As filed with the Securities and Exchange Commission
on Spetember 28, 1998
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Registration No. 33-90952
811-9012
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 5
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT
OF 1940, Amendment No. 5
SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND, INC.
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
(800)-451-2010
(Registrant's Telephone Number, including Area Code:)
Christina T. Sydor
388 Greenwich Street, New York, New York 10013(22nd Floor)
(Name and Address of Agent For Service)
Continuous
(Approximate Date of Proposed Public Offering)
It is proposed that this filing will become effective:
XXX immediately upon filing pursuant to Paragraph (b)
___ On (date) pursuant to paragraph (b)
_____ 60 days after filing pursuant to paragraph (a)
(1)
_____ On (date) pursuant to paragraph (a)(1)
_____ 75 days after filing pursuant to paragraph (a)
(2)
____ On (date) pursuant to paragraph (a)(2) of rule
485
If appropriate, check the following box:
_____ This post-effective amendment designates a new
effective date for a previously filed post-effective amendment.
Title of Securities Being Registered: Shares of Common Stock
SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND, INC.
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND, INC.
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A Cash Portfolio
Item No. Government Portfolio
Municipal Portfolio
Prospectus Heading
1. Cover Page........Cover Page
2. Synopsis..........Fee Table
3. Condensed
Financial
Information.......Financial Highlights
4. General
Description
of Registrant......Cover Page; Investment
Objectives and Policies;
Yield Information;
Additional Information
5. Management
of the Fund.......Introduction; Fee Table;
Management of the Fund;
Distributor
6. Capital Stock
and Other
Securities.........Dividends, Automatic
Reinvestment and Taxes;
Additional Information
7. Purchase of
Securities
Being Offered......Purchase of Shares;
Valuation of Shares
8. Redemption
or Repurchase......Redemption of Shares
9. Pending Legal
Proceedings........Not applicable
Part B Cash Portfolio
Item No. Government Portfolio
Municipal Portfolio
Heading in Statement of
Additional Information
10. Cover Page....... Cover Page
11. Table of
Contents......... Table of Contents
12. General
Information
and History.......Management
Agreement, Plan of
Distribution and Other
Services; See
Prospectus "Cover Page", and
"Additional Information"
13. Investment
Objectives
and Policies......Investment Objectives
and Policies
14. Management
of the Fund........Management Agreement, Plan of
Distribution and Other
Services; See Prospectus
"Management of the
Fund"
15. Control Persons
and Principal
Holders of
Securities........Management Agreement, Plan of
Distribution and Other
Services; See Prospectus
"Management of the Fund"
16. Investment
Advisory and
Other Services.....Management Agreement, Plan of
Distribution and Other
Services; See Prospectus
"Management of the Fund",
"Distributor" and "Additional
Information"
17. Brokerage
Allocation
and Other
Practices...... Investment Objectives; Management
Agreement, Plan of Distribution and
Other Services
18. Capital Stock
and Other
Securities.........See Prospectus
"Purchase of Shares";
"Redemption of Shares"; and
"Dividends, Automatic Reinvestment
and Taxes"
19. Purchase,
Redemption
and Pricing of
Securities
Being Purchased.....Determination of Net Asset
Value; See Prospectus: "Purchase of
Shares";"Redemption of Shares";
"Valuation of Shares"
20. Tax Status..........See Prospectus- "Dividends, Automatic
Reinvestment and Taxes"
20. Underwriters........See Prospectus
"Purchase of Shares"
21. Calculation
of Performance Data..Yield Information;
See Prospectus
"Yield Information",
"Performance Data"
22. Financial
Statements............Statement of Assets and Liabilities
SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND, INC.
FORM N-1A
PART A
PROSPECTUSES
PROSPECTUS
Smith Barney
Institutional Cash
Management
Fund, Inc.
Class A Shares
SEPTEMBER 28, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
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Prospectus September 28, 1998
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Smith Barney Institutional
Cash Management Fund, Inc. -- Class A Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Institutional Cash Management Fund, Inc. (the "Fund") is a
money market fund that invests in high quality money market instruments. The
Fund is a no-load, open-end management investment company that offers shares in
three Portfolios: the Cash Portfolio, the Government Portfolio and the Municipal
Portfolio (individually, a "Portfolio" and collectively, the "Portfolios").
The investment objective of each of the Cash Portfolio and the Government
Portfolio is to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. The investment
objective of the Municipal Portfolio is to maximize current income exempt from
Federal income taxes to the extent consistent with the preservation of capital
and the maintenance of liquidity.
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
Government. There is no assurance that a Portfolio will be able to maintain a
stable net asset value of $1.00 per share.
Each Portfolio is designed primarily for institutions as an economical and
convenient means for the investment of short-term funds. Each Portfolio
currently offers two Classes of shares. Class A shares may be purchased by
institutional investors on their own behalf. Class B shares may be purchased by
institutional investors on behalf of their clients. A Prospectus for Class B
shares is available upon request and without charge by calling the Fund at the
telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.
This Prospectus sets forth concisely certain information about the Fund
and the Portfolios, 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 September 28, 1998, 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. 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE 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
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Fee Table 3
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Financial Highlights 4
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Investment Objectives and Policies 6
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Common Investment Techniques 14
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Risks and Special Considerations 16
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Valuation of Shares 17
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Dividends, Automatic Reinvestment and Taxes 18
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Purchase of Shares 20
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Exchange Privilege 21
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Redemption of Shares 21
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Minimum Account Size 24
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Yield Information 24
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Management of the Fund 24
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Distributor 25
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Additional Information 26
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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
Salomon Smith Barney Inc. ("Salomon Smith Barney" or the "Distributor"). This
Prospectus does not constitute an offer by the Fund or Salomon Smith Barney, 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.
================================================================================
2
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Fee Table
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The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of a Portfolio based on its
current operating expenses:
Smith Barney Institutional Cash Cash Government Municipal
Management Fund -- Class A Shares Portfolio Portfolio Portfolio
================================================================================
Shareholders Transaction Expenses
Sales Charge Imposed on Purchase None None None
Deferred Sales Charge None None None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees (after waiver)* 0.15% 0.11% 0.09%
12b-1 Fees None None None
Other Expenses 0.08 0.08 0.08
================================================================================
TOTAL PORTFOLIO OPERATING
EXPENSES 0.23% 0.23% 0.23%
================================================================================
* These estimated expenses include a management fee waiver. Absent the fee
waiver, for its most recent fiscal year end management fee would have been
0.27% for each portfolio and "Total Portfolio Operating Expenses" would
have been 0.35%, 0.39% and 0.41%, respectively, for the Cash Portfolio,
Government Portfolio and Municipal Portfolio.
Example
The following example is intended to assist an investor in understanding
the various costs that an investor in each of the Portfolios will bear directly
or indirectly. The example assumes payment by the Portfolio 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."
Smith Barney Institutional Cash
Management Fund -- Class A Shares 1 Year 3 Years 5 Years 10 Years
================================================================================
An investor 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:
Cash Portfolio $2 $7 $13 $29
Government Portfolio 2 7 13 29
Municipal Portfolio 2 7 13 29
================================================================================
The example also provides 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. However, a Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
3
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Financial Highlights
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The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's Annual Report
dated May 31, 1998. 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 which is incorporated by reference into the Statement of
Additional Information.
For a share of Class A capital stock outstanding throughout the year:
<TABLE>
<CAPTION>
Cash Portfolio 1998 1997 1996(1)
==============================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00
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Net investment income(2) 0.055 0.052 0.053
Distributions from investment income (0.055) (0.052) (0.053)
Net realized gains (0.000)* -- (0.00)*
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Net Asset Value, End of Year $1.00 $1.00 $1.00
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Total Return 5.58% 5.35% 5.44%++
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Net Assets, End of Year (000s) $848,383 $216,055 $277,572
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Ratios to Average Net Assets+:
Expenses(2)(3) 0.23% 0.23% 0.15%+
Net investment income 5.43 5.23 5.43+
==============================================================================================
Government Portfolio 1998 1997 1996(1)
==============================================================================================
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00
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Net investment income(2) 0.053 0.052 0.052
Distributions from net investment income (0.053) (0.052) (0.052)
Distributions from net realized gains -- (0.000)* (0.000)*
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Net Asset Value, End of Year $1.00 $1.00 $1.00
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Total Return 5.46% 5.29% 5.36%++
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Net Assets, End of Period (000s) $88,484 $151,840 $57,698
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Ratios to Average Net Assets:
Expenses(2) 0.23% 0.21% 0.16%+
Net investment income 5.33 5.18 5.28+
==============================================================================================
</TABLE>
(1) For the period from June 16, 1995 (commencement of operations) to May 31,
1996.
(2) The Manager has waived a portion of its fees for the Portfolio for the
fiscal years ended May 31, 1998, 1997 and for the period ended May 31,
1996. If the Manager had not agreed to the fee waiver, the per share
decrease in net investment income and the ratio of expenses to average net
assets would have been:
Per Share Decrease in Expense Ratio
Net Investment Income Without Fee Waiver
--------------------- ------------------
1998 1997 1996(1) 1998 1997 1996(1)
----- ----- ----- ---- ---- ----
Cash Portfolio $0.001 $0.001 $0.001 0.35% 0.36% 0.39%+
Government Portfolio 0.002 0.001 0.002 0.39 0.43 0.55+
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets of the Portfolio will not exceed 0.80%. * Amount
represents less than $0.001.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
4
<PAGE>
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Financial Highlights (continued)
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For a share of each class of capital stock outstanding throughout the year:
<TABLE>
<CAPTION>
Municipal Portfolio 1998 1997 1996(1)
==============================================================================================
<S> <C> <C> <C>
Net Asset Value, Beginning of Year $1.00 $1.00 $1.00
- ----------------------------------------------------------------------------------------------
Net investment income(2) 0.035 0.034 0.035
Dividends from net investment income (0.035) (0.034)
Distributions from net realized gains (0.000)* -- --
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Net Asset Value, End of Year $1.00 $1.00 $1.00
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Total Return 3.56% 3.40% 3.55%++
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Net Assets, End of Year (000s) $85,671 $23,666 $59,308
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Ratios to Average Net Assets:
Expenses(2)(3) 0.23% 0.21% 0.15%+
Net investment income 3.50 3.34 3.46+
==============================================================================================
</TABLE>
(1) For the period from June 16, 1995 (commencement of operations) to May 31,
1996.
