SMITH BARNEY MONEY FUNDS, INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
April 30, 1998
Smith Barney Money Funds, Inc. is a money market
fund that invests in high quality money market
instruments. The Fund seeks to provide:
Daily Income
Convenience
Daily Liquidity
Stability of Net Asset Value
Shares of the Fund are currently offered in three Portfolios:
Cash Portfolio
Government Portfolio
Retirement Portfolio
This Statement of Additional information is not a Prospectus.
It is intended to provide more detailed information about Smith
Barney Money Funds, Inc. (the "Fund") as well as matters already
discussed in the Prospectus and therefore should be read in
conjunction with the April 30, 1998 Prospectus which may be
obtained from the Fund or a Smith Barney Financial Consultant.
TABLE OF CONTENTS
Statement of Additional Information Page
Directors and Officers 2
Investment Restrictions and Fundamental Policies 4
Computation of Yield 7
Valuation of Shares and Amortized Cost Valuation 7
IRA and Other Prototype Retirement Plans 8
Purchase of Shares 9
The Management Agreement, Plan of Distribution and Other
Services 9
Voting Rights 11
Custodian, Transfer and Dividend Disbursing Agents 13
Independent Auditors 13
Financial Statements 13
Appendix - Securities Ratings 14
DIRECTORS AND OFFICERS
DONALD R. FOLEY, Director
Retired; 3668 Freshwater Drive, Jupiter, Florida 33477. Director
of ten investment companies associated with Smith Barney.
Formerly Vice President of Edwin Bird Wilson, Incorporated
(advertising); 75.
PAUL HARDIN, Director
Professor of Law at University of North Carolina at Chapel Hill;
12083 Morehead, Chapel Hill, North Carolina 27514; Director of
twelve investment companies associated with Smith Barney; Director
of The Summit Bancorporation; Formerly, Chancellor of the
University of North Carolina at Chapel Hill, University of North
Carolina; 66.
*HEATH B. McLENDON, Chairman of the Board, President and Chief
Executive Officer
Managing Director of Smith Barney; Director of forty-two
investment companies associated with Smith Barney; Director and
President of Mutual Management Corp. ("MMC or the "Manager")
(formerly known as Smith Barney Mutual Funds Management Inc.) and
Travelers Investment Adviser, Inc. ("TIA"); Chairman of the Board
of Smith Barney Strategy Advisors Inc.; Prior to July 1993, Senior
Executive Vice President of Shearson Lehman Brothers Inc., Vice
Chairman of Shearson Asset Management, Director of PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited; 64.
RODERICK C. RASMUSSEN, Director
Investment Counselor; 9 Cadence Court, Morristown, New Jersey
07960. Director of ten investment companies associated with Smith
Barney. Formerly Vice President of Dresdner and Company Inc.
(investment counselors); 71.
JOHN P. TOOLAN, Director
Retired; 13 Chadwell Place, Morristown, New Jersey 07960.
Director of ten investment companies associated with Smith Barney.
Formerly, Director and Chairman of Smith Barney Trust Company,
Director of Smith Barney Holdings Inc. and the Manager and Senior
Executive Vice President, Director and Member of the Executive
Committee of Smith Barney; 67.
LEWIS E. DAIDONE, Senior Vice President and Treasurer
Managing Director of Smith Barney; Senior Vice President and
Treasurer of forty-two investment companies associated with Smith
Barney; Director and Senior Vice President of the Manager and TIA;
40.
PHYLLIS M. ZAHORODNY, Vice President and Investment Officer
Managing Director of Smith Barney; Prior to August, 1993, Managing
Director and Portfolio Manager of Shearson Lehman Brothers Inc.;
39.
MARTIN R. HANLEY, Investment Officer
Vice President of Smith Barney; Prior to August, 1993, Vice
President and Senior Trader of Shearson Lehman Brothers; 31.
__________________
* Designates a director who is an "interested person" of the Fund,
as defined under the Investment Company Act of 1940.
IRVING DAVID, Controller and Assistant Secretary
Vice President of Smith Barney and the Manager; Controller of 2
investment companies associated with Smith Barney. Prior to March,
1994, Assistant Treasurer of First Investment Management Company;
36.
CHRISTINA T. SYDOR, Secretary
Managing Director of Smith Barney; Secretary of forty-two
investment companies associated with Smith Barney; Secretary and
General Counsel of the Manager and TIA; 47.
The business address of each of the officers of the Fund
listed above is 388 Greenwich Street, New York, NY 10013. Such
persons are compensated by Smith Barney and are not separately
compensated by the Fund. On April 3, 1998, directors and officers
owned in the aggregate less than 1% of the outstanding securities
of each Portfolio.
The following table shows the compensation paid by the Fund
to each director during the Fund's last fiscal year. None of the
officers of the Fund received any compensation from the Fund for
such period. Officers and interested directors of the Fund are
compensated by Smith Barney.
