the report forecasts that the City will face gaps of $1.4 billion,
$2.6 billion, and $2.8 billion in the 1999 through 2001 fiscal years,
respectively, resulting from 4.8% annual growth in spending form 1998 through
2001, compared with 2.2% annual revenue growth. The report noted that slow
revenue growth is attributable to a variety of factors, including a gradual
deceleration in economic growth through the first half of calendar year 1999,
the impact of recently enacted tax cuts and constraints on increases in the real
property tax, as well as uncertain back rent payments from the Port Authority,
while future costs for existing programs will increase to reflect inflation and
scheduled pay increases for the City employees during the term of existing labor
agreements. The report also noted that debt service and education spending will
increase rapidly, while spending for social services rise more slowly due to
lower projected caseloads.
Finally, the report noted that the new welfare law's most significant fiscal
impact is likely to occur in the years 2002 and beyond, reflecting the full
impact of the lifetime limit on welfare participation which only begins to be
felt in 2002 when the first recipients reach the five-year limit and are assumed
to be covered by Home Relief. In addition, the report noted that, given the
constitutional requirement to care for the needy, the 1996 Welfare Act might
well prompt a migration of benefit-seekers into the City, thereby increasing
City welfare expenditures in the long run. The report concluded that the impact
of the 1996 Welfare Act on the City will ultimately depend on the decisions of
State and City officials, the performance of the local economy and the behavior
of thousands of individuals in response to the new system.
Previous Reports. On September 18, 1997, the City Comptroller issued a report
commenting on developments with respect to the 1998 fiscal year. The report
noted that the City's adopted budget, which is reflected in the City Financial
Plan, had assumed additional State resources of $612 million in the 1998 fiscal
year, and that the approved State budget provided resources of only $216 million
for gap-closing purposes. The report further noted that, while the City will
receive $322 million more in education aid in the 1998 fiscal year than assumed
in the City's adopted budget, it is unlikely that the funding will be entirely
available for gap-closing purposes. In addition, the report noted that the
City's financial statements currently contain approximately $643 million in
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uncollected State education aid receivables from prior years as a result of the
failure of the State to appropriate funds to pay these claims, and that the
staff of BOE has indicated that an additional $302 million in prior year claims
is available for accrual. The report stated that the City Comptroller maintains
the position that no further accrual of prior year aid will take place,
including $75 million in aid assumed in the City's adopted budget for the 1998
fiscal year, unless the State makes significant progress to retire the
outstanding prior year receivables. On October 28, 1997, the City Comptroller
issued a subsequent report commenting on recent developments. With respect to
the 1997 fiscal year, the report noted that the City ended the 1997 fiscal year
with an operating surplus of $1.367 billion, before certain expenditures and
discretionary transfers, of which $1.362 billion was used for expenditures due
in the 1998 fiscal year. With respect to tax revenues for the 1998 fiscal year,
the report noted that total tax revenues in the first quarter of the 1998 fiscal
year were $244.3 million above projections in the City Financial Plan, excluding
audit collections which were $31.2 million less than projected. The report
stated that the increased tax revenues included $110.3 million of greater than
projected general property tax receipts, which resulted, in part, from a
prepayment discount program, and increased revenues from the personal income,
banking corporation, general corporation and unincorporated business taxes. The
report noted that Wall Street profits exceeded expectations in the first half of
the 1997 calendar year. However, the report noted that the stock market in the
last two weeks of October has declined as a result of currency turmoil in
Southeast Asia. The report noted that, while tax revenues in the 1998 fiscal
year should not be significantly affected by the recent stock market decline,
since there is a lag between activity on Wall Street and City tax revenues, if
the current stock market decline persists, tax revenue forecasts for subsequent
years will have to be revised downward. The report noted that the City was not
affected by the October 1987 stock market crash until the 1990 fiscal year, when
revenues from the City's business and real estate taxes fell by 20% over the
1989 fiscal year. The report also noted that expenditures for short-term and
long-term debt issued during the first half of the 1998 fiscal year are
estimated to be between approximately $53.9 million and $58.8 million below
levels anticipated in the City's adopted budget for the 1998 fiscal year,
approximately $20 million below anticipated levels in the 1999 fiscal year and
approximately $30 million below anticipated levels in each of fiscal years 2000
and 2001 due to less borrowing and lower interest rates than assumed.
On August 25, 1997, the IBO issued a report relating to recent developments
regarding welfare reform. The report noted that Federal legislation adopted in
August 1997, modified certain aspects of the 1996 Welfare Act, by reducing SSI
eligibility restrictions for certain legal aliens residing in the country as of
August 22, 1996, resulting in the continuation of Federal benefits, by providing
funding to the states to move welfare recipients from public assistance and into
jobs and by providing continued Medicaid Coverage for those children who lose
SSI due to stricter eligibility criteria. In addition, the report noted that the
State had enacted the Welfare Reform Act of 1997 which, among other things,
requires the City to achieve work quotas and other work requirements and
requires all able-bodied recipients to work after receiving assistance for two
years. The report noted that this provision could require the City to spend
substantial funds over the next several years for workfare and day care in
addition to the funding reflected in the City Financial Plan. The report also
noted that the State Welfare Reform Act of 1997 established a Food Assistance
Program designed to replace Federal food stamp benefits for certain classes of
legal aliens denied eligibility for such benefits by the 1996 Welfare Act. The
report noted that if the City elects to participate in the Food Assistance
Program, it will be responsible for 50% of the costs for the elderly and
disabled. The IBO has stated that it will release an updated report to provide a
detailed analysis of these developments and their likely impact on the City.
On July 16, 1997, the City Comptroller issued a report on the City Financial
Plan. With respect to the 1998 fiscal year, the report identified a possible
$112 million surplus or a possible total net budget gap of up to $440 million,
depending primarily on whether the tax reduction program proposed in the City
Financial Plan is implemented and the 14% personal income tax surcharge is
extended beyond December 31, 1997. The risks identified in the report for the
1998 fiscal year include (i) $178 million related to BOE, resulting primarily
from unidentified expenditure reductions and prior year State aid receivables;
(ii) State aid totaling $115 million which is
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assumed in the City Financial Plan but not provided for in the Governor's
Executive Budget; (iii) State approval of the extension of the 14% personal
income tax surcharge beyond December 31, 1997, which would generate $169 million
in the 1998 fiscal year; (iv) City proposals for State aid totaling $271
million, including the acceleration of $142 million of State revenue sharing
payments from the 1999 fiscal year to the 1998 fiscal year, which are subject to
approval by the Governor and/or the State Legislature; and (v) the assumed sale
of the Coliseum for $200 million, which may be delayed. The report noted that
these risks could be partially offset by between $597 million and $765 million
in potentially available resources, including $200 million of higher projected
tax revenues, $150 million of possible additional State education aid and the
possibility that the proposed sales tax reduction will not be enacted, which
would result in $157 million of additional tax revenues in the 1998 fiscal year.
With respect to the 1998 fiscal year, the report stated that the City has
budgeted $200 million in the General Reserve and included in the City Financial
Plan a $300 million surplus to be used in the 1999 fiscal year, making the
potential $440 million budget gap manageable. However, the report also expressed
concern as to the sustainability of profits in the securities industry.
With respect to the 1999 and subsequent fiscal years, the report identified
total net budget gaps of between $1.9 billion and $2.8 billion, $2.6 billion and
$4.0 billion, and $2.4 billion and $3.8 billion for the 1999 through 2001 fiscal
years, respectively, which include the gaps set forth in the City Financial
Plan. The potential risks and potential available resources identified in the
report for the 1999 through 2001 fiscal years include most of the risks and
resources identified for the 1998 fiscal year, except that the additional risks
for the 1999 through 2001 fiscal years include (i) assumed payments from the
Port Authority relating to the City's claim for back rentals and an increase in
future rentals, part of which are the subject of arbitration, totaling $350
million, $140 million and $135 million in the 1999-2001 fiscal years,
respectively; and (ii) State approval of the extension of the 12.5% personal
income tax surcharge beyond December 31, 1998, which would generate $190
million, $527 million and $554 million in the 1999 through 2001 fiscal years,
respectively.
On July 15, 1997, the staff of the Control Board issued a report commenting on
the City Financial Plan. The report stated that, while the City should end the
1998 fiscal year with its budget in balance, the City Financial Plan still
contains large gaps beginning in the 1999 fiscal year, reflecting revenues which
are not projected to grow during the Financial Plan Period and expenditures
which are projected to grow at about the rate of inflation. The report
identified net risks totaling $485 million, $930 million, $1.2 billion and $1.4
billion for 1998 through 2001 fiscal years, respectively, in addition to the
gaps projected in the City Financial Plan for fiscal years 1999 through 2001.
The principal risks identified in the report included (i) potential tax revenues
shortfalls totaling $150 million, $300 million and $400 million for the 1999
through 2001 fiscal years, respectively, based on historical average trends;
(ii) BOE's structural gap, uncertain State funding of BOE and implementation by
BOE of various unspecified actions, totaling $163 million, $209 million, $218
million and $218 million in the 1998 through 2001 fiscal years, respectively;
(iii) the proposed sale of certain assets in the 1998 fiscal year totaling $248
million, which could be delayed; (iv) assumed additional State actions totaling
$271 million, $121 million, $125 million and $129 million in the 1998 through
2001 fiscal years, respectively; (v) revenues from the extension of the 12.5%
personal income tax surcharge beyond December 31, 1998, totaling $188 million,
$527 million and $554 million in the 1999 through 2001 fiscal years,
respectively, which requires State legislation; and (vi) the receipt of $350
million, $140 million and $135 million from the Port Authority in the 1999
through 2001 fiscal years, respectively, which is the subject of arbitration.
Taking into account the risks identified in the report and the gaps projected in
the City Financial Plan, the report projected a gap of $485 million for the 1998
fiscal year, which could be offset by available reserves, and gaps $2.7 billion,
$4.1 billion and $4.0 billion for the 1999 through 2001 fiscal years,
respectively. The report also noted that (i) if the securities industry or
economy slows down to a greater extent than projected, the City could face
sudden and unpredictable changes to its forecast; (ii) the City's entitlement
reduction assumptions require a decline of historic proportions in the number of
eligible welfare recipients; (iii) the City has not yet shown how the City's
projected debt service, which would consume 20% of tax revenues by the 1999
fiscal year, can be accommodated on a recurring basis; (iv) the City is
deferring recommended capital maintenance;
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and (v) continuing growth in enrollment at BOE has helped create projected gaps
of over $100 million annually at BOE. However, the report noted that if proposed
tax reductions are not approved, additional revenue will be realized, ranging
from $272 million in the 1998 fiscal year to $481 million in the 2001 fiscal
year.
On July 2, 1997, the staff of the OSDC issued a report on the City Financial
Plan. The report projected a potential surplus for the 1998 fiscal year of $190
million, due primarily to the potential for greater than forecast tax revenues,
and projected budget gaps for the 1999 through 2001 fiscal years which are
slightly less than the gaps set forth in the City Financial Plan for such years.
The report also identified risks of $518 million, $1.1 billion, $1.3 billion and
$1.4 billion for the 1998 through 2001 fiscal years, respectively. The
additional risks identified in the report relate to: (i) the receipt of Port
Authority lease payments totaling $350 million, $140 million and $135 million in
the 1999 through 2001 fiscal years, respectively; (ii) City proposals for State
aid totaling $271 million, $121 million, $125 million and $129 million in the
1998 through 2001 fiscal years, respectively, including the acceleration of $142
million of State revenue sharing payments from the 1999 fiscal year to the 1998
fiscal year, which are subject to approval by the Governor and/or the State
Legislature; (iii) the receipt of $200 million in the 1998 fiscal year in
connection with the proposed sale of the New York Coliseum; (iv) the receipt of
$47 million in the 1998 fiscal year from the sale of certain other assets; (v)
uncertain State education aid and expenditure reductions relating to BOE
totaling $325 million in each of the 1999 through 2001 fiscal years; (vi) State
approval of a three-year extension to the City's 12.5% personal income tax
surcharge, which is scheduled to expire on December 31, 1998 and which would
generate revenues of $230 million, $525 million and $550 million in the 1999
through 2001 fiscal years, respectively; and (vii) the potential for additional
funding needs for the City's labor reserve totaling $104 million, $225 million
and $231 million in the 1999 through 2001 fiscal years, respectively, to pay for
collective bargaining increases for the Covered Organizations, which the City
Financial Plan assumes will be paid for by the Covered Organizations, rather
than the City. The report also noted that the City Financial Plan assumes that
the State will extend the 14% personal income tax that is scheduled to expire in
December 1997, which would generate revenues of $200 million in the 1998 fiscal
year and $500 million annually in subsequent fiscal years, and that the City
Financial Plan makes no provision for wage increases after the expiration of
current contracts in fiscal year 2000, which would add $430 million to the 2001
fiscal year budget gap if employees receive wage increases at the projected rate
of inflation. The report noted that the City Financial Plan includes an annual
General Reserve of $200 million and sets aside an additional $300 million in the
1998 fiscal year to reduce the budget gap for the 1999 fiscal year if such funds
are not needed in the 1998 fiscal year. With respect to the gap-closing program
for the 1999 through 2001 fiscal years, the report noted that the City has
broadly outlined a program that relies heavily on unspecified agency actions,
savings from reinvention and other unspecified initiatives and uncertain State
aid and entitlement program reductions which depend on the cooperation of
others.
The report concluded that while 1997 was an unexpectedly good fiscal year for
City revenues, the City projects that the rate of spending for the 1998 fiscal
year will grow substantially faster than the rate of revenues, reflecting
increasing costs for labor, debt service, Medicaid and education, and that the
gaps for the subsequent fiscal years continue to present a daunting challenge.
With respect to the economy, the report noted that the major risks to the City's
economic and revenue forecasts continue to relate to the pace of both the
national economy and activity on Wall Street, that the potential exists for a
national recession over the next four years, and that Wall Street volatility can
have a negative effect, as was apparent in 1994 when the Federal Reserve
repeatedly raised interest rates and the profits of securities firms fell. Other
concerns identified in the report include: (i) $76 million in retroactive claims
for State education aid included in the City Financial Plan for the 1998 fiscal
year which may not be realized; (ii) a potential risk of $698 million in State
education aid owed to the City by the State for prior years, all or a portion of
which the City could be forced to write-off if further delays occur in the State
agreeing to fund these claims; and (iii) the potential adverse impact on HHC
over the long-term of the planned expansion of managed care which emphasizes
out-patient services with fixed monthly fees, uncertainty covering projected
savings from a proposal that most Medicaid recipients be required to enroll in
managed
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care, which is subject to approval by the Federal Government, and the
possibility that the recent Federal budget agreement could substantially reduce
aid to hospitals which serve a large number of medically indigent patients.
On May 27, 1997, the IBO released a report analyzing the financial plan
published on May 8, 1997 (the 'May Financial Plan'). In its report, the IBO
estimated gaps of $27 million, $91 million, $2.1 billion, $2.9 billion and $2.9
billion for the 1997 through 2001 fiscal years, respectively, which include the
gaps set forth in the May Financial Plan for fiscal years 1999 through 2001. The
gaps estimated in the IBO report reflect (i) uncertainty concerning the size and
timing of projected airport rents of $270 million and $215 million in the 1998
and 1999 fiscal years, respectively, which are the subject of an ongoing dispute
between the Port Authority and the City; and (ii) additional funding needs for
the City's labor reserve totaling $104 million, $224 million and $231 million in
the 1999 through 2001 fiscal years, respectively, to pay for collective
bargaining increases for the Covered Organizations, which the May Financial Plan
assumes will be paid for by the Covered Organizations, rather than the City.
These reduced revenues and increased expenditures identified in the IBO report
are substantially offset by tax revenue forecasts which exceed those in the May
Financial Plan. However, the report noted that the May Financial Plan assumes
continued strong revenue growth and that, in the event of an economic downturn,
the City will be required to increase taxes in a slow economy or reduce spending
when it is most needed. With respect to the tax reductions proposed in the May
Financial Plan, the IBO stated that the principal question is whether the City
will be able to afford the tax reductions. In addition, the report discussed
various issues with implications for the City's 1998 budget. These issues
include the reliance in the budget on a number of State legislative actions,
including (i) $294 million from legislation the City has requested to increase
State aid; (ii) $128 million in savings attributable to both a larger City share
of Federal welfare grant funds and State reforms to Medicaid; and (iii) $115
million to restore expenditure reductions proposed in the Governor's Executive
Budget. The report also noted that the City's claim for $900 million of State
reimbursement of prior year education expenditures remains unresolved, that
proposals affecting the MTA, including proposals to eliminate two-fare zones for
bus and subway riders, will result in a significant reduction in revenues for
the MTA, and that the implementation of changes in the City's computer system,
resulting from the inability of the current computer system to recognize the
year 2000, could cost the City up to $150 million to $200 million over the next
three years. In a subsequent report released on June 16, 1997, the IBO noted
that in the City Financial Plan the City had deferred to fiscal years 1999
through 2001 the assumed receipt of back airport rents, and that the tax revenue
forecasts for the 1998 fiscal year in the City Financial Plan are closer than
the forecasts in the May Financial Plan to the IBO's forecast of City tax
revenues in its May report.
On October 31, 1996, the IBO released a report assessing the costs that could be
incurred by the City in response to the 1996 Welfare Act, which, among other
things, replaces the AFDC entitlement program with TANF, imposes a five-year
time limit on TANF assistance, requires 50% of states' TANF caseload to be
employed by 2002, and restricts assistance to legal aliens. The report noted
that if the requirement that all recipients work after two years of receiving
benefits is enforced, these additional costs could be substantial starting in
1999, reflecting costs for worker training and supervision of new workers and
increased child care costs. The report further noted that, if economic
performance weakened, resulting in an increased number of public assistance
cases, potential costs to the City could substantially increase. States are
required to develop plans during 1997 to implement the new law. The report noted
that decisions to be made by the State which will have a significant impact on
the City budget include the allocation of block grant funds between the State
and New York local governments such as the City and the division between the
State and its local governments of welfare costs not funded by the Federal
government.
Seasonal Financing. 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 has issued $1.075
billion of short-term obligations for the fiscal year 1998 to finance the City's
projected cash flow needs for the 1998 fiscal year. The City issued $2.4 billion
of short-term obligations in fiscal year 1997. Seasonal financing requirements
for the 1996 fiscal year increased to $2.4 billion from $2.2 billion and $1.75
billion in the 1995 and 1994 fiscal years, respectively.
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Seasonal financing requirements were $1.4 billion in the 1993 fiscal year. The
delay in the adoption of the State's budget in certain past fiscal years has
required the City to issue short-term notes in amounts exceeding those expected
early in such fiscal years.
Litigation. 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 City 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, 1997 amounted to approximately $3.5 billion.
This estimate was made by categorizing the various claims and applying a
statistical model, based primarily on actual settlements by type of claim during
the preceding ten fiscal years, and by supplementing the estimated liability
with information supplied by the City's Corporation Counsel.
Ratings Agencies. On August 6, 1998, as well as July 2, June 8 and May 27, Fitch
rated New York City's tax-exempt general obligation bonds as 'A-'. Fitch
qualified that rating, stating that concerns still remained over significant
projected outyear budget funding challenges coupled with sizable reliance on the
securities industry. On July 2, 1998, Moody's revised its rating on the New York
City General Obligation Bonds to Aaa from Baa1.
On July 16, 1998, S&P increased New York City's bond rating to A-, up one notch
from BBB+, but analysts at the agency also cautioned that New York still had
room for improvement and that they were worried about the City's rising
long-term debt and the Council's plan to cut taxes by $200 million this year and
$500 million in future years. On July 7, 1998, S&P had assigned its
triple-B-plus rating to New York City general obligation bonds, stating that the
ratings had been placed on CreditWatch with positive implications.
On February 3, 1998, S&P raised its credit outlook for New York City's
outstanding general obligation bonds from stable to positive but maintained its
BBB-plus rating. The City has held this rating since July 10, 1995, when S&P
lowered its rating from A- to BBB+ and removed City bonds from CreditWatch. S&P
stated that 'structural budgetary balance remains elusive because of persistent
softness in the City's economy, highlighted by weak job growth and a growing
dependence on the historically volatile financial services sector.' Other
factors identified by S&P's in lowering its rating on City bonds included a
trend of using one-time measures, including debt refinancings, to close
projected budget gaps, dependence on unratified labor savings to help balance
the City 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. In 1975, S&P suspended its A
rating of City bonds. This suspension remained in effect until March 1981, at
which time the City received an investment grade rating of BBB from S&P. On July
2, 1985, S&P revised its rating of City bonds upward to BBB+ and on November 19,
1987, to A-. On July 10, 1995, S&P revised its rating of City bonds downward to
BBB+, as discussed above. On November 25, 1996, S&P issued a report which stated
that, if the City reached its debt limit without the ability to issue bonds
through other means, it would cause a deterioration in the City's infrastructure
and significant cutbacks in the capital plan which would eventually impact the
City's economy and revenues, and could have eventual negative credit
implications.
On February 24, 1998 Moody's raised its rating for City general obligation bonds
from Baa1 to A3, based on improvement in its financial condition and economy.
Previously, on July 17, 1997, Moody's had changed its outlook on City bonds to
positive from stable. On March 1, 1996, Moody's stated that the rating for the
City's Baa1 general obligation bonds remains under review for a possible
downgrade pending the outcome of the adoption of the City's budget for the 1997
fiscal year and in light of the status of the debate on public assistance and
Medicaid reform; the enactment of a State budget, upon which major assumptions
regarding State aid are dependent, which may be extensively delayed; and the
seasoning of the City's economy with regard to its
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strength and direction in the face of a potential national economic slowdown.
Moody's ratings of City bonds were revised in November 1981 from B (in effect
since 1977) to Ba1, in November 1983 to Baa, in December 1985 to Baa1, in May
1988 to A and again in February 1991 to Baa1.
On February 3, 1998, Fitch Investors Service, Inc. ('Fitch') set its rating of
City general obligation bonds at A-, which it has maintained since July 15,
1993. On February 28, 1996, Fitch placed the City's general obligation bonds on
FitchAlert with negative implications. On November 5, 1996, Fitch removed the
City's general obligation bonds from FitchAlert although Fitch stated that the
outlook remains negative. Since then Fitch has revised the outlook to stable.
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.
On October 9, 1995, Standard & Poor's issued a report which concluded that
proposals to replace the graduated Federal income tax system with a 'flat' tax
could be detrimental to the creditworthiness of certain municipal bonds. The
report noted that the elimination of Federal income tax deductions currently
available, including residential mortgage interest, property taxes and state and
local income taxes, could have a severe impact on funding methods under which
municipalities operate. With respect to property taxes, the report noted that
the total valuation of a municipality's tax base is affected by the
affordability of real estate and that elimination of mortgage interest deduction
would result in a significant reduction in affordability and, thus, in the
demand for, and the valuation of, real estate. The report noted that rapid
losses in property valuations would be felt by many municipalities, hurting
their revenue raising abilities. In addition, the report noted that the loss of
the current deduction for real property and state and local income taxes from
Federal income tax liability would make rate increases more difficult and
increase pressures to lower existing rates, and that the cost of borrowing for
municipalities could increase if the tax-exempt status of municipal bond
interest is worth less to investors. Finally, the report noted that tax
anticipation notes issued in anticipation of property taxes could be hurt by the
imposition of a flat tax, if uncertainty is introduced with regard to their
repayment revenues, until property values fully reflect the loss of mortgage and
property tax deductions.
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APPENDIX B:
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
AAA -- Bonds which are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
AA -- Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. 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 risk appear somewhat larger than the Aaa securities.
A -- Bonds which are rated 'A' possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
BAA -- Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
BA -- Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well-assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B -- Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA -- Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
CA -- Bonds which are rated 'Ca' represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers '1', '2' and '3' in each generic rating
classification from Aa to Caa. The modifier '1' indicates that the security
ranks in the higher end of its generic rating category; the modifier '2'
indicates a mid-range ranking; and the modifier '3' indicates that the issue
ranks in the lower end of its generic rating category.
S&P'S CORPORATE BOND RATINGS
AAA -- This is the highest rating assigned by S&P 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.
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A -- Bonds rated 'A' have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher-rated categories.
BBB -- Bonds rated 'BBB' are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher-rated categories.
BB-B-CCC-CC-C -- Bonds rated 'BB', 'B', 'CCC', '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 COMMERCIAL PAPER RATINGS
PRIME-1 -- Issuers (or related supporting institutions) rated 'Prime-1' have a
superior ability for repayment of short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by: leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
PRIME-2 -- Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratio, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
PRIME-3 -- Issuers (or related supporting institutions) rated 'Prime-3' have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME -- Issuers rated 'Not Prime' do not fall within any of the Prime
rating categories.
S&P'S COMMERCIAL PAPER RATINGS
An 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 categories are as follows:
A-1 -- A short-term obligation rated 'A-1' is rated in the highest category by
Standard & Poor's. The obligor's capacity to meet its financial commitment on
the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
B-2
<PAGE>
A-2 -- A short-term obligation rated 'A-2' is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to meet
its financial commitment on the obligation is satisfactory.
A-3 -- A short-term obligation rated 'A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation.
B -- A short-term obligation rated 'B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet its
financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its
financial commitment on the obligation.
C -- A short-term obligation rated 'C' is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions for the
obligor to meet its financial commitment on the obligation.
D -- A short-term obligation rated 'D' is in payment default. The 'D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The 'D'
rating also will be used upon the filing of a bankruptcy petition or the taking
of a similar action if payments on an obligation are jeopardized.
MOODY'S MUNICIPAL BOND RATINGS
AAA -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
AA -- Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements 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.
Moody's applies numerical modifiers '1', '2' and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of its generic rating category; the modifier '2' indicates a
mid-range ranking; and the modifier '3' indicates that the issue ranks in the
lower end of its generic rating category.
S&P'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.
B-3
<PAGE>
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 -- Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins
of protection are ample though not so large as in the preceding group.
S&P'S RATINGS OF STATE AND MUNICIPAL NOTES
SP-1 -- Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 -- Notes which are rated SP-2 have a satisfactory capacity to pay principal
and interest.
FITCH MUNICIPAL BOND 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.
B-4
<PAGE>
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
FITCH'S SHORT-TERM RATINGS ARE AS FOLLOWS:
F-1+ -- Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
F-2 -- Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3 -- Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.
LOC -- The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher-rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by a Fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such Fund. Neither event will
require a sale of such security by a Fund. However, 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
Statement of Additional Information and in the Prospectus.
B-5
<PAGE>
SALOMON BROTHERS
INSTITUTIONAL INVESTMENT SERIES
PROSPECTUS
Emerging Markets Debt Fund
High Yield Bond Fund
(Class I Shares)
Money Market Fund
April 28, 2000
[SALOMON BROTHERS ASSET MANAGEMENT LOGO]
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete.
Any statement to the contrary is a crime.
<PAGE>
- --------------------------------------------------------------------------------
CONTENTS
<TABLE>
<S> <C>
Fund goals, strategies and risks:
Emerging Markets Debt Fund.............................. 4
High Yield Bond Fund.................................... 6
Money Market Fund....................................... 8
More on the funds' investments.............................. 10
Management.................................................. 11
Buying shares............................................... 12
Exchanging and redeeming shares............................. 13
Other things to know about share transactions............... 14
Dividends, distributions and taxes.......................... 15
Financial highlights........................................ 16
</TABLE>
- --------------------------------------------------------------------------------
THINGS YOU SHOULD KNOW BEFORE INVESTING
ABOUT MUTUAL FUND RISKS
An investment in any of the funds is not a bank deposit and is not insured or
guaranteed by the FDIC or any other government agency.
Although the Money Market Fund seeks to preserve the value of your investment at
$1.00 per share, it is possible to lose money by investing in the fund.
Salomon Brothers Institutional Investment Series - 3
<PAGE>
- --------------------------------------------------------------------------------
EMERGING MARKETS DEBT FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to maximize total return.
OBJECTIVE
- -------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests primarily in U.S. dollar denominated fixed
income securities issued by governments, government-related
entities and corporations located in emerging markets. The
fund also invests in instruments designed to restructure
outstanding emerging market debt such as participations in
loans between governments and financial institutions and
Brady Bonds. The manager invests in at least three emerging
market countries, which are those defined by the World Bank
at the time of investment as emerging or developing
economies.
CREDIT QUALITY: The fund may invest without limit in higher
risk, below-investment grade debt securities.
Below-investment grade debt securities are equivalent to
U.S. corporate debt securities commonly known as 'junk
bonds.'
MATURITY AND DURATION: The fund may hold securities of any
maturity. The manager attempts to manage interest rate risk
of the fund by maintaining the fund's duration between 2 and
7 years. Duration measures in years the sensitivity of the
fund's portfolio to interest rate risk. A higher duration
means the fund is more sensitive to interest rate risk.
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
HOW THE The manager uses a 'top-down' approach and allocates the fund's investments among
MANAGER various emerging market countries. In allocating among different countries, the
SELECTS THE following are some of the factors the manager considers:
FUND'S Currency, inflation and interest rate trends Fiscal policies
INVESTMENTS Growth rate forecasts Political outlook
Liquidity of markets for that country's debt Tax environment
The manager then selects those individual securities that appear to be most
undervalued and to offer the highest potential returns relative to the amount of
credit, interest rate, liquidity and other risks presented by these securities. The
manager engages in independent fundamental analysis to evaluate the
creditworthiness of corporate and governmental issuers.
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PRINCIPAL RISKS Investors could lose money on their investment in the fund,
OF INVESTING IN or the fund may not perform as well as other investments, if
THE FUND any of the following occurs:
Many emerging
market countries Adverse governmental action or political, economic or market
in which the fund instability affects an emerging market country or region or
invests have disrupts its principal financial markets.
markets that are The economies of emerging market countries grow at slower
less liquid and rates than expected or suffer a downturn, recession, rapid
more volatile than inflation or hyperinflation.
markets in the The currency in which a security is priced declines in value
U.S. and other relative to the U.S. dollar.
developed Interest rates rise, causing the prices of fixed income
countries. securities to decline and reducing the value of the fund's
portfolio.
The issuer of a security owned by the fund defaults on its
obligation to pay principal and/or interest or has its
credit rating downgraded. This risk is higher for
below-investment grade fixed income securities, which are
considered speculative because they have a higher risk of
issuer default, are subject to greater price volatility and
may be illiquid.
</TABLE>
Salomon Brothers Institutional Investment Series - 4
<PAGE>
<TABLE>
<S> <C>
PRINCIPAL RISKS The manager's judgment about the attractiveness, relative
OF INVESTING IN value or credit quality of a particular security proves to
THE FUND be incorrect.
(CONTINUED) In many emerging market countries, there is also less
information available about foreign issuers and markets
because of less rigorous accounting and regulatory standards
than in the U.S.
The fund is not diversified, which means that it can invest
a higher percentage of its assets in any one issuer than a
diversified fund. Being non- diversified may magnify the
fund's losses from adverse events affecting a particular
issuer.
