PROSPECTUS JULY 29, 1997
Smith Barney Municipal Money Market Fund, Inc.
388 Greenwich Street
New York, New York 10013
800-451-2010
Smith Barney Municipal Money Market Fund, Inc. (the "Fund") seeks to
provide its shareholders with income exempt from Federal income tax from a
portfolio of high quality short-term municipal obligations selected for
liquidity and stability of principal.
SHARES OF THE FUND ARE NOT INSURED OR GUARANTEED BY THE U.S. GOVERNMENT.
THERE IS NO ASSURANCE THAT THE FUND WILL BE ABLE TO MAINTAIN A STABLE NET ASSET
VALUE OF $1.00 PER SHARE.
This Prospectus sets forth concisely certain information about the Fund,
including service fees and expenses, that prospective investors will find
helpful in making an investment decision. Investors are encouraged to read this
Prospectus carefully and retain it for future reference.
Additional information about the Fund is contained in a Statement of
Additional Information dated July 29, 1997, as amended or supplemented from time
to time, that is available upon request and without charge by calling or writing
the Fund at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant. The Statement of Additional Information has
been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
FEE TABLE 3
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FINANCIAL HIGHLIGHTS 4
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INVESTMENT OBJECTIVE AND POLICIES 6
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RISK AND PORTFOLIO MANAGEMENT 9
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VALUATION OF SHARES 11
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DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES 11
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PURCHASE OF SHARES 13
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REDEMPTION OF SHARES 15
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EXCHANGE PRIVILEGE 19
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MINIMUM ACCOUNT SIZE 22
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YIELD INFORMATION 23
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MANAGEMENT OF THE FUND 23
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DISTRIBUTOR 25
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ADDITIONAL INFORMATION 25
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</TABLE>
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
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FEE TABLE
The following expense table lists the costs and expenses that an investor
will incur either directly or indirectly as a shareholder of the Fund, based on
its operating expenses for its most recent fiscal year:
SMITH BARNEY MUNICIPAL MONEY MARKET FUND, INC.
<TABLE>
<CAPTION>
CLASS A SHARES CLASS C SHARES* CLASS Y SHARES
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<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Charge Imposed on Purchases None None None
Deferred Sales Charge None** None* None
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ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees 0.47% 0.47% 0.47%
12b-1 Fees 0.10 0.10 --
Other Expenses 0.10 0.10 0.10
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Total Fund Operating Expenses 0.67% 0.67% 0.57%
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</TABLE>
* Class C shares are not available for purchase. They represent previously
issued "Class B" shares and may only be redeemed or exchanged out of the
Fund. If redeemed, they may be subject to a contingent deferred sales charge
("CDSC"). See "Redemption of Shares -- Contingent Deferred Sales Charge."
** Class A shares acquired as part of an exchange privilege transaction, which
were originally acquired in one of the other funds of the Smith Barney Mutual
Funds at net asset value subject to a CDSC, remain subject to the original
fund's CDSC while held in the Fund.
Class A shares of the Fund purchased through the Smith Barney AssetOne
Program will be subject to an annual asset-based fee, payable quarterly. The fee
will vary to a maximum of 1.50%, depending on the amount of assets held through
the Program. For more information, please call your Smith Barney Financial
Consultant.
EXAMPLE
The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares,"
"Management of the Fund" and "Distributor."
You would pay the following expenses on a $1,000 investment, assuming (1) 5.00%
annual return and (2) redemption at the end of each time period:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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<S> <C> <C> <C> <C>
Class A $7 $21 $37 $ 83
Class C 7 21 37 83
Class Y 6 18 32 71
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</TABLE>
3
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FEE TABLE (CONTINUED)
The example is included to provide a means for the investor to compare
expense levels of funds with different fee structures over varying investment
periods. To facilitate such comparison, all funds are required to utilize a
5.00% annual return assumption. This assumption is unrelated to the Fund's prior
performance and is not a projection of future performance. THIS EXAMPLE SHOULD
NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES
MAY BE GREATER OR LESS THAN THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report for the five years ended March 31, 1997
thereon appears in the Fund's annual report dated March 31, 1997. The
information set out below should be read in conjunction with the financial
statements and related notes that also appear in the Fund's Annual Report to
Shareholders, which is incorporated by reference into the Statement of
Additional Information.
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
SMITH BARNEY MUNICIPAL MONEY MARKET FUND, INC.
<TABLE>
<CAPTION>
CLASS A SHARES 1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
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Net investment
income(1) 0.029 0.033 0.027 0.019 0.022 0.037 0.052 0.057 0.051 0.043
Dividends from net
investment income (0.029) (0.033) (0.027) (0.019) (0.022) (0.037) (0.052) (0.057) (0.051) (0.043)
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NET ASSET VALUE, END
OF YEAR $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00 $1.00
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TOTAL RETURN 2.94% 3.34% 2.71% 1.89% 2.25% 3.73% 5.33% 5.89% 5.23% 4.40%
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NET ASSETS, END OF YEAR
(IN MILLIONS) $5,562 $5,395 $4,651 $1,286 $1,251 $1,355 $1,373 $1,252 $992 $1,162
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RATIOS TO AVERAGE
NET ASSETS:
Expenses(1) 0.67% 0.63% 0.61% 0.64% 0.62% 0.53% 0.52% 0.53% 0.53% 0.48%
Net investment
income 2.90 3.28 3.01 1.87 2.22 3.66 5.18 5.70 5.08 4.30
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</TABLE>
(1) The manager has waived a part of its fees for the years ended March 31, 1996
and March 31, 1995. If such fees were not waived, the per share effect on
net investment income and expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
OF NET INVESTMENT INCOME WITHOUT FEE WAIVERS
------------------------ --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
------- ------- ----- -----
<CAPTION>
<S> <C> <C> <C> <C>
Class A $0.0001 $0.0002 0.64% 0.63%
</TABLE>
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FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A SHARE OF EACH CLASS OF CAPITAL STOCK OUTSTANDING THROUGHOUT EACH YEAR:
<TABLE>
<CAPTION>
CLASS C SHARES 1997 1996 1995(2) 1994(3)
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<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00 $1.00 $1.00
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Net investment income(1) 0.029 0.033 0.027 0.019
Dividends from net investment
income (0.029) (0.033) (0.027) (0.019)
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NET ASSET VALUE, END OF YEAR $1.00 $1.00 $1.00 $1.00
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TOTAL RETURN 2.94% 3.34% 2.71% 1.89%++
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NET ASSETS, END OF YEAR (IN
MILLIONS) $0.02 $0.04 $1.0 $5.0
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RATIOS TO AVERAGE NET ASSETS:
Expenses(1) 0.67% 0.60% 0.61% 0.64%+
Net investment income 2.89 3.43 3.01 1.87+
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</TABLE>
(1) The manager has waived a part of its fees for the years ended March 31,1996
and March 31, 1995. If such fees were not waived, the per share effect on
net investment income and expense ratios would have been as follows:
<TABLE>
<CAPTION>
PER SHARE DECREASES EXPENSE RATIOS
OF NET INVESTMENT INCOME WITHOUT FEE WAIVERS
------------------------ --------------------
<S> <C> <C> <C> <C>
1996 1995 1996 1995
------- ------- ----- -----
<CAPTION>
<S> <C> <C> <C> <C>
Class C 0.0001 0.0002 0.62 0.63
</TABLE>
(2) On November 7, 1994, the former Class B shares were renamed Class C shares.