(2) The Manager has waived all or a part of its management fees for the
Portfolio for the fiscal years ended May 31, 1998, 1997 and for the period
ended May 31, 1996. In addition, the Manager has agreed to reimburse the
Portfolio for $63,835 in expenses for the period ended May 31, 1996. If
the Manager had not agreed to the fee waiver and the expense
reimbursement, the per share decrease in net investment income and the
ratio of expenses to average net assets would have been:
Per Share Expense Ratio
Decrease in Net Without Fee Waiver
Investment Income and Reimbursement
----------------- -----------------
1998 1997 1996(1) 1998 1997 1996(1)
------ ------ ------ ---- ---- ----
Municipal Portfolio $0.001 $0.004 $0.003 0.41% 0.41% 0.69%+
(3) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets of the Portfolio will not exceed 0.80%. * Amount
represents less than $0.001.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
5
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Investment Objectives and Policies
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The investment objective of each Portfolio set forth in this Prospectus is
fundamental and may not be changed without the affirmative vote of a majority of
the outstanding voting securities of that Portfolio. Shareholders will be
notified of material changes in investment policies. The Portfolios are subject
to additional investment policies and restrictions described in the Statement of
Additional Information, some of which are fundamental and may not be changed
without shareholder approval.
The investment objective of each of the Cash Portfolio and the Government
Portfolio is to seek maximum current income to the extent consistent with
preservation of capital and the maintenance of liquidity. The investment
objective of the Municipal Portfolio is to seek maximum current income that is
exempt from Federal income taxes to the extent consistent with preservation of
capital and the maintenance of liquidity. There can be no assurance that a
Portfolio will achieve its investment objective or be able to maintain a stable
net asset value of $1.00 per share.
Common Investment Policies
The Portfolios will invest only in eligible high quality, short-term money
market instruments that present minimal credit risks, as determined by Mutual
Management Corp. ("MMC") (formerly known as Smith Barney Mutual Funds Management
Inc.), the Funds' investment manager, pursuant to procedures adopted by the
Fund's Board of Directors (the "Directors"). Each Portfolio may invest only in
U.S. dollar denominated instruments that have a remaining maturity of 13 months
or less (as calculated pursuant to Rule 2a-7 under the Investment Company Act of
1940, as amended (the "1940 Act"), and will maintain a dollar weighted average
portfolio maturity of 90 days or less.
Portfolio Quality
Each Portfolio will limit its investments to securities that the Directors
determine present minimal credit risks and that are "Eligible Securities" at the
time of acquisition by the Portfolio. 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, in the case of the Portfolios, (a) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a rating
with respect to a security or class of debt obligations of an issuer or (b) one
NRSRO, if only one NRSRO has issued a rating with respect to such security or
issuer at the time the Portfolio acquires the security. The NRSROs currently
designated as such by the SEC are Standard & Poor's Ratings Group ("S & P"),
Moody's Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc., Duff and Phelps
Credit Rating Co. and Thomson
6
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Investment Objectives and Policies (continued)
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BankWatch. A more detailed discussion of the categories of Municipal Obligations
(as defined below) and the ratings of NRSROs is contained in the Statement of
Additional Information relating to the Portfolios.
In addition, the Cash Portfolio and the Government Portfolio may not
invest more than 5% of their respective total assets in Eligible Securities that
have not received the highest rating from the Requisite NRSROs and comparable
unrated securities ("Second Tier Securities") and may not invest more than the
greater of 1% of their respective total assets or one million dollars in the
Second Tier Securities of any one issuer.
The Cash Portfolio
The Cash Portfolio pursues its objective by investing primarily in high
quality commercial paper and obligations of financial institutions. The
Portfolio may also invest in U.S. Government Securities (as defined below) and
municipal securities, although the Portfolio expects to invest in such
securities to a lesser degree.
Debt Securities -- The Portfolio may invest in debt obligations of
domestic and foreign issuers, including commercial paper (short-term promissory
notes issued by companies to finance their, or their affiliates', current
obligations), notes and bonds and variable amount master demand notes. The
Portfolio may invest in privately issued commercial paper that is restricted as
to disposition under the federal securities laws. In general, any sale of this
paper may not be made without registration under the Securities Act of 1933, as
amended (the "1933 Act"), or the availability of an appropriate exemption
therefrom. Pursuant to the provisions of Section 4(2) of the 1933 Act, however,
some privately issued commercial paper ("Section 4(2) paper") is eligible for
resale to institutional investors, and accordingly, MMC may determine that a
liquid market exists for that paper pursuant to guidelines adopted by the
Directors. If a particular investment in Section 4(2) paper is not determined to
be liquid, that investment will be included within the 10% limitation on
illiquid securities.
Obligations of Financial Institutions -- The Portfolio may invest in
obligations of financial institutions. Examples of obligations in which the
Portfolio may invest include negotiable certificates of deposit, bankers'
acceptances and time deposits of U.S. banks having total assets in excess of $1
billion or the equivalent of $1 billion in other currencies (in the case of
foreign banks) and securities backed by letters of credit of U.S. banks or other
U.S. financial institutions that are members of the Federal Reserve System or
the Federal Deposit Insurance Corporation ("FDIC") (including obligations of
foreign branches of such members), if either: (a) the principal amount of the
obligation is insured in full by the FDIC, or (b) the issuer of such obligation
has capital, surplus and undivided profits in excess of $100 million or total
assets of $1 billion (as reported in its most recently published financial
statements prior to the date of investment). Under current FDIC regulations, the
7
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Investment Objectives and Policies (continued)
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maximum insurance payable as to any one certificate of deposit is $100,000;
therefore, certificates of deposit in denominations greater than $100,000 that
are purchased by the Portfolio will not be fully insured. The Cash Portfolio may
purchase fixed time deposits maturing from two business days to seven calendar
days up to 10% of its total assets. The Cash Portfolio may also purchase fixed
time deposits maturing in more than seven calendar days but in less than one
year, provided, however, that such fixed time deposits shall be considered
illiquid securities.
The Cash Portfolio intends to maintain at least 25% of its total assets
invested in obligations of domestic and foreign banks, subject to the
abovementioned size criteria. The Portfolio may invest in instruments issued by
domestic banks, including those issued by their branches outside the United
States and subsidiaries located in Canada, and in instruments issued by foreign
banks through their branches located in the United States and the United
Kingdom. In addition, the Cash Portfolio may invest in fixed time deposits of
foreign banks issued through their branches located in Grand Cayman Island,
Nassau, Tokyo and Toronto. The Portfolio may also invest in Eurodollar and
Yankee bank obligations as discussed below.
Eurodollar or Yankee Obligations -- Eurodollar bank obligations are dollar
denominated certificates of deposit or time deposits issued outside the U.S.
capital markets by foreign branches of U.S. banks and by foreign banks. Yankee
bank obligations are dollar denominated obligations issued in the U.S. capital
markets by foreign banks. Eurodollar (and to a limited extent, Yankee) bank
obligations are subject to certain sovereign risks. One such risk is the
possibility that a foreign government might prevent dollar denominated funds
from flowing across its borders. Other risks include: adverse political and
economic developments in a foreign country; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and expropriation or nationalization of foreign issuers. See
"Risks and Special Considerations."
U.S. Government Securities -- The Portfolio may invest without limit in
U.S. Government Securities as described below under "The Government Portfolio."
Municipal Securities -- The Portfolio may invest in obligations of states,
territories or possessions of the United States and their subdivisions,
authorities and corporations as described below under "The Municipal Portfolio."
These obligations may pay interest that is exempt from Federal income taxation.
Custodial Receipts -- The Cash Portfolio may acquire custodial receipts or
certificates with respect to U.S. Government Securities, such as CATS, TIGRs and
FICO Strips, underwritten by securities dealers or banks that evidence ownership
of future interest payments, principal payments or both on certain notes or
bonds
8
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Investment Objectives and Policies (continued)
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issued by the U.S. Government, its agencies, authorities or instrumentalities.
The underwriters of these certificates or receipts purchase a U.S. Government
Security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government Security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government Securities but are not U.S. Government Securities. Although
typically under the terms of a custodial receipt the Cash Portfolio is
authorized to assert its rights directly against the issuer of the underlying
obligation, the Cash Portfolio may be required to assert through the custodian
bank such rights as may exist against the underlying issuer. Thus, in the event
the underlying issuer fails to pay principal and/or interest when due, the Cash
Portfolio may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Cash Portfolio had purchased a direct
obligation of the issuer. In addition, in the event that the trust or custodial
account in which the underlying security has been deposited is determined to be
an association taxable as a corporation, instead of a nontaxable entity, the
yield on the underlying security would be reduced in respect of any taxes paid.
The Government Portfolio
The Government Portfolio pursues its objective by investing exclusively in
obligations issued and/or guaranteed, as to payment of principal and interest,
by the United States government or by its agencies and instrumentalities and
repurchase agreements secured by such obligations. The Government Portfolio will
be rated from time to time by S&P and Moody's.
U.S. Government Securities -- U.S. government securities are securities
issued or guaranteed by the U.S. government, its agencies and instrumentalities
and include repurchase agreements collateralized and municipal securities
refunded with escrowed U.S. government securities ("U.S. Government
Securities"). U.S. Government Securities in which the Portfolio may invest
include U.S. Treasury securities and obligations issued or guaranteed by U.S.
government agencies and instrumentalities that are backed by the full faith and
credit of the U.S. government, such as those guaranteed by the Small Business
Administration or issued by the Government National Mortgage Association. In
addition, U.S. Government Securities in which the Portfolio may invest include
securities supported by the right of the issuer to borrow from the U.S.
Treasury, such as securities of Federal Home Loan Banks; and securities
supported primarily or solely by the creditworthiness of the issuer, such as
securities of the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation and the Tennessee Valley Authority. There is no guarantee
that the U.S. government will support
9
<PAGE>
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
securities not backed by its full faith and credit. Accordingly, although these
securities have historically involved little risk of loss of principal if held
to maturity, they may involve more risk than securities backed by the full faith
and credit of the U.S. government.
The Municipal Portfolio
The Municipal Portfolio pursues its objective by investing primarily in
municipal securities whose interest is exempt from Federal income taxes. Under
normal market conditions, the Portfolio will invest at least 80% of its assets
in municipal securities whose interest is exempt from Federal income taxes.
However, the Portfolio reserves the right to invest up to 20% of the value of
its assets in securities whose interest is federally taxable. In addition, the
Portfolio may invest without limit in private activity bonds. Interest income on
certain types of private activity bonds issued after August 7, 1986 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 Portfolio's dividends are derived from interest on these bonds.
These private activity bonds are included in the term "municipal securities" for
purposes of determining compliance with the 80% test described above. Dividends
derived from interest income on all municipal securities are a component of the
"current earnings" adjustment item for purposes of the Federal corporate
alternative minimum tax. Additionally, when MMC is unable to locate investment
opportunities with desirable risk/reward characteristics, the Portfolio may
invest without limit in cash and cash equivalents, including obligations that
may be Federally taxable (See "Taxable Investments").