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Number
Pension or of Funds
Retirement for Which
Benefits Person
Accrued as Total Serves
Aggregate Part of Compensation Within
Name Compensation Fund's from Fund Fund
of Person From the Fund Expenses Complex Complex
<S> <C> <C> <C> <C>
Joseph H. Fleiss**+ $32,984.00 $0 $54,900 10
Donald R. Foley** 33,084.00 0 55,400 10
Paul Hardin 33,084.00 0 73,000 12
Francis P. Martin** 32,784.00 0 53,000 10
Heath B. McLendon* 0 0 0 42
Roderick C. Rasmussen 33,084.00 0 55,400 10
John P. Toolan** 33,084.00 0 55,400 10
</TABLE>
________________________________________
* Designates a director who is an "interested person" of the
Fund.
** Pursuant to a deferred compensation plan, the indicated persons
elected to defer the following amounts of their compensation from
the Fund: Joseph H. Fleiss: $15,642, Donald R. Foley: $15,642,
Francis P. Martin: $32,784 and John P. Toolan: $33,084, and the
following amounts of their total compensation from the Fund
Complex: Joseph H. Fleiss: $21,000, Donald R. Foley: $21,000,
Francis P. Martin: $53,000 and John P. Toolan: $55,400
+ Effective January 1, 1998, Mr. Fleiss became a Director Emeritus.
Upon attainment of age 72 the Fund's current Directors may elect
to change to emeritus status. Any directors elected or appointed
to the Board of Directors in the future will be required to
change to emeritus status upon attainment of age 80. Directors
Emeritus are entitled to serve in emeritus status for a maximum
of 10 years during which time they are paid 50% of the annual
retainer fee and meeting fees otherwise applicable to the Fund's
directors, together with reasonable out-of-pocket expenses for
each meeting attended. During the Fund's last fiscal year,
aggregate compensation from the Fund to Emeritus Directors
totaled $16,292.
INVESTMENT RESTRICTIONS AND FUNDAMENTAL POLICIES
The Portfolios are subject to following restrictions and
policies that are "fundamental," which means that they cannot be
changed without approval by a "vote of a majority of the
outstanding voting securities" of a Portfolio affected by the
change, as defined in the Investment Company Act of 1940 (the
"Act") and in accordance with Rule 18f-2 thereunder (see "Voting
Rights"). The Portfolios are subject to other restrictions and
policies that are "non-fundamental" and which may be changed by
the Fund's Board of Directors without shareholder approval,
subject to any applicable disclosure requirements.
Fundamental Policies - All Portfolios. Without the approval of a
majority of its outstanding voting securities, no Portfolio may:
1. invest in a manner that would cause it to fail to be a
"diversified company" under the 1940 Act and the rules,
regulations and orders thereunder. (However, since each of
the Portfolios operates as money market fund under Rule 2a-7
under the Act, compliance with Rule 2a-7 is deemed to
satisfy the diversification requirements otherwise
applicable to diversified investment companies under the
1940 Act.)
2. issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as
permitted under the 1940 Act and the rules, regulations and
orders thereunder.
3. borrow money, except that (a) the Portfolio may borrow from
banks for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities,
and (b) the Portfolio may, to the extent consistent with its
investment policies, enter into reverse repurchase
agreements, forward roll transactions and similar investment
strategies and techniques. To the extent that it engages in
transactions described in (a) and (b), the Portfolio will be
limited so that no more than 33 -1/3% of the value of its
total assets (including the amount borrowed), valued at the
lesser of cost or market, less liabilities (not including
the amount borrowed) valued at the time the borrowing is
made, is derived from such transactions.
4. make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the Portfolio may
invest consistent with its investment objectives and
policies; (b) repurchase agreements; and (c) loans of its
portfolio securities, to the fullest extent permitted under
the 1940 Act.
5. purchase or sell real estate, real estate mortgages, real
estate investment trust securities, commodities or commodity
contracts, but this restriction shall not prevent the Fund
from (a) investing in securities of issuers engaged in the
real estate business or the business of investing in real
estate (including interests in limited partnerships owning
or otherwise engaging in the real estate business or the
business of investing in real estate) and securities which
are secured by real estate or interests therein; (b) holding
or selling real estate received in connection with
securities it holds or held; or (c) trading in futures
contracts and options on futures contracts (including
options on currencies to the extent consistent with the
Portfolio's investment objective and policies).
Additional Fundamental Policies - Cash and Retirement Portfolios.
In addition to the fundamental policies stated above for all
Portfolios:
1. Neither the Cash Portfolio nor the Retirement Portfolio may
invest less than 25% of its assets in bank obligations
(including both domestic and foreign bank obligations) and
reserves freedom of action to concentrate in securities
issued or guaranteed as to principal and interest by the
U.S. government, its agencies and instrumentalities.
Nonfundamental Policies. As a nonfundamental policy, no Portfolio
may:
1. purchase any securities on margin (except for such short-
term credits as are necessary for the clearance of purchases
and sales of portfolio securities) or sell any securities
short (except "against the box"). For purposes of this
restriction, the deposit or payment by the Portfolio of
underlying securities and other assets in escrow and
collateral agreements with respect to initial or maintenance
margin in connection with futures contracts and related
options and options on securities, indexes or similar items
is not considered to be the purchase of a security on
margin;
2. invest in securities of other investment companies except as
may be acquired as part of a merger, consolidation, or
acquisition of assets;
3. purchase or otherwise acquire any security if, as a result,
more than 10% of its net assets would be invested in
securities that are illiquid;
4. invest in oil and gas interests;
5. invest in any company for the purpose of exercising control;
6. write or purchase put or call options.