(3) For the period from May 25, 1993 (inception date) to March 31, 1994.
++ Total return is not annualized, as it may be representative of the total
return for the year.
+ Annualized.
<TABLE>
<CAPTION>
CLASS Y SHARES 1997 1996(4)
<S> <C> <C>
- ------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF YEAR $1.00 $1.00
- ------------------------------------------------------------------------------------
Net investment income 0.030 0.004
Dividends from net investment
income (0.030) (0.004)
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NET ASSET VALUE, END OF YEAR $1.00 $1.00
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TOTAL RETURN 3.04% 0.39%++
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NET ASSETS, END OF YEAR (IN
MILLIONS) $5.0 $18.0
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RATIOS TO AVERAGE NET ASSETS:
Expenses 0.57% 0.55%+
Net investment income 3.00 2.81+
- ------------------------------------------------------------------------------------
</TABLE>
(4) For the period from February 12, 1996 (inception date) to March 31, 1996.
++ Total return is not annualized, as it may be representative of the total
return for the year.
+ Annualized.
5
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INVESTMENT OBJECTIVE AND POLICIES
The Fund's objective is to provide income exempt from Federal income tax
from a portfolio of high quality short-term municipal obligations selected for
liquidity and stability of principal. The Fund will pursue its objective by
investing in a diversified portfolio of municipal obligations, the interest on
which is exempt from Federal income tax in the opinion of counsel for the
various issuers.
Opinions relating to the validity of municipal obligations and to the
exemption of interest thereon from Federal income tax are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Fund nor
Smith Barney Mutual Funds Management Inc. (the "Manager") will review the
proceedings relating to the issuance of municipal obligations or the bases for
such opinions.
The two principal classifications of municipal obligations are "general
obligation" and "revenue". General obligations are secured by a municipal
issuer's pledge of its full faith, credit, and taxing power for the payment of
principal and interest. Revenue obligations 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. Please
see the Statement of Additional Information for a more detailed discussion about
the different types of municipal obligations.
All of the Fund's investments will be in securities that at the time of
investment have or are deemed to have remaining maturities of 13 months or less
and the dollar-weighted average maturity of the Fund's portfolio will be 90 days
or less. Except for temporary defensive purposes, at least 80% of the Fund's
assets will be invested in municipal obligations that produce income that is
exempt from Federal income tax (other than the alternative minimum tax). In each
of the Fund's prior fiscal years, 100% of its income has been exempt from
Federal income tax and the Fund's shares have had a stable $1.00 price.
The Fund's investments will be limited to obligations that the Board of
Directors determines present minimal credit risks and that (i) are secured by
the full faith and credit of the United States or (ii) are "Eligible
Securities," as defined by the Investment Company Act of 1940, as amended, (the
"1940 Act"), at the time of acquisition by the Fund. The term "Eligible
Securities" includes securities rated by the "Requisite NRSROs" in one of the
two highest short-term rating categories, securities of issuers that have
received such ratings with respect to other short-term debt securities and
comparable unrated securities. "Requisite NRSROs" means any nationally
recognized statistical rating organizations ("NRSROs") that have issued ratings
with respect to a security or class of debt obligations of an issuer. Currently,
there
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INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
are six NRSROs: Standard & Poor's Ratings Group, Moody's Investors Service,
Inc., Fitch Investors Services, Inc., Duff and Phelps Inc., IBCA Limited and its
affiliate, IBCA, Inc. and Thomson BankWatch. The Fund may also invest in unrated
securities if they are of comparable quality as determined by the Manager in
accordance with criteria established by the Fund's Board of Directors.
Municipal obligations, which are issued by states, municipalities and their
agencies, fall into two major categories -- notes and bonds. The two principal
classifications of municipal obligations are "general obligation" and "revenue."
General obligations are secured by a municipal issuer's pledge of its full
faith, credit, and taxing power for the payment of principal and interest.
Revenue obligations 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. Although industrial
development bonds ("IDBs") are issued by municipal authorities, they are
generally secured by the revenues derived from payments of the industrial user.
The payment of the principal and interest on IDBs is dependent solely on the
ability of the user of the facilities financed by the bonds to meet its
financial obligations and the pledge, if any, of real and personal property so
financed as security for such payment.