Municipal Securities -- The municipal securities in which the Portfolio
may invest include municipal notes and short-term municipal bonds. Municipal
notes are generally used to provide for the issuer's short-term capital needs
and generally have maturities of thirteen months or less. Examples include tax
anticipation and revenue anticipation notes, which generally are issued in
anticipation of various seasonal revenues, bond anticipation notes, construction
loan notes and tax-exempt commercial paper. Short-term municipal bonds may
include "general obligation bonds," which are secured by the issuer's pledge of
its faith, credit and taxing power for payment of principal and interest;
"revenue bonds," which are generally paid from the revenues of a particular
facility or a specific excise tax or other source; and "industrial development
bonds," which are issued by or on behalf of public authorities to provide
funding for various privately operated industrial and commercial facilities. The
Portfolio may also invest in high quality participation interests in municipal
securities. A more detailed description of various types of municipal securities
is contained in Appendix B in the Statement of Additional Information.
10
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
When the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government creating
the issuing entity and a security is backed only by the assets and revenues of
the issuing entity, that entity will be deemed to be the sole issuer of the
security. Similarly, in the case of an industrial development bond backed only
by the assets and revenues of the non-governmental issuer, the non-governmental
issuer will be deemed to be the sole issuer of the bond.
At times, the Portfolio may invest more than 25% of the value of its total
assets in tax-exempt securities that are related in such a way that an economic,
business, or political development or change affecting one such security could
similarly affect the other securities; for example, securities whose issuers are
located in the same state, or securities whose interest is derived from revenues
of similar type projects. The Portfolio may also invest more than 25% of its
assets in industrial development bonds or participation interests therein.
The Municipal Portfolio intends to conduct its operations so as to qualify
as a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the Portfolio of any liability
for Federal income tax to the extent that its earnings are distributed to
shareholders. In order to so qualify, among other things, the Portfolio must
ensure that, at the close of each quarter of the taxable year, (i) not more than
25% of the market value of the Portfolio's total assets will be invested in the
securities (other than U.S. Government Securities) of a single issuer or of two
or more issuers that the Portfolio controls and that are engaged in the same,
similar or related trades or businesses and (ii) at least 50% of the market
value of the Portfolio's total assets is represented by (a) cash and cash items,
(b) U.S. Government Securities and (c) other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the market value of
the Portfolio's total assets and to not more than 10% of the outstanding voting
securities of the issuer.
Yields on municipal securities are dependent on 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 the rating of the issue. The achievement of the Portfolio's
investment objective is dependent in part on the continuing ability of the
issuers of municipal securities in which the Portfolio invests to meet their
obligations for the payment of principal and interest when due. Obligations of
issuers of municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Bankruptcy Reform Act of 1978, as amended. Therefore, the possibility
exists that as a result of litigation or other conditions, the ability of any
issuer to pay, when due, the principal of and interest on its municipal
securities may be materially affected.
11
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Investment Objectives and Policies (continued)
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Municipal Leases -- The Portfolio may invest in municipal leases or
participation interests therein. Municipal leases are municipal securities which
may take the form of a lease or an installment purchase or conditional sales
contract. Municipal leases are issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities.
Lease obligations may not be backed by the issuing municipality's credit
and may involve risks not normally associated with general obligation bonds and
other revenue bonds. For example, their interest may become taxable if the lease
is assigned and the holders may incur losses if the issuer does not appropriate
funds for the lease payment on an annual basis, which may result in termination
of the lease and possible default. MMC may determine that a liquid market exists
for municipal lease obligations pursuant to guidelines established by the
Directors.
Taxable Investments -- As discussed above, although the Portfolio will
attempt to invest substantially all of its assets in municipal securities whose
interest is exempt from Federal income tax, the Portfolio may, under certain
circumstances, invest in certain securities whose interest is subject to such
taxation. These securities include: (i) short-term obligations of the U.S.
government, its agencies or instrumentalities, (ii) certificates of deposit,
bankers' acceptances and interest bearing savings deposits of banks having total
assets of more than $1 billion and whose deposits are insured by the FDIC, (iii)
commercial paper and (iv) repurchase agreements as described below covering any
of the securities described in items (i) and (iii) above or any other
obligations of the U.S. government, its agencies or instrumentalities.
Derivative Products -- The Municipal Portfolio 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 Portfolio holds
an interest in one or more underlying bonds coupled with a conditional right to
sell ("put") the Portfolio'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.
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
Investments in derivative products raise certain tax, legal, regulatory
and accounting issues which may not be presented by investments in other
municipal obligations. There is some risk that certain issues could be resolved
in a manner which could adversely impact the performance of the Portfolio. 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 Portfolio
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.
The Portfolio intends to limit the risk of derivative products by
purchasing only those derivative products that are consistent with the
Portfolio's investment objective and policies. The Portfolio will not use such
instruments to leverage securities. Hence, derivative products' contributions to
the overall market risk characteristics of a Portfolio will not materially alter
its risk profile and will be fully consistent with the Portfolio's maturity
guidelines.
Stand-by Commitments -- The Municipal Portfolio may acquire "stand-by
commitments" with respect to municipal securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase, at the Portfolio's option,
specified municipal securities at a specified price. The Portfolio intends to
enter into stand-by commitments only with dealers, banks and broker-dealers
which, in the opinion of MMC, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, MMC will periodically
review the issuer's assets, liabilities, contingent claims and other relevant
financial information. The Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
Year 2000 -- The investment management services provided to the Fund by
MMC and the services provided to shareholders by Salomon Smith Barney depend on
the smooth functioning of their computer systems. Many computer software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer agent
and accounting service agent that they are also in the process of modifying
13
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
their systems with the same goal. There can, however, be no assurance that MMC,
Salomon Smith Barney or any other service provider will be successful, or that
interaction with other non-complying computer systems will not impair Fund
services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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Common Investment Techniques
- --------------------------------------------------------------------------------
Participation Interests -- The Portfolios may invest in participation
interests in any type of security in which the Portfolios may invest. A
participation interest gives a Portfolio an undivided interest in the underlying
securities in the proportion that the Portfolio's participation interest bears
to the total principal amount of the underlying securities. Participation
interests usually carry a demand feature, as described below, backed by a letter
of credit or guarantee of the institution that issued the interests permitting
the holder to tender them back to the institution.
Demand Features -- The Portfolios may invest in securities that are
subject to puts and standby commitments ("demand features"). Demand features
give the Portfolio the right to resell securities at specified periods prior to
their maturity dates to the seller or to some third party at an agreed upon
price or yield. Securities with demand features may involve certain expenses and
risks, including the inability of the issuer of the instrument to pay for the
securities at the time the instrument is exercised, non-marketability of the
instrument and differences between the maturity of the underlying security and
the maturity of the instrument. Securities may cost more with demand features
than without them. Demand features can serve three purposes: (i) to shorten the
maturity of a variable or floating rate security, (ii) to enhance the
instrument's credit quality, and (iii) to provide a source of liquidity. Demand
features are often issued by third party financial institutions, generally
domestic and foreign banks. Accordingly, the credit quality and liquidity of the
Portfolios' investments may be dependent in part on the credit quality of the
banks supporting the Portfolios' investments and changes in the credit quality
of these financial institutions could cause losses to the Portfolios and effect
their share prices. This will result in exposure to risks pertaining to the
banking industry, including the foreign banking industry. Brokerage firms and
insurance companies also provide certain liquidity and credit support.
Variable and Floating Rate Securities -- The securities in which the
Portfolios
14
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Common Investment Techniques (continued)
- --------------------------------------------------------------------------------
invest may have variable or floating rates of interest. These securities pay
interest at rates that are adjusted periodically according to a specified
formula, usually with reference to some interest rate index or market interest
rate. Securities with ultimate maturities of greater than 13 months may be
purchased only pursuant to Rule 2a-7. Under that Rule, only those long-term
instruments that have demand features which comply with certain requirements and
certain variable rate U.S. Government Securities may be purchased. Similar to
fixed rate debt instruments, variable and floating rate instruments are subject
to changes in value based on changes in market interest rates or changes in the
issuer's or guarantor's creditworthiness. The rate of interest on securities
purchased by a Portfolio may be tied to short-term Treasury or other government
securities or indices on securities that are permissible investments of the
Portfolios, as well as other money market rates of interest. The Portfolios will
not purchase securities whose values are tied to interest rates or indexes that
are not appropriate for the duration and volatility standards of a money market
fund.
Mortgage and Asset-Backed Securities -- Each of the Cash Portfolio and the
Government Portfolio may purchase fixed or adjustable rate mortgage-backed
securities issued by the Government National Mortgage Association, Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation. In
addition, the Cash Portfolio may purchase other asset-backed securities,
including securities backed by automobile loans, equipment leases or credit card
receivables. These securities directly or indirectly represent a participation
in, or are secured by and payable from, fixed or adjustable rate mortgage or
other loans which may be secured by real estate or other assets. Unlike
traditional debt instruments, payments on these securities include both interest
and a partial payment of principal. Prepayments of the principal of underlying
loans may shorten the effective maturities of these securities and may result in
a Portfolio having to reinvest proceeds at a lower interest rate.
Repurchase Agreements -- Each Portfolio may seek additional income by
entering into repurchase agreements with respect to obligations that could
otherwise be purchased by a Portfolio. Repurchase agreements are transactions in
which a Portfolio purchases securities (normally U.S. Government Securities) and
simultaneously commits to resell those securities to the seller at an agreed
upon price on an agreed upon future date, normally one to seven days later. The
resale price reflects a market rate of interest that is not related to the
coupon rate or maturity of the securities. If the seller of the securities
underlying a repurchase agreement fails to pay the agreed resale price on the
agreed delivery date, a Portfolio may incur costs in disposing of the collateral
and may experience losses if there is any delay in its ability to do so. The
Fund's custodian maintains possession of the underlying collateral, which is
maintained at not less than 100% of the repurchase price.
Reverse Repurchase Agreements -- Each Portfolio may enter into reverse
15
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Common Investment Techniques (continued)
- --------------------------------------------------------------------------------
repurchase agreements. Reverse repurchase agreements are transactions in which a
Portfolio sells a security and simultaneously commits to repurchase that
security from the buyer at an agreed upon price on an agreed upon future date.
This technique will be used only for temporary or emergency purposes, such as
meeting redemption requests or to earn additional income on portfolio
securities.