All of the foregoing restrictions that are stated in terms
of percentages will apply at the time an investment is made; a
subsequent increase or decrease in the percentage that may result
from changes in values or net assets will not result in a
violation of the restriction. Notwithstanding any of the
foregoing investment restrictions, each of the Cash Portfolio, the
Government Portfolio and the Retirement Portfolio may invest up to
100% of its assets in U.S. Government Obligations.
Reverse Repurchase Agreements. The Government Portfolio may
invest 1/3 of its total assets in reverse repurchase agreements and
to enter into reverse repurchase agreements with broker/dealers and
other financial institutions including the Fund's custodian. Such
agreements involve the sale of portfolio securities with an
agreement to repurchase the securities at an agreed-upon price,
date and interest payment and have the characteristics of
borrowing. Since the proceeds of borrowings under reverse
repurchase agreements are invested, this would introduce the
speculative factor known as "leverage." Such transactions are only
advantageous if the Government Portfolio has an opportunity to earn
a greater rate of interest on the cash derived from the transaction
than the interest cost of obtaining that cash. Opportunities to
realize earnings from the use of the proceeds equal to or greater
than the interest required to be paid may not always be available,
and the Fund intends to use the reverse repurchase technique only
when the Manager believes it will be advantageous to the Government
Portfolio. The use of reverse repurchase agreements may exaggerate
any interim increase or decrease in the value of the Government
Portfolio's assets. The Fund's custodian bank will maintain a
separate account for the Government Portfolio with securities
having a value equal to or greater than such commitments.
Time Deposits. The Cash Portfolio and the Retirement
Portfolio may invest in fixed time deposits with an ultimate
maturity of not more than six months. In addition, each of these
Portfolios currently intends to limit investment in fixed time
deposits with a maturity of two business days or more, when
combined with other illiquid assets of the Portfolio, to not more
than 10% of its assets would be invested in all such instruments.
Fixed time deposits, unlike negotiable certificates of deposit,
generally do not have a market and may be subject to penalties for
early withdrawal of funds.
Asset-Backed Securities. The Cash and Retirement Portfolios
may invest in asset-backed securities arising through the grouping
by governmental, government-related and private organization of
loans, receivables and other assets originated by various lenders.
Interests in pools of these assets differ from other forms of debt
securities, which normally provide for periodic payment of interest
in fixed amounts with principal paid at maturity or specified call
dates. Instead, asset-backed securities provide periodic payments
which generally consist of both interest and principal payments.
The estimated life of an asset-backed security varies with
the prepayment experience with respect to the underlying debt
instruments. The rate of such prepayments, and hence the life of
an asset-backed security, will be primarily a function of current
market interest rates, although other economic and demographic
factors may be involved. For example, falling interest rates
generally result in an increase in the rate of prepayments of
mortgage loans while rising interest rates generally decrease the
rate of prepayments. An acceleration in prepayments in response to
sharply falling interest rates will shorten the security's average
maturity and limit the potential appreciation in the security's
value relative to a conventional debt security. In periods of
sharply rising rates, prepayments generally slow, increasing the
security's average life and its potential for price depreciation.
Illiquid and Restricted Securities. Each Portfolio may
purchase securities that are not registered ("restricted
securities") under the Securities Act of 1933, as amended (the
"1933 Act"), but can be offered and sold to "qualified
institutional buyers" under Rule 144A under the 1933 Act ("Rule
144A"). Each Portfolio may also invest a portion of its assets in
illiquid investments, which include repurchase agreements maturing
in more than seven days. The Board of Directors may determine,
based upon a continuing review of the trading markets for the
specific restricted security, that such restricted securities are
liquid. The Board of Directors has adopted guidelines and
delegated to management the daily function of determining and
monitoring liquidity of restricted securities available pursuant to
Rule 144A. The Board, however, retains sufficient oversight and is
ultimately responsible for the determinations. Since it is not
possible to predict with assurance exactly how the market for Rule
144A restricted securities will develop, the Board will monitor
each Portfolio's investments in these securities, focusing on such
important factors, among others, as valuation, liquidity and
availability of information. Investments in restricted securities
could have the effect of increasing the level of illiquidity in a
Portfolio to the extent that qualified institutional buyers become
for a time uninterested in purchasing these restricted securities.
The Portfolios may also purchase restricted securities that are
not registered under Rule 144A.
The Articles of Incorporation of the Fund permit the Board of
Directors to establish additional Portfolios of the Fund from time
to time. The investment restrictions applicable to any such
additional Portfolio would be established by the Board of Directors
at the time such Portfolio were established and may differ from
those set forth above. In the event of the liquidation or
dissolution of a Portfolio or of the Fund, shares of a Portfolio
are entitled to receive the assets belonging to that Portfolio and
a proportionate distribution of any general assets not belonging to
any particular Portfolio that are available for distribution based
upon the relative net assets of the respective Portfolios.