Among the types of obligations in which the Fund invests are "puts," such
as floating or variable rate instruments subject to demand features ("demand
instruments"); tax-exempt commercial paper; and notes such as Tax Anticipation
Notes, Revenue Anticipation Notes, Tax and Revenue Anticipation Notes and Bond
Anticipation Notes. Demand instruments usually have an indicated maturity of
more than 13 months but contain a demand feature (a "put") that entitles the
holder to receive the principal amount of the underlying security and may be
exercised either (a) at any time on no more than 30 days' notice; or (b) at
specified intervals not exceeding one year and upon no more than 30 days'
notice. Demand instruments are generally supported by letters of credit that are
issued by both domestic and foreign banks. A variable rate instrument provides
for adjustment of its interest rate on set dates and upon such adjustment can
reasonably be expected to have a market value that approximates its par value; a
floating rate instrument provides for adjustment of its interest rate whenever a
specified interest rate (e.g., the prime rate) changes and at any time can
reasonably be expected to have a market value that approximates its par value.
The Fund may invest without limit in private activity bonds. Interest
income on certain types of private activity bonds issued after August 7, 1986,
7
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INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
to finance non-governmental activities is a specific tax preference item for
purposes of the Federal individual and corporate alternative minimum taxes.
Individual and corporate shareholders may be subject to a Federal alternative
minimum tax to the extent the Fund's dividends are derived from interest on
these bonds. These private activity bonds are included in the term "municipal
obligations" for purposes of determining compliance with the 80% test described
above. Dividends derived from interest income on all municipal obligations are a
component of the "current earnings" adjustment item for purposes of the Federal
corporate alternative minimum tax.
The Fund may invest up to 20% of the value of its assets in one or more of
the three principal types of derivative product structures described below.
Derivative products are typically structured by a bank, broker-dealer or other
financial institution. A derivative product generally consists of a trust or
partnership through which the Fund holds an interest in one or more underlying
bonds coupled with a conditional right to sell ("put") the Fund's interest in
the underlying bonds at par plus accrued interest to a financial institution (a
"Liquidity Provider"). Typically, a derivative product is structured as a trust
or partnership which provides for pass-through tax-exempt income. There are
currently three principal types of derivative structures: (1) "Tender Option
Bonds", which are instruments which grant the holder thereof the right to put an
underlying bond at par plus accrued interest at specified intervals to a
Liquidity Provider; (2) "Swap Products", in which the trust or partnership swaps
the payments due on an underlying bond with a swap counterparty who agrees to
pay a floating municipal money market interest rate; and (3) "Partnerships",
which allocate to the partners income, expenses, capital gains and losses in
accordance with a governing partnership agreement.
Investments in derivative products raise certain tax, legal, regulatory and
accounting issues which may not be presented by investments in other municipal
bonds. There is some risk that certain issues could be resolved in a manner
which could adversely impact the performance of the Fund. For example, the
tax-exempt treatment of the interest paid to holders of derivative products is
premised on the legal conclusion that the holders of such derivative products
have an ownership interest in the underlying bonds. While the Fund receives an
opinion of legal counsel to the effect that the income from each derivative
product is tax-exempt to the same extent as the underlying bond, the Internal
Revenue Service (the "IRS") has not issued a ruling on this subject. Were the
IRS to issue an adverse ruling, there is a risk that the interest paid on such
derivative products would be deemed taxable.
8
<PG$PCN>
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
The Fund intends to limit the risk of derivative products by purchasing
only those derivative products that are consistent with the Fund's investment
objective and policies. The Fund will not use such instruments to leverage
securities. Hence, derivative products' contributions to the overall market risk
characteristics of a Fund will not materially alter its risk profile and will be
fully representative of the Fund's maturity guidelines.
The Fund will not invest more than 10% of the value of its assets in
illiquid securities, which, under certain circumstances, will include derivative
products.
The Fund may not purchase or otherwise acquire any securities that are
subject to legal or contractual restrictions on resale or purchase illiquid
securities for which there is no readily available market or engage in any
repurchase transactions that do not mature within seven days if, as a result,
more than 10% of its total assets would be invested in all such securities.
The Fund cannot change its investment objective and fundamental policies
without the vote of a "majority of the outstanding voting securities" as defined
in the 1940 Act. (See "Voting Rights" in the Statement of Additional
Information.)
RISK AND PORTFOLIO MANAGEMENT
There can be no assurance that the Fund will achieve its investment
objective. The ability of the Fund to achieve its investment objective is
dependent on a number of factors, including the skills of the investment manager
in purchasing municipal obligations whose issuers have the continuing ability to
meet their obligations for the payment of interest and principal when due. The
ability to achieve a high level of income is dependent on the yields of the
securities in the portfolio. Yields on municipal obligations are the product of
a variety of factors, including the general conditions of the money market and
of the municipal bond and municipal note markets, the size of a particular
offering, the maturity of the obligation and its rating. Municipal obligations
with longer maturities tend to produce higher yields and are generally subject
to potentially greater price fluctuations than obligations with shorter
maturities.
When-Issued Purchase Commitments. New issues of municipal obligations are
often offered on a "when-issued" basis, i.e., delivery and payment normally take
place 15 to 45 days after the purchase date. The payment obligation and the
interest rate to be received on the securities are fixed at the time the buyer
enters into the commitment, although no interest accrues with respect to a
"when-issued" security prior to its stated delivery date. The
9
<PG$PCN>
RISK AND PORTFOLIO MANAGEMENT (CONTINUED)
Fund will only make commitments to purchase such securities with the intention
of actually acquiring the securities, but the Fund may sell these securities
before the settlement date if it is deemed advisable as a matter of investment
strategy. A segregated account of the Fund consisting of cash, debt securities
of any grade or equity securities having a value equal to or greater than the
Fund's purchase commitments, provided such securities have been determined by
the Manager to be liquid and unencumbered, and are marked to market daily,
pursuant to guidelines established by the Board of Directors, will be maintained
with PNC Bank, National Association (the "Custodian") and monitored on a daily
basis so that the market value of the account will equal or exceed the amount of
such commitments by the Fund.