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
PERFORMANCE
Past performance does not
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
14.89% in 4th quarter 1999;
Lowest: -28.91% in 3rd quarter 1998
YEAR TO DATE: 7.50%
(through 3/31/00)
[GRAPH]
% Total return
17.23 -19.86 31.60
97 98 99
Calendar Years ended December 31
TOTAL RETURN
The bar chart
indicates the risk of
investing in the fund
by showing the
performance of the
fund's shares for each
of the past 3 calendar
years.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
- --------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Inception Date 1 Year Since Inception
- --------------------------------------------------------------------------------------------
Emerging Markets Debt Fund 10/17/96 31.60% 8.76%
J.P. Morgan Emerging Markets Bond Index Plus 10/17/96 25.98% 8.25%
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of the
fund for the periods
shown to that of the
J.P. Morgan Emerging
Markets Bond Index
Plus, an unmanaged
index of emerging
market bonds.
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
FEE TABLE
- -------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
Management fees 0.70%
- -------------------------------------------------------------------------
Distribution and service (12b-1) fee None
Other expenses 0.32%
- -------------------------------------------------------------------------
Total annual fund operating expenses 1.02%
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
Because the manager
waived a portion of its
management fee and
reimbursed the fund for
certain expenses during
the fiscal year ended
February 28, 2000,
actual total operating
expenses were 0.75%.
The manager may change
or eliminate these
expense limits at any
time.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
EXAMPLE
- -------------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $104 $325 $563 $1,248
THE EXAMPLE ASSUMES: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
EXAMPLE
This example helps you
compare the costs of
investing in the fund
with other mutual funds.
Your actual costs may be
higher or lower.
</TABLE>
Salomon Brothers Institutional Investment Series - 5
<PAGE>
- --------------------------------------------------------------------------------
HIGH YIELD BOND FUND
<TABLE>
<S> <C>
INVESTMENT The fund seeks to maximize total return.
OBJECTIVE
- -------------------------------------------------------------------------------------
KEY The fund invests primarily in high yield fixed income
INVESTMENTS securities, including bonds, debentures, notes, equipment
trust certificates, commercial paper, preferred stock and
other obligations of U.S. and foreign issuers.
CREDIT QUALITY: The fund invests at least 80% of its assets
in fixed income securities rated below investment grade by a
recognized rating agency, or if unrated, of equivalent
quality as determined by the manager. Below investment grade
securities are commonly referred to as 'junk bonds.'
MATURITY: The fund's average maturity will generally vary
from 6 to 12 years depending on the manager's outlook for
interest rates. Individual securities may be of any
maturity.
- -------------------------------------------------------------------------------------
HOW THE Individual security selection is driven by the manager's
MANAGER economic view, industry outlook and rigorous credit
SELECTS THE analysis. The manager then selects those individual
FUND'S securities that appear to be most undervalued and to offer
INVESTMENTS the highest potential returns relative to the amount of
credit, interest rate, liquidity and other risk presented by
these securities. The manager allocates the fund's
investments across a broad range of issuers and industries,
which can help to reduce risk.
In evaluating the issuer's creditworthiness, the manager
uses fundamental analysis and considers the following
factors:
The strength of the issuer's financial resources.
The issuer's sensitivity to economic conditions and trends.
The issuer's operating history.
Experience and track record of issuer's management.
- -------------------------------------------------------------------------------------
PRINCIPAL RISKS OF Investors could lose money on their investment in the fund,
INVESTING IN THE FUND or the fund may not perform as well as other investments, if
Investments in high any of the following occurs:
yield securities The issuer of a security owned by the fund defaults on its
involve a substantial obligation to pay principal and/or interest or has its
risk of loss credit rating downgraded.
Interest rates increase, causing the prices of fixed income
securities to decline and reducing the value of the fund's
portfolio.
The manager's judgment about the attractiveness, value or
credit quality of a particular security proves to be
incorrect.
High yield securities are considered speculative and,
compared to investment grade securities, tend to have more
volatile prices and are more susceptible to the following
risks:
Increased price sensitivity to changing interest rates
and to adverse economic and business developments.
Greater risk of loss due to default or declining credit
quality.
Greater likelihood that adverse economic or company
specific events will make the issuer unable to make
interest and/or principal payments.
Negative market sentiment towards high yield securities
depresses the price and liquidity of high yield
securities.
Investing in non-U.S. issuers may involve unique risks
compared to investing in the securities of U.S. issuers.
These risks are more pronounced to the extent the fund
invests in issuers in countries with emerging markets or if
the fund invests significantly in one country. These risks
may include:
Less information about non-U.S. issuers or markets may
be available due to less rigorous disclosure and
accounting standards or regulatory practices.
Many non-U.S. markets are smaller, less liquid and more
volatile than U.S. markets. In a changing market, the
manager may not be able to sell the fund's portfolio
securities in amounts and at prices the manager
considers reasonable.
Economic, political and social developments
significantly disrupt the financial markets or interfere
with the Fund's ability to enforce its rights against
foreign government issuers.
</TABLE>
Salomon Brothers Institutional Investment Series - 6
<PAGE>
<TABLE>
<S> <C> <C>
PERFORMANCE
Past performance does not
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS:
Highest: 5.54% in 2nd quarter 1997;
Lowest: -6.36% in 3rd quarter 1998
YEAR TO DATE: 3.25% (through
3/31/00)
[GRAPH]
% Total return
13.41 -0.34 -0.97
97 98 99
Calendar Years ended December 31
TOTAL RETURN
The bar chart indicates
the risk of investing
in the fund by showing
the performance of the
fund's shares for each
of the past 3 calendar
years.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Inception Date 1 Year Since Inception
- -------------------------------------------------------------------------
High Yield Bond Fund 5/15/96 -0.97% 6.26%
Salomon Smith Barney High Yield Market
Index * 1.74% 7.60%
* Index comparison begins on 5/31/96.
COMPARATIVE
PERFORMANCE
The table indicates the
risk of investing in
the fund by comparing
the average annual
total return of the
fund for the periods
shown to that of the
Salomon Smith Barney
High Yield Market
Index, an unmanaged
index of high yield
securities.
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
FEE TABLE
- -------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF NET ASSETS)
Management fees 0.50%
- -------------------------------------------------------------------------
Distribution and service (12b-1) fee None
Other expenses 0.39%
- -------------------------------------------------------------------------
Total annual fund operating expenses 0.89%
FEES AND EXPENSES
This table sets forth
the fees and expenses
you will pay if you
invest in shares of the
fund.
Because the manager
waived a portion of its
management fee and
reimbursed the fund for
certain expenses for
the fiscal year ended
February 28, 2000,
actual total fund
operating expenses were
0.55%.
The manager may change
or eliminate these
expense limits at any
time.
- ----------------------------------------------------------------------------------------------------------
</TABLE>
EXAMPLE
<TABLE>
<S> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $91 $284 $493 $1,096
THE EXAMPLE ASSUMES: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period
EXAMPLE
This example helps you
compare the costs of
investing in the fund
with other mutual
funds. Your actual
costs may be higher or
Salomon Brothers Institutional Investment Series - 7
<PAGE>
- --------------------------------------------------------------------------------
MONEY MARKET FUND
</TABLE>
<TABLE>
<S> <C>
INVESTMENT The fund seeks as high a level of current income as is
OBJECTIVE consistent with liquidity and stability of principal.
- -------------------------------------------------------------------------------------
KEY INVESTMENTS The fund invests in high quality, U.S. dollar denominated
short term debt securities. These may include obligations
issued by U.S. and foreign banks, the U.S. government, its
agencies or instrumentalities, U.S. states and
municipalities and U.S. and foreign corporate issuers.
The fund may invest in all types of money market securities
including commercial paper, certificates of deposit,
bankers' acceptances, mortgage-backed and asset-backed
securities, repurchase agreements, fixed time deposits and
other short term debt securities. The fund may also invest
in variable rate master demand notes and enter into short
term borrowing arrangements with corporations.
MINIMUM CREDIT QUALITY: The fund invests primarily in
securities rated in the highest short term rating category,
or if unrated, of equivalent quality. The fund may invest up
to 5% of its assets in securities rated in the second
highest short term rating category or, if unrated, of
equivalent quality.
MAXIMUM MATURITY: The fund invests in securities having
remaining maturities of 397 days or less. The fund maintains
a dollar-weighted average portfolio maturity of 90 days or
less.
- -------------------------------------------------------------------------------------
HOW THE In selecting investments for the fund, the manager looks
MANAGER for:
SELECTS THE The best relative values based on an analysis of yield,
FUND'S price, interest rate sensitivity and credit quality.
INVESTMENTS Maturities consistent with the manager's outlook for
interest rates.
Eligible issuers with the most desirable credit quality.
- -------------------------------------------------------------------------------------
PRINCIPAL Although the fund seeks to preserve the value of an
RISKS OF investment at $1 per share, it is possible to lose money by
INVESTING IN investing in the fund, or the fund could underperform other
THE FUND short term debt instruments or money market funds if any of
the following occurs:
Interest rates rise sharply.
An issuer or guarantor of the fund's securities defaults, or
has its credit rating downgraded.
The manager's judgment about the value or credit quality of
a particular security proves to be incorrect.
The value of the fund's foreign securities go down because
of unfavorable government actions or political instability.
</TABLE>
Salomon Brothers Institutional Investment Series - 8
<PAGE>
PERFORMANCE
<TABLE>
<S> <C> <C>
Past performance does not
necessarily indicate how the fund
will perform in the future.
QUARTERLY RETURNS: Highest:
1.51% in 1st quarter 1991;
Lowest: 0.67% in 1st quarter 1994
Prior to April 29, 1996, the fund
was called Salomon Brothers U.S.
Treasury Securities Money Market
Fund and invested exclusively in
U.S. Treasury bonds, notes and
bills.
[GRAPH]
% Total return
5.50 3.45 2.87 3.64 5.02 5.13 5.61 5.59 5.23
91 92 93 94 95 96 97 98 99
Calendar Years ended December 31
TOTAL RETURN
The bar chart indicates
the risk of investing
in the fund by showing
the performance of the
fund's shares for each
of the past 9 calendar
years.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
PERFORMANCE TABLE
THIS TABLE ASSUMES REDEMPTION OF SHARES AT THE END OF THE PERIOD, AND THE REINVESTMENT OF
DISTRIBUTIONS AND DIVIDENDS.
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN (CALENDAR YEARS ENDED DECEMBER 31, 1999)
Inception 1 Year 5 Years Since Inception
Date
- -------------------------------------------------------------------------
Money Market Fund 12/7/90 5.23% 5.32% 4.69%
The fund's 7-day yield as of December 31, 1999 was 6.01%
COMPARATIVE
PERFORMANCE
The table indicates the
average annual total
return of the fund for
the periods shown.
</TABLE>
<TABLE>
<S> <C> <C>
- ----------------------------------------------------------------------------------------------------------
FEE TABLE
- -------------------------------------------------------------------------
SHAREHOLDER FEES (PAID DIRECTLY FROM YOUR INVESTMENT)
Maximum sales charge on purchases None
Maximum deferred sales charge on redemptions None
- -------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES (PAID BY THE FUND AS A % OF FUND NET ASSETS)
Management fees 0.20%
- -------------------------------------------------------------------------
Distribution and service (12b-1) fee None
Other expenses 0.17%
- -------------------------------------------------------------------------
Total annual fund operating expenses 0.37%
FEES AND EXPENSES
This table sets forth
the fees and expenses you
will pay if you invest
in shares of the fund.
Because the manager
waived a portion of its
management fee and
reimbursed the fund for
certain expenses during
the fiscal year ended
December 31, 1999,
actual total fund
operating expenses were
0.17%.
The manager may change
or eliminate these
expense limits at any
time.
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------
EXAMPLE
- ----------------------------------------------------------------------------------------
NUMBER OF YEARS YOU OWN YOUR SHARES 1 YEAR 3 YEARS 5 YEARS 10 YEARS
Your costs would be $38 $119 $208 $468
THE EXAMPLE ASSUMES: You invest $10,000 for the period shown
You reinvest all distributions and dividends without a sales charge
The fund's operating expenses remain the same
Your investment has a 5% return each year
Redemption of your shares at the end of the period.
EXAMPLE
This example helps you
compare the cost of
investing in the fund
with other mutual
funds. Your actual cost
may be higher or lower.
</TABLE>
Salomon Brothers Institutional Investment Series - 9
<PAGE>
- --------------------------------------------------------------------------------
MORE ON THE FUNDS' INVESTMENTS
<TABLE>
<S> <C>
FIXED INCOME Fixed income securities include bonds, notes, bills,
SECURITIES debentures, bank debt obligations, short-term paper,
mortgage and other asset-backed securities, preferred stock,
loan participations and assignments.
- -------------------------------------------------------------------------------------
EQUITY High Yield Bond Fund may invest up to 20% of its assets in
SECURITIES common stocks, convertible securities, warrants or other
High Yield Bond equity securities. The fund holds these equity securities
Fund generally, but not solely, as a result of buying fixed
income securities with an attached equity component. Equity
securities provide the fund with opportunities for
appreciation but expose the fund to the risk of stock market
downturns and adverse events affecting particular companies
that may depress the price of their common stock.
- -------------------------------------------------------------------------------------
SECURITIES OF Investments in securities of foreign entities and securities
FOREIGN denominated in foreign currencies involve special risks.
ISSUERS These include possible political and economic instability
Each fund and the possible imposition of exchange controls or other
restrictions on investments. Emerging market investments
offer the potential for significant gains but also involve
greater risks than investing in more developed countries.
Political or economic instability, lack of market liquidity
and government actions such as currency controls or seizure
of private business or property may be more likely in
emerging markets.
Since Emerging Markets Debt Fund and High Yield Bond Fund
may invest in securities denominated or quoted in currencies
other than the U.S. dollar, changes in foreign currency
rates relative to the U.S. dollar will affect the U.S.
dollar value of these funds' assets. Money Market Fund may
only invest in U.S. dollar denominated investments issued by
foreign branches of U.S. banks and by U.S. and foreign
branches of foreign banks.
- -------------------------------------------------------------------------------------
DERIVATIVE The funds may, but need not, use derivative contracts, such
TRANSACTIONS as futures and options on securities, securities indices or
Each fund except currencies; options on these futures; forward currency
Money Market contracts; and interest rate or currency swaps for any of
Fund the following purposes:
To hedge against the economic impact of adverse changes in
the market value of portfolio securities because of changes
in market prices, currency exchange rates or interest rates.
As a substitute for buying or selling securities.
A derivative contract will obligate or entitle a fund to
deliver or receive an asset or cash payment based on the
change in value of one or more securities, currencies or
indices. Even a small investment in derivative contracts can
have a big impact on a fund's market, currency and interest
rate exposure. Therefore, using derivatives can
disproportionately increase losses and reduce opportunities
for gains when market prices, currency rates or interest
rates are changing. A fund may not fully benefit from or may
lose money on derivatives if changes in their value do not
correspond accurately to changes in the value of the fund's
holdings. The other parties to certain derivative contracts
present the same types of default risk as issuers of fixed
income securities. Derivatives can also make a fund less
liquid and harder to value, especially in declining markets.
- -------------------------------------------------------------------------------------
</TABLE>
Salomon Brothers Institutional Investment Series - 10
<PAGE>
<TABLE>
<S> <C>
TEMPORARY Each of the funds may depart from its principal investment
DEFENSIVE strategies in response to adverse market, economic or
INVESTMENTS political conditions by taking temporary defensive positions
Each fund except in all types of money market and short term debt securities.
Money Market If a fund takes a temporary defensive position, it may be
Fund unable to achieve its investment objective.
- -------------------------------------------------------------------------------------
PORTFOLIO Although neither the Emerging Market Debt Fund or the High
TURNOVER Yield Bond Fund purchases or sells securities for short-term
Each fund except profits, each fund may engage in active and frequent trading
Money Market to achieve its principal investment strategies. Frequent
Fund trading increases transaction costs, which could decrease
the fund's performance, and may result in increased net
short-term capital gains, distributions of which are taxable
to shareholders as ordinary income.
- -------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
Salomon Brothers Asset Management Inc is the investment manager for each fund.
Together with its affiliates, the manager provides a broad range of fixed income
and equity investment advisory services to various individuals located
throughout the world. The manager's principal address is 7 World Trade Center,
New York, New York 10048. It is a wholly-owned subsidiary of Citigroup, Inc.
Citigroup businesses produce a broad range of financial services -- asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading -- and use diverse channels to make
them available to consumer and corporate customers around the world.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------
FUND PORTFOLIO MANAGER SINCE PAST 5 YEARS' BUSINESS EXPERIENCE
Emerging Markets Peter J. Wilby inception Managing Director of Manager
Debt Fund
<S> <C> <C> <C> <C>
- --------------------------------------------------------------------------
High Yield Peter J. Wilby inception Managing Director of Manager
Bond Fund Beth A. Semmel April 2000 Managing Director of Manager
James E. Craige April 2000 Managing Director of Manager
Money Market Nancy A. Noyes inception Director of Manager
Fund
THE PORTFOLIO
MANAGERS
The portfolio managers
are primarily
responsible for the
day-to-day operation of
the funds indicated
beside their names.
</TABLE>
<TABLE>
<S> <C>
- -----------------------------------------------------------------------------
SBAM serves as the funds' manager. For its services for the MANAGEMENT FEES
fiscal year ended December 31, 1999, SBAM received a fee
from Money Market Fund equal to 0.00% of the fund's average
daily net assets. For its services for the fiscal year ended
February 28, 2000, SBAM received a fee from Emerging Markets
Debt Fund and High Yield Bond Fund equal to 0.00% and 0.00%
of each fund's average daily net assets, respectively.
- -----------------------------------------------------------------------------
SSB Citi Fund Management LLC ('SSB Citi'), an affiliate of ADMINISTRATOR
the manager, is the funds' administrator. For its services,
each fund pays an administration fee to SSB Citi of 0.05% of
the fund's average daily net assets.
- -----------------------------------------------------------------------------
CFBDS, Inc. serves as the funds' distributor. DISTRIBUTOR
</TABLE>
Salomon Brothers Institutional Investment Series - 11
<PAGE>
- --------------------------------------------------------------------------------
BUYING SHARES
<TABLE>
<CAPTION>
EMERGING MARKETS DEBT
FUND HIGH YIELD BOND FUND MONEY MARKET FUND
<S> <C> <C> <C>
-------------------------------------------------------------------------
INVESTMENT
MINIMUMS $1,000,000 $1,000,000 $250,000
There is no subsequent investment minimum for any fund.
</TABLE>
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
BUYING SHARES For initial purchases of each fund's shares, complete the
BY MAIL appropriate application and send it with your check to PFPC
Global Fund Services, Inc., the funds' transfer agent.
Send the completed purchase application along with a check
to:
Initial purchases Salomon Brothers Institutional Investment Series
(specify fund)
c/o PFPC Global Fund Services, Inc.
P.O Box 9764
Providence, RI 02940-9764
Purchases (initial or subsequent) may not be made by third
party check.
Checks drawn on foreign banks must be payable in U.S.
dollars and have the routing number of the U.S. bank encoded
on the check.
Send checks for subsequent purchases by mail directly to the
transfer agent.
Be sure to include your fund and account number on checks
for subsequent investments.
Subsequent
purchases
- -------------------------------------------------------------------------------------
BUYING SHARES Call the transfer agent at (800) 446-1013 to tell them about
BY WIRE your incoming wire transfer. You should instruct your bank
to transmit your purchase in federal funds to:
Initial and Boston Safe Deposit and Trust Company
subsequent Boston, Massachusetts
purchases ABA No. 011-001-234
Account #: 142743
Attn: (specify fund)
Name of Account:
Account # (As assigned):
- -------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
---------------------------------------------------------------------------------------------------------
EMERGING MARKETS DEBT FUND PURCHASE IS EFFECTIVE
HIGH YIELD BOND FUND
If order and federal funds or
check are received by the agent On that day
before 4:00 p.m. Eastern time:
Payment wired in federal funds or
check received If order and federal funds or
check are received by the agent On the next business day
after the close of New York Stock
Exchange:
</TABLE>
<TABLE>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------
MONEY MARKET FUND PURCHASE IS EFFECTIVE DIVIDENDS BEGIN
If order and federal
funds or check are At noon, Eastern time,
received by the agent on that day On that day
before noon, Eastern
time:
Payment wired in federal
funds or check received
If order and federal
funds or check are At close of New York On the next business
received by the agent Stock Exchange on day after
after noon, Eastern that day effectiveness
time:
</TABLE>
Salomon Brothers Institutional Investment Series - 12
<PAGE>
- --------------------------------------------------------------------------------
EXCHANGING AND REDEEMING SHARES
<TABLE>
<S> <C>
You should contact the transfer agent to exchange into
other eligible mutual funds in Salomon Brothers
Institutional Investment Series. An exchange is a taxable
transaction, although no gain or loss is generally realized
upon an exchange at net asset value out of Money Market
Fund.
You may exchange shares only for shares of another fund in
Salomon Brothers Institutional Investment Series.
You must meet the minimum investment amount for each fund.
Your fund may suspend or terminate your exchange privilege
if you engage in an excessive pattern of exchanges.
You may only exchange shares of a fund 30 days after
purchase.
EXCHANGE
PRIVILEGE
To learn more about the
exchange privilege
contact the transfer
agent or consult the
statement of additional
information.
- -------------------------------------------------------------------------------------
You may redeem some or all of your shares by sending a
written request
in proper form to:
Salomon Brothers Institutional
Investment Series
(specify fund)
c/o PFPC Global Fund Services, Inc.
P.O Box 9764
Providence, RI 02940-9764
The written request for redemption must be in good order.
This means that you have provided the following
information. Your request will not be processed without
this information.
Name of the fund
Account number
Dollar amount or number of shares being redeemed
Signature of each owner exactly as account is registered
Other documentation required by PFPC Global Fund Services,
Inc.
To be in good order, your request must also include a
signature guarantee if you are redeeming over $50,000 or
instruct that the proceeds be sent to an address other than
the address of record. You can obtain a signature guarantee
from most banks, dealers, brokers, credit unions and
federal savings and loans, but not from a notary public.
REDEMPTIONS
BY MAIL
Generally, a properly
completed written
request for redemption
with any required
signature guarantee is
all that is required
for a redemption. In
some cases, however,
other documents may be
necessary.
- -------------------------------------------------------------------------------------
You may redeem shares by fax only if a signature guarantee REDEMPTIONS BY FAX
or other documentary evidence is not required. Redemption
requests should be properly signed by all owners of the
account and faxed to PFPC Global Fund Services, Inc. at
(508) 871-9503. If fax redemptions are not available for
any reason, you may use the fund's redemption by mail
procedure described above.
- -------------------------------------------------------------------------------------
You may redeem shares by telephone. The proceeds can be REDEMPTIONS BY
sent by check to your address of record or by wire transfer TELEPHONE
to a bank account designated in your application. In
addition, you may be asked to provide proper identification
information. Telephone redemption requests may be made by
calling the transfer agent at (800) 446-1013 between 9:00
a.m. and 4:00 p.m. Eastern time on any day the New York
Stock Exchange is open. If telephone redemptions are not
available for any reason, you may use the fund's redemption
by mail procedure described above.
- -------------------------------------------------------------------------------------
In all cases, your redemption price is the net asset value
per share next determined after your request is received in
good order. Redemption proceeds normally will be sent
within seven days. However, if you recently purchased your
shares by check, your redemption proceeds will not be sent
to you until your original check clears which may take up
to 15 days. Your redemption proceeds can be sent by check
to your address of record or by wire transfer to a bank
account designated on your application. Your bank may
charge you a fee for wire transfers.
If shares of Money Market Fund are redeemed before noon,
Eastern time, you will not receive that day's dividends.
You will receive that day's dividends if you redeem after
noon, Eastern time.
REDEMPTION
PAYMENTS
Any request that your
redemption proceeds be
sent to a destination
other than your bank
account or address of
record must be in
writing and must
include a signature
guarantee.
</TABLE>
Salomon Brothers Institutional Investment Series - 13
<PAGE>
- --------------------------------------------------------------------------------
OTHER THINGS TO KNOW ABOUT SHARE TRANSACTIONS
<TABLE>
<S> <C>
SMALL ACCOUNT BALANCES If your account falls below $10,000 because of a redemption
of fund shares, the fund may ask you to bring your account
up to the minimum requirement. If your account is still
below $10,000 after 30 days, the fund may close your account
and send you the redemption proceeds.
- -------------------------------------------------------------------------------------
SHARE CERTIFICATES The funds do not issue share certificates.
- -------------------------------------------------------------------------------------
SHARE PRICE You may buy, exchange or redeem shares at the net asset
value per share next determined after receipt of your
request in good order. Each fund's net asset value per share
is the value of its assets minus its liabilities divided by
the total shares outstanding. Each fund calculates its net
asset value every day the New York Stock Exchange is open.
Emerging Markets Debt Fund and High Yield Bond Fund each
calculates its net asset value when regular trading closes
on the New York Stock Exchange (normally 4:00 p.m., Eastern
time). Money Market Fund calculates its net asset value
twice daily at 12:00 noon, Eastern time and at 4:00 p.m.,
Eastern time.
Emerging Markets Debt Fund and High Yield Bond Fund
generally value their securities based on market prices or
quotations. The funds' currency conversions are done when
the London stock exchange closes, which is 12:00 noon
Eastern time. When market prices are not available, or when
the manager believes they are unreliable or that the value
of a security has been materially affected by events
occurring after a foreign exchange closes, the funds may
price those securities at fair value. Fair value is
determined in accordance with procedures approved by the
funds' board. A fund that uses fair value to price
securities may value those securities higher or lower than
another fund using market quotations to price the same
securities. International markets may be open on days when
U.S. markets are closed and the value of foreign securities
owned by a fund could change on days when you cannot buy or
redeem shares.
Money Market Fund uses the amortized cost method to value
its portfolio securities. Using this method, the fund
constantly amortizes over the remaining life of a security
the difference between the principal amount due at maturity
and the cost of the security to the fund.
In order to buy, redeem or exchange shares at that day's
price, you must place your order with the transfer agent
before the New York Stock Exchange closes. If the New York
Stock Exchange closes early, you must place your order prior
to the actual closing time. Otherwise, you will receive the
next business day's price.
Members of the funds' selling group must transmit all orders
to buy, exchange or redeem shares to the funds' agent before
the agent's close of business.
- -------------------------------------------------------------------------------------
Each fund has the right to:
Suspend the offering of shares.
Waive or change minimum and additional investment amounts.
Reject any purchase or exchange order.
Change, revoke or suspend the exchange privilege.
Suspend telephone transactions.
Suspend or postpone redemptions of shares on any day when
trading on the New York Stock Exchange is restricted, or as
otherwise permitted by the Securities and Exchange
Commission.
- -------------------------------------------------------------------------------------
REDEMPTIONS IN KIND Each fund may make payment for shares wholly or in part by
distributing portfolio securities to the shareholder. The
redeeming shareholder must pay transaction costs to sell
these securities.
</TABLE>
Salomon Brothers Institutional Investment Series - 14
<PAGE>
- --------------------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
<TABLE>
<S> <C> <C> <C> <C>
The funds normally pay dividends and distribute capital gain, if any, as follows:
- --------------------------------------------------------------------------
FUND INCOME DIVIDEND CAPITAL GAIN DISTRIBUTIONS
DISTRIBUTIONS DISTRIBUTIONS MOSTLY FROM
Emerging Markets Annually Annually Income
Debt
- -------------------------------------------------------------------------
High Yield Bond Annually Annually Income
Money Market Declared Daily/Distributed Annually Income
Monthly
The funds may pay additional distributions and dividends at other times if
necessary for a fund to avoid a federal tax. Money Market Fund anticipates that
it will normally not earn or distribute any long-term capital gains. Capital gain
distributions and dividends are reinvested in additional fund shares.
Alternatively, you can instruct the transfer agent to have your distributions
and/or dividends paid in cash. You can change your choice at any time to be
effective as of the next distribution or dividend, except that any change given
to the transfer agent less than five days before the payment date will not be
effective until the next distribution or dividend is made.
DIVIDENDS AND
DISTRIBUTIONS
Annual distributions of
income and capital gain
are made at the end of
the year in which the
income or gain is
realized, or the
beginning of the next
year.
- -----------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------
TRANSACTION FEDERAL INCOME TAX STATUS
Redemption or exchange of shares Usually capital gain or loss (except no gain
or loss for Money Market Fund); long-term
only if shares owned more than one year
- -------------------------------------------------------------------------
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
- -------------------------------------------------------------------------
Dividends Ordinary income
Long-term capital gain distributions are taxable to you as long-term capital gain
regardless of how long you have owned your shares. You may want to avoid buying
shares when a fund is about to declare a capital gain distribution or a dividend,
because it will be taxable to you even though it may actually be a return of a
portion of your investment.
After the end of each year, the funds will provide you with information about the
distributions and dividends that you received and, except for Money Market Fund, any
redemptions of shares during the previous year. If you do not provide a fund with
your correct taxpayer identification number and any required certifications, you may
be subject to back-up withholding of 31% of your distributions, dividends and,
except for Money Market Fund, redemption proceeds. Because each shareholder's
circumstances are different and special tax rules may apply, you should consult your
tax adviser about your investment in a fund.
TAXES
In general, redeeming
and exchanging shares
(except Money Market
Fund shares) and
receiving distributions
(whether in cash or
additional shares) are
all taxable events.
</TABLE>
Salomon Brothers Institutional Investment Series - 15
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The financial highlights tables are intended to help you understand the
performance of each share for the past 5 years (or since inception if less than
5 years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables was audited by PricewaterhouseCoopers LLP,
independent accountants, whose report, along with the fund's financial
statements, are included in the annual report (available upon request).