COMPUTATION OF YIELD
For the seven-day period ended December 31, 1997, the yield
for the Cash Portfolio was 5.09% (the effective yield was 5.22%)
for Class A shares, 5.15% (the effective yield was 5.28%) for Class
C shares, and 5.30% (the effective yield was 5.45%) for Class Y
shares, with an average dollar-weighted portfolio maturity of 73
days; the yield for the Government Portfolio was 5.08% (the
effective yield was 5.20%) for the Class A and Class C shares and
5.19% (the effective yield was 5.33%) for the Class Y shares with
an average dollar-weighted maturity of 68 days; and the yield for
the Retirement Portfolio was 5.04% (the effective yield was 5.17%)
with an average dollar-weighted portfolio maturity of 65 days. The
Fund quotes current yield of each Portfolio and class by dividing
the net change in the value of a hypothetical pre-existing account
having a balance of one share at the beginning of a recent seven-
day base period by the value of the account at the beginning of the
base period and multiplying this base period return by 365/7. (Net
change in account value being the value of additional shares
purchased with dividends from original shares and dividends
declared on both original shares and any additional shares, but
does not include any changes in unrealized appreciation or
depreciation.) In addition, for each Portfolio and class the Fund
may from time to time quote effective yield figures assuming the
compounding of dividends. The effective yield will be slightly
higher than the yield because of the compounding effect. The Fund
also quotes for each Portfolio and class the average dollar-
weighted portfolio maturity for the corresponding seven-day period.
Although principal is not insured and there can be no
assurance that a $1.00 per share net asset value will be
maintained, it is not expected that the net asset value of any
Portfolio's shares will fluctuate because the Fund uses the
amortized cost method of valuation. (See "Valuation of Shares"
below.) Investors should bear in mind that yield is a function of
the type, quality and maturity of the instruments in a Portfolio,
and the Portfolio's operating expenses. While current yield
information may be useful, investors should realize that each
Portfolio's current yield will fluctuate, is not necessarily
representative of future results and may not provide a basis for
comparison with bank deposits or other investments that pay a fixed
yield for a stated period of time.
VALUATION OF SHARES AND AMORTIZED COST VALUATION
The Prospectus states that net asset value will be determined
on any day the New York Stock Exchange is open and that the net
asset value may be determined on any day that the settlement of
securities otherwise occurs. The New York Stock Exchange is closed
on the following holidays: New Year's Day, President's Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day.
The Fund uses the "amortized cost method" for valuing
portfolio securities pursuant to Rule 2a-7 under the Act. The
amortized cost method of valuation of the Fund's portfolio
securities involves valuing a security at its cost at the time of
purchase and thereafter assuming a constant amortization to
maturity of any discount from or premium to the stated principal
amount of the security, regardless of the impact of fluctuating
interest rates its market value. The market value of portfolio
securities will fluctuate on the basis of the creditworthiness of
the issuers of such securities and with changes in interest rates
generally. While the amortized cost 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
Portfolio would receive if it sold the instrument. During such
periods the yields to investors in the Fund may differ somewhat
from that obtained in a similar company that uses mark-to-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 similar company, and existing investors
would receive less (more) investment income.
The purpose of this method of valuation is to attempt to
maintain a constant net asset value per share, and it is expected
that the price of the Fund's shares will remain at $1.00; however,
shareholders should be aware that despite procedures that will be
followed to have a stabilized price, including maintaining a
maximum dollar-weighted average portfolio maturity of 90 days and
investing in securities with remaining maturities of only 13 months
or less, there is no assurance that at some future date there will
not be a rapid change in prevailing interest rates, a default by an
issuer or some other event that could cause the Fund's price per
share to change from $1.00.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust
agreements have been approved by the Internal Revenue Service and
are available from the Fund or Smith Barney; investors should
consult with their own tax or retirement planning advisors prior to
the establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA
The Small Business Job Protection Act of 1996 changed the
eligibility requirements for participants in Individual Retirement
Accounts ("IRAs"). Under these new provisions, if you or your
spouse have earned income, each of you may establish an IRA and
make maximum annual contributions equal to the lesser of earned
income or $2,000. As a result of this legislation, married couples
where one spouse is non-working may now contribute a total of
$4,000 annually to their IRAs.
The Taxpayer Relief Act of 1997 has changed the requirements
for determining whether or not you are eligible to make a
deductible IRA contribution. Under the new rules effective January
1, 1998, if you are considered an active participant in an
employer-sponsored retirement plan, you may still be eligible for a
full or partial deduction depending upon your combined adjusted
gross income ("AGI"). For married couples filing jointly, a full
deduction is permitted if your combined AGI is $50,000 or less
($30,000 for unmarried individuals); a partial deduction will be
allowed when AGI is between $50,000-$60,000 ($30,000-$40,000 for an
unmarried individual); and no deduction when AGI is $60,000 or more
($40,000 for an unmarried individual). However, if you are married
and your spouse is covered by a employer-sponsored retirement plan,
but you are not, you will be eligible for a full deduction if your
combined AGI is $150,000 or less. A partial deduction is permitted
if your combined AGI is between $150,000-$160,000 and no deduction
is permitted after $160,000.
A Rollover IRA is available to defer taxes on lump sum
payments and other qualifying rollover amounts (no maximum)
received from another retirement plan.