When-Issued or Delayed Delivery Securities -- Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Securities so purchased
are subject to market price fluctuation from the time of purchase but no
interest on the securities accrues to a Portfolio until delivery and payment for
the securities take place. Accordingly, the value of the securities on the
delivery date may be more or less than the purchase price. The Fund's Custodian
will maintain, in a segregated account of the Portfolio, cash, debt securities
of any grade or equity securities, having a value equal to or greater than the
Portfolio's purchase commitments, provided such securities have been determined
by MMC to be liquid and unencumbered, and are marked to market daily, pursuant
to guidelines established by the directors. Forward commitments will be entered
into only when a Portfolio has the intention of taking possession of the
securities, but a Portfolio may sell the securities before the settlement date
if deemed advisable.
Borrowing and Lending -- Each Portfolio may borrow money for temporary or
emergency purposes in amounts up to 33 1/3% of its total assets; provided,
however that no additional investments will be made while borrowings exceed 5%
of a Portfolio's total assets. A Portfolio may not mortgage or pledge securities
except to secure permitted borrowings. As a fundamental policy, a Portfolio will
not lend securities or other assets if, as a result, more than 20% of its total
assets would be lent to other parties; however, the Portfolios do not currently
intend to engage in securities lending.
Portfolio Turnover -- Because the Portfolios invest in securities with
relatively short-term maturities, each Portfolio is expected to have a high
portfolio turnover rate. However, a high turnover rate should not increase a
Portfolio's costs because brokerage commissions are not normally charged on the
purchase and sale of money market instruments.
- --------------------------------------------------------------------------------
Risks and Special Considerations
- --------------------------------------------------------------------------------
Although each Portfolio only invests in high quality money market
instruments, an investment in a Portfolio is subject to risk even if all
securities in a Portfolio's portfolio are paid in full at maturity. All money
market instruments, including U.S. Government Securities, can change in value as
a result of changes in interest rates, the issuer's actual or perceived
creditworthiness or the issuer's ability to meet its obligations.
16
<PAGE>
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Risks and Special Considerations (continued)
- --------------------------------------------------------------------------------
Each Portfolio will be affected by general changes in interest rates which
will result in increases or decreases in the value of the obligations held by
such Portfolio. The market value of the obligations in each Portfolio can be
expected to vary inversely to changes in prevailing interest rates. Investors
should recognize that, in periods of declining interest rates, the yield of each
Portfolio will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates, the yield of each Portfolio will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to each Portfolio from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the balance of the
Portfolio, thereby reducing the current yield of the Portfolio. In periods of
rising interest rates, the opposite can be expected to occur. In addition,
securities in which the Portfolios will invest may not yield as high a level of
current income as might be achieved by investing in securities with less
liquidity and safety and longer maturities.
Investments in securities issued by foreign banks or foreign issuers
present certain risks, including those resulting from fluctuations in currency
exchange rates, revaluation of currencies, future political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions and reduced availability of public
information. Foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements applicable to domestic issuers. In addition, there may be less
publicly available information about a foreign bank than about a domestic bank.
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Valuation of Shares
- --------------------------------------------------------------------------------
The net asset value per share of the Cash Portfolio and the Government
Portfolio is determined as of 2 pm New York City time on each day that the New
York Stock Exchange ("NYSE") and the Fund's custodian are open. The net asset
value per share of the Municipal Portfolio is determined as of 12 noon, New York
City time on each day that the NYSE and the Fund's custodian are open. The net
asset value per share of each Portfolio is determined by dividing the
Portfolio's net assets attributable to the Class (i.e., the value of its assets
less liabilities) by the total number of shares of the Class outstanding. Each
Portfolio 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.
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Dividends, Automatic Reinvestment and Taxes
- --------------------------------------------------------------------------------
Dividends and Distributions
Each Portfolio declares a dividend from its net investment income daily,
for each day the NYSE is open to conduct business, and pays dividends monthly.
If a shareholder redeems an account in full between monthly dividend payment
dates, all dividends declared up to and including the date of liquidation will
be paid with the redemption proceeds. Dividends from net realized capital gains,
if any, will be distributed annually. The Portfolios may also pay additional
dividends shortly before December 31 from certain amounts of undistributed
ordinary income and capital gains, in order to avoid a Federal excise tax
liability. If a shareholder does not otherwise instruct, monthly income
dividends and capital gain distributions will be reinvested automatically in
additional shares of the same Class at net asset value, with no additional sales
charge or CDSC.
The per share amounts of dividends from net investment income on Class B
shares may be lower than that of Class A shares, mainly as a result of the
service fees applicable to the Class B shares. Capital gain distributions, if
any, will be the same across both Classes of Fund shares.
Taxes
The following is a summary of the material federal tax considerations
affecting the separate Portfolios and their shareholders. In addition to the
considerations described below and in the SAI, there may be other federal,
state, local, and/or foreign tax applications to consider. Because taxes are a
complex matter, prospective shareholders are urged to consult their tax advisors
for more detailed information with respect to the tax consequences of any
investment.
Each Portfolio of the Fund will be treated as a separate entity for tax
purposes. The Portfolios intend to qualify, as in prior years, under Subchapter
M of the Internal Revenue Code (the "Code") for tax treatment as regulated
investment companies. In each taxable year that the separate Portfolios qualify,
so long as such qualification is in the best interests of its shareholders, the
Portfolios will pay no federal income tax on the net investment company taxable
income and long-term capital gain that is distributed to its shareholders. The
Municipal Portfolio also intends to satisfy conditions that will enable it to
pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends
are generally not subject to regular federal income taxes, although, may be
considered taxable for certain state and local income (or intangible) tax
purposes.
Dividends paid from net investment income (other than "exempt-interest
dividends") and net realized short-term securities gain, are subject to federal
income tax as ordinary income. Distributions, if any, from net realized
long-term securities gains, derived from the sale of securities held by the
Portfolio for more than one year, are taxable as long-term capital gains,
regardless of the length of time a shareholder has owned Portfolio shares.
18
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Dividends, Automatic Reinvestment and Taxes (continued)
- --------------------------------------------------------------------------------
Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid will qualify for the corporate dividends received deduction.
Dividends consisting of interest from U.S. government securities may be exempt
from state and local income taxes. Shareholders will be informed of the source
and tax status of all distributions promptly after the close of each calendar
year.
The Portfolios are required to withhold ("backup withholding") 31% of all
taxable dividends, capital gain distributions, and the proceeds of any
redemption, regardless of whether gain or loss is realized upon the redemption,
for shareholders who do not provide the Portfolios with a correct taxpayer
identification number (social security or employer identification number).
Withholding from taxable dividends and capital gain distributions also is
required for shareholders who otherwise are subject to backup withholding. Any
tax withheld as a result of backup withholding does not constitute an additional
tax, and may be claimed as a credit on the shareholders' federal income tax
return.
The Municipal Portfolio
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. In addition to the alternative minimum tax, corporate shareholders
must include this percentage as a component in the corporate environmental tax
computation. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase, or carry Portfolio shares, is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all, or a portion
of, any gains realized from the sale or other disposition of certain market
discount bonds are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains, derived
from the sale of bonds held by the Portfolio for more than one year, are taxable
as long-term capital gains, regardless of the length of time a shareholder has
owned Fund shares.
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Purchase of Shares
- --------------------------------------------------------------------------------
Purchases of Portfolio shares may be made directly through the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data"), through
a brokerage account maintained with Salomon Smith Barney or with a broker that
clears securities transactions through Salomon Smith Barney on a fully disclosed
basis (an "Introducing Broker"). Salomon 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. 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.
Class A shares are available for purchase by institutional investors on their
own behalf.
The minimum initial investment in each Portfolio is $1,000,000. The
minimum subsequent investment is $50.
The issuance of shares of a Portfolio is recorded on the books of the
Fund, and, to avoid additional operating costs and for investor convenience,
stock certificates will not be issued unless expressly requested in writing by a
shareholder. Certificates will not be issued for fractional shares.
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 First Data, Salomon 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 Board) that are either in the
client's brokerage account at Salomon Smith Barney or the Introducing Broker
before the Portfolio's close of business. 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 Salomon Smith Barney or the Introducing Broker, the order becomes effective
on the day of receipt if the order is received prior to 12 noon (New York time)
which is the close of business with respect to orders for the Municipal
Portfolio and 2:00 p.m. (New York time) which is the close of business with
respect to orders for the Cash and Government Portfolios, on any day the Fund
calculates its net asset value. See "Valuation of Shares". Purchase orders
received after the close of business or with respect to which Federal funds are
not available, or when orders for the purchase of shares are paid for other than
in Federal funds, will not be accepted and a new purchase order will need to be
submitted on the next day the Fund calculates the Portfolio's net asset value.
Shares purchased begin to accrue income dividends on the business day the
purchase order becomes effective.
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Exchange Privilege
- --------------------------------------------------------------------------------
Shareholders of a Portfolio may exchange their shares for shares of any
other Portfolio on the basis described below. To qualify for the Exchange
Privilege, a shareholder must exchange shares with a current value of at least
$1,000. Under the Exchange Privilege, each of the Portfolios offers to exchange
its shares for shares of any other Portfolio, on the basis of relative net asset
value per share. Since all of the Portfolios seek to maintain a constant $1.00
net asset value per share, it is expected that any exchange with those funds
would be on a share-for-share basis. If in utilizing the Exchange Privilege the
shareholder exchanges all his shares of a Portfolio, all dividends accrued on
such shares for the month to date will be invested in shares of the Portfolio
into which the exchange is being made. An exchange between Portfolios pursuant
to the Exchange Privilege is treated as a sale for Federal income tax purposes
and depending upon the circumstances, a short- or long-term capital gain or loss
may be realized.
To exercise the Exchange Privilege, shareholders should contact First Data
or their Salomon Smith Barney Financial Consultant, who will advise the
applicable Portfolio of the exchange. A shareholder may make exchanges by
telephone, provided that (i) he has elected the telephone exchange option on the
account application, (ii) the registration of the account for the new Portfolio
will be the same as for the Portfolio from which it is exchanged, and (iii) the
shares to be exchanged are not in certificate form. To make exchanges by
telephone, a shareholder should call the telephone number listed above. The
shareholder should identify himself by name and account number and give the name
of the Portfolio into which he wishes to make the exchange, the name of the
Portfolio and the number of shares he wishes to exchange. The shareholder also
may write to First Data requesting that the exchange be effected. Such letter
must be signed exactly as the account is registered with signature(s) guaranteed
by a commercial bank which is a member of the FDIC, a trust company or a member
firm of a domestic securities exchange. The Fund reserves the right to acquire a
properly completed Exchange Application.
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Redemption of Shares
- --------------------------------------------------------------------------------
These exchange privileges may be modified or terminated at any time.