Securities purchased on a "when-issued" basis and the securities held in
the Fund's portfolio are subject to changes in market value based not only upon
the public's perception of the creditworthiness of the issuer but also changes
in the level of interest rates, and this will generally result in both changing
in value in the same way, i.e., both appreciating when interest rates decline
and depreciating when interest rates rise. Therefore, if in order to achieve
higher interest income the Fund remains substantially fully invested at the same
time that it has purchased securities on a "when-issued" basis, there will be a
greater possibility that the market value of the Fund's assets will vary from
$1.00 per share. (See "Valuation of Shares.") And there will be a greater
potential for the realization of capital gains, which are not exempt from
Federal income taxes.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by
commitment a dealer agrees to purchase, at the Fund's option, specified
municipal obligations at a specified price. The Fund intends to enter into
stand-by commitments only with dealers, banks and broker-dealers which, in the
opinion of the investment manager, present minimal credit risks. In evaluating
the creditworthiness of the issuer of a stand-by commitment, the investment
manager will review periodically the issuer's assets, liabilities, contingent
claims and other relevant financial information. Because the Fund invests in
securities backed by banks and other financial institutions, change in the
credit quality of these institutions could cause losses to the Fund and effect
its share price. The Fund will acquire stand-by commitments solely to facilitate
portfolio liquidity and does not intend to exercise its rights thereunder for
trading purposes.
Other Factors to be Considered. The Fund anticipates being as fully
invested as practicable in tax exempt securities. The Fund may invest in taxable
investments due to market conditions or pending investment of
10
<PG$PCN>
RISK AND PORTFOLIO MANAGEMENT (CONTINUED)
proceeds from sales of shares or proceeds from the sale of portfolio securities
or in anticipation of redemptions. However, the Fund generally expects to invest
the proceeds received from the sale of shares in municipal obligations as soon
as reasonably possible, which is generally within one day. At no time will more
than 20% of the Fund's net assets be invested in taxable investments except when
the Manager has determined that market conditions warrant the Fund adopting a
temporary defensive investment posture. To the extent the Fund's assets are
invested for temporary defensive purposes, such assets will not be invested in a
manner designed to achieve the Fund's investment objective.
The Fund may engage in short-term trading to attempt to take advantage of
short-term market variations or may dispose of a portfolio security prior to its
maturity if it believes such disposition advisable or it needs to generate cash
to satisfy redemptions. In such cases, the Fund may realize a gain or loss. From
the commencement of operations, the Fund has not realized any significant gain
or loss during any fiscal year.
From time to time, proposals have been introduced before Congress for the
purpose of restricting or eliminating the Federal income tax exemption for
interest on municipal obligations and similar proposals may be introduced in the
future. If one of these proposals were enacted, the availability of tax exempt
obligations for investment by the Fund and the value of the Fund's portfolio
would be affected. The directors would then reevaluate the Fund's investment
objective and policies.
VALUATION OF SHARES
The net asset value per share is determined as of the close of regular
trading on each day that the New York Stock Exchange ("NYSE") is open by
dividing the Fund's net assets attributable to each Class (i.e., the value of
its assets less liabilities) by the total number of shares of the Class
outstanding. The Fund may also determine net asset value per share on days when
the NYSE is not open, but when the settlement of securities may otherwise occur.
The Fund employs the "amortized cost method" of valuing portfolio securities and
intends to use its best efforts to continue to maintain a constant net asset
value of $1.00 per share.
DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES
The Fund declares a dividend of substantially all of its net investment
income on each day the NYSE is open. Net investment income includes
11
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DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
interest accrued and discount earned and is less premium amortized and expenses
accrued (the discount or premium on portfolio investments is fixed at the time
of purchase). Unless the shareholder has elected to receive monthly
distributions of income, such dividends will automatically be reinvested in Fund
shares of the same Class at net asset value. If a shareholder redeems an account
in full between payment dates, all dividends accrued up to and including the
date of liquidation will be paid with the proceeds from the redemption of
shares. The per share dividends on Class A and Class C shares of the Fund may be
less than the per share dividends on Class Y shares principally as a result of
the service fee applicable to Class A and Class C shares. Long-term capital
gains, if any, will be in the same amount for each Class and will be distributed
annually.
The Fund believes it met the requirements of Subchapter M of the Internal
Revenue Code during its last fiscal year and intends to comply in the future;
thus, no Federal income taxes will ordinarily be paid by the Fund. Distributions
by the Fund of interest income from tax exempt obligations are not taxable to
shareholders and will not be includable in their gross income for Federal income
tax purposes. Realized gains and losses are reflected in the Fund's net assets
and are not included in net investment income. Capital gain distributions, if
any, whether paid in cash or invested in shares of the Fund, will be taxable to
shareholders. All of the Fund's dividends paid during the past fiscal years have
been exempt-interest dividends excludable from gross income for Federal income
tax purposes.
Distributions by the Fund that are exempt for Federal income tax purposes
will not necessarily result in exemption under income tax or other tax laws of
any state or local taxing authority. Generally, only interest earned on
obligations issued by the state or municipality in which the investor resides
will be exempt from state and local taxes; however, the laws of the several
states and local taxing authorities vary with respect to the taxation of
exempt-interest income, and each shareholder should consult a tax advisor in
that regard. The Fund will make available annually to its shareholders
information concerning the percentage of interest income the Fund received
during the calendar year from municipal obligations on a state-by-state basis.
Under the Code, interest on indebtedness incurred or continued to purchase
or carry shares of the Fund will not be deductible to the extent that the Fund's
distributions are exempt from Federal income tax. In addition, any loss realized
upon the redemption of shares held less than six months will be disallowed to
the extent of any exempt-interest dividends received by the shareholder during
such period. However, this holding period may be shortened by the Treasury
Department to a period of not less than
12
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DIVIDENDS, AUTOMATIC REINVESTMENT AND TAXES (CONTINUED)
the greater of 31 days or the period between regular dividend distributions.