An employer who has established a Simplified Employee Pension
- - IRA ("SEP-IRA") on behalf of eligible employees may make a
maximum annual contribution to each participant's account of 15%
(up to $24,000) of each participant's compensation. Compensation
is capped at $160,000 for 1998.
Paired Defined Contribution Prototype
Corporations (including Subchapter S corporations) and non-
corporate entities may purchase shares of the Fund through the
Smith Barney Prototype Paired Defined Contribution Plan (the
"Prototype"). The Prototype permits adoption of profit-sharing
provisions, money purchase pension provisions, or both, to provide
benefits for eligible employees and their beneficiaries. The
Prototype provides for a maximum annual tax deductible contribution
on behalf of each Participant of up to 25% of compensation, but not
to exceed $30,000 (provided that a money purchase pension plan or
both a profit-sharing plan and a money purchase pension plan are
adopted thereunder).
PURCHASE OF SHARES
Letter of Intent - Class Y Shares. A Letter of Intent may
be used as a way for investors to meet the minimum investment
requirement for Class Y shares. Such investors must make an
initial minimum purchase of $5,000,000 in Class Y shares of the
Fund and agree to purchase a total of $15,000,000 of Class Y
Shares of the Fund within 13 months from the date of the Letter.
If a total investment of $15,000,000 is not made within the 13-
month period, all Class Y shares purchased during such period will
be transferred to Class A shares, where they will be subject to
all fees (including a service fee of 0.25%) and expenses
applicable to the Fund's Class A shares, which may include a CDSC
of 1.00%. Please contact a Smith Barney Financial Consultant or
the Transfer Agent for further information.
THE MANAGEMENT AGREEMENT, PLAN OF DISTRIBUTION AND OTHER SERVICES
Manager
MMC manages the day to day operations of each Portfolio
pursuant to management agreements entered into by the Fund on
behalf of each Portfolio. Under the management agreements, the
Manager offers each Portfolio advice and assistance with respect to
the acquisition, holding or disposal of securities and
recommendations with respect to other aspects of the business and
affairs of each Portfolio. It also furnishes each Portfolio with
executive and other personnel; management, bookkeeping, accounting
and administrative services; office space and equipment; and the
services of the officers and employees of the Fund. MMC is a
subsidiary of Salomon Smith Barney Holdings, Inc., which is a
subsidiary of Travelers Group Inc. ("Travelers"), a publicly owned
financial services company.
For the years 1995, 1996 and 1997, the management fee for the
Cash Portfolio was $85,620,015, $103,013,084 and $117,380,871,
respectively; the management fee for the Government Portfolio was
$17,222,206, $18,688,740 and $19,475,520, respectively, and for the
Retirement Portfolio was $5,043,576, $5,588,496 and $5,982,179,
respectively.
The respective Portfolios' management agreements, which were
approved by their shareholders on September 16, 1994 and became
effective on November 21, 1994, provide for daily compensation of
the Manager at the following annual rates: (1) Cash Portfolio -
0.45% on the first $6 billion of the Portfolio's net assets, 0.425%
on the next $6 billion, 0.40% on the next $6 billion and 0.35% on
net assets in excess of $18 billion; (2) Government Portfolio -
0.45% on the first $2.5 billion of the Portfolio's net assets,
0.40% on the next $2.5 billion and 0.35% on net assets in excess of
$5 billion; and (c) Retirement Portfolio - 0.45% on the first $1
billion of the Portfolio's net assets, 0.40% on the next $1 billion
and 0.35% on net assets in excess of $2 billion.
Each Portfolio's management agreement further provides that
all other expenses not specifically assumed by the Manager under
the agreement are borne by the Fund. Expenses payable by the Fund
include, but are not limited to, all charges of custodians
(including sums as custodian and sums for keeping books, performing
portfolio valuations, and for rendering other services to the Fund)
and shareholder servicing agents, filing fees and expenses relating
to the registration and qualification of the Fund's shares under
Federal or state securities laws and maintaining such registrations
and qualifications (including the printing of the Fund's
registration statements and prospectuses), expenses of preparing,
printing and distributing all proxy material, reports and notices
to shareholders, out-of-pocket expenses of directors and fees of
directors who are not "interested persons" as defined in the Act,
fees of auditors and legal counsel, interest, taxes, fees and
commissions of every kind, expenses of issue, repurchase or
redemption of shares, and all other costs incident to the Fund's
corporate existence and extraordinary expenses such as litigation
and indemnification expenses. Direct expenses are charged to the
relevant Portfolio; general corporate expenses of the Fund are
allocated among all the Portfolios on the basis of relative net
assets. No sales or promotion expenses are incurred by the Fund,
but expenses incurred in complying with laws regulating the issue
or sale of the Fund's shares are not deemed sales or promotion
expenses.
The Manager has agreed that if in any fiscal year the total
expenses of any Portfolio, exclusive of taxes, brokerage, interest
and extraordinary expenses, exceed 0.70% of the average daily net
assets for that fiscal year of the Portfolio, the Manager will
reduce its fee to the extent of such excess, or reimburse any such
excess amount to the relevant Portfolio. The 0.70% voluntary
expense limitation shall be in effect until it is terminated by 14
days' written notice to shareholders and by supplement to the then
current prospectus.