For a share of capital stock outstanding throughout each year:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EMERGING MARKETS DEBT FUND HIGH YIELD BOND FUND
FOR THE YEAR ENDED FOR THE YEAR ENDED
FEBRUARY 28 FEBRUARY 28
2000 1999 1998 1997(1) 2000 1999 1998 1997(2)
NET ASSET VALUE BEGINNING
OF PERIOD $ 4.95 $ 7.21 $ 10.91 $ 10.00 $ 8.60 $ 9.67 $ 11.13 $ 10.00
------- ------- ------- ------- ------- ------- ------- -------
Net investment income 0.65 0.62 1.69 0.35 0.80 1.04 1.51 0.57
Net realized and
unrealized gain (loss)
on investments 1.32 (2.29) (0.27) 0.78 (1.11) (1.05) (0.34) 0.93
------- ------- ------- ------- ------- ------- ------- -------
Total from investment
operations 1.97 1.67 1.42 1.13 (0.31) (0.01) 1.17 1.50
------- ------- ------- ------- ------- ------- ------- -------
Dividends from net
investment income (0.61) (0.59) (1.77) (0.20) (0.69) (1.00) (1.66) (0.36)
Distributions from net
realized gain on
investments -- (0.00) (3.35) (0.02) -- (0.06) (0.97) (0.01)
------- ------- ------- ------- ------- ------- ------- -------
Total dividends and
distributions (0.61) (0.59) (5.12) (0.22) (0.69) (1.06) (2.63) (0.37)
------- ------- ------- ------- ------- ------- ------- -------
NET ASSET VALUE, END OF
PERIOD $ 6.31 $ 4.95 $ 7.21 $ 10.91 $ 7.60 $ 8.60 $ 9.67 $ 11.13
------- ------- ------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- ------- ------- -------
NET ASSETS, END OF PERIOD
(000S) $62,429 $30,523 $14,596 $ 6,211 $51,415 $37,367 $22,664 $ 6,575
Total return (3) 40.36% (23.1)% +14.6% +11.4% (3.72)% 0.1% +11.1% +15.1%
Ratios to average net
assets:
Expenses 0.75% 0.75% 0.75% 0.75%(4) 0.55% 0.55% 0.55% 0.55%(4)
Net investment income 11.14% 13.61% 8.53% 8.94%(4) 9.68% 8.80% 9.10% 9.36%(4)
Portfolio turnover rate 203% 295% 549% 136% 39% 102% 189% 151%
Before waiver of
management fee, expenses
absorbed by manager and
credits on custodian cash
balances, net investment
income per share and
expense ratios would have
been:
Net investment income
(loss) $ 0.63 $ 0.59 $ 1.18 $ 0.08 $ 0.77 $ 0.94 $ 0.93 $ 0.29
Expense ratio 1.02% 1.50% 3.34% 7.57%(4) 0.89% 1.39% 4.03% 5.22%(4)
</TABLE>
--------------------------------------------------
(1) Emerging Markets Debt Fund's commencement of investment operations was
October 17, 1996.
(2) High Yield Bond Fund's commencement of investment operations was May 15,
1996.
(3) Total return is calculated assuming a $1,000 investment on the first day of
each period reported, reinvestment of all dividends at the net asset value
on the ex-dividend date, and a sale at net asset value on the last day of
each period reported. Total return calculated for a period of less than one
year is not annualized.
(4) Annualized.
* Amount represents less than $0.01 per share.
Salomon Brothers Institutional Investment Series - 16
<PAGE>
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
For a share of capital stock outstanding throughout each year ended:
<TABLE>
<S> <C> <C> <C> <C> <C>
MONEY MARKET FUND
YEAR ENDED DECEMBER 31,
1999 1998 1997 1996(1) 1995
NET ASSET VALUE, BEGINNING OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------
Net investment income 0.051 0.054 0.055 0.050 0.049
Dividends from net investment income (0.051) (0.054) (0.055) (0.050) (0.049)
NET ASSET VALUE, END OF PERIOD $ 1.000 $ 1.000 $ 1.000 $ 1.000 $ 1.000
-------- -------- -------- -------- -------
-------- -------- -------- -------- -------
NET ASSETS, END OF PERIOD (000S) $119,231 $138,941 $133,012 $159,651 $11,425
Total return 5.2% 5.6% 5.6% 5.1% 5.0%
RATIOS TO AVERAGE NET ASSETS
Expenses 0.17% 0.18% 0.18% 0.20% 0.65%
Net investment income (loss) 5.04% 5.45% 5.48% 5.29% 4.89%
Before waiver of management fee, expenses absorbed by the
manager and credits earned on custodian cash balances, net
investment income per share and expense ratios would have
been:
Expense ratio(2) 0.37% 0.37% 0.41% 0.46% 0.70%
Net investment income per share $ 0.048 $ 0.053 $ 0.052 $ 0.048 $ 0.049
</TABLE>
-------------------
(1) The fund changed its name and objective on April 29, 1996. Prior to April
29, 1996, the fund was called Salomon Brothers U.S. Treasury Securities
Money Market Fund and invested principally in United States Treasury bonds,
notes and bills.
(2) The ratio of expenses to average net assets will not exceed 0.18%, as a
result of a voluntary expense limitation which went into effect in 1997.
Salomon Brothers Institutional Investment Series - 17
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
- --------------------------------------------------------------------------------
Emerging Markets Debt Fund
High Yield Bond Fund
Money Market Fund
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT THE FUNDS
SHAREHOLDER REPORTS. Annual and semi-annual reports to shareholders provide
additional information about the funds' investments. These reports discuss the
market conditions and investment strategies that significantly affected each
fund's performance during its last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION. The statement of additional information
provides more detailed information about each fund. It is incorporated by
reference into (is legally a part of) this combined prospectus.
The funds send only one report to a household if more than one account has the
same address. Contact the transfer agent if you do not want this policy to apply
to you.
HOW TO OBTAIN ADDITIONAL INFORMATION.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting the transfer
agent at 1-800-446-1013, by calling Salomon Brothers Asset Management or
writing the funds at 7 World Trade Center, 38th Floor, New York, NY 10048.
You can also review the funds' shareholder reports, prospectus and statement of
additional information at the Securities and Exchange Commission's Public
Reference Room in Washington, D.C. You can get copies of these materials for a
fee by writing to the Public Reference Section of the Commission, Washington,
D.C. 20549-6009. Information about the public reference room may be obtained by
calling 1-800-SEC-0330. You can get the same reports and information free from
the Commission's Internet web site -- http://www.sec.gov
If someone makes a statement about the funds that is not in this prospectus, you
should not rely upon that information. Neither the funds nor the distributor is
offering to sell shares of the funds to any person to whom the funds may not
lawfully sell their shares.
(Investment Company Act file no. 811-07497)
Salomon Brothers Institutional Investment Series
<PAGE>
April 28, 2000
STATEMENT OF ADDITIONAL INFORMATION
SALOMON BROTHERS INSTITUTIONAL INVESTMENT SERIES
7 WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(800) 446-1013
Salomon Brothers Institutional Investment Series consists of:
Salomon Brothers Institutional Emerging Markets Debt Fund (the 'Emerging
Markets Debt Fund');
Salomon Brothers Institutional High Yield Bond Fund (the 'High Yield Bond
Fund'); and
Salomon Brothers Institutional Money Market Fund (the 'Money Market Fund')
(each, a 'fund' and collectively, the 'funds').
This Statement of Additional Information ('SAI') is not a prospectus and is only
authorized for distribution when preceded or accompanied by the funds' current
Prospectus dated April 28, 2000, as supplemented from time to time (the
'Prospectus'). This SAI supplements and should be read in conjunction with the
Prospectus, a copy of which may be obtained without charge by writing the funds
at the address, or by calling the toll-free telephone number, listed above.
CONTENTS
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<S> <C>
Investment Objectives and Policies. 2
Risk Factors................................................ 21
Investment Limitations...................................... 32
Portfolio Turnover.......................................... 35
Portfolio Transactions...................................... 35
Purchase, Redemption and Exchange of Shares................. 37
Directors and Officers...................................... 40
Institutional Series Funds and Series Funds................. 41
Investment Manager.......................................... 45
Net Asset Value............................................. 47
Taxes....................................................... 48
Performance Data............................................ 52
Other Information about the Funds........................... 54
Appendix A.................................................. A-1
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INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the funds' investment objectives and strategies they
employ to achieve those objectives. Each of the funds, except the Money Market
Fund, is a no-load investment portfolio of Salomon Brothers Institutional Series
Funds Inc., an open-end investment company incorporated in Maryland on
January 19, 1996 ('Institutional Series Funds'). The Money Market Fund is a
no-load investment portfolio of Salomon Brothers Series Funds Inc., an open-end
investment company incorporated in Maryland on April 17, 1990 ('Series Funds').
The Emerging Markets Debt Fund is a non-diversified portfolio and the other
funds are diversified portfolios. Institutional Series Funds and Series Funds
are, individually a 'Company,' and collectively, the 'Companies.' The discussion
below supplements the information set forth in the Prospectus under 'Investment
Objectives and Policies.' References herein to the investment manager mean
Salomon Brothers Asset Management Inc. ('SBAM').
EMERGING MARKETS DEBT FUND
General. The fund seeks to achieve its objective by investing at least 65% of
its total assets in debt securities of government, government-related and
corporate issuers in emerging market countries and of entities organized to
restructure outstanding debt of such issuers. An 'emerging market country' is
any country considered to be an emerging market country by the World Bank at the
time of investment. These countries generally include every nation in the world
except the United States, Canada, Japan, Australia, New Zealand and most
countries located in Western Europe.
In selecting emerging market country debt securities for investment, SBAM will
apply a market risk analysis contemplating assessment of factors such as
liquidity, volatility, tax implications, interest rate sensitivity, counterparty
risks and technical market considerations. Currently, investing in many emerging
market country securities is not feasible or may involve unacceptable risks. As
opportunities to invest in debt securities in other countries develop, the fund
expects to expand and further diversify the emerging market countries in which
it invests. While the fund generally is not restricted in the portion of its
assets which may be invested in a single country or region, it is anticipated
that, under normal conditions, the fund's assets will be invested in issuers in
at least three emerging market countries.
Emerging Market Countries. Emerging Markets Debt Fund expects that its
investments in emerging market country debt securities will be made primarily,
but not exclusively, in some or all of the following emerging market countries:
Algeria
Argentina
Azerbaijan
Brazil
Bulgaria
Chile
China
Colombia
Costa Rica
Croatia
Czech Republic
Dominican Republic
Ecuador
Egypt
Estonia
Ghana
Greece
Hong Kong
Hungary
India
Indonesia
Israel
Ivory Coast
Jamaica
Jordan
Kazakhstan
Kenya
Korea
Latvia
Lebanon
Lithuania
Malaysia
Mexico
Moldava
Morocco
Nicaragua
Nigeria
Pakistan
Panama
Paraguay
Peru
Philippines
Poland
Portugal
Romania
Russia
Saudi Arabia
Singapore
Slovakia
Slovenia
South Africa
Taiwan
Thailand
Trinidad & Tobago
Tunisia
Turkey
Turkmenistan
Ukraine
Uruguay
Uzbekistan
Venezuela
Vietnam
Yugoslavia
Zaire
Zimbabwe
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Emerging Market Country Debt Securities. Emerging market country debt securities
in which Emerging Markets Debt Fund may invest are U.S. dollar denominated and
non-U.S. dollar denominated debt securities, including bonds, notes, bills,
debentures, convertible securities, warrants, bank debt obligations, short-term
paper, mortgage and other asset-backed securities, preferred stock, loan
participations, assignments and interests issued by entities organized and
operated for the purpose of restructuring the investment characteristics of
instruments issued by emerging market country issuers. The fund is subject to no
restrictions on the maturities of the emerging market country debt securities in
which it will invest and such maturities may range from overnight to thirty
years. There is no limit on the percentage of the fund's assets that may be
invested in non-U.S. dollar denominated securities and a substantial portion of
the fund's assets may be invested in non-U.S. dollar denominated securities. The
amount of assets invested in non-U.S. dollar denominated securities will vary
depending upon market conditions. The fund may invest in Brady Bonds, which are
debt securities issued under the framework of the Brady Plan, an initiative
announced by former U.S. Treasury Secretary Nicholas F. Brady in 1989 as a
mechanism for debtor nations to restructure their outstanding external
indebtedness.
The fund's investments in government, government-related and restructured debt
securities will consist of: (i) debt securities or obligations issued or
guaranteed by governments, governmental agencies or instrumentalities and
political subdivisions located in emerging market countries (including
participations in loans between governments and financial institutions); (ii)
debt securities or obligations issued by government-owned, controlled or
sponsored entities located in emerging market countries (including
participations in loans between governments and financial institutions); and
(iii) interests in issuers organized and operated for the purpose of
restructuring the investment characteristics of instruments issued by any of the
entities described above. Such type of restructuring involves the deposit with
or purchase by an entity of specific instruments and the issuance by that entity
of one or more classes of securities backed by, or representing interests in,
the underlying instruments. Certain issuers of such structured securities may be
deemed to be 'investment companies' as defined in the Investment Company Act of
1940 (the '1940 Act'). As a result, the fund's investment in such securities may
be limited by certain investment restrictions contained in the 1940 Act. In
addition to the risks of investing in emerging market country debt securities,
the Fund's investment in government, government-related and restructured debt
instruments are subject to special risks, including the inability or
unwillingness to repay principal and interest, requests to reschedule or
restructure outstanding debt, and requests to extend additional loan amounts.
The fund may have limited recourse in the event of default on such debt
instruments.
Emerging Market Debt Fund's investments in debt securities of corporate issuers
in emerging market countries may include debt securities or obligations issued
by: (i) banks located in emerging market countries or by branches of emerging
market country banks located outside such country; or (ii) companies organized
under the laws of an emerging market country.
Equity Investments. Emerging Markets Debt Fund may invest up to 10% of its total
assets in common stock, convertible securities, warrants or other equity
securities when consistent with the fund's objective. The fund will generally,
but not exclusively, hold such equity investments as a result of purchases of
unit offerings of fixed-income securities which include such securities or in
connection with an actual or proposed conversion or exchange of fixed-income
securities, but may also purchase equity securities not associated with
fixed-income securities when, in the opinion of SBAM, such purchase is
appropriate.
Other Investments. In order to maintain liquidity, Emerging Markets Debt Fund
may hold and/or invest up to 35% of its total assets in cash and/or U.S. dollar
denominated debt securities including: (1) short-term (less than 12 months to
maturity) and medium-term (not greater than five years to maturity) obligations
issued or guaranteed by (a) the U.S. government or the government of a developed
country, their agencies or instrumentalities or (b) international organizations
designated or supported by multiple foreign governmental entities to promote
economic reconstruction or development ('supranational entities'); (2) finance
company obligations, corporate commercial paper and other short-term commercial
obligations, in each case rated or issued by
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companies with similar securities outstanding that are rated 'Prime-1' or 'A' or
better by Moody's or 'A-1' or 'A' or better by S&P or, if unrated, of comparable
quality as determined by SBAM; (3) obligations (including certificates of
deposit, time deposits, demand deposits and bankers' acceptances) of banks; and
(4) repurchase agreements (as discussed below) with respect to securities in
which the fund may invest.
HIGH YIELD BOND FUND
General. High Yield Bond Fund intends to invest, under normal market conditions,
at least 80% of its total assets in non-investment grade fixed-income
securities, (e.g., bonds, debentures, notes, equipment lease certificates,
equipment trust certificates, conditional sales contracts, commercial paper and
other obligations and preferred stock). The lower-rated bonds in which the fund
will invest are commonly referred to as 'junk bonds.'
The debt obligations in which the fund will invest generally will be rated, at
the time of investment, 'Ba' or 'B' or lower by Moody's Investors Service
('Moody's') or 'BB' or 'B' or lower by Standard & Poor's Ratings Group ('S&P'),
or determined by SBAM to be of comparable quality. Debt securities rated by both
Moody's and S&P need only satisfy the foregoing ratings standards with respect
to either the Moody's or the S&P rating. The fund is not required to dispose of
a debt security if its credit rating or credit quality declines. Medium and
low-rated and comparable unrated securities offer yields that fluctuate over
time, but generally are superior to the yields offered by higher rated
securities. However, such securities also involve significantly greater risks,
including price volatility and risk of default in the payment of interest and
principal, than higher rated securities. Certain of the debt securities
purchased by the fund may be rated as low as 'C' by Moody's or 'D' by S&P or may
be considered comparable to securities having such ratings. An investment in
High Yield Bond Fund should not be considered as a complete investment program.
High Yield Bond Fund will be free to invest in high yield debt securities of any
maturity and may adjust the average maturity of the fund's portfolio from time
to time, depending on SBAM's assessment of the relative yields available on
securities of different maturities and its expectations of future changes in
interest rates.
Foreign Securities. High Yield Bond Fund may invest up to 10% of its total
assets in securities of foreign issuers and up to 5% of its total assets in
foreign governmental issuers in any one country. The foreign securities in which
High Yield Bond Fund may invest, all or a portion of which may be non-U.S.
dollar denominated, include: (a) debt obligations issued or guaranteed by
foreign national, provincial, state, municipal or other governments with taxing
authority or by their agencies or instrumentalities, including Brady Bonds;
(b) debt obligations of supranational entities; (c) debt obligations of the U.S.
government issued in non-dollar securities; (d) debt obligations and other
fixed-income securities of foreign corporate issuers; and (e) U.S. corporate
issuers. There is no minimum rating criteria for the fund's investments in such
securities.
Equity Investments. High Yield Bond Fund may invest up to 10% of its total
assets in either: (1) equipment lease certificates, equipment trust certificates
and conditional sales contracts; or (2) limited partnership interests. The fund
may invest up to 100% of its total assets in preferred stock. The fund will
generally, but not exclusively, hold equity securities or equity investments as
a result of purchases of unit offerings of fixed-income securities which include
such securities or in connection with an actual or proposed conversion or
exchange of fixed-income securities, but may also purchase equity securities not
associated with fixed-income securities when, in the opinion of SBAM, such
purchase is appropriate.
Other Investments. In order to maintain liquidity, the fund may hold and/or
invest up to 20% of its total assets in cash and/or U.S. dollar denominated debt
securities including: (1) short-term (less than 12 months to maturity) and
medium-term (not greater than five years to maturity) obligations issued or
guaranteed by (a) the U.S. government or the government of a developed country,
their agencies or instrumentalities or (b) international organizations
designated or supported by multiple foreign governmental entities to promote
economic reconstruction or development ('supranational
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entities'); (2) finance company obligations, corporate commercial paper and
other short-term commercial obligations, in each case rated or issued by
companies with similar securities outstanding that are rated 'Prime-1' or 'A' or
better by Moody's or 'A-1' or 'A' or better by S&P or, if unrated, of comparable
quality as determined by SBAM; (3) obligations (including certificates of
deposit, time deposits, demand deposits and bankers' acceptances) of banks; and
(4) repurchase agreements.
MONEY MARKET FUND
General. Money Market Fund will limit its portfolio investments to securities
that are determined by SBAM to present minimal credit risks pursuant to
guidelines established by the fund's Board of Directors and which are 'Eligible
Securities' at the time of acquisition by the fund. The term 'Eligible
Securities' includes: (i) securities rated in one of the two highest short-term
rating categories by: (a) any two nationally recognized statistical rating
organizations ('NRSROs') that have issued a rating with respect to a security or
class of debt obligations of an issuer; or (b) one NRSRO, if only one NRSRO has
issued such a rating at the time that the fund acquires the security (together,
'Requisite NRSROs'), (ii) securities of issuers that have received such ratings
with respect to other short-term debt securities comparable in priority and
security and (iii) comparable unrated securities. The fund may not invest more
than 5% of its total assets in Eligible Securities that have not received the
highest rating from the Requisite NRSROs and comparable unrated securities
('Second Tier Securities') and may not invest more than the greater of 1% of its
total assets or $1 million in the Second Tier Securities of any one issuer.
Money Market Fund may also invest in the following types of securities:
Repurchase Agreements
U.S. Government Securities
Bank Obligations
Corporate Debt Securities
Floating and Variable Rate Securities
Variable Amount Master Demand Notes
Asset-Backed Securities
Municipal Obligations
FIXED INCOME SECURITIES
U.S. GOVERNMENT SECURITIES (EACH FUND)
Money Market Fund may invest without limit in securities issued or guaranteed by
the U.S. government or by its agencies or instrumentalities include obligations
of several kinds. U.S. government securities in general include a wide variety
of U.S. Treasury obligations consisting of bills, notes and bonds, which
principally differ only in their interest rates, maturities and times of
issuance. Securities issued or guaranteed by U.S. government agencies and
instrumentalities are debt securities issued by agencies or instrumentalities
established or sponsored by the U.S. government and may be backed only by the
credit of the issuing agency or instrumentality. The fund will invest in such
obligations only where SBAM is satisfied that the credit risk with respect to
the issuer is minimal.
ASSET-BACKED SECURITIES (EACH FUND)
Asset-backed securities are generally issued as pass through certificates, which
represent undivided fractional ownership interests in the underlying pool of
assets, or as debt instruments, which are generally issued as the debt of a
special purpose entity organized solely for the purpose of owning such assets
and issuing such debt. Asset-backed securities are often backed by a pool of
assets representing the obligations of a number of different parties.
Asset-backed securities frequently carry credit protection in the form of extra
collateral, subordinated certificates, cash reserve accounts, letters of credit
or other enhancements. For example, payments of principal and interest may be
guaranteed up to certain amounts and for a certain time period by a letter of
credit or other enhancement issued by a financial institution unaffiliated with
the entities issuing the securities. Assets which, to date, have been used to
back asset-backed securities include motor vehicle installment sales contracts
or installment loans secured by motor vehicles, and receivables from revolving
credit (credit card) agreements.
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FLOATING AND VARIABLE RATE INSTRUMENTS (EACH FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may each invest in floating
and variable rate obligations. Money Market Fund may invest in floating and
variable rate instruments with stated maturities in excess of 397 days upon
compliance with certain conditions contained in Rule 2a-7 promulgated under the
1940 Act, in which case such obligations will be treated, in accordance with
Rule 2a-7, as having maturities not exceeding 397 days.
Floating or variable rate obligations bear interest at rates that are not fixed,
but vary with changes in specified market rates or indices, such as the prime
rate, and at specified intervals. Certain of the floating or variable rate
obligations that may be purchased by a fund may carry a demand feature that
would permit the holder to tender them back to the issuer at par value prior to
maturity. Such obligations include variable rate master demand notes, which are
unsecured instruments issued pursuant to an agreement between the issuer and the
holder that permit the indebtedness thereunder to vary and provide for periodic
adjustments in the interest rate. A fund will limit its purchases of floating
and variable rate obligations to those of the same quality as it otherwise is
allowed to purchase. SBAM or the applicable sub-adviser will monitor on an
ongoing basis the ability of an issuer of a demand instrument to pay principal
and interest on demand.
Demand Instruments. Certain of the floating or variable rate obligations that
may be purchased by a fund may carry a demand feature that would permit the
holder to tender them back to the issuer of the instrument or to a third party
at par value prior to maturity. Some of the demand instruments purchased by the
funds are not traded in a secondary market and derive their liquidity solely
from the ability of the holder to demand repayment from the issuer or third
party providing credit support. If a demand instrument is not traded in a
secondary market, each fund will nonetheless treat the instrument as 'readily
marketable' for the purposes of its investment restriction limiting investments
in illiquid securities unless the demand feature has a notice period of more
than seven days; if the notice period is greater than seven days, such a demand
instrument will be characterized as 'not readily marketable' for such purpose.
A fund's right to obtain payment at par on a demand instrument could be affected
by events occurring between the date the fund elects to demand payment and the
date payment is due that may affect the ability of the issuer of the instrument
or a third party providing credit support to make payment when due, except when
such demand instruments permit same day settlement. To facilitate settlement,
these same day demand instruments may be held in book entry form at a bank other
than a fund's custodian subject to a sub-custodian agreement approved by the
fund between that bank and the fund's custodian.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES
(EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may invest in zero coupon
securities, pay-in-kind bonds and deferred payment securities.
Zero coupon securities are debt securities that pay no cash income but are sold
at substantial discounts from their value at maturity. When a zero coupon
security is held to maturity, its entire return, which consists of the
amortization of discount, comes from the difference between its purchase price
and its maturity value. This difference is known at the time of purchase, so
that investors holding zero coupon securities until maturity know at the time of
their investment what the expected return on their investment will be. Certain
zero coupon securities also are sold at substantial discounts from their
maturity value and provide for the commencement of regular interest payments at
a deferred date. Zero coupon securities may have conversion features. A fund
also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a portion of
their interest in the form of debt or equity securities. Deferred payment
securities are securities that remain zero coupon securities until a
predetermined date, at which time the stated coupon rate becomes effective and
interest becomes payable at regular intervals.
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LOAN PARTICIPATIONS AND ASSIGNMENTS (EMERGING MARKETS DEBT FUND AND HIGH YIELD
BOND FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may invest in loan
participations and assignments. The funds consider these investments to be
investments in debt securities. Loan participations typically will result in a
fund having a contractual relationship only with the lender, not with the
borrower. A fund will have the right to receive payments of principal, interest
and any fees to which it is entitled only from the lender selling the
participation and only upon receipt by the lender of the payments from the
borrower. In connection with purchasing loan participations, a fund generally
will have no right to enforce compliance by the borrower with the terms of the
loan agreement relating to the loan, nor any rights of set-off against the
borrower, and the fund may not benefit directly from any collateral supporting
the loan in which it has purchased the participation. As a result, a fund will
assume the credit risk of both the borrower and the lender that is selling the
participation. In the event of the insolvency of the lender selling a
participation, a fund may be treated as a general creditor of the lender and may
not benefit from any set-off between the lender and the borrower. A fund will
acquire loan participations only if the lender interpositioned between the fund
and the borrower is determined by SBAM to be creditworthy. When a fund purchases
assignments from lenders, the fund will acquire direct rights against the
borrower on the loan, except that under certain circumstances such rights may be
more limited than those held by the assigning lender.
FIRM COMMITMENTS AND WHEN-ISSUED SECURITIES (EACH FUND)
A fund may purchase securities on a firm commitment basis, including when-issued
securities. Securities purchased on a firm commitment basis are purchased for
delivery beyond the normal settlement date at a stated price and yield. No
income accrues to the purchaser of a security on a firm commitment basis prior
to delivery. Such securities are recorded as an asset and are subject to changes
in value based upon changes in the general level of interest rates. Purchasing a
security on a firm commitment basis can involve a risk that the market price at
the time of delivery may be lower than the agreed upon purchase price, in which
case there could be an unrealized loss at the time of delivery. A fund will only
make commitments to purchase securities on a firm commitment basis with the
intention of actually acquiring the securities, but may sell them before the
settlement date if it is deemed advisable. A fund will establish a segregated
account in which it will maintain liquid assets in an amount at least equal in
value to the fund's commitments to purchase securities on a firm commitment
basis. If the value of these assets declines, the fund will place additional
liquid assets in the account on a daily basis so that the value of the assets in
the account is equal to the amount of such commitments.
MUNICIPAL OBLIGATIONS (MONEY MARKET FUND)
Money Market Fund may invest in high-quality, short-term municipal obligations
that carry yields that are competitive with those of other types of money market
instruments in which the fund may invest. Municipal obligations are debt
securities, the interest from which is, in the opinion of bond counsel to their
issuer, excluded from gross income for regular Federal income tax purposes.
Municipal obligations include 'public purpose' obligations, which generate
interest that is exempt from regular Federal income tax and for individual
taxpayers, is not subject to the alternative minimum tax. Municipal obligations
also include qualified 'private activity bond' which generate interest that is
exempt from regular Federal income tax but that is subject to the alternative
minimum tax. Variations exist in the security of municipal obligations, both
within a particular classification and between classifications.
BRADY BONDS (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Brady Bonds are debt securities, generally denominated in U.S. dollars, issued
under the framework of the Brady Plan. In restructuring its external debt under
the Brady Plan framework, a debtor nation negotiates with its existing bank
lenders as well as multilateral institutions such as the International Bank for
Reconstruction and Development (the 'World Bank') and the
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International Monetary Fund (the 'IMF'). The Brady Plan framework, as it has
developed, contemplates the exchange of external commercial bank debt for newly
issued bonds, known as Brady Bonds. Brady Bonds may also be issued in respect of
new money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount. Under these arrangements with the World
Bank and/or the IMF, debtor nations have been required to agree to the
implementation of certain domestic monetary and fiscal reforms. Such reforms
have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should also recognize that
the Brady Plan only sets forth general guiding principles for economic reform
and debt reduction, emphasizing that solutions must be negotiated on a
case-by-case basis between debtor nations and their creditors. SBAM believes
that economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries which have issued or have announced plans
to issue Brady Bonds an attractive opportunity for investment. However, there
can be no assurance that SBAM's expectations with respect to Brady Bonds will be
realized.
Brady Bonds which have been issued to date are rated in the categories 'BB' or
'B' by S&P or 'Ba' or 'B' by Moody's or, in cases in which a rating by S&P or
Moody's has not been assigned, are generally considered by the investment
manager to be of comparable quality.
Agreements implemented under the Brady Plan to date are designed to achieve debt
and debt-service reduction through specific options negotiated by a debtor
nation with its creditors. As a result, the financial packages offered by each
country differ. The types of options have included the exchange of outstanding
commercial bank debt for bonds issued at 100% of face value of such debt which
carry a below-market stated rate of interest (generally known as par bonds),
bonds issued at a discount from the face value of such debt (generally known as
discount bonds), bonds bearing an interest rate which increases over time and
bonds issued in exchange for the advancement of new money by existing lenders.
Discount bonds issued to date under the framework of the Brady Plan have
generally borne interest computed semiannually at a rate equal to 13/16 of one
percent above the then current six month LIBOR rate. Regardless of the stated
face amount and stated interest rate of the various types of Brady Bonds, the
applicable funds will purchase Brady Bonds in secondary markets, as described
below, in which the price and yield to the investor reflect market conditions at
the time of purchase. Brady Bonds issued to date have traded at a deep discount
from their face value. Certain sovereign bonds are entitled to 'value recovery
payments' in certain circumstances, which in effect constitute supplemental
interest payments but generally are not collateralized. Certain Brady Bonds have
been collateralized as to principal due at maturity (typically 30 years from the
date of issuance) by U.S. Treasury zero coupon bonds with a maturity equal to
the final maturity of such Brady Bonds, although the collateral is not available
to investors until the final maturity of the Brady Bonds. Collateral purchases
are financed by the IMF, the World Bank and the debtor nations' reserves. In
addition, interest payments on certain types of Brady Bonds may be
collateralized by cash or high-grade securities in amounts that typically
represent between 12 and 18 months of interest accruals on these instruments
with the balance of the interest accruals being uncollateralized. The applicable
funds may purchase Brady Bonds with no or limited collateralization, and will be
relying for payment of interest and (except in the case of principal
collateralized Brady Bonds) principal primarily on the willingness and ability
of the foreign government to make payment in accordance with the terms of the
Brady Bonds. Brady Bonds issued to date are purchased and sold in secondary
markets through U.S. securities dealers and other financial institutions and are
generally maintained through European transnational securities depositories. A
substantial portion of the Brady Bonds and other sovereign debt securities in
which the fund invests are likely to be acquired at a discount, which involves
certain considerations discussed below under 'Taxes.'
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STRUCTURED INVESTMENTS (EMERGING MARKETS DEBT FUND)
Included among the issuers of emerging market country debt securities in which
Emerging Markets Debt Fund may invest are entities organized and operated solely
for the purpose of restructuring the investment characteristics of various
securities. These entities are typically organized by investment banking firms
which receive fees in connection with establishing each entity and arranging for
the placement of its securities. This type of restructuring involves the deposit
with or purchase by an entity, such as a corporation or trust, of specified
instruments, such as Brady Bonds, and the issuance by that entity of one or more
classes of securities ('Structured Investments') backed by, or representing
interests in, the underlying instruments. The cash flow on the underlying
instruments may be apportioned among the newly issued Structured Investments to
create securities with different investment characteristics such as varying
maturities, payment priorities or interest rate provisions; the extent of the
payments made with respect to Structured Investments is dependent on the extent
of the cash flow on the underlying instruments. Because Structured Investments
of the type in which Emerging Markets Debt Fund anticipates investing typically
involve no credit enhancement, their credit risk will generally be equivalent to
that of the underlying instruments.