Further, persons who may be "substantial users" (or "related persons" of
substantial users) of facilities financed by industrial development bonds should
consult their tax advisors before purchasing Fund shares.
The Tax Reform Act of 1986 provides that interest on certain municipal
obligations (i.e., certain private activity bonds) issued after August 7, 1986
will be treated as a preference item for purposes of both the corporate and
individual alternative minimum tax. Under Treasury regulations, that portion of
the Fund's exempt-interest dividend to be treated as a preference item for
shareholders will be based on the proportionate share of the interest received
by the Fund from the specified private activity bonds. Shareholders should
consult their tax advisors concerning the effect of the Tax Reform Act of 1986
on an investment in the Fund.
PURCHASE OF SHARES
Purchases of Fund shares may be made through a brokerage account maintained
with Smith Barney Inc. ("Smith Barney"), with a broker that clears securities
transactions through Smith Barney on a fully disclosed basis (an "Introducing
Broker") or with an investment dealer in the selling group. Smith Barney and
other broker/dealers may charge their customers an annual account maintenance
fee in connection with a brokerage account through which an investor purchases
or holds shares. Accounts held directly at First Data are not subject to a
maintenance fee.
Investors in Class A may open an account by making an initial investment of
at least $1,000 for each Fund account. Investors in Class Y may open an account
by making an initial investment of at least $5,000,000. Subsequent investments
of at least $50 may be made for either Class. For shareholders purchasing shares
of the Fund through the Systematic Investment Plan on a monthly basis, the
minimum initial investment requirement for Class A shares and the subsequent
investment requirement for all Classes is $25. For shareholders purchasing
shares of the Fund through the Systematic Investment Plan on a quarterly basis,
the minimum initial investment requirement for Class A shares and the subsequent
investment requirement for all Classes is $50. There are no minimum investment
requirements in Class A for employees of Travelers Group Inc. ("Travelers") and
its subsidiaries, including Smith Barney, and Directors or Trustees of any of
the Smith Barney Mutual Funds, and their spouses and children. The Fund reserves
the right to waive or change minimums, to decline any order to purchase its
shares and to suspend the offering of shares from time to time. Shares purchased
will be held in the shareholder's account by the
13
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PURCHASE OF SHARES (CONTINUED)
Fund's transfer agent, First Data Investor Services Group, Inc. ("First Data").
Share certificates are issued only upon a shareholder's written request to First
Data.
Class A and Class Y shares of the Fund are available for purchase directly
by investors. Class C shares are not available for purchase directly by
investors; they may only be redeemed or exchanged out of the Fund.
For investors who maintain a brokerage account with Smith Barney, Smith
Barney has advised the Fund that depending on the type of securities account,
its clients' free credit balances (i.e., immediately available funds) may be
invested automatically in full shares of the Fund either on a daily or weekly
basis. In addition to this "sweep" service, shareholders who open a Smith Barney
FMA(R)PLUS(SM) account, which is a full service investment account, will also be
able to take advantage of, among other things: a free Individual Retirement
Account ("IRA"), free dividend reinvestment, unlimited checking, 100 free ATM
withdrawals each year and online computer access to account information. Smith
Barney clients should contact their Financial Consultant for more complete
information. A complete record of Fund dividends, purchases and redemptions will
be included on such shareholders' regular Smith Barney statements.
The minimum initial investment requirement in the Fund for an account
established under the Uniform Gift to Minors Act is $250 and the subsequent
investment requirement is $50.
The Fund's shares are sold continuously at their net asset value next
determined after a purchase order is received and becomes effective. A purchase
order becomes effective when the Fund, Smith Barney or an Introducing Broker
receives, or converts the purchase amount into, Federal funds (i.e., monies of
member banks within the Federal Reserve System held on deposit at a Federal
Reserve Bank). When orders for the purchase of Fund shares are paid for in
Federal funds, or are placed by an investor with sufficient Federal funds or
cash balance in the investor's brokerage account with Smith Barney or the
Introducing Broker, the order becomes effective on the day of receipt if
received prior to the close of regular trading on the NYSE, on any day the Fund
calculates its net asset value. See "Valuation of Shares." Purchase orders
received after the close of regular trading on the NYSE on any business day are
effective as of the time the net asset value is next determined. When orders for
the purchase of Fund shares are paid for other than in Federal funds, Smith
Barney or the Introducing Broker, acting on behalf of the investor, will
complete the conversion into, or itself advance, Federal funds, and the order
will become effective on the day following its receipt by the Fund, Smith Barney
or the Introducing Broker.
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PURCHASE OF SHARES (CONTINUED)
Shares purchased directly through First Data begin to accrue income dividends on
the day that the purchase order becomes effective. All other shares purchased
begin to accrue income dividends on the next business day following the day that
the purchase order becomes effective.
SYSTEMATIC INVESTMENT PLAN
Upon completion of certain automated systems, shareholders may make
additions to their accounts at any time by purchasing shares through a service
known as the Systematic Investment Plan. Under the Systematic Investment Plan,
Smith Barney or First Data is authorized through preauthorized transfers of at
least $25 on a monthly basis or at least $50 on a quarterly basis to charge the
regular bank account or other financial institution indicated by the shareholder
on a monthly or quarterly basis to provide systematic additions to the
shareholder's Fund account. A shareholder who has insufficient funds to complete
the transfer will be charged a fee of up to $25 by Smith Barney or First Data.
Additional information is available from the Fund or a Smith Barney Financial
Consultant.
LETTER OF INTENT
Class Y Shares. A Letter of Intent provides an opportunity for investors
to meet the minimum investment requirement for Class Y shares by aggregating
investments over a six-month period. Such investors must make an initial minimum
purchase of $1,000,000 in Class Y shares of the Fund and agree to purchase a
total of $5,000,000 of Class Y shares of the same Fund within six months from
the date of the Letter. If a total investment of $5,000,000 is not made within
the six-month period, all Class Y shares purchased to date will be transferred
to Class A shares, where they will be subject to all fees (including a service
fee of 0.10%) 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
First Data for further information.