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 prior to 2:00 p.m. (12:00 noon in
the case of the Municipal Portfolio), New York time, are priced at the net asset
value as next determined. Redemption requests received after 2:00 p.m. (12:00
noon in the case of the Municipal Portfolio), New York time, will not be
accepted and a new redemption request should be submitted on the following day
that the Fund
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Redemption of Shares (continued)
- --------------------------------------------------------------------------------
calculates its net asset value. Redemption requests must be made through Salomon
Smith Barney, an introducing broker or the securities dealer in the selling
group through whom the shares were purchased, except that shareholders who
purchased shares of the Fund from First Data may also redeem shares directly
through First Data. A shareholder desiring to redeem shares represented by
certificates also must present the certificates to Salomon 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 represented by certificates will not be deemed
received until certificates are received by First Data in proper form.
Shares held at Salomon Smith Barney. A redemption request received by
Salomon Smith Barney in proper form before 2:00 p.m. (12:00 noon in the case of
the Municipal Portfolio) will not earn a dividend on the day the request is
received and redemption proceeds will be credited to a shareholder's account on
the same day.
Shares held at First Data. A shareholder who purchased shares of the Fund
directly through First Data may redeem shares through First Data in the manner
described in the Prospectus under "Expedited Redemption Procedures" and
"Ordinary Redemption Procedures".
Expedited Redemption Procedures
Shareholders meeting the requirements stated below may initiate
redemptions by submitting their redemption requests by telephone at 800-451-2010
or mail to First Data and have the proceeds sent by a Federal funds wire to a
previously designated bank account. A redemption request received prior to 2:00
p.m. (12:00 noon in the case of the Municipal Portfolio) (New York time) will
not earn a dividend on the day the request is received and payment will be made
in Federal funds wired on the same business day. If an expedited redemption
request for which the redemption proceeds will be wired is received after 2:00
p.m. (12:00 noon in the case of the Municipal Portfolio) (New York time), and
prior to the close of regular trading on a day on which First Data is open for
business, the redemption proceeds will be wired on the next business day
following the redemption request that First Data is open for business. A
redemption request received after 2:00 p.m. (12:00 noon in the case of the
Municipal Portfolio) (New York time) will earn a dividend on the day the request
is received. If an expedited redemption request is received after the regular
close of trading on the NYSE or on a day that Salomon Smith Barney or First Data
is closed, the redemption proceeds will be wired on the next business day
following receipt of the redemption request. Therefore, a redeeming shareholder
will receive a dividend on the day the request is received, but not on the day
that shares are redeemed out of his account. The Fund or First Data will not be
liable for following instructions communicated by telephone that they reasonably
22
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
believe to be genuine. In this regard, the Fund and First Data will employ
reasonable procedures to confirm that instructions communicated by telephone are
genuine. Telephone redemptions and exchanges are not available for shares for
which certificates have been issued.
To utilize the expedited redemption procedure, all shares must be held in
non-certificate form in the shareholder's account. In addition, an account
application with the expedited section properly completed must be on file with
First Data before an expedited redemption request is submitted. This form
requires a shareholder to designate the bank account to which its redemption
proceeds should be sent. Any change in the bank account designated to receive
the proceeds must be submitted in proper form on a new account application with
signature guaranteed. In making a telephone redemption request, a shareholder
must provide the shareholder's name and account number, the dollar amount of the
redemption requested, the name of the Portfolio, and the name of the bank to
which the redemption proceeds should be sent. If the information provided by the
shareholder does not correspond to the information on the application, the
transaction will not be approved. If, because of unusual circumstances, a
shareholder is unable to contact First Data at the telephone number listed on
the preceding page to make an expedited redemption request, he may contact his
Salomon Smith Barney Financial Consultant to effect such a redemption, or
request redemption in writing as described under "Ordinary Redemption
Procedures" below.
Ordinary Redemption Procedures
If this method of redemption is used, the shareholder may submit his
redemption request in writing to First Data. A Portfolio will make payment for
shares redeemed pursuant to the ordinary redemption procedures by check sent to
the shareholder at the address on such shareholder's account application. Such
checks will normally be sent out within one business day, but in no event more
than three business days after receipt of the redemption request in proper form.
If certificates have been issued representing the shares to be redeemed, prior
to effecting a redemption with respect to such shares, First Data must have
received such certificates. A shareholder's signature must be guaranteed by an
"eligible guarantor institution", as such term is defined by Rule 17 Ad-15 of
the Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by First Data through use of industry publications. A
notary public is not an acceptable guarantor. In certain instances, First Data
may request additional documentation which it believes necessary to insure
proper authorization such as, but not limited to: trust instruments, death
certificates, appointment of executor or administrator, or certificates of
corporate authority. Shareholders having questions regarding proper
documentation should contact First Data.
23
<PAGE>
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to redeem involuntarily any shareholder's
account if the aggregate net asset value of the shares of a Portfolio held in
the account is less than $100,000 (if a shareholder has more than one account in
a Portfolio, each account must satisfy the minimum account size.) Before the
Directors of the Fund elect to exercise such right, shareholders will receive
prior written notice and will be permitted 60 days to bring accounts up to the
minimum to avoid involuntary redemption.
- --------------------------------------------------------------------------------
Yield Information
- --------------------------------------------------------------------------------
The Portfolios may measure performance in several ways, including "yield",
"effective yield" and "tax equivalent yield" (for the Municipal Portfolio only).
A Portfolio's yield is a way of showing the rate of income the Portfolio earns
on its investments as a percentage of the Portfolio's share price. Yield
represents the income, less expenses generated by the investments, in the
Portfolio over a seven-day period expressed as an annual percentage rate.
Effective yield is similar in that it is calculated over the same time frame,
but instead the net investment income is compounded and then annualized. Due to
the compounding effect, the effective yield will normally be higher than the
yield. The Municipal Portfolio may also quote its tax-equivalent yield, which
shows the taxable yield an investor would have to earn before taxes to equal the
Portfolio's tax-free yield. Portfolio yield figures are based upon historical
earnings and are not intended to indicate future performance.
From time to time in advertisements or sales material, the Portfolios may
discuss their performance ratings or other information as published by
recognized statistical or rating services, such as Lipper Analytical Services,
Inc., IBC Money Fund Report, Morningstar, or by publications of general
interest, such as Forbes or Money. In addition, the Portfolios may compare their
yields to those of certain U.S. Treasury obligations or other money market
instruments.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
Directors
Overall responsibility for management and supervision of the Fund rests
with its Directors. The Directors approve all significant agreements between the
Fund and the companies that furnish services to the Fund and each Portfolio,
including agreements with the Fund's distributor, investment manager, custodian
and transfer agent. The day-to-day operations of each Portfolio are delegated to
the Portfolio's investment manager. The Statement of Additional Information
contains background information regarding each Director and executive officer of
the Fund.
24
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Investment 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,
subject to the direction of the Directors of the Fund. As compensation for MMC's
services to the Portfolios, each Portfolio pays a monthly fee at the annual rate
of 0.27% of the value of that Portfolio's average daily net assets.
MMC waived a portion of its management fee for the Fund for the fiscal year
ended May 31, 1998, and the effective rate of the management fee was 0.15%,
0.11% and 0.09% of the daily net assets for the Cash Portfolio, Government
Portfolio and Municipal Portfolio, respectively. For the past fiscal year,
total operating expenses without the management fee waiver were 0.35%, 0.39%
and 0.41% of the average daily net assets for the Cash Portfolio, Government
Portfolio and Municipal Portfolio, respectively.
MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.,
which is a wholly owned subsidiary of Travelers Group, Inc. ("Travelers"), a
diversified financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services,
including Asset Management, Consumer Finance Services, Life Insurance Services
and Property & Casualty Services. Salomon Smith Barney and Salomon Smith Barney
Holdings Inc. are each located at 388 Greenwich Street, New York, New York
10013.
MMC was incorporated on March 12, 1968 under the laws of Delaware. As of
August 31, 1998 MMC had aggregate assets under management in excess of $106
billion.
On April 6, 1998, Travelers announced that it had entered into a
Merger Agreement with Citicorp. The transaction was approved
by the stockholders of both Travelers and Citicorp on June 22, 1998
and by the Federal Reserve Board on September 23, 1998. The companies
expect the merger to close on or about October 8, 1998, creating a new
entity to be called Citigroup. By approving the merger, the Federal
Reserve Board approved Travelers, as the surviving entity, becoming 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. MMC does not believe that
its compliance with the applicable law 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.
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Salomon Smith Barney serves as Principal Underwriter of shares of the
Fund. The Fund has adopted a Distribution and Shareholder Servicing Plan (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act. With respect to Class A
shares, the Plan permits MMC to use its advisors fee to pay a fee to Salomon
Smith Barney which in turn makes payments to securities dealers with which
Salomon Smith Barney has entered into selected dealers agreements. Salomon Smith
Barney may also use a portion of the fee it receives under the Plan to
compensate its Financial Consultants. The purpose of the Plan is to promote
distribution of the Fund's shares and to
25
<PAGE>
- --------------------------------------------------------------------------------
Distributor (continued)
- --------------------------------------------------------------------------------
enhance the provision of shareholder services. The Plan merely permits the
reallocation of a portion of the advisory fee received to pay for distribution
related and shareholder servicing activities.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the merger of Travelers and Citicorp
and as a consequence of the applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end, management investment company, was organized under
the laws of the State of Maryland on March 28, 1995. The Directors have
authorized the issuance of three series of shares, each representing shares in
one of three separate Portfolios, and may also authorize the creation of
additional series of shares. Each share of a Portfolio represents an equal
proportionate interest in the net assets of that Portfolio or Class with each
other share of the same Portfolio or Class and is entitled to such dividends and
distributions out of the net income of that Portfolio or Class as are declared
in the discretion of the Directors. Shareholders are entitled to one vote for
each share held and will vote in the aggregate and not by Portfolio or Class,
except as otherwise required by the 1940 Act or Maryland General Corporation
Law. As described under "Voting Rights" in the Statement of Additional
Information, the Portfolio ordinarily will not hold shareholder meetings;
however, shareholders have the right to call a meeting upon a vote of 10% of the
Portfolio'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, is the custodian of each Portfolio's assets.
First Data, located at Exchange Place, Boston, Massachusetts 02109,
provides transfer agency and shareholder services for the Fund.
The Fund sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Fund at the end of the period covered.
26
<PAGE>
SALOMON SMITH BARNEY
A Member of TravelersGroup[LOGO]
Smith Barney Institutional Cash
Management Fund, Inc.
Class A Shares
388 Greenwich Street
New York, New York 10013
FD0958 9/98
PROSPECTUS
Smith Barney
Institutional Cash
Management
Fund, Inc.