Each Portfolio's management agreement will continue in effect
if specifically approved annually by a majority of the directors of
the Fund, including a majority of the directors who are not parties
to such contract or "interested persons" of any such party. Each
agreement may be terminated without penalty by either of the
parties on 60 days' written notice and must terminate in the event
of its assignment. It may be amended or modified only if approved
by vote of the holders of "a majority of the outstanding voting
securities" of such Portfolio as defined in the Act and Rules
thereunder which is discussed below under "Voting Rights."
Each agreement provides that the Manager is not liable for
any act or omission in the course of or in connection with
rendering services under the agreement in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of
its obligations or duties.
On April 6, 1998, Travelers announced that it had entered into
a Merger Agreement with Citicorp. The transaction, which is
expected to be completed during the third quarter of 1998, is
subject to various regulatory approvals, including approval by the
Federal Reserve Board. The transaction is also subject to approval
by the stockholders of each of Travelers and Citicorp. Upon
consummation of the merger, the surviving corporation would be a
bank holding company subject to regulation under the Bank Holding
Company Act of 1956 (the "BHCA"), the requirements of the Glass-
Steagall Act and certain other laws and regulations. Although the
effects of the merger of Travelers and Citicorp and compliance with
the requirements of the BHCA and the Glass-Steagall Act are still
under review, MMC does not believe that its compliance with
applicable law following the merger of Travelers and Citicorp will
have a material adverse effect on its ability to continue to
provide the Fund with the same level of investment advisory
services that it currently receives.
Plan of Distribution
The Fund has adopted for each Portfolio a plan of
distribution pursuant to Rule 12b-1 under the Act (the "Plan")
under which a service fee is paid by each of Class A and Class C to
Smith Barney for shares of the Portfolios attributable to Smith
Barney at an annual rate of 0.10% of such Class A shares' average
daily net assets. See "Distributor" in the Prospectus. In
addition, the Plan provides for a service fee to be paid to PFS
Distributors, Inc. by each Class A share held in accounts
attributable to PFS Distributors, Inc. at an annual rate of 0.10%
of such Class A shares average daily net assets.
Brokerage
The Manager places orders for the purchase and sale of
securities for the Portfolios of the Fund. All of the Fund's
portfolio transactions have been principal transactions with major
dealers in money market instruments, on which no brokerage
commissions are paid. Purchases from or sales to dealers serving
as market-makers include the spread between the bid and asked
prices. No portfolio transactions are handled by Smith Barney.
VOTING RIGHTS
As permitted by Maryland law, there will normally be no
meetings of shareholders for the purpose of electing directors
unless and until such time as less than a majority of the directors
holding office have been elected by shareholders. At that time,
the directors then in office will call a shareholders' meeting for
the election of directors. The directors must call a meeting of
shareholders for the purpose of voting upon the question of removal
of any director when requested in writing to do so by the record
holders of not less than 10% of the outstanding shares of the fund.
At such a meeting, a director may be removed after the holders of
record of not less than a majority of the outstanding shares of the
Fund have declared that the director be removed either by
declaration in writing or by votes cast in person or by proxy.
Except as set forth above, the directors shall continue to hold
office and may appoint successor directors.
Rule 18f-2 under the Act provides that any matter required to
be submitted by the provisions of the Act or applicable state law,
or otherwise, to the holders of the outstanding voting securities
of an investment company shall not be deemed to have been
effectively acted upon unless approved by "vote of a majority of
the outstanding voting securities" (as defined below) of each
Portfolio or class affected by the matter. Rule 18f-2 further
provides that a Portfolio or class shall be deemed to be affected
by a matter unless it is clear that the interests of each Portfolio
or class in a matter are identical or that the matter does not
affect any interest of the Portfolio or class. Under the Rule the
approval of a management agreement or any change in a fundamental
investment policy would be effectively acted upon with respect to a
Portfolio only if approved by a majority of the outstanding voting
securities of the Portfolio affected by the matter. The Rule,
however, also provides that the ratification of independent public
accountants, the election of directors, and the approval of a
distribution agreement that is submitted to shareholders are not
subject to the separate voting requirements and may be effectively
acted upon by a vote of the holders of a majority of all Fund
shares voting without regard to Portfolio.
As used in the Prospectus and this Statement of Additional
Information, a "vote of a majority of the outstanding voting
securities" means the affirmative vote of the lesser of (a) more
than 50% of the outstanding shares of the Fund (or the affected
Portfolio or class) or (b) 67% or more of such shares present at a
meeting if more than 50% of the outstanding shares of the Fund (or
the affected Portfolio or class) are represented at the meeting in
person or by proxy.
Following are the names, addresses and percent of ownership
of each person who owns of record or is known by the Fund to own of
record of beneficially 5% or more of any Class of a Portfolio as of
April 3, 1998:
Cash Portfolio Class C Shares
Frontier Trust Company as TTEE, Laser Technologies Employees
401K Plan, PO Box 190, Exton, PA, 19341 owned of record 57,691.74
shares (12.60%); Frontier Trust Company as TTEE, Mens Apparel
Guild in California, Attn.: Joe Loggia, 6200 Canoga Avenue, Suite
303, Woodland Hills, CA 91367, owned of record 57,292.37 shares
(12.51%); Frontier Trust Company as TTEE, Greenhill & Co. 401K
Plan, 31 West 52nd Street, New York, NY 10101 owned of record
49,140.04 shares (10.73%); Frontier Trust Company as TTEE, Sioux
City Tent & Awning Co. Inc., DBA Mullin Awning & Siding 401k Plan,
811 Steuben Street, Sioux City, IA 51101 owned of record 33,120.24
shares (7.23%); Health Partners of Philadelphia Inc., Zubair M.