REDEMPTION OF SHARES
Shareholders may redeem their shares without charge on any day the Fund
calculates its net asset value. See "Valuation of Shares." Redemption requests
received in proper form before the close of regular trading on the NYSE are
priced at the net asset value as next determined on that day. Redemption
requests received after the close of regular trading on the NYSE, are priced at
the net asset value as next determined.
15
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REDEMPTION OF SHARES (CONTINUED)
The Fund normally transmits redemption proceeds on the business day
following receipt of a redemption request but, in any event, payment will be
made no later than the third business day after a redemption request is made,
except on days on which the New York Stock Exchange is closed and settlement of
securities does not otherwise occur, or as permitted under the 1940 Act in
extraordinary circumstances. Generally, if the redemption proceeds are remitted
to a Smith Barney brokerage account, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney will benefit
from the use of temporarily uninvested funds. A shareholder who pays for Fund
shares by personal check will be credited with the proceeds of a redemption of
those shares only after the purchase check has been collected, which may take up
to ten days or more. A shareholder who anticipates the need for more immediate
access to his or her investment should purchase shares with Federal funds, by
bank wire or with a certified or cashier's check.
Shareholders who purchase securities through Smith Barney or an Introducing
Broker may take advantage of special redemption procedures under which Class A
shares of the Fund will be redeemed automatically to the extent necessary to
satisfy debit balances arising in the shareholder's account with Smith Barney or
the Introducing Broker. One example of how an automatic redemption may occur
involves the purchase of securities. If a shareholder purchases securities but
does not pay for them by settlement date, the number of Fund shares necessary to
cover the debit will be redeemed automatically as of the settlement date, which
usually occurs three business days after the trade date. Class A shares that are
subject to a CDSC (see "Redemption of Shares--Contingent Deferred Sales Charge")
are not eligible for such automatic redemption and will only be redeemed upon
specific request. If the shareholder does not request redemption of such shares,
the shareholder's account with Smith Barney or the Introducing Broker may be
margined to satisfy debit balances if sufficient Fund shares that are not
subject to any applicable CDSC are unavailable. No fee is currently charged with
respect to these automatic transactions. Shareholders not wishing to participate
in these arrangements should notify their Smith Barney Financial Consultant.
Redemption requests must be made through Smith Barney, an Introducing
Broker or the securities dealer through whom the shares are purchased. A
shareholder desiring to redeem shares represented by certificates also must
present the certificates to Smith Barney, the Introducing Broker or First Data
endorsed for transfer (or accompanied by an endorsed stock power), signed
exactly as the shares are registered. Redemption requests involving shares
16
<PG$PCN>
REDEMPTION OF SHARES (CONTINUED)
represented by certificates will not be deemed received until the certificates
are received by First Data in proper form.
A written redemption request must (a) state the Class and number or dollar
amount of shares to be redeemed, (b) identify the shareholder's account number
and (c) be signed by each registered owner exactly as the shares are registered.
If the shares to be redeemed were issued in certificate form, the certificates
must be endorsed for transfer (or be accompanied by an endorsed stock power) and
must be submitted to First Data together with the redemption request. Any
signature appearing on a share certificate, stock power or written redemption
request in excess of $2,000 must be guaranteed by an eligible guarantor
institution such as a domestic bank, savings and loan institution, domestic
credit union, member bank of the Federal Reserve System or member firm of a
national securities exchange. Written redemption requests of $2,000 or less do
not require the signature guarantee unless more than one such redemption request
is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record. First Data may require additional supporting
documents for redemptions made by corporations, executors, administrators,
trustees or guardians. A redemption request will not be deemed properly received
until First Data receives all required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee, that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment in the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares, may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemptions of shares (i) by
retirement plans or (ii) for which certificates have been issued are not
permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be
17
<PG$PCN>
REDEMPTION OF SHARES (CONTINUED)
mailed or wired, as the case may be, on the next business day following the
redemption request. In order to use the wire procedures, the bank receiving the
proceeds must be a member of the Federal Reserve System or have a correspondent
relationship with a member bank. The Fund reserves the right to charge
shareholders a nominal fee for each wire redemption. Such charges, if any, will
be assessed against the shareholder's account from which shares were redeemed.
In order to change the bank account designated to receive redemption proceeds, a
shareholder must complete a new Telephone/Wire Authorization Form and, for the
protection of the shareholder's assets, will be required to provide a signature
guarantee and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests may
be made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open. See "Exchange
Privilege" for more information.
Additional Information Regarding Telephone Redemption and Exchange
Program. Neither the Fund nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Fund and its agents will employ procedures designed to verify the
identity of the caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Fund reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this service
at any time following at least seven (7) days prior notice to shareholders.
CONTINGENT DEFERRED SALES CHARGE
Class A and Class C shares acquired as part of an exchange privilege
transaction, which were originally acquired in one of the other Smith Barney
Mutual Funds at net asset value subject to a CDSC, continue to be subject to any
applicable CDSC of the original fund. Therefore, such Class A and Class C shares
that are redeemed within 12 months of the date of purchase of the original fund
may be subject to a CDSC of 1.00%. The amount of any CDSC will be paid to and
retained by Smith Barney. The CDSC will be assessed based on an amount equal to
the net asset value at the time of redemption. Accordingly, no CDSC will be
imposed on increases in net asset value above the initial purchase price in the
original fund. In addition, no charge will be assessed on shares derived from
reinvestment of dividends or capital gains distribution.
18
<PG$PCN>
REDEMPTION OF SHARES (CONTINUED)
In determining the applicability of any CDSC, it will be assumed that a
redemption is made first of shares representing capital appreciation, next of
shares representing the reinvestment of dividends and capital gain distributions
and finally of other shares held by the shareholder for the longest period of
time. The length of time that Class A and Class C shares have been held will be
calculated from the date that the shares were initially acquired in one of the
other Smith Barney Mutual Funds, and such shares being redeemed will be
considered to represent, as applicable, capital appreciation or dividend and
capital gain distribution reinvestments in such other funds. For Federal income
tax purposes, the amount of the CDSC will reduce the gain or increase the loss,
as the case may be, on the amount realized on redemption.