Class B Shares
SEPTEMBER 28, 1998
Prospectus begins on page one
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
- --------------------------------------------------------------------------------
Prospectus September 28, 1998
- --------------------------------------------------------------------------------
Smith Barney Institutional
Cash Management Fund -- Class B Shares
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Institutional Cash Management Fund, Inc. (the "Fund") is a
money market fund that invests in high quality money market instruments. The
Fund is a no-load, open-end management investment company that offers shares in
three Portfolios: the Cash Portfolio, the Government Portfolio and the Municipal
Portfolio (individually, a "Portfolio" and collectively, the "Portfolios").
The investment objective of each of the Cash Portfolio and the Government
Portfolio is to maximize current income to the extent consistent with the
preservation of capital and the maintenance of liquidity. The investment
objective of the Municipal Portfolio is to maximize current income exempt from
Federal income taxes to the extent consistent with the preservation of capital
and the maintenance of liquidity.
An investment in a Portfolio is neither insured nor guaranteed by the U.S.
Government. There is no assurance that a Portfolio will be able to maintain a
stable net asset value of $1.00 per share.
Each Portfolio is designed primarily for institutions as an economical and
convenient means for the investment of short-term funds. Each Portfolio
currently offers two Classes of shares. Class A shares may be purchased by
institutional investors on their own behalf. Class B shares may be purchased by
institutional investors on behalf of their clients. A Prospectus for Class A
shares is available upon request and without charge by calling the Fund at the
telephone number set forth above or by contacting a Salomon Smith Barney
Financial Consultant.
This Prospectus sets forth concisely certain information about the Fund
and the Portfolios, 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 September 28, 1998, 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. 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.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
1
<PAGE>
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Fee Table 3
- --------------------------------------------------------------------------------
Financial Highlights 4
- --------------------------------------------------------------------------------
Investment Objectives and Policies 5
- --------------------------------------------------------------------------------
Common Investment Techniques 13
- --------------------------------------------------------------------------------
Risks and Special Considerations 15
- --------------------------------------------------------------------------------
Valuation of Shares 16
- --------------------------------------------------------------------------------
Dividends, Automatic Reinvestment and Taxes 17
- --------------------------------------------------------------------------------
Purchase of Shares 19
- --------------------------------------------------------------------------------
Exchange Privilege 20
- --------------------------------------------------------------------------------
Redemption of Shares 20
- --------------------------------------------------------------------------------
Minimum Account Size 23
- --------------------------------------------------------------------------------
Yield Information 23
- --------------------------------------------------------------------------------
Management of the Fund 23
- --------------------------------------------------------------------------------
Distributor and Service Organizations 24
- --------------------------------------------------------------------------------
Additional Information 25
- --------------------------------------------------------------------------------
================================================================================
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
Salomon Smith Barney Inc. ("Salomon Smith Barney" or the "Distributor"). This
Prospectus does not constitute an offer by the Fund or Salomon Smith Barney, 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.
================================================================================
2
<PAGE>
- --------------------------------------------------------------------------------
Fee Table
- --------------------------------------------------------------------------------
The following expense table lists the costs and expenses that an investor
will incur either directly or indirectly as a shareholder of a Portfolio based
on its projected annual operating expenses:
Smith Barney Institutional Cash Management Cash Government Municipal
Funds -- Class B Shares Portfolio Portfolio Portfolio
================================================================================
Shareholders Transaction Expenses
Sales Charge Imposed on Purchase None None None
Deferred Sales Charge None None None
Annual Portfolio Operating Expenses
(as a percentage of average net assets)
Management Fees (after waiver)** 0.15% 0.11% 0.09%
12b-1 Fees 0.25 0.25 0.25
Other Expenses 0.07 0.08* 0.08*
================================================================================
TOTAL PORTFOLIO OPERATING
EXPENSES 0.47% 0.48% 0.48%
================================================================================
* "Other Expenses" have been estimated based on expenses for Class A shares
of Government and Municipal Portfolios because no Class B shares
for the portfolios were
outstanding as May 31, 1998. These estimated expenses include a management
fee waiver. Absent the fee waiver, for its most recent fiscal year end,
management fee would have been 0.27% for each portfolio. "Total Portfolio
Operating Expenses" would have been 0.48%, 0.64% and 0.66%, respectively
for the Cash Portfolio, Government Portfolio and Municipal Portfolio.
Example
The following example is intended to assist an investor in understanding
the various costs that an investor in each of the Portfolios will bear directly
or indirectly. The example assumes payment by the Portfolio 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."
Smith Barney Institutional
Cash Management
Funds -- Class B Shares 1 Year 3 Years 5 Years 10 Years
================================================================================
An investor 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:
Cash Portfolio 5 15 26 59
Government Portfolio 5 15 26 60
Municipal Portfolio 5 15 27 60
================================================================================
The example also provides 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. However, a Portfolio's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
3
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's Annual Report
dated May 31, 1998. 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 which is incorporated by reference into the Statement of
Additional Information.
For a share of each class of capital stock outstanding throughout the period:
Class B
Shares
-------
Cash Portfolio 1998(1)(2)
================================================================================
Net Asset Value, Beginning of Year $ 1.00
- --------------------------------------------------------------------------------
Net investment income (3) 0.031
Distributions from net investment income (0.031)
- --------------------------------------------------------------------------------
Net Asset Value, End of Year $ 1.00
- --------------------------------------------------------------------------------
Total Return 3.13%++
- --------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 2,400
- --------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses (3)(4) 0.47%+
Net investment income 5.21+
================================================================================
(1) For the period from October 28, 1997 (inception date) to May 31, 1998.
(2) For the period ended May 31, 1998 there were no Class B shares
outstanding for the Government and Municipal portfolios.
(3) The Manager has waived a portion of its management fees for the Portfolio
for the period ended May 31, 1998. If the Manager had not agreed to the
fee waiver, the per share effect decrease in investment income and the
ratio of expenses to average net assets for Class B shares would have
been:
Per Share Decrease to Expense Ratio
Net Investment Income Without Fee Waiver
--------------------- ------------------
1998 1998
---- ----
Class B $0.000* 0.48%+
(4) As a result of a voluntary expense limitation, the ratio of expenses to
average net assets of the Portfolio will not exceed 0.80%.
* Amount represents less than $0.001.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
4
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Policies
- --------------------------------------------------------------------------------
The investment objective of each Portfolio set forth in this Prospectus is
fundamental and may not be changed without the affirmative vote of a majority of
the outstanding voting securities of that Portfolio. Shareholders will be
notified of material changes in investment policies. The Portfolios are subject
to additional investment policies and restrictions described in the Statement of
Additional Information, some of which are fundamental and may not be changed
without shareholder approval.
The investment objective of each of the Cash Portfolio and the Government
Portfolio is to seek maximum current income to the extent consistent with
preservation of capital and the maintenance of liquidity. The investment
objective of the Municipal Portfolio is to seek maximum current income that is
exempt from Federal income taxes to the extent consistent with preservation of
capital and the maintenance of liquidity. There can be no assurance that a
Portfolio will achieve its investment objective or be able to maintain a stable
net asset value of $1.00 per share.
Common Investment Policies
The Portfolios will invest only in eligible high quality, short-term money
market instruments that present minimal credit risks, as determined by Mutual
Management Corp. ("MMC") (formerly known as Smith Barney Mutual Fund Management
Inc.), the Fund's investment manager, pursuant to procedures adopted by the
Fund's Board of Directors (the "Directors"). Each Portfolio may invest only in
U.S. dollar denominated instruments that have a remaining maturity of 13 months
or less (as calculated pursuant to Rule 2a-7 under the Investment Company Act of
1940, as amended (the "1940 Act"), and will maintain a dollar weighted average
portfolio maturity of 90 days or less.
Portfolio Quality
Each Portfolio will limit its investments to securities that the Directors
determine present minimal credit risks and that are "Eligible Securities" at the
time of acquisition by the Portfolio. 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, in the case of the Portfolios, (a) any two nationally
recognized statistical rating organizations ("NRSROs") that have issued a rating
with respect to a security or class of debt obligations of an issuer or (b) one
NRSRO, if only one NRSRO has issued a rating with respect to such security or
issuer at the time the Portfolio acquires the security. The NRSROs currently
designated as such by the SEC are Standard & Poor's Ratings Group ("S & P"),
Moody's Investors Service, Inc. ("Moody's"), Fitch IBCA, Inc., Duff and Phelps
Credit Rating Co. and Thomson
5
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
BankWatch. A more detailed discussion of the categories of Municipal Obligations
(as defined below) and the ratings of NRSROs is contained in the Statement of
Additional Information relating to the Portfolios.
In addition, the Cash Portfolio and the Government Portfolio may not
invest more than 5% of their respective total assets in Eligible Securities that
have not received the highest rating from the Requisite NRSROs and comparable
unrated securities ("Second Tier Securities") and may not invest more than the
greater of 1% of their respective total assets or one million dollars in the
Second Tier Securities of any one issuer.
The Cash Portfolio
The Cash Portfolio pursues its objective by investing primarily in high
quality commercial paper and obligations of financial institutions. The
Portfolio may also invest in U.S. Government Securities (as defined below) and
municipal securities, although the Portfolio expects to invest in such
securities to a lesser degree.
Debt Securities -- The Portfolio may invest in debt obligations of
domestic and foreign issuers, including commercial paper (short-term promissory
notes issued by companies to finance their, or their affiliates', current
obligations), notes and bonds and variable amount master demand notes. The
Portfolio may invest in privately issued commercial paper that is restricted as
to disposition under the federal securities laws. In general, any sale of this
paper may not be made without registration under the Securities Act of 1933, as
amended (the "1933 Act"), or the availability of an appropriate exemption
therefrom. Pursuant to the provisions of Section 4(2) of the 1933 Act, however,
some privately issued commercial paper ("Section 4(2) paper") is eligible for
resale to institutional investors, and accordingly, MMC may determine that a
liquid market exists for that paper pursuant to guidelines adopted by the
Directors. If a particular investment in Section 4(2) paper is not determined to
be liquid, that investment will be included within the 10% limitation on
illiquid securities.