Ali, 23 Sumac Court, Newark, DE 19702 owned of record 32,902.68
shares (7.19%); Frontier Trust Company as TTEE, Northstar
Sportswear Company 401K Plan, PO Box 569, Kingston, WA 98346 owned
of record 32,176.58 shares (7.03%); Frontier Trust Company as
TTEE, Peer Bearing Company Union Employees Money Purchase Plan, 241
W Palatine Road, Wheeling, IL 60090 owned of record 28,031.47
shares (6.12%); Tanco Engineering Inc. C/O Leggette & Co., Attn.:
Mary V. Boggs, 4131 N. Central Expressway, Suite 1100, Dallas, TX
owned of record 27,214.94 shares (5.94%); Frontier Trust Company as
TTEE, Medford Electrical Contracting Corp., Attn.: John B.
Giacalone, 1011 Fellsway, Medford, MA 02155 owned of record
23,701.39 shares (5.18%).
Cash Portfolio Class Y Shares
Cogen Tech Financial Ser. LP, Attn.: Dick Lydecker, 711
Louisiana Street, 33rd Floor, Houston, TX 77002 owned of record
10,000,000.00 shares (20.35%); Jay Norton Zidell TTEE, FBO Jay
Norton Zidell Trust, U/A/D 11/01/91, 6900 SE Riverside Drive #27,
Vancouver, WA 98664 owned of record 8,521,301.07 shares (17.33%);
Cynthia L. Ulstron, 5141 N. Alto Lane, Oak Harbor, WA 98277 owned
of record 4,694,705.79 shares (9.55%); Rooke Corp., D/B/A Aviation
Equipment Inc., Attn.: Jim Shaw V.P./CFO, 7230 Fulton Avenue, North
Hollywood, CA 91605 owned of record 4,396,561.06 shares (8.94%);
Patricia E. Rodeheaver TTEE, FBO Patricia E. Rodeheaver U/A/D
5/11/90, 1 Lakeridge Lane, Warrentown, MO 63383 owned of record
4,282,787.74 (8.71%); Edward W. Machala, PO Box 568, Exeter, RI
02822 owned of record 3,013,131.84 (6.13%); QAD Inc., Attn.:
Treasury, 6450 Via Real, Carpinteria, CA 93013 owned of record
2,946,028.55 shares (5.99%).
Cash Portfolio Class Z Shares
Citibank NA TTEE, Travelers Group Inc. Master TR, 401K
Savings Plan, Attn.: Nancy Kronenberg, 111 Wall Street, New York,
NY 10005 owned of record 2,787,477.55 shares (99.79%).
Government Portfolio Class C Shares
Jerry L. Calkins, Smith Barney Inc. Rollover Custodian, 8694
W. 101 Street, Overland Park, KS 66212 owned of record 61,745.47
shares (25.56%); Frontier Trust Company as TTEE, Southern Floral
Company, PO Box 1313, Houston, TX 77251 owned of record 37,261.43
shares (15.43%); H. Walker Harris MD, Smith Barney Inc. Rollover
Custodian, 2860 Cromwell Drive, Columbus, GA 31906 owned of record
25,138.11 shares (10.41%); Terry Donofrio, Smith Barney Inc. IRA
Custodian, 21 Glenair Avenue, Waldwick, NJ 07463 owned of record
22,507.03 shares (9.32%); Henry N. Hand, 18 Chestnut Oak Drive,
Cape May Court House, NJ 08210 owned of record 18,074.92 shares
(7.48%); James F. Burgess Jr., M. Kathleen Burgess JTWROS, 5901
Lakeshore Drive, Columbia, SC 29206 owned of record 17,451.50
shares (7.22%); Ward G. Pennebaker, Smith Barney Inc. Sep.
Custodian. 7510 Inwood, Houston, TX 77063 owned of record
16,199.88 shares (6.70%).
Government Portfolio Class Y Shares
Rodney A. Hanes Jr., 364 Laurel Road, New Canaan Court 06840
owned or record 8,078,970.19 shares (50.95%); William M. Haber, 54
Wilton Road, Westport, CT 06880 owned of record 5,453,177.94
shares (34.39%); James E. Smith and Jeralyn K. Talcott JTWROS,
Main Court, 2525 Trumble Creek Road, Kalispell, MT 59901 owned of
record 1,110,389.27 shares (7.00%).
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING AGENTS
PNC Bank, National Association, a national banking
association with offices at 17th and Chestnut Streets,
Philadelphia, Pennsylvania (the "Custodian") serves as custodian of
the Fund's investments. First Data Investor Services Group, Inc.,
Exchange Place, Boston, Massachusetts 02109 serves as the Fund's
dividend disbursing and transfer agent.