The CDSC on Class A and Class C shares, if any, will be waived on (a)
exchanges (see "Exchange Privilege" below); (b) redemptions of shares within
twelve months following the death or disability of the shareholder; (c)
involuntary redemptions; and (d) redemptions of shares in connection with a
combination of the Fund with any investment company by merger, acquisition of
assets or otherwise. In addition, a shareholder who has redeemed shares from
other funds of the Smith Barney Mutual Funds may, under certain circumstances,
reinvest all or part of the redemption proceeds within 60 days and receive pro
rata credit for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by Smith Barney in
the case of shareholders who are also Smith Barney clients or by First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be exchanged for
shares of the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the shareholder's state of
residence. Exchanges of Class A and Class C shares are subject to minimum
investment requirements and all shares are subject to other requirements of the
fund into which exchanges are made and a sales charge may apply.
19
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EXCHANGE PRIVILEGE (CONTINUED)
FUND NAME
- --------------------------------------------------------------------------------
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Disciplined Small Cap Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
* Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- National Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
20
<PG$PCN>
EXCHANGE PRIVILEGE (CONTINUED)
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Allocation Series Inc.
Smith Barney Concert Allocation Series Inc. -- Balanced Portfolio
Smith Barney Concert Allocation Series Inc. -- Conservative Portfolio
Smith Barney Concert Allocation Series Inc. -- Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- High Growth Portfolio
Smith Barney Concert Allocation Series Inc. -- Income Portfolio
Money Market Funds
Smith Barney Money Funds, Inc. -- Cash Portfolio
Smith Barney Money Funds, Inc. -- Government Portfolio
** Smith Barney Money Funds, Inc. -- Retirement Portfolio
* Smith Barney Muni Funds -- California Money Market Portfolio
* Smith Barney Muni Funds -- New York Money Market Portfolio
- ------------------------
* Available for exchange with Class A and Class Y shares of the Fund.
** Available for exchange with Class A shares of the Fund.
Class A Exchanges. Class A shares of the Fund will be subject to the
appropriate sales charge upon the exchange of such shares for Class A shares of
another fund of the Smith Barney Mutual Funds sold with a sales charge. If no
sales charge was imposed upon the initial purchase of the shares, any shares
obtained through automatic reinvestment will be subject to a sales charge upon
exchange.
Class C Exchanges. Class C shares of the Fund may be exchanged out of the
Fund. Upon such exchange, the new Class C shares will be deemed to have been
purchased on the same date as the Class C shares of the original fund that had
been purchased.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
21
<PG$PCN>
EXCHANGE PRIVILEGE (CONTINUED)
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. The investment
manager may determine that a pattern of frequent exchanges is excessive and
contrary to the best interests of the Fund's other shareholders. In this event,
the Fund may, at its discretion, decide to limit additional purchases and/or
exchanges by the shareholder. Upon such a determination, the Fund will provide
notice in writing or by telephone to the shareholder at least 15 days prior to
suspending the exchange privilege and during the 15 day period the shareholder
will be required to (a) redeem his or her shares in the Fund or (b) remain
invested in the Fund or exchange into any of the funds of the Smith Barney
Mutual Funds ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All relevant factors will
be considered in determining what constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption and Exchange Program." Exchanges
will be processed at the net asset value next determined plus any applicable
sales charge. Redemption procedures discussed above are also applicable for
exchanging shares, and exchanges will be made upon receipt of all supporting
documents in proper form. If the account registration of the shares of the fund
being acquired is identical to the registration of the shares of the fund
exchanged, no signature guarantee is required. A capital gain or loss for tax
purposes will be realized upon the exchange, depending upon the cost or other
basis of shares redeemed. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired. These exchange
privileges are available to shareholders resident in any state in which the fund
shares being acquired may legally be sold. The Fund reserves the right to modify
or discontinue exchange privileges upon 60 days' prior notice to shareholders.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to redeem involuntarily any shareholder's
account if the aggregate net asset value of the shares held in the account is
less than $500, in which event the shareholder will receive prior written notice
and will be permitted 60 days to bring the account up to the minimum to avoid
involuntary liquidation. Any applicable CDSC will be deducted from the proceeds
of this liquidation. (If a shareholder has more than one account in the Fund,
each account must satisfy the minimum account size.)
22
<PG$PCN>
YIELD INFORMATION
From time to time the Fund advertises the yield, effective yield and tax
equivalent yield of its Class A, Class C and Class Y shares. These yield figures
are based on historical earnings and are not intended to indicate future
performance. The yield of each Class refers to the net investment income
generated by an investment in the Class over a specific seven-day period,
expressed as an annual percentage rate. The effective yield is calculated
similarly but, when annualized, the income earned by an investment in the Class
is assumed to be reinvested. The effective yield will be slightly higher than
the yield because of the compounding effect of the assumed reinvestment. The tax
equivalent yield also is calculated similarly to the yield, except that a stated
income tax rate is used to demonstrate the taxable yield necessary to produce an
after-tax yield equivalent to the tax-exempt yield of the Class.
MANAGEMENT OF THE FUND
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund,
including agreements with the Fund's distributor, investment manager, custodian
and transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's investment manager. The Statement of Additional Information contains
background information regarding each Director and executive officer of the
Fund.