Obligations of Financial Institutions -- The Portfolio may invest in
obligations of financial institutions. Examples of obligations in which the
Portfolio may invest include negotiable certificates of deposit, bankers'
acceptances and time deposits of U.S. banks having total assets in excess of $1
billion or the equivalent of $1 billion in other currencies (in the case of
foreign banks) and securities backed by letters of credit of U.S. banks or other
U.S. financial institutions that are members of the Federal Reserve System or
the Federal Deposit Insurance Corporation ("FDIC") (including obligations of
foreign branches of such members), if either: (a) the principal amount of the
obligation is insured in full by the FDIC, or (b) the issuer of such obligation
has capital, surplus and undivided profits in excess of $100 million or total
assets of $1 billion (as reported in its most recently published financial
6
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
statements prior to the date of investment). Under current FDIC regulations, the
maximum insurance payable as to any one certificate of deposit is $100,000;
therefore, certificates of deposit in denominations greater than $100,000 that
are purchased by the Portfolio will not be fully insured. The Cash Portfolio may
purchase fixed time deposits maturing from two business days to seven calendar
days up to 10% of its total assets. The Cash Portfolio may also purchase fixed
time deposits maturing in more than seven calendar days but in less than one
year, provided, however, that such fixed time deposits shall be considered
illiquid securities.
The Cash Portfolio intends to maintain at least 25% of its total assets
invested in obligations of domestic and foreign banks, subject to the
abovementioned size criteria. The Portfolio may invest in instruments issued by
domestic banks, including those issued by their branches outside the United
States and subsidiaries located in Canada, and in instruments issued by foreign
banks through their branches located in the United States and the United
Kingdom. In addition, the Cash Portfolio may invest in fixed time deposits of
foreign banks issued through their branches located in Grand Cayman Island,
Nassau, Tokyo and Toronto. The Portfolio may also invest in Eurodollar and
Yankee bank obligations as discussed below.
Eurodollar or Yankee Obligations -- Eurodollar bank obligations are dollar
denominated certificates of deposit or time deposits issued outside the U.S.
capital markets by foreign branches of U.S. banks and by foreign banks. Yankee
bank obligations are dollar denominated obligations issued in the U.S. capital
markets by foreign banks. Eurodollar (and to a limited extent, Yankee) bank
obligations are subject to certain sovereign risks. One such risk is the
possibility that a foreign government might prevent dollar denominated funds
from flowing across its borders. Other risks include: adverse political and
economic developments in a foreign country; the extent and quality of government
regulation of financial markets and institutions; the imposition of foreign
withholding taxes; and expropriation or nationalization of foreign issuers. See
"Risks and Special Considerations."
U.S. Government Securities -- The Portfolio may invest without limit in
U.S. Government Securities as described below under "The Government Portfolio."
Municipal Securities -- The Portfolio may invest in obligations of states,
territories or possessions of the United States and their subdivisions,
authorities and corporations as described below under "The Municipal Portfolio."
These obligations may pay interest that is exempt from Federal income taxation.
Custodial Receipts -- The Cash Portfolio may acquire custodial receipts or
certificates with respect to U.S. Government Securities, such as CATS, TIGRs and
FICO Strips, underwritten by securities dealers or banks that evidence ownership
of
7
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
future interest payments, principal payments or both on certain notes or bonds
issued by the U.S. Government, its agencies, authorities or instrumentalities.
The underwriters of these certificates or receipts purchase a U.S. Government
Security and deposit the security in an irrevocable trust or custodial account
with a custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the U.S. Government Security. Custodial receipts evidencing specific
coupon or principal payments have the same general attributes as zero coupon
U.S. Government Securities but are not U.S. Government Securities. Although
typically under the terms of a custodial receipt the Cash Portfolio is
authorized to assert its rights directly against the issuer of the underlying
obligation, the Cash Portfolio may be required to assert through the custodian
bank such rights as may exist against the underlying issuer. Thus, in the event
the underlying issuer fails to pay principal and/or interest when due, the Cash
Portfolio may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Cash Portfolio had purchased a direct
obligation of the issuer. In addition, in the event that the trust or custodial
account in which the underlying security has been deposited is determined to be
an association taxable as a corporation, instead of a nontaxable entity, the
yield on the underlying security would be reduced in respect of any taxes paid.
The Government Portfolio
The Government Portfolio pursues its objective by investing exclusively in
obligations issued and/or guaranteed, as to payment of principal and interest,
by the United States government or by its agencies and instrumentalities and
repurchase agreements secured by such obligations. The Government Portfolio will
be rated from time to time by S&P and Moody's.
U.S. Government Securities -- U.S. government securities are securities
issued or guaranteed by the U.S. government, its agencies and instrumentalities
and include repurchase agreements collateralized and municipal securities
refunded with escrowed U.S. government securities ("U.S. Government
Securities"). U.S. Government Securities in which the Portfolio may invest
include U.S. Treasury securities and obligations issued or guaranteed by U.S.
government agencies and instrumentalities that are backed by the full faith and
credit of the U.S. government, such as those guaranteed by the Small Business
Administration or issued by the Government National Mortgage Association. In
addition, U.S. Government Securities in which the Portfolio may invest include
securities supported by the right of the issuer to borrow from the U.S.
Treasury, such as securities of Federal Home Loan Banks; and securities
supported primarily or solely by the creditworthiness of the issuer, such as
securities of the Federal National Mortgage Association, the Federal Home Loan
Mortgage Corporation and the Tennessee
8
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
Valley Authority. There is no guarantee that the U.S. government will support
securities not backed by its full faith and credit. Accordingly, although these
securities have historically involved little risk of loss of principal if held
to maturity, they may involve more risk than securities backed by the full faith
and credit of the U.S. government.
The Municipal Portfolio
The Municipal Portfolio pursues its objective by investing primarily in
municipal securities whose interest is exempt from Federal income taxes. Under
normal market conditions, the Portfolio will invest at least 80% of its assets
in municipal securities whose interest is exempt from Federal income taxes.
However, the Portfolio reserves the right to invest up to 20% of the value of
its assets in securities whose interest is federally taxable. In addition, the
Portfolio may invest without limit in private activity bonds. Interest income on
certain types of private activity bonds issued after August 7, 1986 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 Portfolio's dividends are derived from interest on these bonds.
These private activity bonds are included in the term "municipal securities" for
purposes of determining compliance with the 80% test described above. Dividends
derived from interest income on all municipal securities are a component of the
"current earnings" adjustment item for purposes of the Federal corporate
alternative minimum tax. Additionally, when MMC is unable to locate investment
opportunities with desirable risk/reward characteristics, the Portfolio may
invest without limit in cash and cash equivalents, including obligations that
may be Federally taxable (See "Taxable Investments").
Municipal Securities -- The municipal securities in which the Portfolio
may invest include municipal notes and short-term municipal bonds. Municipal
notes are generally used to provide for the issuer's short-term capital needs
and generally have maturities of thirteen months or less. Examples include tax
anticipation and revenue anticipation notes, which generally are issued in
anticipation of various seasonal revenues, bond anticipation notes, construction
loan notes and tax-exempt commercial paper. Short-term municipal bonds may
include "general obligation bonds," which are secured by the issuer's pledge of
its faith, credit and taxing power for payment of principal and interest;
"revenue bonds," which are generally paid from the revenues of a particular
facility or a specific excise tax or other source; and "industrial development
bonds," which are issued by or on behalf of public authorities to provide
funding for various privately operated industrial and commercial facilities. The
Portfolio may also invest in high quality participation interests in municipal
securities. A more detailed description of various types of
9
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Investment Objectives and Policies (continued)
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municipal securities is contained in Appendix B in the Statement of Additional
Information.
When the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government creating
the issuing entity and a security is backed only by the assets and revenues of
the issuing entity, that entity will be deemed to be the sole issuer of the
security. Similarly, in the case of an industrial development bond backed only
by the assets and revenues of the non-governmental issuer, the non-governmental
issuer will be deemed to be the sole issuer of the bond.
At times, the Portfolio may invest more than 25% of the value of its total
assets in tax-exempt securities that are related in such a way that an economic,
business, or political development or change affecting one such security could
similarly affect the other securities; for example, securities whose issuers are
located in the same state, or securities whose interest is derived from revenues
of similar type projects. The Portfolio may also invest more than 25% of its
assets in industrial development bonds or participation interests therein.
The Municipal Portfolio intends to conduct its operations so as to qualify
as a "regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the Portfolio of any liability
for Federal income tax to the extent that its earnings are distributed to
shareholders. In order to so qualify, among other things, the Portfolio must
ensure that, at the close of each quarter of the taxable year, (i) not more than
25% of the market value of the Portfolio's total assets will be invested in the
securities (other than U.S. Government Securities) of a single issuer or of two
or more issuers that the Portfolio controls and that are engaged in the same,
similar or related trades or businesses and (ii) at least 50% of the market
value of the Portfolio's total assets is represented by (a) cash and cash items,
(b) U.S. Government Securities and (c) other securities limited in respect of
any one issuer to an amount not greater in value than 5% of the market value of
the Portfolio's total assets and to not more than 10% of the outstanding voting
securities of the issuer.
Yields on municipal securities are dependent on 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 the rating of the issue. The achievement of the Portfolio's
investment objective is dependent in part on the continuing ability of the
issuers of municipal securities in which the Portfolio invests to meet their
obligations for the payment of principal and interest when due. Obligations of
issuers of municipal securities are subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of creditors, such
as the Bankruptcy Reform Act of 1978, as amended. Therefore, the possibility
exists that as a result of litigation or other
10
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Investment Objectives and Policies (continued)
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conditions, the ability of any issuer to pay, when due, the principal of and
interest on its municipal securities may be materially affected.
Municipal Leases -- The Portfolio may invest in municipal leases or
participation interests therein. Municipal leases are municipal securities which
may take the form of a lease or an installment purchase or conditional sales
contract. Municipal leases are issued by state and local governments and
authorities to acquire a wide variety of equipment and facilities.
Lease obligations may not be backed by the issuing municipality's credit
and may involve risks not normally associated with general obligation bonds and
other revenue bonds. For example, their interest may become taxable if the lease
is assigned and the holders may incur losses if the issuer does not appropriate
funds for the lease payment on an annual basis, which may result in termination
of the lease and possible default. MMC may determine that a liquid market exists
for municipal lease obligations pursuant to guidelines established by the
Directors.
Taxable Investments -- As discussed above, although the Portfolio will
attempt to invest substantially all of its assets in municipal securities whose
interest is exempt from Federal income tax, the Portfolio may, under certain
circumstances, invest in certain securities whose interest is subject to such
taxation. These securities include: (i) short-term obligations of the U.S.
government, its agencies or instrumentalities, (ii) certificates of deposit,
bankers' acceptances and interest bearing savings deposits of banks having total
assets of more than $1 billion and whose deposits are insured by the FDIC, (iii)
commercial paper and (iv) repurchase agreements as described below covering any
of the securities described in items (i) and (iii) above or any other
obligations of the U.S. government, its agencies or instrumentalities .