INDEPENDENT AUDITORS
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, has been selected as independent auditors for the Fund for
its fiscal year ending December 31, 1998 to examine and report on
their examination of the financial statements and financial
highlights of the Fund.
FINANCIAL STATEMENTS
The following financial information is hereby incorporated by
reference to the Fund's 1997 Annual Report to Shareholders, a copy
of which is furnished with this Statement of Additional
information:
Pages in
Annual Report
Statements of Assets and Liabilities
17
Statements of Operations 18
Statement of Changes in Net Assets
19-21
Notes to Financial Statements
22-26
Financial Highlights 27-29
Independent Auditors' Report
30
APPENDIX - SECURITIES RATINGS
BOND (AND NOTES) RATINGS
Moody's Investors Service, Inc.
Aaa - Bonds that 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 that 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 that make
the long term risks appear somewhat larger than in "Aaa"
securities.
Note: The modifier 1 indicates that the security ranks
in the higher end of its generic rating category; the
modifier 2 indicates a mid-range ranking; and the modifier 3
indicates that the issue ranks in the lower end of its
generic rating category.
Standard & Poor's Rating Group
AAA - Debt rated "AAA" has the highest rating assigned
by Standard & Poor's. Capacity to pay interest and repay
principal is extremely strong.
AA - Debt rated "AA" has a very strong capacity to pay
interest and repay principal and differs from the highest
rated issues only in small degree.
Plus (+) or Minus (-): The rating of "AA" may be
modified by the addition of a plus or minus sign to show
relative standing within the major rating categories.
Provisional Ratings: The letter "p" indicates that the
rating is provisional. A provisional rating assumes the
successful completion of the project being financed by the
debt being rated and indicates that payment of debt service
requirements is largely or entirely dependent upon the
successful and timely completion of the project. This
rating, however, while addressing credit quality subsequent
to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such
completion. The investor should exercise judgment with
respect to such likelihood and risk.
L - The letter "L" indicates that the rating pertains
to the principal amount of those bonds where the underlying
deposit collateral is fully insured by the Federal Savings &
Loan Insurance Corp. or the Federal Deposit Insurance Corp.
- Continuance of the rating is contingent upon S&P's
receipt of closing documentation confirming investments and
cash flow.
* - Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow agreement.
Fitch IBCA, Inc.
AAA - Bonds rated AAA by Fitch have the lowest
expectation of credit risk. The obligor has an exceptionally
strong capacity for timely payment of financial commitments
which is highly unlikely to be adversely affected by
foreseeable events.
AA - Bonds rated AA by Fitch have a very low
expectation of credit risk. They indicate very strong
capacity for timely payment of financial commitments. This
capacity is not significantly vulnerable to foreseeable
events.
Plus (+) Minus (-): Plus and minus signs are used with
a rating symbol to indicate the relative position of a credit
within the rating category. Plus and minus signs, however,
are not used in the "AAA" category.
COMMERCIAL PAPER RATINGS
Moody's Investors Service, Inc.
Issuers rated "Prime-1" (or related supporting
institutions) have a superior capacity for repayment of
short-term promissory obligations. Prime-1 repayment will
normally be evidenced by the following characteristics:
leading market positions in well-established industries; high
rates of return on funds employed; conservative
capitalization structures with moderated reliance on debt and
ample asset protection; broad margins in earnings coverage of
fixed financial changes and high internal cash generation;
well-established access to a range of financial markets and
assured sources of alternate liquidity.
Issuers rated "Prime-2" (or related supporting
institutions) have strong capacity for repayment of short-
term promissory obligations. This will normally be evidenced
by many of the characteristics cited above but to a lesser
degree. Earnings trends and coverage rations, while sound,
will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity
is maintained.
Standard & Poor's Ratings Group
A-1 - This designation indicates that the degree of
safety regarding timely payment is either overwhelming or
very strong. Those issuers determined to possess
overwhelming safety characteristics will be denoted with a
plus (+) sign designation.
A-2 - Capacity for timely payment on issues with this
designation is strong. However, the relative degree of
safety is not as high as for issues designated A-1.
Fitch IBCA, Inc.
Fitch's short-term ratings apply to debt obligations
that are payable on demand or have original maturities of
generally up to three years, including commercial paper,
certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a
long-term rating on the existence of liquidity necessary to
meet financial commitment in a timely manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as
having the strongest capacity for timely payments of
financial commitments. The "+" denotes an exceptionally
strong credit feature.
F1 - Issues assigned this rating are regarded as having
the strongest capacity for timely payment of financial
commitments.
F2 - Issues assigned this rating have a satisfactory
capacity for timely payment of financial commitments, but the
margin of safety is not as great as in the case of the higher
ratings.
Duff & Phelps Inc.
Duff 1+ - Indicates the highest certainty of timely
payment: short-term liquidity is clearly outstanding, and
safety is just below risk-free United States Treasury short-
term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment:
liquidity factors and company fundamentals are sound.
The Thompson BankWatch ("TBW")
TBW-1 - Indicates a very high degree of
likelihood that principal and interest will be paid on
a timely basis.
TBW-2 - while the degree of safety regarding
timely repayment of principal and interest is strong,
the relative degree of safety is not as high as for
issues rated TBW-1.
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