Emerging Markets Debt Fund is permitted to invest in a class of Structured
Investments that is either subordinated or unsubordinated to the right of
payment of another class. Subordinated Structured Investments typically have
higher yields and present greater risks than unsubordinated Structured
Investments. Although the fund's purchase of subordinated Structured Investments
would have a similar economic effect to that of borrowing against the underlying
securities, the purchase will not be deemed to be borrowing for purposes of the
limitations placed on the extent of the fund's assets that may be used for
borrowing. See 'Risk Factors.'
1940 Act Limitations. Certain issuers of Structured Investments may be deemed to
be 'investment companies' as defined in the 1940 Act. As a result, the Fund's
investment in these Structured Investments may be limited by the restrictions
contained in the 1940 Act described under 'Other Investment Companies.'
Structured Investments are typically sold in private placement transactions, and
there currently is no active trading market for Structured Investments.
RULE 144A SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may each purchase certain
restricted securities ('Rule 144A securities') for which there is a secondary
market of qualified institutional buyers, as contemplated by Rule 144A under the
Securities Act of 1933, as amended (the '1933 Act'). Rule 144A provides an
exemption from the registration requirements of the 1933 Act for the resale of
certain restricted securities to qualified institutional buyers.
One effect of Rule 144A is that certain restricted securities may now be liquid,
though there is no assurance that a liquid market for Rule 144A securities will
develop or be maintained. In promulgating Rule 144A the Securities and Exchange
Commission (the 'SEC') stated that the ultimate responsibility for liquidity
determinations is that of an investment company's board of directors. However,
the SEC stated that the board may delegate the day-to-day function of
determining liquidity to the fund's investment adviser, provided that the board
retains sufficient oversight. The Board of Directors of Institutional Series
Funds and Series Funds have adopted policies and procedures for the purpose of
determining whether securities that are eligible for resale under Rule 144A are
liquid or illiquid for purposes of a fund's limitation on investment in illiquid
securities. Pursuant to those policies and procedures, each fund's Board of
Directors has delegated to the investment manager the determination as to
whether a particular security is liquid or illiquid, requiring that
consideration be given to, among other things, the frequency of trades and
quotes for the security, the number of dealers willing to sell the security and
the number of potential purchasers, dealer undertakings to make a market in the
security, the nature of the security and the time needed to dispose of the
security. Each fund's Board of Directors periodically reviews fund purchases and
sales of Rule 144A securities.
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VARIABLE AMOUNT MASTER DEMAND NOTES (MONEY MARKET FUND)
A variable amount master demand note differs from ordinary commercial paper in
that it is issued pursuant to a written agreement between the issuer and the
holder, its amount may from time to time be increased by the holder (subject to
an agreed maximum) or decreased by the holder or the issuer, it is payable on
demand, the rate of interest payable on it varies with an agreed formula and it
is not typically rated by a rating agency.
BANK OBLIGATIONS (EACH FUND)
Bank obligations that may be purchased by a fund include certificates of
deposit, banker's acceptances and fixed time deposits. A certificate of deposit
is a short-term negotiable certificate issued by a commercial bank against funds
deposited in the bank and is either interest-bearing or purchased on a discount
basis. A banker's acceptance is a short-term draft drawn on a commercial bank by
a borrower, usually in connection with an international commercial transaction.
The borrower is liable for payment as is the bank, which unconditionally
guarantees to pay the draft at its face amount on the maturity date. Fixed time
deposits are obligations of branches of U.S. banks or foreign banks which are
payable at a stated maturity date and bear a fixed rate of interest. Although
fixed time deposits do not have a market, there are no contractual restrictions
on the right to transfer a beneficial interest in the deposit to a third party.
Bank obligations may be general obligations of the parent bank or may be limited
to the issuing branch by the terms of the specific obligations or by government
regulation.
Investors should also be aware that securities issued or guaranteed by foreign
banks, foreign branches of U.S. banks, and foreign government and private
issuers may involve investment risks in addition to those relating to domestic
obligations.
EQUITY INVESTMENTS
COMMON STOCK (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Common stocks are shares of a corporation or other entity that entitle the
holder to a pro rata share of the profits of the corporation, if any, without
preference over any other shareholder or class of shareholders, including
holders of the entity's preferred stock and other senior equity. Common stock
usually carries with it the right to vote and frequently an exclusive right to
do so.
WARRANTS (EMERGING MARKET DEBT FUND AND HIGH YIELD BOND FUND)
Emerging Market Debt Fund and High Yield Bond Fund may each invest in warrants,
which are securities permitting, but not obligating, their holder to subscribe
for other securities. Warrants do not carry the right to dividends or voting
rights with respect to their underlying securities, and they do not represent
any rights in assets of the issuer. An investment in warrants may be considered
speculative. In addition, the value of a warrant does not necessarily change
with the value of the underlying securities and a warrant ceases to have value
if it is not exercised prior to its expiration date.
PREFERRED STOCK (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Preferred stocks, like debt obligations, are generally fixed-income securities.
Shareholders of preferred stocks normally have the right to receive dividends at
a fixed rate when and as declared by the issuer's board of directors, but do not
participate in other amounts available for distribution by the issuing
corporation. Dividends on the preferred stock may be cumulative, and all
cumulative dividends usually must be paid prior to common shareholders receiving
any dividends. Preferred stock dividends must be paid before common stock
dividends and, for that reason, preferred stocks generally entail less risk than
common stocks. Upon liquidation, preferred stocks are entitled to a specified
liquidation preference, which is generally the same as the par or stated value,
and are senior in right of payment to common stock. Preferred stocks are,
however, equity securities in the sense that they do not represent a liability
of the issuer and, therefore, do not
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offer as great a degree of protection of capital or assurance of continued
income as investments in corporate debt securities. In addition, preferred
stocks are subordinated in right of payment to all debt obligations and
creditors of the issuer, and convertible preferred stocks may be subordinated to
other preferred stock of the same issuer.
OTHER INVESTMENT COMPANIES (EACH FUND)
Each fund may invest in unaffiliated investment funds which invest principally
in securities in which that fund is authorized to invest. Under the 1940 Act, a
fund may invest a maximum of 10% of its total assets in the securities of other
investment companies. In addition, under the 1940 Act, not more than 5% of the
fund's total assets may be invested in the securities of any one investment
company and a fund may not purchase more than 3% of the outstanding voting stock
of such investment company. The Money Market Fund will only invest in other
money market funds which are subject to the requirements of Rule 2a-7 under the
1940 Act and which are considered to present minimal credit risks. To the extent
a fund invests in other investment funds, the fund's shareholders will incur
certain duplicative fees and expenses, including investment advisory fees.
The return on such investments will be reduced by the operating expenses,
including investment advisory and administration fees, of such investment funds,
and will be further reduced by fund expenses, including management fees; that
is, there will be a layering of certain fees and expenses. Investment in
investment companies also may involve the payment of substantial premiums above
the value of such companies' portfolio securities. The funds do not intend to
invest in such vehicles or funds unless the investment manager determines that
the potential benefits of such investment justify the payment of any applicable
premiums.
DERIVATIVES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
A fund will not be obligated to use derivatives and makes no representation as
to the availability of these techniques at this time or at any time in the
future. 'Derivatives,' as used in the Prospectus and this SAI, refers to
interest rate, currency or stock or bond index futures contracts, currency
forward contracts and currency swaps, the purchase and sale (or writing) of
exchange listed and over-the-counter ('OTC') put and call options on debt and
equity securities, currencies, interest rate, currency or stock index futures
and fixed-income and stock indices and other financial instruments, entering
into various interest rate transactions such as swaps, caps, floors, collars,
entering into equity swaps, caps, floors, the purchase and sale of indexed debt
securities or trading in other similar types of instruments.
Derivatives may be used to attempt to protect against possible changes in the
market value of securities held or to be purchased for a fund's portfolio
resulting from securities markets or currency exchange rate fluctuations, to
protect a fund's unrealized gains in the value of its securities, to facilitate
the sale of those securities for investment purposes, to manage the effective
maturity or duration of a fund's portfolio or to establish a position in the
derivatives markets as a temporary substitute for purchasing or selling
particular securities or to seek to enhance a fund's income or gain. A fund may
use any or all types of derivatives which it is authorized to use at any time;
no particular strategy will dictate the use of one type of transaction rather
than another, as use of any authorized derivative will be a function of numerous
variables, including market conditions. The ability of a fund to utilize
derivatives successfully will depend on numerous factors including the
investment manager's ability to predict pertinent market movements, which cannot
be assured. These skills are different from those needed to select a fund's
portfolio securities.
Subject to the constraints described above, a fund may (if and to the extent so
authorized) purchase and sell interest rate, currency or stock or bond index
futures contracts and enter into currency forward contracts and currency swaps;
purchase and sell (or write) exchange listed and over-the-counter put and call
options on securities, loan participations and assignments, currencies, futures
contracts, indices and other financial instruments, and a fund may enter into
interest rate transactions, equity swaps and related transactions and other
similar transactions which may be
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developed to the extent SBAM determines that they are consistent with the
applicable fund's investment objective and policies and applicable regulatory
requirements. A fund's interest rate transactions may take the form of swaps,
caps, floors and collars, and a fund's currency transactions may take the form
of currency forward contracts, currency futures contracts, currency swaps and
options on currencies or currency futures contracts.
A fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the Commodity
Futures Trading Commission ('CFTC') thereunder and the federal income tax
requirements applicable to regulated investment companies.
Currency Transactions. A fund may engage in currency transactions with
counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-listed
and OTC options on currencies, and currency swaps. A forward currency contract
involves a privately negotiated obligation to purchase or sell (with delivery
generally required) a specific currency at a future date, which may be any fixed
number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract. A currency swap is an agreement to
exchange cash flows based on the notional difference among two or more
currencies and operates similarly to an interest rate swap, which is described
below under 'Swaps, Caps, Floors and Collars.' A fund may enter into currency
transactions only with Counterparties that the investment manager deems to be
creditworthy.
A fund may enter into forward currency exchange contracts when the investment
manager believes that the currency of a particular country may suffer a
substantial decline against the U.S. dollar. In those circumstances, a fund may
enter into a forward contract to sell, for a fixed amount of U.S. dollars, the
amount of that currency approximating the value of some or all of the fund's
portfolio securities denominated in such currency. Forward contracts may limit
potential gain from a positive change in the relationship between the U.S.
dollar and foreign currencies.
Transaction hedging is entering into a currency transaction with respect to
specific assets or liabilities of the fund, which will generally arise in
connection with the purchase or sale of the fund's portfolio securities or the
receipt of income from them. Position hedging is entering into a currency
transaction with respect to portfolio securities positions denominated or
generally quoted in that currency. A fund will not enter into a transaction to
hedge currency exposure to an extent greater, after netting all transactions
intended wholly or partially to offset other transactions, than the aggregate
market value (at the time of entering into the transaction) of the securities
held by the fund that are denominated or generally quoted in or currently
convertible into the currency, other than with respect to proxy hedging as
described below.
A fund may cross-hedge currencies by entering into transactions to purchase or
sell one or more currencies that are expected to increase or decline in value
relative to other currencies to which the fund has or in which the fund expects
to have exposure. To reduce the effect of currency fluctuations on the value of
existing or anticipated holdings of its securities, a fund may also engage in
proxy hedging. Proxy hedging is often used when the currency to which the Fund's
holdings is exposed is difficult to hedge generally or difficult to hedge
against the dollar. Proxy hedging entails entering into a forward contract to
sell a currency, the changes in the value of which are generally considered to
be linked to a currency or currencies in which some or all of the fund's
securities are or are expected to be denominated, and to buy dollars. The amount
of the contract would not exceed the market value of the fund's securities
denominated in linked currencies.
Currency transactions are subject to risks different from other portfolio
transactions, as discussed below under 'Risk Factors.' If a fund enters into a
currency hedging transaction, the fund will comply with the asset segregation
requirements described below under 'Use of Segregated and Other Special
Accounts.'
Futures Contracts. A fund may trade futures contracts: (1) on domestic and
foreign exchanges on currencies, interest rates and bond indices; and (2) on
domestic and, to the extent permitted by
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the CFTC, foreign exchanges on stock indices. Futures contracts are generally
bought and sold on the commodities exchanges on which they are listed with
payment of initial and variation margin as described below. The sale of a
futures contract creates a firm obligation by the fund, as seller, to deliver to
the buyer the specific type of financial instrument called for in the contract
at a specific future time for a specified price (or, with respect to certain
instruments, the net cash amount). None of the funds is a commodity pool, and
each fund, where permitted, will use futures contracts and options thereon
solely: (i) for bona fide hedging purposes; and (ii) for other purposes in
amounts permitted by the rules and regulations promulgated by the CFTC. A fund's
use of financial futures contracts and options thereon will in all cases be
consistent with applicable regulatory requirements and in particular the rules
and regulations of the CFTC. Maintaining a futures contract or selling an option
on a futures contract will typically require the fund to deposit with a
financial intermediary, as security for its obligations, an amount of cash or
other specified assets ('initial margin') that initially is from 1% to 10% of
the face amount of the contract (but may be higher in some circumstances).
Additional cash or assets ('variation margin') may be required to be deposited
thereafter daily as the mark-to-market value of the futures contract fluctuates.
A fund will not enter into a futures contract or option thereon other than for
bona fide hedging purposes if, immediately thereafter, the sum of the amount of
its initial margin and premiums required to maintain permissible non-bona fide
hedging positions in futures contracts and options thereon would exceed 5% of
the liquidation value of the fund's portfolio, after taking into account
unrealized profits and losses on existing contracts; however, in the case of an
option that is in-the-money at the time of the purchase, the in-the-money amount
may be excluded in calculating the 5% limitation. The value of all futures
contracts sold by the fund (adjusted for the historical volatility relationship
between the fund and the contracts) will not exceed the total market value of
the fund's securities. In addition, the value of a fund's long futures and
options positions (futures contracts on stock or bond indices, interest rates or
foreign currencies and call options on such futures contracts) will not exceed
the sum of: (a) liquid assets segregated for this purpose; (b) cash proceeds on
existing investments due within thirty days; and (c) accrued profits on the
particular futures or options positions. The segregation requirements with
respect to futures contracts and options thereon are described below under 'Use
of Segregated and Other Special Accounts.'
Interest Rate Futures Contracts. A fund may enter into interest rate futures
contracts in order to protect it from fluctuations in interest rates without
necessarily buying or selling fixed income securities. An interest rate futures
contract is an agreement to take or make delivery of either: (i) an amount of
cash equal to the difference between the value of a particular index of debt
securities at the beginning and at the end of the contract period; or (ii) a
specified amount of a particular debt security at a future date at a price set
at time of the contract. For example, if a fund owns bonds, and interest rates
are expected to increase, the fund might sell futures contracts on debt
securities having characteristics similar to those held in the portfolio. Such a
sale would have much the same effect as selling an equivalent value of the bonds
owned by the fund. If interest rates did increase, the value of the debt
securities in the portfolio would decline, but the value of the futures
contracts to the fund would increase at approximately the same rate, thereby
keeping the net asset value of each class of the fund from declining as much as
it otherwise would have. A fund could accomplish similar results by selling
bonds with longer maturities and investing in bonds with shorter maturities when
interest rates are expected to increase. However, since the futures market may
be more liquid than the cash market, the use of futures contracts as a risk
management technique allows a fund to maintain a defensive position without
having to sell its portfolio securities.
Similarly, when the investment manager expects that interest rates may decline,
a fund may purchase interest rate futures contracts in an attempt to hedge
against having to make subsequently anticipated purchases of bonds at the higher
prices subsequently expected to prevail. Since the fluctuations in the value of
appropriately selected futures contracts should be similar to that of the bonds
that will be purchased, a fund could take advantage of the anticipated rise in
the cost of the bonds without actually buying them until the market had
stabilized. At that time, a
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fund could make the intended purchase of the bonds in the cash market and the
futures contracts could be liquidated.
At the time of delivery of securities pursuant to an interest rate futures
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate from that specified in
the contract. In some (but not many) cases, securities called for by a futures
contract may have a shorter term than the term of the futures contract and,
consequently, may not in fact have been issued when the futures contract was
entered.
Options. A put option gives the purchaser of the option, upon payment of a
premium, the right to sell, and the writer of the obligation to buy (if the
option is exercised), the underlying security, index, currency or other
instrument at the exercise price. A fund's purchase of a put option on a
security, for example, might be designed to protect its holdings in the
underlying instrument (or, in some cases, a similar instrument) against a
substantial decline in the market value of such instrument by giving the fund
the right to sell the instrument at the option exercise price. A call option,
upon payment of a premium, gives the purchaser of the option the right to buy
(if the option is exercised), and the seller the obligation to sell, the
underlying instrument at the exercise price. A fund's purchase of a call option
on a security, financial futures contract, index, currency or other instrument
might be intended to protect the fund against an increase in the price of the
underlying instrument that it intends to purchase in the future by fixing the
price at which it may purchase the instrument. An 'American' style put or call
option may be exercised at any time during the option period, whereas a
'European' style put or call option may be exercised only upon expiration or
during a fixed period prior to expiration. Exchange-listed options are issued by
a regulated intermediary such as the Options Clearing Corporation ('OCC'), which
guarantees the performance of the obligations of the parties to the options.
In order to hedge against adverse market shifts or to increase income or gain,
the funds may purchase put and call options or write 'covered' put and call
options on futures contracts on stock indices, interest rates and currencies. In
addition, in order to hedge against adverse market shifts or to increase its
income, a fund may purchase put and call options and write 'covered' put and
call options on stocks, stock indices and currencies. A fund may utilize options
on currencies in order to hedge against currency exchange rate risks. A call
option is 'covered' if, so long as the fund is obligated as the writer of the
option, it will own: (i) the underlying investment subject to the option;
(ii) securities convertible or exchangeable without the payment of any
consideration into the securities subject to the option; or (iii) a call option
on the relevant security or currency with an exercise price no higher than the
exercise price on the call option written. A put option is 'covered' if, to
support its obligation to purchase the underlying investment if a put option
that a fund writes is exercised, the Fund will either (a) deposit with its
custodian in a segregated account cash, cash equivalents, U.S. government
securities or other high grade liquid debt obligations having a value at least
equal to the exercise price of the underlying investment or (b) continue to own
an equivalent number of puts of the same 'series' (that is, puts on the same
underlying investment having the same exercise prices and expiration dates as
those written by the fund), or an equivalent number of puts of the same 'class'
(that is, puts on the same underlying investment) with exercise prices greater
than those that it has written (or, if the exercise prices of the puts it holds
are less than the exercise prices of those it has written, it will deposit the
difference with its custodian in a segregated account). Parties to options
transactions must make certain payments and/or set aside certain amounts of
assets in connection with each transaction.
In all cases except for certain options on interest rate futures contracts, by
writing a call, a fund will limit its opportunity to profit from an increase in
the market value of the underlying investment above the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
By writing a put, a fund will limit its opportunity to profit from a decrease in
the market value of the underlying investment below the exercise price of the
option for as long as the fund's obligation as writer of the option continues.
Upon the exercise of a put option written by a fund, the fund may suffer an
economic loss equal to the difference between the price at which the fund is
required to purchase the underlying investment and its market value at the time
of the option exercise, less the premium received for writing the option. Upon
the exercise of
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a call option written by a fund, the fund may suffer an economic loss equal to
an amount not less than the excess of the investment's market value at the time
of the option exercise over the fund's acquisition cost of the investment, less
the sum of the premium received for writing the option and the positive
difference, if any, between the call price paid to the fund and the fund's
acquisition cost of the investment.
In all cases except for certain options on interest rate futures contracts, in
purchasing a put option, a fund will seek to benefit from a decline in the
market price of the underlying investment, while in purchasing a call option, a
fund will seek to benefit from an increase in the market price of the underlying
investment. If an option purchased is not sold or exercised when it has
remaining value, or if the market price of the underlying investment remains
equal to or greater than the exercise price, in the case of a put, or remains
equal to or below the exercise price, in the case of a call, during the life of
the option, the fund will lose its investment in the option. For the purchase of
an option to be profitable, the market price of the underlying investment must
decline sufficiently below the exercise price, in the case of a put, and must
increase sufficiently above the exercise price, in the case of a call, to cover
the premium and transaction costs.
In the case of certain options on interest rate futures contracts, a fund may
purchase a put option in anticipation of a rise in interest rates, and purchase
a call option in anticipation of a fall in interest rates. By writing a covered
call option on interest rate futures contracts, a fund will limit its
opportunity to profit from a fall in interest rates. By writing a covered put
option on interest rate futures contracts, a fund will limit its opportunity to
profit from a rise in interest rates.
A fund may choose to exercise the options it holds, permit them to expire or
terminate them prior to their expiration by entering into closing transactions.
A fund may enter into a closing purchase transaction in which the fund purchases
an option having the same terms as the option it had written or a closing sale
transaction in which the fund sells an option having the same terms as the
option it had purchased. A covered option writer unable to effect a closing
purchase transaction will not be able to sell the underlying security until the
option expires or the underlying security is delivered upon exercise, with the
result that the writer will be subject to the risk of market decline in the
underlying security during such period. Should a fund choose to exercise an
option, the fund will purchase in the open market the securities, commodities or
commodity futures contracts underlying the exercised option.
Exchange-listed options on securities and currencies, with certain exceptions,
generally settle by physical delivery of the underlying security or currency,
although in the future, cash settlement may become available. Frequently, rather
than taking or making delivery of the underlying instrument through the process
of exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
Index options are cash settled for the net amount, if any, by which the option
is 'in-the-money' (that is, the amount by which the value of the underlying
instrument exceeds, in the case of a call option, or is less than, in the case
of a put option, the exercise price of the option) at the time the option is
exercised.
OCC-issued and exchange-listed options, with certain exceptions, generally
settle by physical delivery of the underlying security or currency, although in
the future, cash settlement may become available. Index options are cash settled
for the net amount, if any, by which the option is 'in-the-money' (that is, the
amount by which the value of the underlying instrument exceeds, in the case of a
call option, or is less than, in the case of a put option, the exercise price of
the option) at the time the option is exercised. Frequently, rather than taking
or making delivery of the underlying instrument through the process of
exercising the option, listed options are closed by entering into offsetting
purchase or sale transactions that do not result in ownership of the new option.
OTC options are purchased from or sold to securities dealers, financial
institutions or other parties (collectively referred to as 'counterparties' and
individually referred to as a 'counterparty') through a direct bilateral
agreement with the counterparty. In contrast to exchange-listed options, which
generally have standardized terms and performance mechanics, all of the terms of
an OTC option, including such terms as method of settlement, term, exercise
price, premium, guaranties
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and security, are determined by negotiation of the parties. It is anticipated
that any fund authorized to use OTC options will generally only enter into OTC
options that have cash settlement provisions, although it will not be required
to do so.
Unless the parties provide for it, no central clearing or guaranty function is
involved in an OTC option. As a result, if a counterparty fails to make or take
delivery of the security, currency or other instrument underlying an OTC option
it has entered into with the fund or fails to make a cash settlement payment due
in accordance with the terms of that option, the fund will lose any premium it
paid for the option as well as any anticipated benefit of the transaction. Thus,
the investment manager must assess the creditworthiness of each such
counterparty or any guarantor or credit enhancement of the counterparty's credit
to determine the likelihood that the terms of the OTC option will be met. A fund
will enter into OTC option transactions only with U.S. government securities
dealers recognized by the Federal Reserve Bank of New York as 'primary dealers,'
or broker-dealers, domestic or foreign banks, or other financial institutions
that the investment manager deems to be creditworthy. In the absence of a change
in the current position of the staff of the SEC, OTC options purchased by a fund
and the amount of a fund's obligation pursuant to an OTC option sold by the fund
(the cost of the sell-back plus the in-the-money amount, if any) or the value of
the assets held to cover such options will be deemed illiquid.
If a fund sells a call option, the premium that it receives may serve as a
partial hedge, to the extent of the option premium, against a decrease in the
value of the underlying securities or instruments held by the fund or will
increase the fund's income. Similarly, the sale of put options can also provide
gains for a fund.
A fund may purchase and sell call options on securities that are traded on U.S.
and foreign securities exchanges and in the OTC markets, and on securities
indices, currencies and futures contracts. All calls sold by a fund must be
'covered' (that is, the fund must own the securities or futures contract subject
to the call), or must otherwise meet the asset segregation requirements
described below for so long as the call is outstanding. Even though the fund
will receive the option premium to help protect it against loss, a call sold by
a fund will expose the fund during the term of the option to possible loss of
opportunity to realize appreciation in the market price of the underlying
security or instrument and may require the fund to hold a security or instrument
that it might otherwise have sold.
A fund reserves the right to purchase or sell options on instruments and indices
which may be developed in the future to the extent consistent with applicable
law, the fund's investment objective and the restrictions set forth herein.
A fund may purchase and sell put options on securities (whether or not it holds
the securities in its portfolio) and on securities indices, currencies and
futures contracts. In selling put options, a fund faces the risk that it may be
required to buy the underlying security at a disadvantageous price above the
market price.
Options on Stocks and Stock Indices. A fund may purchase put and call options
and write covered put and call options on stocks and stock indices listed on
domestic and foreign securities exchanges in order to hedge against movements in
the equity markets or to increase income or gain to the fund. In addition, the
fund may purchase options on stocks that are traded over-the-counter. Options on
stock indices are similar to options on specific securities. However, because
options on stock indices do not involve the delivery of an underlying security,
the option represents the holder's right to obtain from the writer cash in an
amount equal to a fixed multiple of the amount by which the exercise price
exceeds (in the case of a put) or is less than (in the case of a call) the
closing value of the underlying stock index on the exercise date. Options are
also traded in certain industry or market segment indices such as the Oil Index,
the Computer Technology Index and the Transportation Index. Stock index options
are subject to position and exercise limits and other regulations imposed by the
exchange on which they are traded.
If the investment manager expects general stock market prices to rise, a fund
might purchase a call option on a stock index or a futures contract on that
index as a hedge against an increase in prices of particular equity securities
it wants ultimately to buy. If the stock index does rise, the
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price of the particular equity securities intended to be purchased may also
increase, but that increase would be offset in part by the increase in the value
of the fund's index option or futures contract resulting from the increase in
the index. If, on the other hand, the investment manager expects general stock
market prices to decline, it might purchase a put option or sell a futures
contract on the index. If that index does decline, the value of some or all of
the equity securities in a fund's portfolio may also be expected to decline, but
that decrease would be offset in part by the increase in the value of the Fund's
position in such put option or futures contract.
Options on Currencies. A fund may invest in options on currencies traded on
domestic and foreign securities exchanges in order to hedge against currency
exchange rate risks or to increase income or gain, as described above in
'Forward Currency Exchange Contracts.'
Options on Futures Contracts. A fund may purchase put and call options and write
covered put and call options on futures contracts on stock indices, interest
rates and currencies traded on domestic and, to the extent permitted by the
CFTC, foreign exchanges, in order to hedge all or a portion of its investments
or to increase income or gain and may enter into closing transactions in order
to terminate existing positions. There is no guarantee that such closing
transactions can be effected. An option on a stock index futures contract,
interest rate futures contract or currency futures contract, as contrasted with
the direct investment in such a contract, gives the purchaser the right, in
return for the premium paid, to assume a position in the underlying contract at
a specified exercise price at any time on or before the expiration date of the
option. Upon exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be accompanied by delivery
of the accumulated balance in the writer's futures margin account. The potential
loss related to the purchase of an option on a futures contract is limited to
the premium paid for the option (plus transaction costs). While the price of the
option is fixed at the point of sale, the value of the option does change daily
and the change would be reflected in the net asset value of the fund.
The purchase of an option on a financial futures contract involves payment of a
premium for the option without any further obligation on the part of the fund.
If the fund exercises an option on a futures contract it will be obligated to
post initial margin (and potentially variation margin) for the resulting futures
position just as it would for any futures position. Futures contracts and
options thereon are generally settled by entering into an offsetting
transaction, but no assurance can be given that a position can be offset prior
to settlement or that delivery will occur.
Interest Rate and Equity Swaps and Related Transactions. Emerging Markets Debt
Fund and High Yield Debt Fund may each enter into interest rate and equity swaps
and may purchase or sell (i.e., write) interest rate and equity caps, floors and
collars. A fund expects to enter into these transactions in order to hedge
against either a decline in the value of the securities included in the fund's
portfolio, or against an increase in the price of the securities which it plans
to purchase, or in order to preserve or maintain a return or spread on a
particular investment or portion of its portfolio or to achieve a particular
return on cash balances, or in order to increase income or gain. Interest rate
and equity swaps involve the exchange by a fund with another party of their
respective commitments to make or receive payments based on a notional principal
amount. The purchase of an interest rate or equity cap entitles the purchaser,
to the extent that a specified index exceeds a predetermined level, to receive
payments on a contractually-based principal amount from the party selling the
interest rate or equity cap. The purchase of an interest rate or equity floor
entitles the purchaser, to the extent that a specified index falls below a
predetermined rate, to receive payments on a contractually-based principal
amount from the party selling the interest rate or equity floor. A collar is a
combination of a cap and a floor which preserve a certain return within a
predetermined range of values.
A fund may enter into interest rate and equity swaps, caps, floors and collars
on either an asset-based or liability-based basis, depending on whether it is
hedging its assets or its liabilities, and will usually enter into interest rate
and equity swaps on a net basis (i.e., the two payment streams are netted out),
with the fund receiving or paying, as the case may be, only the net amount of
the two payments. The net amount of the excess, if any, of a fund's obligations
over its entitlements with respect to each interest rate or equity swap will be
accrued on a daily basis, and an amount
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of liquid assets having an aggregate net asset value at least equal to the
accrued excess will be maintained in a segregated account by the fund's
custodian in accordance with procedures established by the Board of Directors.
If a fund enters into an interest rate or equity swap on other than a net basis,
the fund will maintain a segregated account in the full amount accrued on a
daily basis of the fund's obligations with respect to the swap. A fund will only
enter into interest rate and equity swap, cap, floor or collar transactions with
counterparties the investment manager deems to be creditworthy.
The investment manager will monitor the creditworthiness of counterparties to
its interest rate and equity swap, cap, floor and collar transactions on an
ongoing basis. If there is a default by the other party to such a transaction, a
fund will have contractual remedies pursuant to the agreements related to the
transaction. The swap market has grown substantially in recent years with a
large number of banks and investment banking firms acting both as principals and
agents utilizing standardized swap documentation. The investment manager has
determined that, as a result, the swap market is liquid. Caps, floors and
collars are more recent innovations for which standardized documentation has not
yet been developed and, accordingly, they are less liquid than swaps. To the
extent a fund sells caps, floors and collars it will maintain in a segregated
account cash and/or, cash equivalents or other liquid securities having an
aggregate net asset value at least equal to the full amount, accrued on a daily
basis, of the fund's obligations with respect to the caps, floors or collars.