MANAGER
Smith Barney Mutual Funds Management Inc. ("SBMFM" or the "Manager")
manages the day-to-day operations of the Fund pursuant to a Management
Agreement. (All of the Fund's business and affairs are the responsibility of and
are managed under the direction of the Board of Directors of the Fund and all
powers of the Fund may be exercised by or under the authority of the Board,
except as conferred on or reserved to the shareholders by applicable law or the
Fund's charter or bylaws). SBMFM was incorporated in 1968 under the laws of the
State of Delaware. SBMFM is controlled by Smith Barney Holdings Inc.,
("Holdings") the parent company of Smith Barney. Holdings is a wholly-owned
subsidiary of Travelers, a financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer
23
<PG$PCN>
MANAGEMENT OF THE FUND (CONTINUED)
Finance Services, Life Insurance Services and Property & Casualty Insurance
Services. SBMFM, Smith Barney Holdings Inc. and Smith Barney are each located at
388 Greenwich Street, New York, New York 10013. SBMFM renders investment advice
to investment companies that had aggregate assets under management as of March
31, 1997 of approximately $83 billion.
Pursuant to the Management Agreement, the Manager offers the Fund 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 the Fund. It also furnishes the Fund with bookkeeping, accounting and
administrative services, office space and equipment, and the services of the
officers and employees of the Fund. It provides a variety of administrative and
shareholder services directly or at its expense through securities firms. For
the last fiscal year, the actual management fee was 0.47% of the Fund's average
net assets and the total expenses were 0.67%, 0.67% and 0.57% of average net
assets for Class A, Class C and Class Y shares, respectively. The Fund's
management agreement provides for daily compensation of the Manager at the
annual rate of 0.50% on the first $2.5 billion of the Fund's net assets, 0.475%
of the next $2.5 billion and 0.45% on the net assets in excess of $5 billion.
The Manager has agreed that to the extent that in any fiscal year the aggregate
expenses of the Fund, exclusive of taxes, brokerage, interest and extraordinary
expenses such as litigation costs, exceed 0.70% of the average daily net assets
for that fiscal year of the Fund, the Manager will reduce its fee or reimburse
the Fund to the extent of such excess. The 0.70% voluntary expense limitation
shall be in effect until it is terminated by notice to shareholders and by
supplement to the then current prospectus.
SBMFM, in effecting purchases and sales of portfolio securities for the
account of the Fund, implements the Fund's policy of seeking the best execution
of orders. The Fund's portfolio transactions have for the most part been
principal transactions directly with the major underwriters for, and dealers in,
tax exempt money market instruments. No brokerage commissions are paid on such
transactions, but the price paid to underwriters or dealers will normally
include an underwriter's spread or dealer's markup. The primary consideration in
the allocation of transactions is prompt execution of orders in an effective
manner at the most favorable price. Under certain circumstances, transactions
will be effected with remarketing agents who receive fees from the issuers for
services rendered. No principal transactions are handled by Smith Barney.
The term "Smith Barney" in the title of the Fund has been adopted by
permission of Smith Barney and is subject to the right of Smith Barney to
24
<PG$PCN>
MANAGEMENT OF THE FUND (CONTINUED)
elect that the Fund stop using the term in any form or combination of its name.
DISTRIBUTOR
Smith Barney serves as Principal Underwriter of shares of the Fund for
which it receives no compensation and conducts a continuous offering pursuant to
a "best efforts" arrangement requiring it to take and pay for only such
securities as may be sold to the public. Under a plan of distribution pursuant
to Rule 12b-1 (the "Plan") under the 1940 Act, a service fee is paid by each of
Class A and Class C to Smith Barney at an annual rate of 0.10% of the Class'
average daily net assets. The fee is used by Smith Barney to pay its financial
consultants for servicing shareholder accounts for as long as a shareholder
remains a holder of the Class. The service fee is credited at a rate of 0.10% of
the average balance of Class shares held in the accounts of the customers of
financial consultants. The service fee is also spent by Smith Barney on the
following types of expenses: (1) the pro rata share of other employment costs of
such financial consultants (e.g., FICA, employee benefits, etc.); (2) employment
expenses of home office personnel primarily responsible for providing service to
the Fund's shareholders and (3) the pro rata share of branch office fixed
expenses (including branch overhead allocations).
Shareholder servicing expenses incurred by Smith Barney but not reimbursed
by a Class in any year will not be a continuing liability of the Class in
subsequent years.
Smith Barney also advises profit-sharing and pension accounts. Smith Barney
and its affiliates may in the future act as investment advisers for other
accounts.
ADDITIONAL INFORMATION
The Fund, an open-end, diversified investment company, was incorporated
under Maryland law on April 1, 1980. Class A, Class C and Class Y shares
represent interests in the assets of the Fund and have identical voting,
dividend, liquidation and other rights on the same terms and conditions except
that expenses related to the distribution of each Class of shares are borne
solely by each Class and each Class of shares has exclusive voting rights with
respect to provisions of the Fund's Rule 12b-1 distribution plan which pertain
to a particular Class. Fund shares do not have cumulative voting rights; are
fully paid when issued; have no preemptive, subscription or
25
<PG$PCN>
ADDITIONAL INFORMATION (CONTINUED)
conversion rights; and are redeemable and subject to redemption as set forth
under "Redemption of Shares" and "Minimum Account Size." As described under
"Voting Rights" in the Statement of Additional Information, the Fund ordinarily
will not hold shareholder meetings; however, shareholders have the right to call
a meeting upon a vote of 10% of the Fund's outstanding shares for the purpose of
voting to remove directors and the Fund will assist shareholders in calling such
a meeting as required by the 1940 Act.
PNC Bank, National Association, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, serves as custodian of the Fund's investments.
First Data, located at Exchange Place, Boston, Massachusetts 02109, serves
as the Fund's transfer agent.
The Fund sends its shareholders a semi-annual report and an audited annual
report, which include listings of the investment securities held by the Fund at
the end of the period covered. In an effort to reduce the Fund's printing and
mailing costs, the Fund plans to consolidate the mailing of its semi-annual and
annual reports by household. This consolidation means that a household having
multiple accounts with the identical address of record will receive a single
copy of each report. Shareholders who do not want this consolidation to
apply to their account should contact their Smith Barney Financial Consultant or
the Fund's transfer agent.
26
<PG$PCN>