A fund will maintain liquid assets in a segregated custodial account to cover
its current obligations under swap agreements. If a fund enters into a swap
agreement on a net basis, it will segregate assets with a daily value at least
equal to the excess, if any, of the fund's accrued obligations under the swap
agreement over the accrued amount the fund is entitled to receive under the
agreement. If a fund enters into a swap agreement on other than a net basis, it
will segregate assets with a value equal to the full amount of the fund's
accrued obligations under the agreement.
Indexed Securities. A fund may purchase securities whose prices are indexed to
the prices of other securities, securities indices, currencies, or other
financial indicators. Indexed securities typically, but not always, are debt
securities or deposits whose value at maturity or coupon rate is determined by
reference to a specific instrument or statistic. Currency-indexed securities
typically are short-term to intermediate-term debt securities whose maturity
values or interest rates are determined by reference to the values of one or
more specified foreign currencies, and may offer higher yields than U.S.
dollar-denominated securities of equivalent issuers. Currency-indexed securities
may be positively or negatively indexed; that is, their maturity value may
increase when the specified currency value increases, resulting in a security
that performs similarly to a foreign currency-denominated instrument, or their
maturity value may decline when foreign currencies increase, resulting in a
security whose price characteristics are similar to a put on the underlying
currency. Currency-indexed securities may also have prices that depend on the
values of a number of different foreign currencies relative to each other.
Combined Transactions. A fund may enter into multiple transactions, including
multiple options transactions, multiple futures transactions, multiple currency
transactions (including forward currency contracts), multiple interest rate
transactions and any combination of futures, options, currency and interest rate
transactions, instead of a single derivative, as part of a single or combined
strategy when, in the judgment of the investment manager, it is in the best
interests of the fund to do so. A combined transaction will usually contain
elements of risk that are present in each of its component transactions.
Although combined transactions will normally be entered into by a fund based on
the investment manager's judgment that the combined strategies will reduce risk
or otherwise more effectively achieve the desired portfolio management goal, it
is possible that the combination will instead increase the risks or hinder
achievement of the fund's investment objective.
Use of Segregated and Other Special Accounts. Use of many derivatives by a fund
will require, among other things, that the fund segregate liquid assets with its
custodian, or a designated sub-custodian, to the extent the fund's obligations
are not otherwise 'covered' through ownership of the underlying security,
financial instrument or currency. In general, either the full amount of any
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obligation by a fund to pay or deliver securities or assets must be covered at
all times by the securities, instruments or currency required to be delivered,
or, subject to any regulatory restrictions, an amount of liquid assets at least
equal to the current amount of the obligation must be segregated with the
custodian or sub-custodian in accordance with procedures established by the
Board of Directors. The segregated assets cannot be sold or transferred unless
equivalent assets are substituted in their place or it is no longer necessary to
segregate them. A call option on securities written by a fund, for example, will
require the fund to hold the securities subject to the call (or securities
convertible into the needed securities without additional consideration) or to
segregate liquid securities sufficient to purchase and deliver the securities if
the call is exercised. A call option sold by a fund on an index will require the
fund to own portfolio securities that correlate with the index or to segregate
liquid securities equal to the excess of the index value over the exercise price
on a current basis. A put option on securities written by a fund will require
the fund to segregate liquid securities equal to the exercise price. Except when
a fund enters into a forward contract in connection with the purchase or sale of
a security denominated in a foreign currency or for other non-speculative
purposes, which requires no segregation, a currency contract that obligates the
fund to buy or sell a foreign currency will generally require the fund to hold
an amount of that currency or liquid securities denominated in that currency
equal to the fund's obligations or to segregate liquid securities equal to the
amount of the fund's obligations.
OTC options entered into by a fund, including those on securities, currency,
financial instruments or indices, and OCC-issued and exchange-listed index
options will generally provide for cash settlement, although the fund will not
be required to do so. As a result, when a fund sells these instruments it will
segregate an amount of assets equal to its obligations under the options. OCC-
issued and exchange-listed options sold by a fund other than those described
above generally settle with physical delivery, and the fund will segregate an
amount of assets equal to the full value of the option. OTC options settling
with physical delivery or with an election of either physical delivery or cash
settlement will be treated the same as other options settling with physical
delivery.
In the case of a futures contract or an option on a futures contract, a fund
must deposit initial margin and, in some instances, daily variation margin in
addition to segregating liquid assets sufficient to meet its obligations to
purchase or provide securities or currencies, or to pay the amount owed at the
expiration of an index-based futures contract. A fund will accrue the net amount
of the excess, if any, of its obligations relating to swaps over its
entitlements with respect to each swap on a daily basis and will segregate with
its custodian, or designated sub-custodian, an amount of liquid assets having an
aggregate value equal to at least the accrued excess. Caps, floors and collars
require segregation of liquid assets with a value equal to the fund's net
obligation, if any.
Derivatives may be covered by means other than those described above when
consistent with applicable regulatory policies. A fund may also enter into
offsetting transactions so that its combined position, coupled with any
segregated assets, equals its net outstanding obligation in related derivatives.
A fund could purchase a put option, for example, if the strike price of that
option is the same as or higher than the strike price of a put option sold by
the fund. Moreover, instead of segregating assets if it holds a futures contract
or forward contract, a fund could purchase a put option on the same futures
contract or forward contract with a strike price as high as or higher than the
price of the contract held. Other derivatives may also be offset in
combinations. If the offsetting transaction terminates at the time of or after
the primary transaction, no segregation is required, but if it terminates prior
to that time, assets equal to any remaining obligation would need to be
segregated.
OTHER PRACTICES
REPURCHASE AGREEMENTS (EACH FUND)
Each fund may enter into repurchase agreements for cash management purposes.
Money Market Fund may also enter into repurchase agreements with terms less than
397 days. A repurchase
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agreement is a transaction in which the seller of a security commits itself at
the time of sale to repurchase that security from the buyer at a mutually agreed
upon time and price. Each fund will enter into repurchase agreements only with
dealers, banks or recognized financial institutions which, in the investment
manager's determination based on guidelines established by each fund's Board of
Directors, are deemed creditworthy. The investment manager monitors the value of
the securities underlying the repurchase agreement at the time the transaction
is entered into and at all times during the term of the repurchase agreement to
ensure that the value of the securities always equals or exceeds the repurchase
price. Each fund requires that additional securities be deposited if the value
of the securities purchased decreases below their resale price and does not bear
the risk of a decline in the value of the underlying security unless the seller
defaults under the repurchase obligation. In the event of default by the seller
under the repurchase agreement, a fund could experience losses and experience
delays in connection with the disposition of the underlying security. To the
extent that, in the meantime, the value of the securities that a fund has
purchased has decreased, the fund could experience a loss. Repurchase agreements
with maturities of more than seven days will be treated as illiquid securities.
REVERSE REPURCHASE AGREEMENTS (HIGH YIELD BOND FUND AND EMERGING MARKETS DEBT
FUND)
High Yield Bond Fund and Emerging Markets Debt Fund may enter into 'reverse'
repurchase agreements to avoid selling securities during unfavorable market
conditions to meet redemptions. Pursuant to a reverse repurchase agreement, a
fund will sell portfolio securities and agree to repurchase them from the buyer
at a particular date and price. Whenever a fund enters into a reverse repurchase
agreement, it will establish a segregated account in which it will maintain
liquid assets in an amount at least equal to the repurchase price marked to
market daily (including accrued interest), and will subsequently monitor the
account to ensure that such equivalent value is maintained. A fund pays interest
on amounts obtained pursuant to reverse repurchase agreements. Reverse
repurchase agreements are considered to be borrowings by a fund.
LOANS OF PORTFOLIO SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND
FUND)
Emerging Markets Debt Fund and High Yield Bond Fund may each lend portfolio
securities to brokers or dealers or other financial institutions to generate
income. The procedure for the lending of securities will include the following
features and conditions. The borrower of the securities will deposit cash,
securities or other permissible forms of collateral (e.g., letters of credit)
with the fund in an amount equal to a minimum of 100% of the market value of the
securities lent. The fund will invest any cash collateral in short-term debt
securities and earn the interest thereon. A negotiated portion of the income so
earned may be paid to the borrower or the broker who arranged the loan. If the
value of the collateral drops below the required minimum at any time, the
borrower may be called upon to post additional collateral. If the additional
collateral is not posted, the loan will be immediately due and the fund may use
the collateral or its own cash to replace the securities by purchase in the open
market charging any loss to the borrower. These will be 'demand' loans and may
be terminated by the fund at any time. The fund may invest the cash collateral
and earn additional income or receive an agreed-upon fee from a borrower that
has delivered cash equivalent collateral. Cash collateral received by a fund may
be invested in securities in which the fund is permitted to invest. A fund will
receive any dividends and interest paid on the securities lent and the loans
will be structured to assure that the fund will be able to exercise its voting
rights on the securities. Voting rights may pass with the lending of portfolio
securities. A fund may pay administrative and custodial fees in connection with
a securities loan and may pay a negotiated portion of the interest or fee earned
with respect to the collateral to the borrower or a placing broker. Such loans
will be authorized only to the extent that the receipt of income from such
activity would not cause any adverse tax consequences to a fund's shareholders
and only in accordance with applicable rules and regulations.
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RISK FACTORS
FOREIGN SECURITIES (EACH FUND)
General. Investors should recognize that investing in the securities of foreign
issuers generally, and particularly in emerging market issuers, involves special
considerations which are not typically associated with investing in securities
of U.S. issuers. Investments in securities of foreign issuers may involve risks
arising from differences between U.S. and foreign securities markets, including
less volume, much greater price volatility in and relative illiquidity of
foreign securities markets, different trading and settlement practices and less
governmental supervision and regulation, from changes in currency exchange
rates, from high and volatile rates of inflation, from economic, social and
political conditions and, as with domestic multinational corporations, from
fluctuating interest rates.
Emerging Market Countries. Certain of the risks associated with international
investments and investing in smaller capital markets are heightened for
investments in emerging market countries. For example, some of the currencies of
emerging market countries have experienced devaluations relative to the U.S.
dollar, and major adjustments have been made periodically in certain of such
currencies. Certain of such countries face serious exchange constraints. In
addition, governments of many emerging market countries have exercised and
continue to exercise substantial influence over many aspects of the private
sector. In certain cases, the government owns or controls many companies,
including the largest in the country. Accordingly, government actions in the
future could have a significant effect on economic conditions in developing
countries which could affect private sector companies and a fund, as well as the
value of securities in the fund.
Investment in certain emerging market securities is restricted or controlled to
varying degrees which may at times limit or preclude investment in certain
emerging market securities and increase the costs and expenses of a fund.
Certain emerging market countries require governmental approval prior to
investments by foreign persons, limit the amount of investment by foreign
persons in a particular issuer, limit the investment by foreign persons only to
a specific class of securities of an issuer that may have less advantageous
rights than other classes, restrict investment opportunities in issuers in
industries deemed important to national interests and/or impose additional taxes
on foreign investors. Certain emerging market countries may require governmental
approval for the repatriation of investment income, capital or the proceeds of
sales of securities by foreign investors which could adversely affect a fund. In
addition, if a deterioration occurs in an emerging market country's balance of
payments, it could impose temporary restrictions on foreign capital remittances.
Investing in local markets in emerging market countries may require a fund to
adopt special procedures, seek local government approvals or take other actions,
each of which may involve additional costs to the fund.
Certain markets are in only the earliest stages of development. There is also a
high concentration of market capitalization and trading volume in a small number
of issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of such markets
also may be affected by developments with respect to more established markets in
the region. Brokers in emerging market countries typically are fewer in number
and less capitalized than brokers in the United States. These factors, combined
with the U.S. regulatory requirements for open-end investment companies and the
restrictions on foreign investment, result in potentially fewer investment
opportunities for a fund and may have an adverse impact on the investment
performance of a fund.
There generally is less governmental supervision and regulation of exchanges,
brokers and issuers in foreign countries than there is in the United States. For
example, there may be no comparable provisions under certain foreign laws to
insider trading and similar investor protection securities laws that apply with
respect to securities transactions consummated in the United States. Further,
brokerage commissions and other transaction costs on foreign securities
exchanges generally are higher than in the United States.
With respect to investments in certain emerging market countries, archaic legal
systems may have an adverse impact on a fund. For example, while the potential
liability of a shareholder in a U.S.
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corporation with respect to acts of the corporation is generally limited to the
amount of the shareholder's investment, the notion of limited liability is less
clear in certain emerging market countries. Similarly, the rights of investors
in emerging market companies may be more limited than those of shareholders of
U.S. corporations.
Other investment risks include the possible imposition of foreign taxes on
certain amounts of a fund's income which may reduce the net return on foreign
investments as compared to income received from a U.S. issuer, the possible
seizure or nationalization of foreign assets and the possible establishment of
exchange controls, expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might affect adversely payments due on
securities held by a fund, the lack of extensive operating experience of
eligible foreign subcustodians and legal limitations on the ability of a fund to
recover assets held in custody by a foreign subcustodian in the event of the
subcustodian's bankruptcy. Moreover, brokerage commissions and other
transactions costs on foreign securities exchanges are generally higher than in
the United States.
In addition, there may be less publicly-available information about a foreign
issuer than about a U.S. issuer, and foreign issuers may not be subject to the
same accounting, auditing and financial record-keeping standards and
requirements as U.S. issuers. In particular, the assets and profits appearing on
the financial statements of an emerging market country issuer may not reflect
its financial position or results of operations in the way they would be
reflected had the financial statements been prepared in accordance with U.S.
generally accepted accounting principles. In addition, for an issuer that keeps
accounting records in local currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain assets and liabilities be
restated on the issuer's balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation accounting may indirectly
generate losses or profits. Consequently, financial data may be materially
affected by restatements for inflation and may not accurately reflect the real
condition of those issuers and securities markets. Finally, in the event of a
default of any such foreign obligations, it may be more difficult for a fund to
obtain or enforce a judgment against the issuers of such obligations.
The manner in which foreign investors may invest in companies in certain
emerging market countries, as well as limitations on such investments, also may
have an adverse impact on the operations of a fund. For example, the fund may be
required in certain of such countries to invest initially through a local broker
or other entity and then have the shares purchased re-registered in the name of
the fund. Re-registration may in some instances not be able to occur on a timely
basis, resulting in a delay during which the fund may be denied certain of its
rights as an investor.
Foreign markets have different clearance and settlement procedures, and in
certain markets there have been times when settlements have failed to keep pace
with the volume of securities transactions, making it difficult to conduct such
transactions. Further, satisfactory custodial services for investment securities
may not be available in some countries having smaller, emerging capital markets,
which may result in a fund incurring additional costs and delays in transporting
and custodying such securities outside such countries. Delays in settlement or
other problems could result in periods when assets of a fund are uninvested and
no return is earned thereon. The inability of a fund to make intended security
purchases due to settlement problems or the risk of intermediary counterparty
failures could cause a fund to miss attractive investment opportunities. The
inability to dispose of a portfolio security due to settlement problems could
result either in losses to a fund due to subsequent declines in the value of
such portfolio security or, if the fund has entered into a contract to sell the
security, could result in possible liability to the purchaser.
Securities Related Activities. In some countries, banks or other financial
institutions may constitute a substantial number of the leading companies or
companies with the most actively traded securities. The 1940 Act limits a fund's
ability to invest in any equity security of an issuer which, in its most recent
fiscal year, derived more than 15% of its revenues from 'securities related
activities,' as defined by the rules thereunder. These provisions may also
restrict a fund's investments in certain foreign banks and other financial
institutions.
Foreign Subcustodians. Rules adopted under the 1940 Act permit a fund to
maintain its foreign securities and cash in the custody of certain eligible
non-U.S. banks and securities depositories.
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Certain banks in foreign countries may not be eligible sub-custodians for a
fund, in which event the fund may be precluded from purchasing securities in
certain foreign countries in which it otherwise would invest or which may result
in the fund's incurring additional costs and delays in providing transportation
and custody services for such securities outside of such countries. A fund may
encounter difficulties in effecting on a timely basis portfolio transactions
with respect to any securities of issuers held outside their countries. Other
banks that are eligible foreign sub-custodians may be recently organized or
otherwise lack extensive operating experience. In addition, in certain countries
there may be legal restrictions or limitations on the ability of a fund to
recover assets held in custody by foreign sub-custodians in the event of the
bankruptcy of the sub-custodian.
Credit Rating. The securities in which Emerging Markets Debt Fund will invest
will not be required to meet a minimum rating standard and may not be rated for
creditworthiness by any internationally recognized credit rating organization
and generally the fund's investments are expected to be in the lower and lowest
rating categories of internationally recognized credit rating organizations or
of comparable quality. Such securities, commonly referred to as 'junk bonds,'
involve significantly greater risks, including price volatility and risk of
default of payment of interest and principal than higher rated securities. An
investment in Emerging Markets Debt Fund should not be considered as a complete
investment program for all investors. Moreover, substantial investments in
foreign securities may have adverse tax implications as described under 'Taxes.'
In light of the risks associated with high yield corporate and sovereign debt
securities, SBAM will take various factors into consideration in evaluating the
creditworthiness of an issuer. For corporate debt securities, such factors
typically include the issuer's financial resources, its sensitivity to economic
conditions and trends, the operating history of the issuer, and the experience
and track record of the issuer's management. For sovereign debt instruments,
these will typically include the economic and political conditions within the
issuer's country, the issuer's overall and external debt levels and debt service
ratios, the issuer's access to capital markets and other sources of funding, and
the issuer's debt service payment history. SBAM will also review the ratings, if
any, assigned to the security by any recognized rating organizations, although
SBAM's judgment as to the quality of a debt security may differ from that
suggested by the rating published by a rating service. In addition to the
foregoing credit analysis, SBAM will evaluate the relative value of an
investment compared with its perceived credit risk. In selecting securities for
Emerging Markets Debt Fund, SBAM intends to consider the correlation among
securities represented in the fund's portfolio in an attempt to reduce the risk
of exposure to market, industry and issuer volatility. The fund's ability to
achieve its investment objective may be more dependent on SBAM's credit analysis
than would be the case if it invested in higher quality debt securities. A
description of the ratings used by Moody's and S&P is set forth in Appendix A.
FIXED-INCOME SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Except to the extent that values are affected independently by other factors
such as developments relating to a specific issuer, when interest rates decline,
the value of a fixed-income portfolio can generally be expected to rise.
Conversely, when interest rates rise, the value of a fixed-income portfolio can
generally be expected to decline. Prices of longer term securities generally
increase or decrease more sharply than those of shorter term securities in
response to interest rate changes, particularly if such securities were
purchased at a discount. Because the Emerging Markets Debt Fund and High Yield
Bond Fund will invest primarily in fixed-income securities, the net asset value
of these funds' shares can be expected to change as general levels of interest
rates fluctuate. It should be noted that the market values of securities rated
below investment grade and comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those of higher-rated securities.
Call or Buy-Back Features. In addition, many fixed-income securities contain
call or buy-back features that permit their issuers to call or repurchase the
securities from their holders. Such securities may present risks based on
payment expectations. Although a fund would typically receive a premium if an
issuer were to redeem a security, if an issuer exercises such a 'call
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option' and redeems the security during a time of declining interest rates, a
fund may realize a capital loss on its investment if the security was purchased
at a premium and a fund may have to replace the called security with a lower
yielding security, resulting in a decreased rate of return to the fund.
HIGH YIELD SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
High Yield Bond Fund and Emerging Markets Debt Fund may invest without
limitation in high yield securities. Under rating agency guidelines, medium- and
lower-rated securities and comparable unrated securities will likely have some
quality and protective characteristics that are outweighed by large
uncertainties or major risk exposures to adverse conditions. Medium and lower
rated securities may have poor prospects of ever attaining any real investment
standing, may have a current identifiable vulnerability to default or are in
default, may be unlikely to have the capacity to pay interest and repay
principal when due in the event of adverse business, financial or economic
conditions, and/or to be in default or not current in the payment of interest or
principal. Such securities are considered speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligations. Accordingly, it is possible that these types of
factors could reduce the value of securities held by a fund with a commensurate
effect on the value of the fund's shares.
Changes in Credit Ratings. Changes by recognized rating services in their
ratings of any fixed-income security and in the ability of an issuer to make
payments of interest and principal may also affect the value of these
investments. A description of the ratings used by Moody's and S&P is set forth
in Appendix A to this Prospectus. The ratings of Moody's and S&P generally
represent the opinions of those organizations as to the quality of the
securities that they rate. Such ratings, however, are relative and subjective,
are not absolute standards of quality, are subject to change and do not evaluate
the market risk or liquidity of the securities. Ratings of a non-U.S. debt
instrument, to the extent that those ratings are undertaken, are related to
evaluations of the country in which the issuer of the instrument is located.
Ratings generally take into account the currency in which a non-U.S. debt
instrument is denominated. Instruments issued by a foreign government in other
than the local currency, for example, typically have a lower rating than local
currency instruments due to the existence of an additional risk that the
government will be unable to obtain the required foreign currency to service its
foreign currency-denominated debt. In general, the ratings of debt securities or
obligations issued by a non-U.S. public or private entity will not be higher
than the rating of the currency or the foreign currency debt of the central
government of the country in which the issuer is located, regardless of the
intrinsic creditworthiness of the issuer.
Liquidity. The secondary markets for high yield securities are not as liquid as
the secondary markets for higher rated securities. The secondary markets for
high yield securities are concentrated in relatively few market makers and
participants in the market are mostly institutional investors, including
insurance companies, banks, other financial institutions and mutual funds. In
addition, the trading volume for high yield securities is generally lower than
that for higher-rated securities and the secondary markets could contract under
adverse market or economic conditions independent of any specific adverse
changes in the condition of a particular issuer. These factors may have an
adverse effect on the ability of a fund holding such securities to dispose of
particular portfolio investments at fair value, may adversely affect the fund's
net asset value per share and may limit the ability of such a fund to obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value. If a fund is not able to obtain precise or accurate market
quotations for a particular security, it will become more difficult to value
such fund's portfolio securities, and a greater degree of judgment may be
necessary in making such valuations. The secondary markets for high yield
securities may contract due to adverse economic conditions or for other reasons
relating to or independent of any specific adverse changes in the condition of a
particular issuer and, as a result, certain liquid securities in a fund's
portfolio may become illiquid and the proportion of the fund's assets invested
in illiquid securities may significantly increase.
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Legislative and Regulatory Developments. Prices for high yield securities may be
affected by legislative and regulatory developments. These laws could adversely
affect a fund's net asset value and investment practices, the secondary market
for high yield securities, the financial condition of issuers of these
securities and the value of outstanding high yield securities. For example,
federal legislation requiring the divestiture by federally insured savings and
loan associations of their investments in high yield bonds and limiting the
deductibility of interest by certain corporate issuers of high yield bonds
adversely affected the market in recent years.
HIGH YIELD CORPORATE SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND
FUND)
While the market values of securities rated below investment grade and
comparable unrated securities tend to react less to fluctuations in interest
rate levels than do those of higher-rated securities, the values of certain of
these securities also tend to be more sensitive to individual corporate
developments and changes in economic conditions than higher-rated securities. In
addition, such securities present a higher degree of credit risk. Issuers of
these securities are often highly leveraged and may not have more traditional
methods of financing available to them, so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater than with investment grade securities because
such securities generally are unsecured and subordinated to the prior payment of
senior indebtedness. A fund also may incur additional expenses to the extent
that it is required to seek recovery upon a default in the payment of principal
or interest on its portfolio holdings.
The development of a market for high yield non-U.S. corporate securities has
been a relatively recent phenomenon. On the other hand, the market for high
yield U.S. corporate debt securities is more established than that for high
yield non-U.S. corporate debt securities, but has undergone significant changes
in the past and may undergo significant changes in the future.
High yield corporate securities in which a fund may invest will generally be
unsecured. Most of the debt securities will bear interest at fixed rates but a
fund may also invest in securities with variable rates of interest or which
involve equity features, such as contingent interest or participations based on
revenues, sales or profits (i.e., interest or other payments, often in addition
to a fixed rate of return, that are based on the borrower's attainment of
specified levels of revenues, sales or profits and thus enable the holder of the
security to share in the potential success of the venture).
HIGH YIELD FOREIGN SOVEREIGN DEBT SECURITIES (EMERGING MARKETS DEBT FUND AND
HIGH YIELD BOND FUND)
Investing in fixed and floating rate high yield foreign sovereign debt
securities, especially in emerging market countries, will expose a fund to the
direct or indirect consequences of political, social or economic changes in the
countries that issue the securities or in which the issuers are located. The
ability and willingness of sovereign obligors in developing and emerging market
countries or the governmental authorities that control repayment of their
external debt to pay principal and interest on such debt when due may depend on
general economic and political conditions within the relevant country. Certain
countries in which a fund may invest, especially emerging market countries, have
historically experienced, and may continue to experience, high rates of
inflation, high interest rates, exchange rate trade difficulties and extreme
poverty and unemployment. Many of these countries are also characterized by
political uncertainty or instability. Additional factors which may influence the
ability or willingness to service debt include, but are not limited to, a
country's cash flow situation, the availability of sufficient foreign exchange
on the date a payment is due, the relative size of its debt service burden to
the economy as a whole, and the issuing government's policy towards the
International Monetary Fund, the World Bank and other international agencies.
The ability of a foreign sovereign obligor, especially an obligor in an emerging
market country, to make timely payments on its external debt obligations will
also be strongly influenced by the
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obligor's balance of payments, including export performance, its access to
international credits and investments, fluctuations in interest rates and the
extent of its foreign reserves. A country whose exports are concentrated in a
few commodities or whose economy depends on certain strategic imports could be
vulnerable to fluctuations in international prices of these commodities or
imports. To the extent that a country receives payment for its exports in
currencies other than dollars, its ability to make debt payments denominated in
dollars could be adversely affected. If a foreign sovereign obligor cannot
generate sufficient earnings from foreign trade to service its external debt, it
may need to depend on continuing loans and aid from foreign governments,
commercial banks and multilateral organizations, and inflows of foreign
investment. The commitment on the part of these foreign governments,
multilateral organizations and others to make such disbursements may be
conditioned on the government's implementation of economic reforms and/or
economic performance and the timely service of its obligations. Failure to
implement such reforms, achieve such levels of economic performance or repay
principal or interest when due may result in the cancellation of such third
parties' commitments to lend funds, which may further impair the obligor's
ability or willingness to timely service its debts. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, because many external debt obligations bear interest at rates
which are adjusted based upon international interest rates. The ability to
service external debt will also depend on the level of the relevant government's
international currency reserves and its access to foreign exchange. Currency
devaluations may affect the ability of a sovereign obligor to obtain sufficient
foreign exchange to service its external debt. The risks enumerated above are
particularly heightened with regard to issues in emerging market countries.
As a result of the foregoing or other factors, a governmental obligor,
especially in an emerging market country, may default on its obligations. If
such an event occurs, a fund may have limited legal recourse against the issuer
and/or guarantor. Remedies must, in some cases, be pursued in the courts of the
defaulting party itself, and the ability of the holder of foreign sovereign debt
securities to obtain recourse may be subject to the political climate in the
relevant country. In addition, no assurance can be given that the holders of
commercial bank debt will not contest payments to the holders of other foreign
sovereign debt obligations in the event of default under their commercial bank
loan agreements.
BRADY BONDS (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Certain debt obligations, customarily referred to as 'Brady Bonds,' are created
through the exchange of existing commercial bank loans to foreign entities for
new obligations in connection with debt restructuring under a plan introduced by
former U.S. Secretary of the Treasury, Nicholas F. Brady (the 'Brady Plan').
Brady Bonds have been issued only recently, and, accordingly, do not have a long
payment history. They may be fully or partially collateralized or
uncollateralized and issued in various currencies (although most are U.S. dollar
denominated) and they are actively traded in the over-the-counter secondary
market. U.S. dollar denominated, collateralized Brady Bonds, which may be fixed
rate par bonds or floating rate discount bonds, are generally collateralized in
full as to principal due at maturity by U.S. Treasury zero coupon obligations
which have the same maturity as the Brady Bonds. Certain interest payments on
these Brady Bonds may be collateralized by cash or securities in an amount that,
in the case of fixed rate bonds, is typically equal to between 12 and 18 months
of rolling interest payments or, in the case of floating rate bonds, initially
is typically equal to between 12 and 18 months rolling interest payments based
on the applicable interest rate at that time and is adjusted at regular
intervals thereafter with the balance of interest accruals in each case being
uncollateralized. A significant amount of the Brady Bonds that the funds may
purchase have no or limited collateralization, and a fund will be relying for
payment of interest and (except in the case of principal collateralized Brady
Bonds) principal primarily on the willingness and ability of the foreign
government to make payment in accordance with the terms of the Brady Bonds. In
the event of a default on collateralized Brady Bonds for which obligations are
accelerated, the collateral for the payment of principal will not be distributed
to investors, nor will such obligations be sold and the proceeds distributed.
The collateral will be held by the collateral agent to the scheduled maturity of
the
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defaulted Brady Bonds, which will continue to be outstanding, at which time the
face amount of the collateral will equal the principal payments which would have
then been due on the Brady Bonds in the normal course. Based upon current market
conditions, a fund would not intend to purchase Brady Bonds which, at the time
of investment, are in default as to payments. However, in light of the residual
risk of the Brady Bonds and, among other factors, the history of default with
respect to commercial bank loans by public and private entities of countries
issuing Brady Bonds, investments in Brady Bonds are to be viewed as speculative.
A substantial portion of the Brady Bonds and other sovereign debt securities in
which High Yield Bond Fund and Emerging Markets Debt Fund invest are likely to
be acquired at a discount, which involves certain considerations discussed below
under taxes.
Sovereign obligors in developing and emerging market countries are among the
world's largest debtors to commercial banks, other governments, international
financial organizations and other financial institutions. These obligors have in
the past experienced substantial difficulties in servicing their external debt
obligations, which led to defaults on certain obligations and the restructuring
of certain indebtedness. Restructuring arrangements have included, among other
things, reducing and rescheduling interest and principal payments by negotiating
new or amended credit agreements or converting outstanding principal and unpaid
interest to Brady Bonds, and obtaining new credit to finance interest payments.
Holders of certain foreign sovereign debt securities may be requested to
participate in the restructuring of such obligations and to extend further loans
to their issuers. There can be no assurance that the Brady Bonds and other
foreign sovereign debt securities in which the funds may invest will not be
subject to similar restructuring arrangements or to requests for new credit
which may adversely affect a fund's holdings. Furthermore, certain participants
in the secondary market for such debt may be directly involved in negotiating
the terms of these arrangements and may therefore have access to information not
available to other market participants.
ASSET-BACKED SECURITIES (EACH FUND)
Asset-backed securities present certain risks which are, generally, related to
limited interests, if any, in related collateral. Credit card receivables are
generally unsecured and the debtors are entitled to the protection of a number
of state and federal consumer credit laws, many of which give such debtors the
right to set off certain amounts owed on the credit cards, thereby reducing the
balance due. Most issuers of automobile receivables permit the servicers to
retain possession of the underlying obligations. If the servicer were to sell
these obligations to another party, there is a risk that the purchaser would
acquire an interest superior to that of the holders of the related automobile
receivables. In addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the trustee for
the holders of the automobile receivables may not have a proper security
interest in all of the obligations backing such receivables. Therefore, there is
the possibility that recoveries on repossessed collateral may not, in some
cases, be available to support payments on these securities. Other types of
asset-backed securities will be subject to the risks associated with the
underlying assets. If a letter of credit or other form of credit enhancement is
exhausted or otherwise unavailable, holders of asset-backed securities may also
experience delays in payments or losses if the full amounts due on underlying
assets are not realized. Because asset-backed securities are relatively new, the
market experience in these securities is limited and the market's ability to
sustain liquidity through all phases of the market cycle has not been tested.
ZERO COUPON SECURITIES, PAY-IN-KIND BONDS AND DEFERRED PAYMENT SECURITIES
(EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
Zero coupon securities, pay-in-kind bonds and deferred payment securities tend
to be subject to greater price fluctuations in response to changes in interest
rates than are ordinary interest-paying debt securities with similar maturities.
The value of zero coupon securities appreciates more during periods of declining
interest rates and depreciates more during periods of rising interest rates than
ordinary interest-paying debt securities with similar maturities. Zero coupon
securities, pay-in-kind
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bonds and deferred payment securities may be issued by a wide variety of
corporate and governmental issuers. Although these instruments are generally not
traded on a national securities exchange, they are widely traded by brokers and
dealers and, to such extent, will not generally be considered illiquid for the
purposes of a fund's 15% limitation on investments in illiquid securities
discussed below.
Current federal income tax law requires the holder of a zero coupon security,
certain pay-in-kind bonds, deferred payment securities and certain other
securities acquired at a discount (such as Brady Bonds) to accrue income with
respect to these securities prior to the receipt of cash payments. Accordingly,
to avoid liability for federal income and excise taxes, a fund may be required
to distribute income accrued with respect to these securities and may have to
dispose of portfolio securities under disadvantageous circumstances in order to
generate cash to satisfy these distribution requirements.
LOAN PARTICIPATIONS AND ASSIGNMENTS (EMERGING MARKETS DEBT FUND AND HIGH YIELD
BOND FUND)
A fund may have difficulty disposing of assignments and loan participations. In
certain cases the market for such instruments is not highly liquid, and
therefore the funds anticipate that in such cases such instruments could be sold
only to a limited number of institutional investors. The lack of a highly liquid
secondary market may have an adverse impact on the value of such instruments and
will have an adverse impact on a fund's ability to dispose of particular
assignments or loan participations in response to a specific economic event,
such as deterioration in the creditworthiness of the borrower.
The Board of Directors of Institutional Series Funds has adopted policies and
procedures for High Yield Bond Fund and Emerging Markets Debt Fund to determine
whether assignments and loan participations purchased by such funds are liquid
or illiquid for purposes of a fund's limitation on investment in illiquid
securities. Pursuant to those policies and procedures, the Board of Directors
has delegated to SBAM the determination as to whether a particular loan
participation or assignment is liquid or illiquid, requiring that consideration
be given to, among other things, the frequency of quotes, the number of dealers
willing to sell and the number of potential purchasers, the nature of the loan
participation or assignment and the time needed to dispose of it, and the
contractual provisions of the relevant documentation. The Board of Directors
periodically reviews purchases and sales of assignments and loan participations.
In valuing a loan participation or assignment held by a fund for which a
secondary trading market exists, the fund will rely upon prices or quotations
provided by banks, dealers or pricing services. To the extent a secondary
trading market does not exist, a fund's loan participations and assignments will
be valued in accordance with procedures adopted by the Board of Directors,
taking into consideration, among other factors: (i) the creditworthiness of the
borrower under the loan and the lender; (ii) the current interest rate, period
until next rate reset and maturity of the loan; (iii) recent prices in the
market for similar loans; and (iv) recent prices in the market for instruments
of similar quality, rate, period until next interest rate reset and maturity.
To the extent that liquid assignments and loan participations that a fund holds
become illiquid, due to the lack of sufficient buyers or market or other
conditions, the percentage of a fund's assets invested in illiquid assets would
increase. SBAM, under the supervision of the Board of Directors, monitors fund
investments in assignments and loan participations and will, in such a case,
consider appropriate measures to enable a fund to maintain sufficient liquidity
for operating purposes and to meet redemption requests.
RESTRICTED SECURITIES AND SECURITIES WITH LIMITED TRADING MARKETS (EACH FUND)
Each fund may purchase securities for which there is a limited trading market or
which are subject to restrictions on resale to the public. If a fund were to
acquire substantial positions in securities with limited trading markets, the
activities of the fund could have an adverse effect upon the liquidity and
marketability of such securities and the fund might not be able to dispose of
its holdings in those securities at then current market prices. Circumstances
could also exist (to satisfy
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redemptions, for example) when portfolio securities might have to be sold by a
fund at times which otherwise might be considered to be disadvantageous so that
the fund might receive lower proceeds from such sales than it had expected to
realize. Investments in securities which are 'restricted' may involve added
expenses to a fund should the fund be required to bear registration costs with
respect to such securities and could involve delays in disposing of such
securities which might have an adverse effect upon the price and timing of sales
of such securities and the liquidity of the fund with respect to redemptions.
Restricted securities and securities for which there is a limited trading market
may be significantly more difficult to value due to the unavailability of
reliable market quotations for such securities, and investment in such
securities may have an adverse impact on net asset value. Certain funds may
purchase Rule 144A securities for which there may be a secondary market of
qualified institutional buyers as contemplated by Rule 144A under the 1933 Act.
A fund's holdings of Rule 144A securities which are liquid securities will not
be subject to the fund's applicable limitation on investments in illiquid
securities. Rule 144A is a relatively recent development and there is no
assurance that a liquid market in Rule 144A securities will develop or be
maintained. To the extent that the number of qualified institutional buyers is
reduced, a previously liquid Rule 144A security may be determined to be
illiquid, thus increasing the percentage of illiquid assets in a fund's
portfolio. SBAM, under the supervision of the Board of Directors, is responsible
for monitoring the liquidity of Rule 144A securities. The Board of Directors
periodically reviews the funds' purchases and sales of such Rule 144A
securities.
BANK OBLIGATIONS (EACH FUND)
Banks are subject to extensive governmental regulations which may limit both the
amounts and types of loans and other financial commitments which may be made and
interest rates and fees which may be charged. The profitability of this industry
is largely dependent upon the availability and cost of capital funds for the
purpose of financing lending operations under prevailing money market
conditions. Also, general economic conditions play an important part in the
operations of this industry and exposure to credit losses arising from possible
financial difficulties of borrowers might affect a bank's ability to meet its
obligations.
LOANS OF PORTFOLIO SECURITIES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND
FUND)
In the event of the bankruptcy of the other party to a securities loan, a fund
could experience delays in recovering the securities it lent. To the extent
that, in the meantime, the value of the securities a fund lent has increased,
the fund could experience a loss. Any securities that a fund may receive as
collateral will not become a part of its portfolio at the time of the loan and,
in the event of a default by the borrower, the fund will, if permitted by law,
dispose of such collateral except that the fund may retain any such part thereof
that is a security in which the fund is permitted to invest. Portfolio
securities purchased with cash collateral are subject to possible depreciation.
BORROWING (EACH FUND)
Each of the funds may borrow in certain limited circumstances. See 'Investment
Limitations.' Borrowing creates an opportunity for increased return, but, at the
same time, creates special risks. For example, borrowing may exaggerate changes
in the net asset value of a fund's shares and in the return on the fund's
portfolio. Although the principal of any borrowing will be fixed, a fund's
assets may change in value during the time the borrowing is outstanding. A fund
may be required to liquidate portfolio securities at a time when it would be
disadvantageous to do so in order to make payments with respect to any
borrowing, which could affect SBAM's strategy. Furthermore, if a fund were to
engage in borrowing, an increase in interest rates could reduce the value of the
fund's shares by increasing the fund's interest expense.
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NON-DIVERSIFICATION (EMERGING MARKETS DEBT FUND)
Emerging Markets Debt Fund is classified as a 'non-diversified' fund under the
1940 Act, which means that the fund is not limited by the 1940 Act in the
proportion of its assets that may be invested in the obligations of a single
issuer. The fund, however, intends to comply with the diversification
requirements imposed by the Code for qualification as a regulated investment
company. To the extent the fund invests a greater proportion of its assets in
the securities of a smaller number of issuers, the fund may be more susceptible
to any single economic, political or regulatory occurrence than a more
diversified fund and may be subject to greater risk of loss with respect to its
portfolio securities.
DERIVATIVES (EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND)
General. Derivatives involve special risks, including possible default by the
other party to the transaction, illiquidity and, to the extent the investment
manager's view as to certain market movements is incorrect, the risk that the
use of derivatives could result in significantly greater losses than if it had
not been used. Losses resulting from the use of derivatives will reduce a fund's
net asset value, and possibly income, and the losses may be significantly
greater than if derivatives had not been used. The degree of a fund's use of
derivatives may be limited by certain provisions of the Code. See 'Taxes.'
Currency Transactions. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to a fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, the risk exists that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
fund is engaging in proxy hedging. Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to a fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure as
well as incurring transaction costs. Buyers and sellers of currency futures
contracts are subject to the same risks that apply to the use of futures
contracts generally. Further, settlement of a currency futures contract for the
purchase of most currencies must occur at a bank based in the issuing nation.
Trading options on currency futures contracts is relatively new, and the ability
to establish and close out positions on these options is subject to the
maintenance of a liquid market that may not always be available. Currency
exchange rates may fluctuate based on factors extrinsic to that country's
economy.
Futures Contracts. The use of options and futures transactions entails certain
special risks. In particular, the variable degree of correlation between price
movements of futures contracts and price movements in the related portfolio
position of a fund could create the possibility that losses on the derivative
will be greater than gains in the value of the fund's position. In addition,
futures and options markets could be illiquid in some circumstances and certain
over-the-counter options could have no markets. A fund might not be able to
close out certain positions without incurring substantial losses. To the extent
a fund utilizes futures and options transactions for hedging, such transactions
should tend to minimize the risk of loss due to a decline in the value of the
hedged position and, at the same time, limit any potential gain to the fund that
might result from an increase in value of the position. There is also the risk
of loss by a fund of margin deposits in the event of bankruptcy of a broker with
whom the fund has an open position in a futures contract or option thereon.
Finally, the daily variation margin requirements for futures contracts create a
greater ongoing potential financial risk than would purchases of options, in
which case the exposure is limited to the cost of the initial premium and
transaction costs.
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Options. Use of put and call options could result in losses to a fund, force the
purchase or sale of portfolio securities at inopportune times or for prices
higher or lower than current market values, or cause a fund to hold a security
it might otherwise sell or sell a security it might otherwise hold.
A fund's ability to close out its position as a purchaser or seller of an
OCC-issued or exchange-listed put or call option is dependent, in part, upon the
liquidity of the particular option market. Among the possible reasons for the
absence of a liquid option market on an exchange are: (1) insufficient trading
interest in certain options, (2) restrictions on transactions imposed by an
exchange, (3) trading halts, suspensions or other restrictions imposed with
respect to particular classes or series of options or underlying securities,
including reaching daily price limits, (4) interruption of the normal operations
of the OCC or an exchange, (5) inadequacy of the facilities of an exchange or
the OCC to handle current trading volume or (6) a decision by one or more
exchanges to discontinue the trading of options (or a particular class or series
of options), in which event the relevant market for that option on that exchange
would cease to exist, although any such outstanding options on that exchange
would continue to be exercisable in accordance with their terms.
The hours of trading for listed options may not coincide with the hours during
which the underlying financial instruments are traded. To the extent that the
option markets close before the markets for the underlying financial
instruments, significant price and rate movements can take place in the
underlying markets that would not be reflected in the corresponding option
markets.
Interest Rate and Equity Swaps and Related Transactions. The use of interest
rate and equity swaps is a highly specialized activity which involves investment
techniques and risks different from those associated with ordinary portfolio
securities transactions. If the investment manager is incorrect in its forecasts
of market values, interest rates and other applicable factors, the investment
performance of a fund would diminish compared with what it would have been if
these investment techniques were not utilized. Moreover, even if the investment
manager is correct in its forecasts, there is a risk that the swap position may
correlate imperfectly with the price of the asset or liability being hedged.
As is the case with futures and options strategies, the effective use of swaps
and related transactions by a fund may depend, among other things, on a fund's
ability to terminate the transactions at times when SBAM deems it desirable to
do so. To the extent a fund does not, or cannot, terminate such a transaction in
a timely manner, a fund may suffer a loss in excess of any amounts that it may
have received, or expected to receive, as a result of entering into the
transaction.
The liquidity of swap agreements will be determined by the investment manager
based on various factors, including (1) the frequency of trades and quotations,
(2) the number of dealers and prospective purchasers in the marketplace,
(3) dealer undertakings to make a market, (4) the nature of the security
(including any demand or tender features), and (5) the nature of the marketplace
for trades (including the ability to assign or offset the fund's rights and
obligations relating to the investment). Such determination will govern whether
a swap will be deemed within the percentage restriction on investments in
securities that are not readily marketable.
There is no limit on the amount of interest rate and equity swap transactions
that may be entered into by a fund. These transactions do not involve the
delivery of securities or other underlying assets or principal. Accordingly, the
risk of loss with respect to interest rate and equity swaps is limited to the
net amount of payments that a fund is contractually obligated to make, if any.
The effective use of swaps and related transactions by a fund may depend, among
other things, on the fund's ability to terminate the transactions at times when
the investment manager deems it desirable to do so. Because swaps and related
transactions are bilateral contractual arrangements between a fund and
counterparties to the transactions, the fund's ability to terminate such an
arrangement may be considerably more limited than in the case of an exchange
traded instrument. To the extent a fund does not, or cannot, terminate such a
transaction in a timely manner, the fund may suffer a loss in excess of any
amounts that it may have received, or expected to receive, as a result of
entering into the transaction. If the other party to a swap defaults, a fund's
risk of loss is the net amount of payments that the fund contractually is
entitled to receive, if any. A fund
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may purchase and sell caps, floors and collars without limitation, subject to
the segregated account requirement described above.
Indexed Securities. Because the amount of interest and/or principal payments
which the issuer of indexed debt securities is obligated to make is linked to
the prices of other securities, securities indices, currencies, or other
financial indicators, such payments may be significantly greater or less than
payment obligations in respect of other types of debt securities. As a result,
an investment in indexed debt securities may be considered speculative.
Moreover, the performance of indexed securities depends to a great extent on the
performance of and may be more volatile than the security, currency, or other
instrument to which they are indexed, and may also be influenced by interest
rate changes in the United States and abroad. At the same time, indexed
securities are subject to the credit risks associated with the issuer of the
security, and their values may decline substantially if the issuer's
creditworthiness deteriorates.
Losses resulting from the use of derivatives will reduce a fund's net asset
value, and possibly income, and the losses can be greater than if derivatives
had not been used.
Risks of Derivatives Outside the United States. When conducted outside the
United States, derivatives may not be regulated as rigorously as in the United
States, may not involve a clearing mechanism and related guarantees, and will be
subject to the risk of governmental actions affecting trading in, or the prices
of, foreign securities, currencies and other instruments. In addition, the price
of any foreign futures or foreign options contract and, therefore, the potential
profit and loss thereon, may be affected by any variance in the foreign exchange
rate between the time an order is placed and the time it is liquidated, offset
or exercised. The value of positions taken as part of non-U.S. derivatives also
could be adversely affected by: (1) other complex foreign political, legal and
economic factors, (2) lesser availability of data on which to make trading
decisions than in the United States, (3) delays in the fund's ability to act
upon economic events occurring in foreign markets during nonbusiness hours in
the United States, (4) the imposition of different exercise and settlement terms
and procedures and margin requirements than in the United States and (5) lower
trading volume and liquidity.
INVESTMENT LIMITATIONS
Except for: (i) the investment limitations set forth below which are indicated
as fundamental policies; (ii) the investment restrictions set forth in the
Prospectus; and (iii) each fund's investment objective as described in the
Prospectus, the other policies and percentage limitations referred to in this
SAI and the Prospectus are not fundamental policies of the funds and may be
changed by vote of each Company's Board of Directors without shareholder
approval. The investment restrictions which are fundamental policies may be
changed only when approved by the holders of a majority of a fund's outstanding
voting securities, which, as defined by the 1940 Act, means the lesser of:
(i) 67% of the shares represented at a meeting at which more than 50% of the
outstanding shares are represented; or (ii) more than 50% of the outstanding
shares.
If a percentage restriction on investment or utilization of assets is adhered to
at the time an investment is made, a later change in percentage ownership
resulting from changing market values or similar type of event will not be
considered a violation of such restriction.
MONEY MARKET FUND
Money Market Fund may not:
(1) invest more than 5% of the current value of its total assets in the
securities of any one issuer, other than obligations issued or guaranteed by
the U.S. government, its agencies or instrumentalities; however, up to 25%
of the value of the total assets of the fund may be invested without regard
to this limitation;
(2) purchase any securities which would cause more than 25% of the value of
its total assets at the time of such purchase to be invested in securities
of one or more issuers conducting their principal business activities in the
same industry, provided that there is no limitation with
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respect to investment in obligations issued or guaranteed by the U.S.
government, its agencies or instrumentalities, with respect to bank
obligations or with respect to repurchase agreements collateralized by any
of such obligations;
(3) borrow money except as a temporary measure from banks for extraordinary
or emergency purposes, and in no event in excess of 15% of the value of its
total assets, except that for the purpose of this restriction, short-term
credits necessary for settlement of securities transactions are not
considered borrowings (the fund will not purchase any securities at any time
while such borrowings exceed 5% of the value of its total assets); or
(4) pledge, hypothecate, mortgage or otherwise encumber its assets in excess
of 20% of the value of its total assets, and then only to secure borrowings
permitted by (3) above.
(5) invest more than 10% of the value of its net assets in securities which
are illiquid;
(6) purchase shares of other investment companies (except as part of a
merger, consolidation or reorganization or purchase of assets approved by
the fund's shareholders), provided that the fund may purchase shares of any
registered open-end investment company that determines its net asset value
per share based on the amortized cost or penny-rounding method, if
immediately after any such purchase the fund does not: (a) own more than 3%
of the outstanding voting stock of any one investment company, (b) invest
more than 5% of the value of its total assets in any one investment company,
or (c) invest more than 10% of the value of its total assets in the
aggregate in securities of investment companies;
(7) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions);
(8) sell securities short;
(9) purchase or sell commodities or commodity contracts, including futures
contracts;
(10) invest for the purpose of exercising control over management of any
company;
(11) make loans, except that the fund may (a) purchase and hold debt
instruments in accordance with its investment objective and policies and
(b) enter into repurchase agreements with respect to portfolio securities;
(12) underwrite the securities of other issuers, except to the extent that
the purchase of investments directly from the issuer thereof and later
disposition of such securities in accordance with the fund's investment
program may be deemed to be an underwriting;
(13) purchase real estate or real estate limited partnership interests
(other than securities issued by companies that invest in real estate or
interests therein);
(14) invest directly in interests in oil, gas or other mineral exploration
development programs or mineral leases;
(15) purchase warrants; or
(16) issue senior securities except as permitted by the 1940 Act.
Each of the above restrictions is a fundamental policy of Money Market Fund. For
the purpose of applying the above percentage restrictions and the percentage
investment limitations set forth in the Prospectus to receivables-backed
obligations, the special purpose entity issuing the receivables-backed
obligations and/or one or more of the issuers of the underlying receivables will
be considered an issuer in accordance with applicable regulations.
With respect to investment limitation (1), the fund intends (as a matter of
non-fundamental policy) to limit investments in the securities of any single
issuer (other than securities issued or guaranteed by the U.S. government, its
agencies or instrumentalities) to not more than 5% of the fund's total assets at
the time of purchase, provided that the fund may invest up to 25% of its total
assets in the securities of a single issuer for a period of up to three business
days provided such issuer meets certain credit quality requirements of the 1940
Act.
33
<PAGE>
EMERGING MARKETS DEBT FUND AND HIGH YIELD BOND FUND
The High Yield Bond Fund and Emerging Markets Debt Fund may not:
(1) With respect to High Yield Bond Fund only, invest more than 5% of the
current value of its total assets in the securities of any one issuer, other
than obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities; however, up to 25% of the value of the total assets of
the fund may be invested without regard to this limitation, so long as no
more than 25% of its total assets are invested in the securities of any one
issuer;
(2) borrow money, except for temporary or emergency purposes and then not in
excess of 5% of the value of the total assets of the applicable fund at the
time the borrowing is made, except that for the purpose of this restriction,
short-term credits necessary for settlement of securities transactions are
not considered borrowings (neither fund will purchase additional securities
at any time its borrowings exceed 5% of total assets); or
(3) invest more than 25% of the total assets of each fund in the securities
of issuers having their principal activities in any particular industry,
except for obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities or by any state, territory or any possession
of the United States or any of their authorities, agencies,
instrumentalities or political subdivisions, or with respect to repurchase
agreements collateralized by any of such obligations (for purposes of this
restriction, supranational issuers will be considered to comprise an
industry as will each foreign government that issues securities purchased by
a fund).
(4) underwrite securities of other issuers, except to the extent that the
purchase of investments directly from the issuer thereof or from an
underwriter for an issuer and the later disposition of such securities in
accordance with a fund's investment program may be deemed to be an
underwriting;
(5) purchase or sell real estate, although a fund may purchase and sell
securities of companies which deal in real estate, may purchase and sell
marketable securities which are secured by interests in real estate and may
invest in mortgages and mortgage-backed securities;
(6) purchase or sell commodities or commodity contracts except that a fund
may engage in derivative transactions to the extent permitted by its
investment policies as such policies are set forth from time to time in the
Prospectus and this SAI;
(7) make loans, except that: (a) a fund may purchase and hold debt
securities in accordance with its investment objective and policies; (b) a
fund may enter into repurchase agreements with respect to portfolio
securities, subject to applicable limitations of its investment policies;
(c) a fund may lend portfolio securities with a value not in excess of
one-third of the value of its total assets, provided that collateral
arrangements with respect to options, forward currency and futures
transactions will not be deemed to involve loans of securities; and
(d) delays in the settlement of securities transactions will not be
considered loans;
(8) purchase the securities of other investment companies except as
permitted under the 1940 Act or in connection with a merger, consolidation,
acquisition or reorganization;
(9) purchase securities on margin (except for delayed delivery or
when-issued transactions or such short-term credits as are necessary for the
clearance of transactions, and except for initial and variation margin
payments in connection with purchases or sales of futures contracts);
(10) sell securities short; provided that short positions in a futures
contract or forward contract are permitted;
(11) purchase or retain any securities of an issuer if one or more persons
affiliated with a fund owns beneficially more than 1/2 of 1% of the
outstanding securities of such issuer and such affiliated persons so owning
1/2 of 1% together own beneficially more than 5% of such securities;
34
<PAGE>
(12) invest in oil, gas and other mineral leases, provided, however, that
this shall not prohibit a fund from purchasing publicly traded securities of
companies engaging in whole or in part in such activities;
(13) with respect to the High Yield Bond fund only, purchase the securities
of any issuer if by reason thereof the value of its investment in all
securities of that issuer will exceed 5% of the value of its total assets;
(14) invest more than 5% of its total assets in securities of unseasoned
issuers (other than securities issued or guaranteed by U.S. federal or state
or foreign governments or agencies, instrumentalities or political
subdivisions thereof) which, including their predecessors, have been in
operation for less than three years;
(15) purchase puts, calls, straddles, spreads and any combination thereof if
by reason thereof the value of its aggregate investment in such classes of
securities will exceed 5% of its total assets;
(16) invest in warrants (other than warrants acquired by a fund as part of a
unit or attached to securities at the time of purchase) if, as a result, the
investments (valued at the lower of cost or market) would exceed 5% of the
value of the fund's net assets or if, as a result, more than 2% of the
fund's net assets would be invested in warrants that are not listed on AMEX
or NYSE; or
(17) issue senior securities except as permitted by the 1940 Act.
Investment restrictions (1) through (9) described above are fundamental policies
and restrictions (10) through (17) are non-fundamental policies of Emerging
Market Debt Fund and High Yield Bond Fund.
For purposes of investment limitations (1) and (3) above, both the borrower
under a loan and the lender selling a participation will be considered an
'issuer.'
PORTFOLIO TURNOVER
Purchases and sales of portfolio securities may be made as considered advisable
by the investment manager in the best interests of the shareholders. Each fund
intends to limit portfolio trading to the extent practicable and consistent with
its investment objectives. Each fund's portfolio turnover rate may vary from
year to year, as well as within a year. A fund's distributions of any net short-
term capital gains realized from portfolio transactions are taxable to
shareholders as ordinary income. In addition, higher portfolio turnover rates
can result in corresponding increases in portfolio transaction costs for a fund.
With respect to Money Market Fund, SBAM seeks to enhance the fund's yield by
taking advantage of yield disparities or other factors that occur in the money
market. For example, market conditions frequently result in similar securities
trading at different prices. Money Market Fund may dispose of any portfolio
security prior to its maturity if such disposition and reinvestment of the
proceeds are expected to enhance yield consistent with SBAM's judgment as to a
desirable portfolio maturity structure or if such disposition is believed to be
advisable due to other circumstances or considerations. Subsequent to its
purchase, a portfolio security may be assigned a lower rating or cease to be
rated. Such an event would not require the disposition of the instrument, but
SBAM will consider such an event in determining whether the Fund should continue
to hold the security. The policy of the Money Market Fund regarding dispositions
of portfolio securities and its policy of investing in securities deemed to have
maturities of 397 days or less will result in high portfolio turnover. A higher
rate of portfolio turnover results in increased transaction costs to the Fund in
the form of dealer spreads. See 'Portfolio Transactions.'
PORTFOLIO TRANSACTIONS
Subject to policy established by each Company's Board of Directors, the
investment manager is primarily responsible for each fund's portfolio decisions
and the placing of the fund's portfolio transactions.
35
<PAGE>
Fixed-income, certain short-term securities and certain equities normally will
be purchased or sold from or to issuers directly or to dealers serving as market
makers for the securities at a net price, which may include dealer spreads and
underwriting commissions. Equity securities may also be purchased or sold
through brokers who will be paid a commission.
The general policy of each fund in selecting brokers and dealers is to obtain
the best results taking into account factors such as the general execution and
operational facilities of the broker or dealer, the type and size of the
transaction involved, the creditworthiness of the broker or dealer, the
stability of the broker or dealer, execution and settlement capabilities, time
required to negotiate and execute the trade, research services and the
investment manager's arrangements related thereto (as described below), overall
performance, the dealer's risk in positioning the securities involved, and the
broker's commissions and dealer's spread or mark-up. While the investment
manager generally seeks the best price in placing its orders, a fund may not
necessarily be paying the lowest price available. The purchase by a fund of
participations or assignments may be pursuant to privately negotiated
transactions pursuant to which a fund may be required to pay fees to the seller
or forego a portion of payments in respect of the participation agreement.
Notwithstanding the above, in compliance with Section 28(e) of the 1934 Act, the
investment manager may select brokers who charge a commission in excess of that
charged by other brokers, if the investment manager determines in good faith
that the commission to be charged is reasonable in relation to the brokerage and
research services provided to the investment manager by such brokers. Research
services generally consist of research or statistical reports or oral advice
from brokers and dealers regarding particular companies, industries or general
economic conditions. The investment manager may also have arrangements with
brokers pursuant to which such brokers provide research services to the
investment manager in exchange for a certain volume of brokerage transactions to
be executed by such broker. While the payment of higher commissions increases a
fund's costs, the investment manager does not believe that the receipt of such
brokerage and research services significantly reduces its expenses as a fund's
investment manager. Arrangements for the receipt of research services from
brokers may create conflicts of interest.
Research services furnished to the investment manager by brokers who effect
securities transactions for a fund may be used by the investment manager in
servicing other investment companies and accounts which it manages. Similarly,
research services furnished to the investment manager by brokers who effect
securities transactions for other investment companies and accounts which the
investment manager manages may be used by the investment manager in servicing a
fund. Not all of these research services are used by the investment manager in
managing any particular account, including the funds.
Affiliated persons of a fund, or affiliated persons of such persons, may from
time to time be selected to execute portfolio transactions for such fund.
Subject to the considerations discussed above and in accordance with procedures
adopted by each Company's Board of Directors, in order for such an affiliated
person to be permitted to effect any portfolio transactions for a fund, the
commissions, fees or other remuneration received by such affiliated person must
be reasonable and fair compared to the commissions, fees or other remuneration
received by other brokers in connection with comparable transactions. This
standard would allow such an affiliated person to receive no more than the
remuneration which would be expected to be received by an unaffiliated broker in
a commensurate arm's-length transaction.
Under the 1940 Act, persons affiliated with a fund are prohibited from dealing
with it as a principal in the purchase and sale of securities unless an
exemptive order allowing such transactions is obtained from the SEC. However, a
fund may purchase securities from underwriting syndicates of which the
investment manager or any of its affiliates (including Salomon Brothers Inc) is
a member under certain conditions, in accordance with the provisions of
Rule 10f-3 promulgated under the 1940 Act.
36
<PAGE>
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
General. PFPC Global Fund Services, Inc. ('PFPC'), 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.
PFPC will require that a shareholder provide requests in writing, accompanied by
a valid signature guarantee form, when changing certain information in an
account (i.e., wiring instructions, telephone privileges, etc.).
PURCHASE OF SHARES
Purchase Procedures. There is no front-end sales charge or contingent-deferred
sales charge imposed on purchases of fund shares. Under certain circumstances,
certain broker/dealers may impose transaction fees on the purchase and/or sale
of shares. The minimum initial investment in the Money Market Fund is $250,000
and the minimum investment in the other funds is $1,000,000. Subsequent
purchases may be made in any amount.
Subsequent investments may be made at any time by mailing a check to the funds'
transfer agent and dividend disbursing agent, along with a detachable stub from
the Statement of Account (or a letter providing the account number).
Shareholders should be sure to write the fund's account number on the check.
Purchases of fund shares (initial or subsequent) may not be made by third party
check.
Shares of each fund may be purchased on any business day at the net asset value
per share next determined after receipt of a purchase order. Shares certificates
will not be issued. Share purchase orders are effective on the date the fund
receives a completed Account Application Form (and other required documents) and
federal funds become available.
Initial and subsequent investments may also be made by wire transfer.
Shareholders should note that their bank may charge a fee in connection with
transferring money by bank wire.
For a share purchase order for any fund other than the Money Market Fund to
become effective on a particular business day, prior to 4:00 p.m. (Eastern
time): (i) in the case of a wire transfer payment, a purchaser must call (800)
446-1013 to inform the transfer agent of an incoming wire transfer; or (ii) in
the case of payment by check or money order, a complete share purchase order
must be actually received by the transfer agent, and, in either case, federal
funds must be received by the transfer agent, on behalf of the fund. If federal
funds are received by the transfer agent that same day, the order will be
effective on that day. If a fund receives notification of a wire transfer or a
complete share purchase order after 4:00 p.m., or if federal funds are not
received by the transfer agent, such purchase order shall be executed as of the
date that federal funds are actually received.
Purchase orders for shares of the Money Market Fund placed by 12:00 noon
(Eastern time) on any business day will be executed and begin to earn dividends
that same day if payment is received in or converted into federal funds by 12:00
noon (Eastern time) that day. Purchase orders received after 12:00 noon (Eastern
time) or for which payment is received in or converted into federal funds after
12:00 noon (Eastern time) will be executed and begin to earn dividends on the
following business day.
REDEMPTION OF SHARES
If the Board of Directors of Institutional Series Funds or Series Funds
determines that it is in the best interests of the remaining shareholders of a
fund, the fund may pay the redemption price in whole, or in part, by a
distribution in kind from the portfolio of the fund, in lieu of cash, taking
such securities at their value employed for determining such redemption price,
and selecting the securities in such manner as such Board of Directors may deem
fair and equitable. However, each fund has made an election pursuant to Rule
18f-1 under the 1940 Act requiring that all
37
<PAGE>
redemptions be effected in cash to each redeeming shareholder, during periods of
90 days, up to the lesser of $250,000 or 1% of the net assets of such fund. A
shareholder who receives a distribution in kind may incur a brokerage commission
upon a later disposition of such securities and may receive less than the
redemption value of such securities or property upon sale, particularly where
such securities are sold prior to maturity. Redemption in kind is not as liquid
as a cash redemption.
Under the 1940 Act, a fund may suspend the right of redemption or postpone the
date of payment upon redemption for any period: (i) during which the NYSE is
closed, other than customary weekend and holiday closings; (ii) during which
trading on the NYSE is restricted; or (iii) during which (as determined by the
SEC by rule or regulation) an emergency exists as a result of which disposal or
valuation of portfolio securities is not reasonably practicable, or for such
other periods as the SEC may permit. A fund may also suspend or postpone the
recordation of the transfer of its shares upon the occurrence of any of the
foregoing conditions.
Redemption Procedures. Each fund will redeem all full and fractional shares of
the fund upon request on any business day at the applicable net asset value
determined after the receipt of proper redemption instructions. Shareholders
liquidating their holdings will receive upon redemption all dividends reinvested
through the date of redemption. If notice of redemption is received on any
business day, the redemption will be effective on the date of receipt. Payment
will ordinarily be made by wire on the next business day, but, in any case,
within no more than seven business days from the date of receipt. If the notice
is received on a day that is not a business day or after the close of regularly
scheduled trading on the NYSE, the redemption notice will be deemed received as
of the next business day. The funds do not charge a redemption fee. The value of
shares at the time of redemption may be more or less than the shareholder's
cost.
For the convenience of shareholders, each fund has established different
redemption procedures. No redemption requests will be processed until the fund
has received a completed Purchase Application, and no redemption of shares
purchased by check will be made until all checks received for such shares have
been collected, which may take up to 15 days or more.
Redemption By Mail. Shares may be redeemed by mail by submitting a written
request from the registered owner(s) signed exactly as shares are registered.
Signature guarantees by an acceptable guarantor are required to redeem amounts
greater than $50,000 or to have proceeds sent to an address other than the
address of record. The transfer agent has adopted standards and procedures
pursuant to which signature-guarantees in proper form generally will be accepted
from domestic banks, brokers, dealers, credit unions, national securities
exchanges, registered securities associations, clearing agencies and savings
associations, as well as from participants in the New York Stock Exchange
Medallion Signature Program, the Securities Transfer Agents Medallion Program
('STAMP') and the Stock Exchanges Medallion Program. Shareholders with any
questions regarding signature-guarantees should contact the transfer agent.
In certain instances, the transfer agent may require additional documents such
as, but not limited to, trust instruments, death certificates, appointments as
executor or administrator or certificates of corporate authority.
Checks for redemption proceeds will be mailed to the address of record within
seven days of redemption.
Redemption By Wire. If redemption by wire has been elected in the Purchase
Application, shares may be redeemed on any business day upon request made by
telephone or letter. A shareholder or any authorized agent (so designated on the
Account Application Form) must provide PFPC with the dollar or share amount to
be redeemed, the account to which the redemption proceeds should be wired, the
name of the shareholder and the shareholder's account number. Shareholders
should note that their bank may charge a fee in connection with transferring
money by wire.
A shareholder may change its authorized agent, the address of record or the
account designated to receive redemption proceeds at any time by providing the
transfer agent with written instructions signature guaranteed as described
above.
38
<PAGE>
Telephone Redemption. A shareholder may request redemption by calling the
transfer agent at (800) 446-1013. Proceeds from telephone redemptions will be
forwarded to the shareholder by check unless the shareholder has requested
redemption by wire in the manner described above under 'Redemption by Wire.' The
check will be made only payable to the registered shareholder and sent to the
address of record on file with the transfer agent. Each fund reserves the right
to refuse a telephone request for redemption if it is believed advisable to do
so. Procedures for redeeming shares by telephone may be modified or terminated
at any time by the funds. Neither the funds nor the transfer agent will be
liable for following redemption instructions received by telephone which are
reasonably believed to be genuine, and the shareholder will bear the risk of
loss in the event of unauthorized or fraudulent telephone instructions. Each
fund will employ reasonable procedures to confirm that instructions communicated
by telephone are genuine. Each fund and/or the transfer agent may be liable for
any losses due to unauthorized or fraudulent instructions if they do not follow
such procedures. Each fund may require personal identification codes.
Small Accounts. Each fund reserves the right, upon not less than 30 days'
written notice, to redeem shares in an account which has a value of $10,000 or
less, if the reduction in value is the result of shareholder redemptions or
transfers and not as a result of a decline in the net asset value. However, any
shareholder affected by the exercise of this right will be allowed to make
additional investments prior to the date fixed for redemption to avoid
liquidation of the account.
EXCHANGE OF SHARES
Shareholders may exchange all or part of their shares for shares of other funds
in the Salomon Brothers Institutional Investment Series. The value of the shares
exchanged must meet the investment minimum of the fund into which the investor
is exchanging. Shares of a fund are eligible for exchange 30 days after
purchase.
Each fund reserves the right to refuse a telephone request for exchange if it is
believed advisable to do so. Procedures for exchanging shares by telephone may
be modified or terminated at any time by a fund. None of the funds, the transfer
agent nor the funds' distributor will be liable for following exchange
instructions received by telephone, which are reasonably believed to be genuine,
and the shareholder will bear the risk of loss in the event of unauthorized or
fraudulent telephone instructions. The funds, the transfer agent and the funds'
distributor may employ reasonable procedures to confirm that instructions
communicated by telephone are genuine. The funds, the transfer agent and the
funds' distributor may be liable for any losses due to unauthorized or
fraudulent instructions if they do not follow such procedures. When requesting
an exchange by telephone, shareholders should have available the correct account
registration and account numbers or tax identification number.
The exchange privilege enables shareholders of a fund to acquire shares in a
fund with a different investment objective when they believe that a shift
between funds is an appropriate investment decision. This privilege is available
to shareholders residing in any state in which the fund shares being acquired
may legally be sold.
Upon receipt of proper instructions and all necessary supporting documents,
shares submitted for exchange are redeemed at the then-current net asset value
and the proceeds immediately invested in shares of the fund being acquired at a
price equal to the then current net asset value of such shares.
All accounts involved in a telephone exchange must have the same registration.
If a new account is to be established, the dollar amount to be exchanged must be
at least as much as the minimum initial investment of the fund whose shares are
being purchased. Any new account established by exchange will automatically be
registered in the same way as the account from which shares are exchanged and
will carry the same dividend option.
Exercise of the exchange privilege is treated as a taxable disposition of the
shares surrendered in the exchange and purchase of the shares received for
federal income tax purposes. The price of the shares of the fund into which
shares are exchanged will be the new cost basis for tax purposes.
39
<PAGE>
The exchange privilege is not designed for investors trying to catch short-term
swings in market prices by making frequent exchanges. Each fund reserves the
right to reject any exchange request in whole or in part. The exchange privilege
may be modified or terminated at any time upon written notice to shareholders. A
fund reserves the right to impose a limit on the number of exchanges a
shareholder may make. Call or write the applicable fund for further details.
DIRECTORS AND OFFICERS
The business and affairs of each fund are managed under the direction of its
Board of Directors. The Board of Directors approves all significant agreements
between a fund and the persons or companies that furnish services to the fund,
including agreements with its distributor, investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the fund are
delegated to the fund's investment manager and administrator.
The principal occupations of the directors and executive officers of the
Institutional Series Funds and the Series Funds for the past five years are
listed below. Certain of the directors and officers are also directors and
officers of one or more other investment companies for which SBAM acts as
investment manager. 'Interested directors' of the funds (as defined in the 1940
Act) are indicated by an asterisk.
Except as indicated below, the address of each executive officer is 7 World
Trade Center, New York, New York 10048.
40
<PAGE>
INSTITUTIONAL SERIES FUNDS AND SERIES FUNDS
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ---------------- ------------------------------------
<S> <C> <C>
Charles F. Barber Director and Consultant; formerly, Chairman of the
66 Glenwood Drive Chairman, Audit Board, ASARCO Incorporated
Greenwich, CT 06830 Committee
Age: 83
Carol L. Colman .................. Director and President, Colman Consulting
Colman Consulting Audit Committee
278 Hawley Road Member
North Salem, NY 10560
Age: 54
Daniel P. Cronin ................. Director and Vice President and General Counsel, Pfizer
Pfizer, Inc. Audit Committee International Inc., Senior Assistant
253 East 42nd Street Member General Counsel, Pfizer Inc.
New York, NY 10017
Age: 54
Heath B. McLendon* ............... Director, Managing Director, Salomon Smith Barney,
Age: 66 Chairman and Inc. ('SSB'); President and Director, SSB
President Citi Fund Management LLC ('SSB Citi') and
Travelers Investment Adviser, Inc. ('TIA')
Peter J. Wilby ................... Executive Vice Managing Director of SBAM and SSB since
Age: 41 President January 1996. Prior to January 1996,
Director of SBAM and SSB.
Beth A. Semmel ................... Executive Vice Managing Director of SBAM and SSB since
Age: 39 President January 1996. From May 1993 to December
1995, Vice President of SBAM and SSB.
Maureen O'Callaghan .............. Executive Vice Director of SBAM and SSB since October
Age: 36 President 1988.
James E. Craige .................. Executive Vice Managing Director of SBAM and SSB since
Age: 32 President January 1999. Director of SBAM and SSB
since January 1998. Vice President of SBAM
and SSB since 1992.
Thomas K. Flanagan ............... Executive Vice Managing Director of SBAM and SSB since
Age: 47 President January 1999. Director, SBAM and SSB since
1991.
Robert E. Amodeo ................. Vice President Director of SBAM and SSB since January
Age: 35 (Series Funds 1999. Vice President of SBAM and SSB from
Only) January 1996. Prior to that, served as
assistant portfolio manager.
Charles K. Bardes ................ Vice President Vice President of SBAM and SSB since 1997.
Age: 40 (Series Funds He has been employed by SBAM and SSB since
Only) 1986.
Thomas A. Croak .................. Vice President Vice President of SBAM and SSB since
Age: 38 (Series Funds January 1995.
Only)
John B. Cunningham ............... Vice President Director of SBAM and SSB since December
Age: 35 (Series Funds 1998. Vice President of SBAM and SSB since
Only) January 1995.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION(S) HELD PRINCIPAL OCCUPATION(S) PAST 5 YEARS
- --------------------- ---------------- ------------------------------------
<S> <C> <C>
Nancy Noyes ...................... Vice President Director, SBAM and SSB since January 1996.
Age: 40 (Series Funds From August 1992 to January 1996, Vice
Only) President of SBAM and SSB.
George J. Williamson ............. Vice President Director of SBAM and SSB since January
Age: 66 (Series Funds 1999. Prior to January 1996, Vice
Only) President of SBAM and SSB.
Christina T. Sydor ............... Secretary Managing Director of SSB; General Counsel
388 Greenwich Street and Secretary of SSB Citi and TIA.
New York, New York 10013
Age: 48
Lewis E. Daidone ................. Vice President Managing Director of SSB; Director and
388 Greenwich Street and Treasurer Senior Vice President of SSB Citi and TIA.
New York, New York 10013
Age: 41
Anthony Pace ..................... Controller Vice President of SSB since 1995
388 Greenwich Street
New York, New York 10013
Age: 34
</TABLE>
Directors of the Institutional Series Funds and Series Funds not affiliated with
SBAM receive from their respective funds an annual fee and a fee for each Board
of Directors and Board committee meeting attended and are reimbursed for all
out-of-pocket expenses relating to attendance at meetings. Directors who are
affiliated with SBAM do not receive compensation but are reimbursed for all
out-of-pocket expenses relating to attendance at such meetings.
The following lists shareholders of record who held 5% or more of the
outstanding shares of the funds as of March 23, 2000. The shareholders of 25% or
more of the outstanding shares of a fund are deemed to be 'control persons,' as
defined in the 1940 Act, of the funds. As of March 23, 2000, Salomon Brothers
Asset Management Inc. and its affiliates, own 0% and 0% of the outstanding
shares of the Emerging Markets Debt Fund and the High Yield Bond Fund,
respectively.
<TABLE>
<CAPTION>
FUND SHAREHOLDER PERCENTAGE HELD
---- ----------- ---------------
<S> <C> <C>
Money Market Fund. State Street Bank & Trust TTEE 42.01%
FBO Travelers Group 401K Savings
388 Greenwich Street 35th Fl.
New York, NY 10013
Saturn & Co. 29.08%
c/o Investors Bank & Trust Co.
P.O. Box 9130 FPG90
Attn: Mutual Funds Processing
Boston, MA 02117-9130
Silicon Alley Management Inc. 8.14%
103 Faulk Rd., Ste. 260
Wilmington, DE 19803
Irv Brilliant & 5.29%
Benice Brilliant TTEES
Nicole Brilliant Trust
U/A/D 09/05/84
P.O. Box 150513
Brooklyn, NY 11215-0513
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
FUND SHAREHOLDER PERCENTAGE HELD
---- ----------- ---------------
<S> <C> <C>
High Yield Bond Fund............... LaSalle National Bank TTEE 38.35%
FBO Ahold USA Inc Pension Trust
DTD 12/1/98 Attn: Brian Fields
950 East Paces Ferry Road, Ste. 2575
Atlanta, GA 30326
Benjamin Moore & Co. 25.11%
Attn: James Henderson
51 Chestnut Ridge Road
Montvale, NJ 07645
L-3 Communications Corp Master Trust 22.63%
600 Third Avenue
New York, NY 10016
Town of Plymouth Contributory Retirement 6.45%
System
Attn: Patrick DelloRusso Fin Dir.
11 Lincoln Street
Plymouth, MA 02360
Emerging Markets Debt Fund......... American National Can Company 49.57%
Attn: Wact Melcher
8770 West Bryn Mawr Avenue
Chicago, IL 60631-3542
Benjamin Moore & Co. 24.27%
Attn: James Henderson
51 Chestnut Ridge Road
Montvale, NJ 07645
L-3 Communications Corp Master Trust 16.78%
600 Third Avenue
New York, NY 10016
</TABLE>
As of March 23, 2000, directors and officers of the Institutional Series Funds
beneficially owned less than 1% of the outstanding shares of any series of the
Institutional Series Funds.
COMPENSATION TABLE
The following table provides information concerning the compensation paid to
each director of the Series Funds during the fiscal year ended December 31, 1999
and the Institutional Series Funds for the fiscal year ended February 28, 2000.
Neither Company provides any pension or retirement benefits to directors. In
addition, no remuneration was paid by the Series Funds during the fiscal year
ended December 31, 1999 or the Institutional Series Funds for the fiscal year
ended February 28, 2000 to officers of either Company including to Mr. McLendon,
who is affiliated with SBAM. Accordingly, Mr. McLendon is an 'interested
person,' as defined in the 1940 Act.
INSTITUTIONAL SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION
FROM THE TOTAL COMPENSATION
INSTITUTIONAL FROM OTHER FUNDS
NAME OF PERSON, POSITION SERIES FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- ------------------------ ------------ ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director......... $6,750 $128,350(15) $135,100(16)*
Daniel P. Cronin, Director.......... 6,750 43,450(6) 50,200(7)
Carol L. Colman, Director........... 6,750 47,475(5) 54,225(6)
</TABLE>
- ---------
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
(footnotes continued on next page)
43
<PAGE>
(footnotes continued from previous page)
* In addition, Mr. Barber received $18,375 in deferred compensation from
investment companies advised by affiliates of SBAM.
SERIES FUNDS
<TABLE>
<CAPTION>
AGGREGATE
COMPENSATION TOTAL COMPENSATION
FROM THE SERIES FROM OTHER FUNDS
NAME OF PERSON, POSITION FUNDS ADVISED BY SBAM(A) TOTAL COMPENSATION(A)
- ------------------------ ----- ------------------ ---------------------
<S> <C> <C> <C>
Charles F. Barber, Director......... $9,600 $125,500(15) $135,100(16)*
Daniel P. Cronin, Director.......... 9,600 40,600(6) 50,200(7)
Carol L. Colman, Director........... 9,600 44,625(5) 54,225(6)
</TABLE>
- ---------
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
* In addition, Mr. Barber received $18,375 in deferred compensation from
investment companies advised by affiliates of SBAM.
44
<PAGE>
INVESTMENT MANAGER
Each fund retains SBAM to act as its investment manager. SBAM serves as the
investment manager to numerous individuals and institutions and other investment
companies. SBAM is a wholly owned subsidiary of Citigroup.
SBAM serves as investment manager to each fund pursuant to management contracts
dated as of November 28, 1997. The management contract between SBAM and each
respective fund provides that SBAM shall manage the operations of each fund,
subject to policies established by each Company's Board of Directors. Pursuant
to the applicable management contract, SBAM manages each fund's investment
portfolio, directs purchases and sales of portfolio securities and reports
thereon to the fund's officers and directors regularly. SBAM also provides the
office space, facilities, equipment and personnel necessary to perform the
following services for each fund: SEC compliance, including record keeping,
reporting requirements and registration statements and proxies; supervision of
fund operations, including custodian, accountants and counsel and other parties
performing services or operational functions for each fund; certain
administrative and clerical services, including certain accounting services,
facilitation of redemption requests, exchange privileges, account adjustments,
development of new shareholder services and maintenance of certain books and
records; and certain services related to each fund's shareholders, including
assuring that investments and redemptions are completed efficiently, responding
to shareholder inquiries and maintaining a flow of information to shareholders.
In addition, SBAM pays the compensation of each fund's officers, employees and
directors affiliated with SBAM. Each fund bears all other costs of its
operations, including the compensation of its directors not affiliated with
SBAM.
As compensation for its services, Money Market Fund pays SBAM a monthly fee at
an annual rate of .20% of the fund's average daily net assets. SBAM has
voluntarily agreed to reduce or otherwise limit the expenses of the fund
(exclusive of taxes, interest and extraordinary expenses such as litigation and
indemnification expenses), on an annualized basis, to .25% of the fund's average
daily net assets and for a period of at least one year from the date of the
Prospectus such expenses shall not exceed .18% of the fund's average daily net
assets. For the fiscal years ended December 31, 1997, 1998 and 1999, Money
Market Fund paid SBAM $0 (which reflects a waiver of $350,642), $14,911 (which
reflects a waiver of $304,989), and $0 (which reflects a waiver of $251,358),
respectively, for its services. SBAM also absorbed an additional $47,012 of
other expenses for the fiscal year ended December 31, 1997).
As compensation for its services, High Yield Bond Fund pays SBAM a monthly fee
at an annual rate of .50% of the fund's average daily net assets and Emerging
Markets Debt Fund pays SBAM a monthly fee at an annual rate of .70% of the
fund's average daily net assets.
For the fiscal years ended February 28, 1998, 1999 and 2000 SBAM waived all
investment management fees from each of High Yield Bond Fund and Emerging
Markets Debt Fund, totalling $32,193, $126,508 and $140,213 and $75,783,
$159,813 and $124,013, respectively. SBAM also absorbed an additional $173,188
and $205,872, $84,986 and $10,382 in expenses, for 1998 and 1999, respectively.
The management contract for each fund provides that it will continue
automatically for successive annual periods provided that such continuance is
approved at least annually: (a) by the vote of a majority of the directors not
parties to the management contract or interested persons of such parties, which
votes are cast in person at a meeting called for the purpose of voting on such
management contract; and (b) either by the Board of Directors or a majority of
the outstanding voting securities. Each management contract may be terminated by
either party on 60 days' written notice, and will terminate immediately in the
event of its assignment. The management contracts for Money Market, High Yield
Bond and Emerging Market Debt Funds were most recently approved by shareholders
of the respective funds on January 14, 1998.
Under the terms of the management contract between each fund and SBAM, neither
SBAM nor its affiliates shall be liable for losses or damages incurred by the
fund, unless such losses or damages are attributable to the willful misfeasance,
bad faith or gross negligence on the part of
45
<PAGE>
either SBAM or its affiliates or from reckless disregard by it of its
obligations and duties under the Management Contract ('disabling conduct'). In
addition, High Yield Bond Fund and Emerging Markets Debt Fund will indemnify
SBAM and its affiliates and hold each of them harmless against any losses or
damages not resulting from disabling conduct.
Investment decisions for a particular fund are made independently from those for
other funds and accounts advised or managed by SBAM. Such other funds and
accounts may also invest in the same securities as a fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as a fund, however, transactions in such securities will be
made, insofar as feasible, for the respective funds and accounts in a manner
deemed equitable to all. In some cases, this procedure may adversely affect the
size of the position obtained for or disposed of by a fund or the price paid or
received by a fund. In addition, because of different investment objectives, a
particular security may be purchased for one or more funds or accounts when one
or more funds or accounts are selling the same security.
Rule 17j-1 under the 1940 Act requires all registered investment companies and
their investment advisers and principal underwriters to adopt written codes of
ethics and institute procedures designed to prevent 'access persons' (as defined
in Rule 17j-1) from engaging in any fraudulent, deceptive or manipulative
trading practices. Each Company's Board of Directors has adopted a code of
ethics (the 'Fund Code') that incorporates personal trading policies and
procedures applicable to access persons of each fund, which includes officers,
directors and other specified persons who may make, participate in or otherwise
obtain information concerning the purchase or sale of securities by the fund. In
addition, the Fund Code attaches and incorporates personal trading policies and
procedures applicable to access persons of SBAM, as the investment adviser to
each fund, which policies serve as SBAM's code of ethics (the 'Adviser Code').
The Fund and Adviser Codes have been designed to address potential conflicts of
interest that can arise in connection with the personal trading activities of
investment company and investment advisory personnel.
Pursuant to the Fund and Adviser Codes, access persons are generally permitted
to engage in personal securities transactions, provided that a transaction does
not involve securities that are being purchased or sold, are being considered
for purchase or sale, or are being recommended for purchase or sale by or for a
fund. In addition, the Adviser Codes contains specified prohibitions and
blackout periods for certain categories of securities and transactions,
including a prohibition on short-term trading and purchasing securities during
an initial public offering. The Adviser Codes also require that access persons
obtain preclearance to engage in personal securities transactions with certain
exceptions. Finally, the Fund and Adviser Codes require access persons to report
all personal securities transactions periodically. The restrictions contained in
the Fund and Adviser Codes are generally inapplicable to transactions in money
market securities.
ADMINISTRATOR
Institutional Series Funds and Series Funds currently employ SSB Citi Fund
Management LLC ('SSB Citi') under their applicable administration agreement to
provide certain administrative services to the respective funds. Prior to
January 1, 1999, Investors Bank and Trust Company ('IBT') provided such
administrative services to the Institutional Series. For the fiscal years ended
December 31, 1997, 1998, Money Market Fund paid fees of $189,460 and $174,815 to
IBT under a prior administration agreement. Fees paid to IBT by High Yield Bond
Fund for the period ended February 28, 1998, 1999, and 2000 were $165,100,
$130,310 and, $ respectively. Fees paid to IBT by Emerging Markets Debt
Fund for the years ended February 28, 1998, 1999 and 2000 were $177,600,
$119,048 and, $ respectively.
DISTRIBUTOR
Shares of the funds are offered on a continuous basis and without a sales charge
through CFBDS as distributor pursuant to a distribution agreement between CFBDS
and the funds. CFBDS
46
<PAGE>
receives no remuneration for its services as distributor and is not obligated to
sell any specific amount of fund shares.
EXPENSES
Each fund's expenses include taxes, interest, fees and salaries of such fund
directors and officers who are not directors, officers or employees of the
fund's service contractors, SEC fees, state securities qualification fees, costs
of preparing and printing prospectuses for regulatory purposes and for
distribution to existing shareholders, advisory and administration fees, charges
of the custodian and of the transfer and dividend disbursing agent, certain
insurance premiums, outside auditing and legal expenses, costs of shareholder
reports and shareholder meetings and any extraordinary expenses. Each fund also
pays for brokerage fees and commissions (if any) in connection with the purchase
and sale of portfolio securities.
NET ASSET VALUE
In calculating net asset value, portfolio securities listed or traded on
national securities exchanges, or reported by the NASDAQ National Market
reporting system, are valued at the last sale price, or, if there have been no
sales on that day, at the mean of the current bid and ask price which represents
the current value of the security. Over-the-counter securities are valued at the
mean of the current bid and ask price.
Securities that are primarily traded on foreign exchanges generally are valued
at the preceding closing values of such securities on their respective
exchanges, except that when an occurrence subsequent to the time a value was so
established is likely to have changed such value, then the fair value of those
securities will be determined by consideration of other factors by or under the
direction of each Company's Board of Directors or its delegates. In valuing
assets, prices denominated in foreign currencies are converted to U.S. dollar
equivalents at the current exchange rate. Securities may be valued by
independent pricing services which use prices provided by market-makers or
estimates of market values obtained from yield data relating to instruments or
securities with similar characteristics. Short-term obligations with maturities
of 60 days or less are valued at amortized cost, which constitutes fair value as
determined by the Board of Directors. Amortized cost involves valuing an
instrument at its original cost to a fund and thereafter assuming a constant
amortization to maturity of any discount or premium, regardless of the impact of
fluctuating interest rates on the market value of the instrument. All other
securities and other assets of a fund will be valued at fair value as determined
in good faith pursuant to procedures adopted by the Board of Directors of the
applicable fund.
As stated in the Prospectus, Money Market Fund seeks to maintain a net asset
value of $1.00 per share with respect to the fund and, values the fund's
instruments on the basis of amortized cost pursuant to Rule 2a-7 under the 1940
Act. While this method provides certainty in valuation, it may result in periods
during which value, as determined by amortized cost, is higher or lower than the
price the fund would receive if it sold the instrument. During such periods the
yield to investors in the fund may differ somewhat from that obtained in a
similar company which uses market values for all its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher) aggregate
portfolio value on a particular day, a prospective investor in the fund would be
able to obtain a somewhat higher (lower) yield than would result from investment
in such a similar company, and existing investors would receive less (more)
investment income. The purpose of using the amortized cost method of calculation
is to attempt to maintain a stable net asset value per share of $1.00.
The Board of Directors of Series Funds has established procedures applicable to
Money Market Fund, reasonably designed, taking into account current market
conditions and Money Market Fund's investment objective, to stabilize the net
asset value per share as computed for the purposes of sales and redemptions at
$1.00. These procedures include periodic review, as the Board of Directors deems
appropriate and at such intervals as are reasonable in light of current
47
<PAGE>
market conditions, of the amortized cost value per share and net asset value per
share based upon available indications of market value.
In the event of a deviation of 1/2 of 1% between Money Market Fund's net asset
value based upon available market quotations or market equivalents and $1.00 per
share based on amortized cost, the Board of Directors will promptly consider
what action, if any, should be taken. The Board of Directors will also take such
action as they deem appropriate to eliminate or to reduce to the extent
reasonably practicable any material dilution or other unfair result which might
arise from differences between the two. Such action may include redemption in
kind, selling instruments prior to maturity to realize capital gains or losses
or to shorten the average maturity, withholding dividends, or utilizing a net
asset value per share as determined by using available market quotations.
TAXES
TAXATION OF A FUND
The following discussion is a brief summary of certain additional tax
considerations affecting a fund and its shareholders. No attempt is made to
present a detailed explanation of all federal, state, local and foreign tax
concerns that may be applicable to the funds or to all categories of investors,
some of which may be subject to special tax rules. The discussions set forth
here and in the Prospectus do not constitute tax advice. Investors are urged to
consult their own tax advisers with specific questions relating to federal,
state, local or foreign taxes.
Each fund has elected and intends to continue to qualify to be treated as a
regulated investment company ('RIC') under Subchapter M of the Code.
Qualification as a RIC requires, among other things, that a fund: (a) derive at
least 90% of its gross income in each taxable year from dividends, interest,
payments with respect to securities loans and gains from the sale or other
disposition of stock or securities, or other income (including gains from
options, futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each quarter of each taxable year, (i) at least
50% of the market value of a fund's assets is represented by cash, cash items,
United States government securities, securities of other RICs and other
securities, with such other securities limited, in respect of any one issuer, to
an amount not greater than 5% of the value of a fund's assets and 10% of the
outstanding voting securities of such issuer, and (ii) not more than 25% of the
value of its assets is invested in the securities of any one issuer (other than
United States government securities or the securities of other RICs).
As a RIC, a fund will not be subject to federal income tax on its investment
company taxable income, as that term is defined in the Code, determined without
regard to the deduction for dividends paid) and 'net capital gain' (the excess
of the fund's net long-term capital gain over net short-term capital loss), if
any, that it distributes in each taxable year to its shareholders, provided that
the fund distributes at least 90% of the sum of its investment company taxable
income and any net tax-exempt interest for such taxable year in accordance with
the Code's timing and other requirements. Investment company taxable income
generally includes a fund's taxable net investment income plus the excess, if
any, of its net short-term capital gain over its long-term capital loss.
However, a fund would be subject to corporate income tax (currently at a maximum
rate of 35%) on any undistributed net investment income and net capital gain.
Each fund expects to designate amounts retained as undistributed capital gain in
a notice to its shareholders who (i) will be required to include in income for
United States federal income tax purposes, as long-term capital gain, their
proportionate shares of the undistributed amount, (ii) will be entitled to
credit their proportionate shares of the 35% tax paid by a fund on the
undistributed amount against their federal income tax liabilities and to claim
refunds to the extent such credits exceed their liabilities and (iii) will be
entitled to increase their tax basis, for federal income tax purposes, in their
shares by an amount equal to 65% of the amount of undistributed net capital gain
included in the shareholder's income. Money Market Fund does not expect to
recognize any net capital gain.
48
<PAGE>
A fund will be subject to a nondeductible 4% excise tax to the extent that it
does not distribute by the end of each calendar year: (a) at least 98% of its
ordinary income for such calendar year; (b) at least 98% of its capital gain net
income (the excess of its capital gains over its capital losses) for the one
year period ending, as a general rule, on October 31 of each year; and (c) 100%
of the undistributed income and gains from the preceding calendar year (if any)
pursuant to the calculations in (a) and (b). For this purpose any income or gain
retained by a fund that is subject to corporate income tax will be considered to
have been distributed by year-end.
Emerging Markets Debt Fund and High Yield Bond Fund may each engage in hedging
or derivatives transactions involving foreign currencies, forward contracts,
options and futures contracts (including options, futures and forward contracts
on foreign currencies) and short sales. Such transactions will be subject to
special provisions of the Code that, among other things, may affect the
character of gains and losses realized by a fund (that is, may affect whether
gains or losses are ordinary or capital and, if capital, whether long-term or
short-term), accelerate recognition of income of a fund and defer recognition of
certain of a fund's losses. These rules could therefore affect the character,
amount and timing of distributions to shareholders. In addition, these
provisions (1) will require a fund to 'mark-to-market' certain types of
positions in its portfolio each year (that is, treat them as if they were closed
out) and (2) may cause a fund to recognize income or gain without receiving cash
with which to pay dividends or make distributions in amounts necessary to
satisfy the distribution requirement for RIC qualification and avoid both the
corporate level tax and the 4% excise tax. Each fund intends to monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any option,
futures contract, forward contract or hedged investment in order to mitigate the
effect of these rules.
A fund will monitor its transactions in such options and contracts and may make
certain other tax elections in order to mitigate the effect of the above rules
and to prevent disqualification of the fund as a RIC under Subchapter M of the
Code.
A fund may make investments that produce income that is not matched by a
corresponding cash distribution to the fund, such as investments in pay-in-kind
bonds, zero-coupon securities or other obligations, such as certain Brady Bonds,
having original issue discount (i.e., an amount generally equal to the excess of
the stated redemption price of the security at maturity over its issue price),
or market discount (i.e., an amount generally equal to the excess of the stated
redemption price or revised issue price of the security over the basis of such
bond immediately after it was acquired) if the fund elects to accrue market
discount on a current basis. In addition, income may continue to accrue for
federal income tax purposes with respect to a non-performing investment. Any
such income would be treated as income earned by a fund and therefore would be
subject to the distribution requirements of the Code. Because such income may
not be matched by a corresponding cash distribution to a fund, the fund may be
required to borrow money or dispose of other securities to be able to make
distributions to its investors. In addition, if an election is not made to
currently accrue market discount with respect to a market discount bond, all or
a portion of any deduction for any interest expense incurred to purchase or hold
such bond may be deferred until such bond is sold or otherwise disposed of.
If Emerging Markets Debt Fund or High Yield Bond Fund acquires an equity
interest in certain foreign investment entities, referred to as 'passive foreign
investment companies,' the fund itself may be subject to U.S. federal income tax
and an additional charge in the nature of interest on a portion of any 'excess
distribution' from such company or gain from the disposition of its equity
interest, even if the distribution or gain is distributed by the fund to its
shareholders in a manner that satisfies the requirements referred to above. If
the fund were able and elected to treat a passive foreign investment company as
a 'qualified electing fund,' in lieu of the treatment described above, the fund
would be required each year to include in income, and distribute to shareholders
in accordance with the distribution requirements referred to above, the fund's
pro rata share of the ordinary earnings and net capital gains of the company,
whether or not actually received by the fund. The fund generally should be able
to make an alternative election to mark
49
<PAGE>
these investments to market annually, resulting in the recognition of ordinary
income (rather than capital gain) or ordinary loss, subject to certain
limitations on the ability to use any such loss.
Under Section 988 of the Code, gains or losses attributable to fluctuations in
exchange rates between the time Emerging Markets Debt Fund or High Yield Bond
Fund accrues income or receivables or expenses or other liabilities denominated
in a foreign currency and the time the fund actually collects such income or
pays such liabilities are generally treated as ordinary income or loss.
Similarly, gains or losses on foreign currency, foreign currency forward
contracts, certain foreign currency options or futures contracts and the
disposition of debt securities denominated in foreign currency, to the extent
attributable to fluctuations in exchange rates between the acquisition and
disposition dates, are also treated as ordinary income or loss.
Each fund is permitted to carry forward any unused capital losses to be utilized
to offset capital gains realized during the eight-year period following the year
in which the losses arose, which will reduce the net realized capital gains (if
any) required to be distributed to shareholders for those years.
At December 31, 1999 Money Market Fund had net capital loss carry-forwards
available to offset future gains of $2,034, of which $616 expires on
December 31, 2004, $333 expires on December 31, 2005, and $1,748 expires on
December 31, 2006. At February 28, 2000, the High Yield Fund and the Emerging
Market Debt Fund had a net capital loss carry-forward of $112,289 and
$6,128,591, respectively.
A fund may be subject to certain taxes, including without limitation, taxes
imposed by foreign countries with respect to its income and capital gains. If
Emerging Markets Fund qualifies as a RIC and more than 50% of the value of the
fund's total assets at the close of any taxable year consists of stock or
securities of foreign corporations, which for this purpose may include
obligations of foreign governmental issuers, the fund may elect, for United
States federal income tax purposes, to treat any foreign country's income or
withholding taxes paid by the fund that can be treated as income taxes under the
United States income tax principles, as paid by its shareholders. High Yield
Bond Fund and Money Market Fund will generally not satisfy the 50% requirement
for making this election and therefore will be unable to make it.
For any year that Emerging Markets Debt Fund makes such an election, each
shareholder in such fund will be required to include in its income an amount
equal to his or her allocable share of qualified income taxes paid by such fund
to a foreign country's government and shareholders will be entitled, subject to
certain holding period requirements and other limitations, to credit their
portions of these amounts against their United States federal income tax due, if
any, or to deduct their portions from their United States taxable income, if
any. No deductions for foreign taxes paid by such fund may be claimed, however,
by non-corporate shareholders (including certain foreign shareholders described
below) who do not itemize deductions. Shareholders that are exempt from tax
under Section 501(a) of the Code, such as pension plans, generally will derive
no benefit from this election. However, such shareholders should not be
disadvantaged either because the amount of additional income they are deemed to
receive equal to their allocable share of such foreign countries' income taxes
paid by such fund generally will not be subject to United States federal income
tax.
TAXATION OF UNITED STATES SHAREHOLDERS
The Prospectus describes each fund's policy with respect to distribution of net
investment income and any net capital gains. Investors (except in the case of
Money Market Fund) should consider the tax implications of buying shares just
prior to a distribution. Although the price of shares purchased at that time may
reflect the amount of the forthcoming distribution, those purchasing just prior
to a distribution will receive a distribution which will nevertheless be taxable
to them.
Shareholders receiving a distribution in the form of additional shares will be
treated for federal income tax purposes as receiving a distribution in an amount
equal to the amount of cash that would have been received had they elected to
receive cash and will have a cost basis in each
50
<PAGE>
share received equal to such amount divided by the number of shares received.
Shareholders will be notified annually as to the federal tax status of
distributions.
Gain or loss on the redemption, exchange or other disposition of fund shares
that is treated as a sale under the Code will result in capital gain or loss to
shareholders who hold their fund shares as capital assets. Generally,
transactions in shares of Money Market Fund are not expected to result in gains
or losses, except to the extent that any sales charge is imposed on the
redemption of certain shares acquired in an exchange from another fund in which
such a charge is applied. Generally, a shareholder's capital gain or loss will
be long-term gain or loss if the shares have been held for more than one year.
In general, the maximum federal income tax rate imposed on long-term capital
gain of individuals with respect to mutual fund shares held for more than one
year is 20%. Not later than 60 days after the close of its taxable year the fund
will provide its shareholders with a written notice designating the amounts of
any ordinary income dividends or capital gain dividends. The maximum federal
income tax rate imposed on individuals with respect to net realized short-term
capital gain (which is taxed at ordinary income rates) will be 39.6%. With
respect to corporate taxpayers, long-term capital gain is taxed at the same
federal income tax rates as ordinary income and short-term capital gain, the
maximum being 35%. If a shareholder redeems or exchanges shares of a fund before
he or she has held them for more than six months, any allowable capital loss on
such redemption or exchange will be treated as a long-term capital loss to the
extent of any capital gain dividends received by the shareholder (or credited to
the shareholder as an undistributed capital gain) with respect to such shares.
Additionally, any loss realized on a redemption or exchange of fund shares
generally will be disallowed under 'wash sale' rules to the extent the shares
disposed of are replaced with other shares of the same fund within a period of
61 days beginning 30 days before and ending 30 days after such disposition, such
as pursuant to reinvestment of dividends in fund shares.
If, for any full fiscal year, a fund's total distributions exceed its investment
company taxable income and net capital gain, the excess distributions generally
will be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. In the event a fund distributes a return of capital in excess of a
shareholder's adjusted basis, the excess amount will generally be taxable as
capital gain.
Dividend and/or capital gain distributions will be reinvested automatically in
additional shares of a fund at net asset value and such shares will be
automatically credited to a shareholder's account, unless a shareholder elects
to receive either dividends or capital gains distributions in cash.
All dividends and distributions to shareholders will be taxable to shareholders
as ordinary income or long-term capital gain, whether paid in cash or reinvested
in additional shares. For federal income tax purposes, distributions from
investment company taxable income and from net tax-exempt interest, if any, are
taxable to shareholders as ordinary income. A portion of High Yield Bond Fund's
dividends may qualify for the dividends received deduction available to
corporations to the extent it receives dividends from U.S. corporations and
satisfies certain holding period and other requirements.
Availability of the deduction to corporate shareholders is also subject to
holding period requirements, limitations on debt financing, and other tax
consequences. Dividends from the other funds will generally not qualify for the
dividends-received deduction.
A fund's distributions from its net capital gain that it properly designates as
'capital gain dividends' are taxable to shareholders as long-term capital gain,
without regard to how long they have held their fund shares. Capital gain
dividends do not qualify for any dividends-received deduction.
Generally, shareholders will be taxable on dividends or distributions in the
year of receipt. However, if a fund declares a dividend or distribution in
October, November or December to shareholders of record on a specified date in
such a month which is actually paid during the following January, it will be
deemed to have been received by the shareholders on December 31 of the year in
which the dividend or distribution is declared.
51
<PAGE>
Each fund may be required to withhold federal income tax at a rate of 31%
('backup withholding') from dividends (including capital gain dividends) and,
except in the case of Money Market Fund, redemption proceeds paid to
shareholders who fail to provide certain information or certifications or are
otherwise subject to backup withholding. This tax may be withheld from dividends
if (i) the payee fails to furnish the fund with the payee's correct and, when
required, properly certified taxpayer identification number (e.g., an
individual's social security number), (ii) the Internal Revenue Service ('IRS')
or a broker notifies the Fund that the payee has failed to report properly
certain interest and dividend income to the IRS and to respond to notices to
that effect, or (iii) when required to do so, the payee fails to certify that he
or she is not subject to backup withholding. Backup withholding is not an
additional tax and any amounts withheld may be credited against the
shareholder's federal income tax liability.
Depending on the residence of the shareholder for tax purposes, distributions
may also be subject to state and local taxes or, for certain foreign investors,
other federal withholding taxes. Statements detailing the tax status of each
shareholders' dividends and distributions will be mailed annually.
The foregoing is intended to be general information to shareholders and
potential investors in a fund and does not constitute tax advice. Shareholders
and potential investors should consult their own tax advisers regarding federal,
state, local and foreign tax consequences of ownership of shares in a fund.
PERFORMANCE DATA
From time to time, a fund may quote its 'yield,' 'effective yield,' 'average
annual total return' and/or 'aggregate total return' in advertisements or in
reports and other communications to shareholders and compare its performance
figures to those of other funds or accounts with similar objectives and to
relevant indices. Such performance information will be calculated as described
below.
Total return figures show the average annual percentage change in value of an
investment in a fund from the beginning date of the measuring period to the end
of the measuring period. These figures reflect changes in the price of the
shares and assume that any income dividends and/or capital gains distributions
made by a fund during the period were reinvested in shares of the same fund.
Standardized total return is calculated in accordance with the SEC's formula.
Nonstandardized total return differs from the standardized total return only in
that it may relate to a nonstandard period or is presented in the aggregate
rather than as an annual average.
Total return figures will be given for the most current one-, five- and ten-year
periods, or the life of a fund to the extent it has not been in existence for
any such periods, and may be given for other periods as well, such as on a
year-by-year basis. When considering average total return figures for periods
longer than one year, it is important to note that the total return for any one
year in the period might have been greater or less than the average for the
entire period. 'Aggregate total return' figures may be used for various periods,
representing the cumulative change in value of an investment in fund shares for
the specific period (again reflecting changes in share prices and assuming
reinvestment of dividends and distributions). Aggregate total return may be
shown by means of schedules, charts or graphs and may indicate subtotals of the
various components of total return (i.e., change in the value of initial
investment, income dividends and capital gains distributions).
52
<PAGE>
AVERAGE ANNUAL TOTAL RETURN
A fund's 'average annual total return' figures, as described and shown in the
Prospectus, are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1+T)'pp'n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 payment made at the
beginning of a 1-, 5-, or 10-year period at the end of such period (or
fractional portion thereof), assuming reinvestment of all dividends and
distributions.
The performance data represents past performance; investment returns and
principal value of an investment will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
The following table sets forth the average annual total return for Emerging
Markets Debt Fund, High Yield Bond Fund and Money Market Fund for certain
periods of time ending February 29, 2000 and December 31, 1999, respectively (in
each case, after management fee waiver and reimbursement of certain expenses).
<TABLE>
<CAPTION>
YEAR ENDED FIVE YEARS ENDED FROM INCEPTION
FUND FEBRUARY 29, 2000 FEBRUARY 28, 2000 FEBRUARY 29, 2000(1),(2)
---- ----------------- ----------------- ------------------------
<S> <C> <C> <C>
Emerging Markets Debt Fund............... 40.36% n/a 9.95%
High Yield Bond Fund..................... - 3.72% n/a 5.66%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FIVE YEARS ENDED FROM INCEPTION
DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999(3)
----------------- ----------------- --------------------
<S> <C> <C> <C>
Money Market Fund........................ 5.23% 5.32% 4.69%
</TABLE>
(1) Emerging Markets Debt Fund's inception was October 17, 1996
(2) High Yield Bond Fund's inception was May 15, 1996
(3) Money Market Fund's inception was December 7, 1990
AGGREGATE TOTAL RETURN
The 'aggregate total return' figures for a fund, as described in the Prospectus,
represent the cumulative change in the value of an investment in fund shares of
such class for the specified period and are computed by the following formula:
AGGREGATE TOTAL RETURN = ERV-P
-----
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment made
at the beginning of a 1-, 5-, or 10-year period at the end of such
period (or fractional portion thereof), assuming reinvestment of
all dividends and distributions.
The following table sets forth the aggregate total return for Emerging Markets
Debt Fund, High Yield Bond Fund and Money Market Fund for certain periods of
time ending February 29, 2000, and December 31, 1999, respectively (in each
case, after management fee waiver and reimbursement of certain expenses).
<TABLE>
<CAPTION>
YEAR ENDED FIVE YEARS ENDED FROM INCEPTION
FUND FEBRUARY 29, 2000 FEBRUARY 28, 2000 FEBRUARY 29, 2000(1),(2)
---- ----------------- ----------------- ------------------------
<S> <C> <C> <C>
Emerging Markets Debt Fund............... 40.36% n/a 37.67%
High Yield Bond Fund..................... - 3.72% n/a 23.21%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED FIVE YEARS ENDED FROM INCEPTION
FUND DECEMBER 31, 1999 DECEMBER 31, 1999 DECEMBER 31, 1999(3)
---- ----------------- ----------------- --------------------
<S> <C> <C> <C>
Money Market Fund........................ 5.23% 29.56% 51.46%
</TABLE>
(1) Emerging Markets Debt Fund's inception was October 17, 1996
(2) High Yield Bond Fund's inception was May 15, 1996
(3) Money Market Fund's inception was December 7, 1990
53
<PAGE>
YIELD
With respect to Money Market Fund, yield quotations are expressed in annualized
terms and may be quoted on a compounded basis.
The current yield for Money Market Fund is computed by (a) determining the net
change in the value of a hypothetical pre-existing account in the fund having a
balance of one share at the beginning of a seven calendar day period for which
yield is to be quoted; (b) dividing the net change by the value of the account
at the beginning of the period to obtain the base period return; and (c)
annualizing the results (i.e., multiplying the base period return by 365/7). The
net change in the value of the account reflects the value of additional shares,
but does not include realized gains and losses or unrealized appreciation and
depreciation. In addition, the Money Market Fund may calculate a compound
effective annualized yield by adding 1 to the base period return (calculated as
described above), raising the sum to a power equal to 365/7 and subtracting 1.
For the seven-day period ended December 31, 1999, the annualized yield and
effective yield of the Money Market Fund were 6.01% and 6.20%, respectively.
In periods of declining interest rates Money Market Fund's yield will tend to be
somewhat higher than prevailing market rates on short-term obligations, and in
periods of rising interest rates the fund's yield will tend to be somewhat
lower. Also, when interest rates are falling, the inflow of net new money to
Money Market Fund from the continuous sale of shares will likely be invested in
portfolio instruments producing lower yields than the balance of the fund's
portfolio, thereby reducing the fund's current yield. In periods of rising
interest rates, the opposite can be expected to occur.
Any quotation of performance stated in terms of yield will be given no greater
prominence than the information prescribed under SEC rules. In addition, all
advertisements containing performance data of any kind will include a legend
disclosing that such performance data represents past performance and that the
investment return and principal value of an investment will fluctuate so that an
investor's shares, when redeemed, may be worth more or less than their original
cost.
Furthermore, in reports or other communications to shareholders or in
advertising materials, performance of fund shares may be compared with that of
other mutual funds or classes of shares of other mutual funds, as listed in the
rankings prepared by Lipper Analytical Services, Inc. or similar independent
services that monitor the performance of mutual funds, financial indices such as
the S&P 500 Index or other industry or financial publications including, but not
limited to, Bank Rate Monitor, Barron's, Business Week, CDA Investment
Technologies, Inc., Changing Times, Forbes, Fortune, ICB/Donoghue's Money Fund
Report, Institutional Investor, Investors Daily, Money, Morningstar Mutual Fund
Values, The New York Times, USA Today and The Wall Street Journal. The yield of
the Money Market Fund may also be compared to yields set forth in the weekly
statistical release H.15(519) or the monthly statistical release designated
G.13(415) published by the Board of Governors of the Federal Reserve System.
A fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and operating expenses.
Consequently, any given performance quotation should not be considered
representative of the performance of fund shares for any specified period in the
future. Because performance will vary, it may not provide a basis for comparing
an investment in fund shares with certain bank deposits or other investments
that pay a fixed return for a stated period of time. Investors comparing a
fund's performance with that of other mutual funds should give consideration to
the nature, quality and maturity of the respective investment companies'
portfolio securities and market conditions. An investor's principal is not
guaranteed by any fund.
OTHER INFORMATION ABOUT THE FUNDS
Capital Stock. As used in the Prospectus and this SAI, the term 'majority,' when
referring to the approvals to be obtained from shareholders in connection with
matters affecting a particular fund or any other single portfolio (e.g.,
approval of investment management contracts), means the vote of the lesser of:
(i) 67% of the shares of the portfolio represented at a meeting if the holders
of more than 50% of the outstanding shares of the portfolio are present in
person or by proxy; or
54
<PAGE>
(ii) more than 50% of the outstanding shares of the portfolio. Shareholders are
entitled to one vote for each full share held and fractional votes for
fractional shares held.
Each fund share is entitled to such dividends and distributions out of the
income earned on the assets belonging to that fund as are declared in the
discretion of the fund's Board of Directors.
In the event of the liquidation or dissolution of the Institutional Series funds
or Series funds, as the case may be, shares of a fund are entitled to receive
the assets attributable to it that are available for distribution, and a
proportionate distribution, based upon the relative net assets of a fund, of any
general assets not attributable to a fund that are available for distribution.
Shareholders are not entitled to any preemptive rights. All shares, when issued,
will be fully paid, non-assessable, fully transferable and redeemable at the
option of the holder.
Custodian. PNC Bank, N.A. currently serves as custodian for Money Market Fund
and High Yield Bond Fund. The Chase Manhattan Bank, N.A. ('Chase') serves as
custodian for Emerging Markets Debt Fund ('PNC' and together with Chase in such
capacity, the 'Custodian'). The Custodian, among other things: maintains a
custody account or accounts in the name each fund; receives and delivers all
assets for the fund upon purchase and upon sale or maturity; collects and
receives all income and other payments and distributions on account of the
assets of the fund; and makes disbursements on behalf of the fund. The custodian
does not determine the investment policies of a fund, nor decide which
securities a fund will buy or sell. For its services, the Custodian receives a
monthly fee based upon the daily average market value of securities held in
custody and also receives securities transaction charges, including
out-of-pocket expenses. The assets of each fund are held under bank
custodianship in compliance with the 1940 Act. A fund may also periodically
enter into arrangements with other qualified custodians with respect to certain
types of securities or other transactions such as repurchase agreements or
derivatives transactions.
Transfer Agent. PFPC Global Fund Services, Inc. ('PFPC'), located at P.O.
Box 9764, Providence, RI 02940-9764, serves as each fund's transfer agent. As
the fund's transfer agent, PFPC: 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, PFPC receives a monthly fee.
Independent Accountants. PricewaterhouseCoopers LLP serves as each fund's
independent accountants. PricewaterhouseCoopers provides audit services, tax
return preparation and assistance and consultation in connection with review of
SEC filings. The financial statements and financial highlights included or
incorporated by reference in the Prospectus and incorporated by reference in
this SAI have been incorporated by reference in reliance upon the report of
PricewaterhouseCoopers given on the authority of that firm as experts in
auditing and accounting. PricewaterhouseCoopers' address is 1177 Avenue of the
Americas, New York, New York 10036.
Counsel. Simpson Thacher & Bartlett serves as counsel to each fund, and is
located at 425 Lexington Avenue, New York, New York 10017-3909.
Piper Marbury Rudnick & Wolfe LLP of Baltimore, Maryland has issued an opinion
regarding the valid issuance of shares being offered for sale pursuant to the
funds' Prospectus.
Financial Statements. The audited financial statements for Money Market Fund for
the fiscal year ended December 31, 1999 as well as the audited financial
statements for High Yield Bond Fund and Emerging Markets Debt Fund for the
fiscal year ended February 28, 2000 are incorporated herein by reference.
55
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S, S&P AND FITCH WITH RESPECT TO
BONDS AND COMMERCIAL PAPER APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
Aaa -- Bonds which are rated 'Aaa' are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edged.' Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective elements
are likely to change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa -- Bonds which are rated 'Aa' are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds because margins of protection may not be as large as in Aaa
securities or fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risk appear
somewhat larger than the Aaa securities.
A -- Bonds which are rated 'A' possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving security
to principal and interest are considered adequate but elements may be present
which suggest a susceptibility to impairment some time in the future.
Baa -- Bonds which are rated 'Baa' are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Ba -- Bonds which are rated 'Ba' are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position,
characterizes bonds in this class.
B -- Bonds which are rated 'B' generally lack characteristics of the desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa -- Bonds which are rated 'Caa' are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal or
interest.
Ca -- Bonds which are rated 'Ca' represent obligations which are speculative to
a high degree. Such issues are often in default or have other marked
shortcomings.
C -- Bonds which are rated 'C' are the lowest rated class of bonds and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
Moody's applies numerical modifiers '1', '2' and '3' in each generic rating
classification from Aa to Caa. The modifier '1' indicates that the security
ranks in the higher end of its generic rating category; the modifier '2'
indicates a mid-range ranking; and the modifier '3' indicates that the issue
ranks in the lower end of its generic rating category.
S&P CORPORATE BOND RATINGS
AAA -- This is the highest rating assigned by Standard & Poor's to a debt
obligation and indicates an extremely strong capacity to repay principal and pay
interest.
AA -- Bonds rated 'AA' also qualify as high-quality debt obligations. Capacity
to repay principal and interest is very strong, and differs from 'AAA' issues
only in small degree.
A-1
<PAGE>
A -- Bonds rated 'A' have a strong capacity to repay principal and pay interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than debt in higher rated categories.
BBB -- Bonds rated 'BBB' are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher rated categories.
BB-B-CCC-CC-C -- Bonds rated 'BB', 'B', 'CCC' and 'C' are regarded, on balance,
as predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposures to adverse conditions.
CI -- Bonds rated 'CI' are income bonds on which no interest is being paid.
D -- Bonds rated 'D' are in default. The 'D' category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The 'D' rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set both above may be modified by the addition of a plus or minus to
show relative standing within the major rating categories.
MOODY'S COMMERCIAL PAPER RATINGS
PRIME-1 -- Issuers (or related supporting institutions) rated 'Prime-1' have a
superior ability for repayment of short-term debt obligations. 'Prime-1'
repayment ability will often be evidenced by leading market positions in
well-established industries, high rates of return on funds employed,
conservative capitalization structures with moderate reliance on debt and ample
asset protection, broad margins in earnings coverage of fixed financial charges
and high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
PRIME-2 -- Issuers (or related supporting institutions) rated 'Prime-2' have a
strong ability for repayment of short-term obligations. This will normally be
evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratio, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternative liquidity is maintained.
PRIME-3 -- Issuers (or related supporting institutions) rated 'Prime-3' have an
acceptable ability for repayment of senior short-term debt obligations. The
effect of industry characteristics and market compositions may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and may require relatively high
financial leverage. Adequate alternate liquidity is maintained.
NOT PRIME -- Issuers rated 'Not Prime' do not fall within any of the Prime
rating categories.
S&P COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely repayment of debt having an original maturity of no more than 365 days.
Ratings are graded into several categories, ranging from 'A-1' for the highest
quality obligations to 'D' for the lowest. The categories are as follows:
A-1 -- This highest category indicates that the degree of safety regarding
timely payment is strong. Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+) sign designation.
A-2
<PAGE>
A-2 -- Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated 'A-1.'
A-3 -- Issues carrying this designation have adequate capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
B -- Issues rated 'B' are regarded as having only speculative capacity for
timely payment.
C -- This rating is assigned to short-term debt obligations with a doubtful
capacity for payment.
D -- Debt Rated 'D' is in payment default. The 'D' rating category is used when
interest payments or principal payments are not made on the date due, even if
the applicable grace period has not expired, unless S&P believes that such
payments will be made during such grace period.
MOODY'S MUNICIPAL BOND RATINGS
Aaa -- Bonds which are rated Aaa are judged to be of the best quality and carry
the smallest degree of investment risk. Interest payments are protected by a
large or by an exceptionally stable margin, and principal is secure. While the
various protective elements are likely to change, such changes as can be
visualized are most unlikely to impair the fundamentally strong position of such
issues.
Aa -- Bonds which are rated Aa are judged to be of high-quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements pursuant
which make the long term risks appear somewhat larger than in Aaa securities.
A -- Bonds which are rated A possess many favorable investment qualities and are
to be considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate but elements may be present which
suggest a susceptibility to impairment sometime in the future.
Baa -- Bonds which are rated Baa are considered as medium grade obligations,
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Moody's applies numerical modifiers '1', '2' and '3' to certain of its rating
classifications. The modifier '1' indicates that the security ranks in the
higher end of its generic rating category; the modifier '2' indicates a
mid-range ranking; and the modifier '3' indicates that the issue ranks in the
lower end of its generic rating category.
S&P MUNICIPAL BOND RATINGS
AAA -- is the highest rating assigned by S&P to a debt obligation and indicates
an extremely strong capacity to pay principal and interest.
AA -- Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong, and in the majority of instances they
differ from AAA issues only in small degrees.
A -- Bonds rated A have a strong capacity to pay principal and interest,
although they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB -- Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay principal and interest for bonds in
this category than for bonds in the A category.
A-3
<PAGE>
The ratings set forth above may be modified by the addition of a plus or minus
to show relative standing within the major rating categories.
MOODY'S RATINGS OF STATE AND MUNICIPAL NOTES
MIG-1/VMIG-1 -- Notes rated MIG-1/VMIG-1 are of the best quality. There is
present strong protection by established cash flows, superior liquidity support
or broad-based access to the market for refinancing.
MIG-2/VMIG-2 -- Notes which are rated MIG-2/VMIG-2 are of high-quality. Margins
of protection are ample though not so large as in the preceding group.
S&P RATINGS OF STATE AND MUNICIPAL NOTES
SP-1 -- Notes which are rated SP-1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to possess overwhelming safety
characteristics will be given a plus (+) designation.
SP-2 -- Notes which are rated SP-2 have a satisfactory capacity to pay principal
and interest.
FITCH MUNICIPAL BOND RATINGS
AAA -- Bonds rated AAA by Fitch are considered to be investment grade and of the
highest credit quality. The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be affected by reasonably
foreseeable events.
AA -- Bonds rated AA by Fitch are considered to be investment grade and of very
high credit quality. The obligor's ability to pay interest and repay principal
is very strong, although not quite as strong as bonds rated AAA. Because bonds
rated in the AAA and AA categories are not significantly vulnerable to
foreseeable future developments, short-term debt of these issues is generally
rated F-1+ by Fitch.
A -- Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position of a
credit within a rating category. Plus and minus signs, however, are not used in
the AAA category.
FITCH SHORT-TERM RATINGS
Fitch short-term ratings apply, to debt obligations that are payable on demand
or have original maturities of, generally, up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on the
existence of liquidity necessary to meet the issuer's obligations in a timely
manner.
FITCH'S SHORT-TERM RATINGS ARE AS FOLLOWS:
F-1+ -- Issues assigned this rating are regarded as having the strongest degree
of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance of timely payment only
slightly less in degree than issues rated F-1+.
A-4
<PAGE>
F-2 -- Issues assigned this rating have a satisfactory degree of assurance for
timely payment but the margin of safety is not as great as for issues assigned
F-1+ and F-1 ratings.
F-3 -- Issues assigned this rating have characteristics suggesting that the
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.
LOC -- The symbol LOC indicates that the rating is based on a letter of credit
issued by a commercial bank.
Like higher rated bonds, bonds rated in the Baa or BBB categories are considered
to have adequate capacity to pay principal and interest. However, such bonds may
have speculative characteristics, and changes in economic conditions or other
circumstances are more likely to lead to a weakened capacity to make principal
and interest payments than is the case with higher grade bonds.
After purchase by a fund, a security may cease to be rated or its rating may be
reduced below the minimum required for purchase by such fund. Neither event will
require a sale of such security by a fund. However, SBAM will consider such
event in its determination of whether such fund should continue to hold the
security. To the extent the ratings given by Moody's or S&P may change as a
result of changes in such organizations or their rating systems, a fund will
attempt to use comparable ratings as standards for investments in accordance
with the investment policies contained in this Prospectus and in the Statement
of Additional Information.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
A-5
STATEMENT OF DIFFERENCES
------------------------
The dagger symbol shall be expressed as ............................... 'D'
Characters normally expressed as superscript shall be preceded by...... 'pp'