Derivative Products -- The Municipal Portfolio 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 Portfolio holds
an interest in one or more underlying bonds coupled with a conditional right to
sell ("put") the Portfolio'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
11
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Investment Objectives and Policies (continued)
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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 obligations. There is some risk that certain issues could be resolved
in a manner which could adversely impact the performance of the Portfolio. 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 Portfolio
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.
The Portfolio intends to limit the risk of derivative products by
purchasing only those derivative products that are consistent with the
Portfolio's investment objective and policies. The Portfolio will not use such
instruments to leverage securities. Hence, derivative products' contributions to
the overall market risk characteristics of a Portfolio will not materially alter
its risk profile and will be fully consistent with the Portfolio's maturity
guidelines.
Stand-by Commitments -- The Municipal Portfolio may acquire "stand-by
commitments" with respect to municipal securities held in its portfolio. Under a
stand-by commitment, a dealer agrees to purchase, at the Portfolio's option,
specified municipal securities at a specified price. The Portfolio intends to
enter into stand-by commitments only with dealers, banks and broker-dealers
which, in the opinion of MMC, present minimal credit risks. In evaluating the
creditworthiness of the issuer of a stand-by commitment, MMC will periodically
review the issuer's assets, liabilities, contingent claims and other relevant
financial information. The Portfolio will acquire stand-by commitments solely to
facilitate portfolio liquidity and does not intend to exercise its rights
thereunder for trading purposes.
Year 2000 -- The investment management services provided to the Fund by
MMC and the services provided to shareholders by Salomon Smith Barney depend on
the smooth functioning of their computer systems. Many computer software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before
12
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
that date. In addition, MMC has been advised by the Fund's custodian, transfer
agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that MMC, Salomon Smith Barney or any other service provider will be successful,
or that interaction with other non-complying computer systems will not impair
Fund services at that time.
In addition, the ability of issuers to make timely payments of interest and
principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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Common Investment Techniques
- --------------------------------------------------------------------------------
Participation Interests -- The Portfolios may invest in participation
interests in any type of security in which the Portfolios may invest. A
participation interest gives a Portfolio an undivided interest in the underlying
securities in the proportion that the Portfolio's participation interest bears
to the total principal amount of the underlying securities. Participation
interests usually carry a demand feature, as described below, backed by a letter
of credit or guarantee of the institution that issued the interests permitting
the holder to tender them back to the institution.
Demand Features -- The Portfolios may invest in securities that are
subject to puts and standby commitments ("demand features"). Demand features
give the Portfolio the right to resell securities at specified periods prior to
their maturity dates to the seller or to some third party at an agreed upon
price or yield. Securities with demand features may involve certain expenses and
risks, including the inability of the issuer of the instrument to pay for the
securities at the time the instrument is exercised, non-marketability of the
instrument and differences between the maturity of the underlying security and
the maturity of the instrument. Securities may cost more with demand features
than without them. Demand features can serve three purposes: (i) to shorten the
maturity of a variable or floating rate security, (ii) to enhance the
instrument's credit quality, and (iii) to provide a source of liquidity. Demand
features are often issued by third party financial institutions, generally
domestic and foreign banks. Accordingly, the credit quality and liquidity of the
Portfolios' investments may be dependent in part on the credit quality of the
banks supporting the Portfolios' investments and changes in the credit quality
of these financial institutions could cause losses to the Portfolios and effect
their share prices. This will result in exposure to risks pertaining to the
banking industry, including the foreign banking industry. Brokerage firms and
insurance companies also provide certain liquidity and credit support.
13
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Common Investment Techniques (continued)
- --------------------------------------------------------------------------------
Variable and Floating Rate Securities -- The securities in which the
Portfolios invest may have variable or floating rates of interest. These
securities pay interest at rates that are adjusted periodically according to a
specified formula, usually with reference to some interest rate index or market
interest rate. Securities with ultimate maturities of greater than 13 months may
be purchased only pursuant to Rule 2a-7. Under that Rule, only those long-term
instruments that have demand features which comply with certain requirements and
certain variable rate U.S. Government Securities may be purchased. Similar to
fixed rate debt instruments, variable and floating rate instruments are subject
to changes in value based on changes in market interest rates or changes in the
issuer's or guarantor's creditworthiness. The rate of interest on securities
purchased by a Portfolio may be tied to short-term Treasury or other government
securities or indices on securities that are permissible investments of the
Portfolios, as well as other money market rates of interest. The Portfolios will
not purchase securities whose values are tied to interest rates or indexes that
are not appropriate for the duration and volatility standards of a money market
fund.
Mortgage and Asset-Backed Securities -- Each of the Cash Portfolio and the
Government Portfolio may purchase fixed or adjustable rate mortgage-backed
securities issued by the Government National Mortgage Association, Federal
National Mortgage Association or the Federal Home Loan Mortgage Corporation. In
addition, the Cash Portfolio may purchase other asset-backed securities,
including securities backed by automobile loans, equipment leases or credit card
receivables. These securities directly or indirectly represent a participation
in, or are secured by and payable from, fixed or adjustable rate mortgage or
other loans which may be secured by real estate or other assets. Unlike
traditional debt instruments, payments on these securities include both interest
and a partial payment of principal. Prepayments of the principal of underlying
loans may shorten the effective maturities of these securities and may result in
a Portfolio having to reinvest proceeds at a lower interest rate.
Repurchase Agreements -- Each Portfolio may seek additional income by
entering into repurchase agreements with respect to obligations that could
otherwise be purchased by a Portfolio. Repurchase agreements are transactions in
which a Portfolio purchases securities (normally U.S. Government Securities) and
simultaneously commits to resell those securities to the seller at an agreed
upon price on an agreed upon future date, normally one to seven days later. The
resale price reflects a market rate of interest that is not related to the
coupon rate or maturity of the securities. If the seller of the securities
underlying a repurchase agreement fails to pay the agreed resale price on the
agreed delivery date, a Portfolio may incur costs in disposing of the collateral
and may experience losses if there is any delay in its ability to do so. The
Fund's custodian maintains possession of the underlying collateral, which is
maintained at not less than 100% of the repurchase price.
14
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Common Investment Techniques (continued)
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Reverse Repurchase Agreements -- Each Portfolio may enter into reverse
repurchase agreements. Reverse repurchase agreements are transactions in which a
Portfolio sells a security and simultaneously commits to repurchase that
security from the buyer at an agreed upon price on an agreed upon future date.
This technique will be used only for temporary or emergency purposes, such as
meeting redemption requests or to earn additional income on portfolio
securities.
When-Issued or Delayed Delivery Securities -- Each Portfolio may purchase
securities on a when-issued or delayed delivery basis. Securities so purchased
are subject to market price fluctuation from the time of purchase but no
interest on the securities accrues to a Portfolio until delivery and payment for
the securities take place. Accordingly, the value of the securities on the
delivery date may be more or less than the purchase price. The Fund's custodian
will maintain, in a segregated account of the Portfolio, cash, debt securities
of any grade or equity securities, having a value equal to or greater than the
Portfolio's purchase commitments, provided such securities have been determined
by MMC to be liquid and unencumbered, and are marked to market daily, pursuant
to guidelines established by the directors. Forward commitments will be entered
into only when a Portfolio has the intention of taking possession of the
securities, but a Portfolio may sell the securities before the settlement date
if deemed advisable.
Borrowing and Lending -- Each Portfolio may borrow money for temporary or
emergency purposes in amounts up to 33 1/3% of its total assets; provided,
however that no additional investments will be made while borrowings exceed 5%
of a Portfolio's total assets. A Portfolio may not mortgage or pledge securities
except to secure permitted borrowings. As a fundamental policy, a Portfolio will
not lend securities or other assets if, as a result, more than 20% of its total
assets would be lent to other parties; however, the Portfolios do not currently
intend to engage in securities lending.
Portfolio Turnover -- Because the Portfolios invest in securities with
relatively short-term maturities, each Portfolio is expected to have a high
portfolio turnover rate. However, a high turnover rate should not increase a
Portfolio's costs because brokerage commissions are not normally charged on the
purchase and sale of money market instruments.
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Risks and Special Considerations
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Although each Portfolio only invests in high quality money market
instruments, an investment in a Portfolio is subject to risk even if all
securities in a Portfolio's portfolio are paid in full at maturity. All money
market instruments, including U.S. Government Securities, can change in value as
a result of changes in interest rates, the issuer's actual or perceived
creditworthiness or the issuer's ability to meet its obligations.
15
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Risks and Special Considerations (continued)
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Each Portfolio will be affected by general changes in interest rates which
will result in increases or decreases in the value of the obligations held by
such Portfolio. The market value of the obligations in each Portfolio can be
expected to vary inversely to changes in prevailing interest rates. Investors
should recognize that, in periods of declining interest rates, the yield of each
Portfolio will tend to be somewhat higher than prevailing market rates, and in
periods of rising interest rates, the yield of each Portfolio will tend to be
somewhat lower. Also, when interest rates are falling, the inflow of net new
money to each Portfolio from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the balance of the
Portfolio, thereby reducing the current yield of the Portfolio. In periods of
rising interest rates, the opposite can be expected to occur. In addition,
securities in which the Portfolios will invest may not yield as high a level of
current income as might be achieved by investing in securities with less
liquidity and safety and longer maturities.
Investments in securities issued by foreign banks or foreign issuers
present certain risks, including those resulting from fluctuations in currency
exchange rates, revaluation of currencies, future political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions and reduced availability of public
information. Foreign issuers generally are not subject to uniform accounting,
auditing and financial reporting standards or to other regulatory practices and
requirements applicable to domestic issuers. In addition, there may be less
publicly available information about a foreign bank than about a domestic bank.
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Valuation of Shares
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The net asset value per share of the Cash Portfolio and the Government
Portfolio is determined as of 2:00 p.m. New York City time on each day that the
New York Stock Exchange ("NYSE") and the Fund's custodian are open. The net
asset value per share of the Municipal Portfolio is determined as of 12:00 noon
New York City time on each day that the NYSE and the Fund's custodian are open.
The net asset value per share of each Portfolio is determined by dividing the
Portfolio's net assets attributable to the Class (i.e., the value of its assets
less liabilities) by the total number of shares of the Class outstanding. Each
Portfolio 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.
16
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Dividends, Automatic Reinvestment and Taxes
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Dividends and Distributions
Each Portfolio declares a dividend from its net investment income daily,
for each day the NYSE is open to conduct business, and pays dividends monthly.
If a shareholder redeems an account in full between monthly dividend payment
dates, all dividends declared up to and including the date of liquidation will
be paid with the redemption proceeds. Dividends from net realized capital gains,
if any, will be distributed annually. The Portfolios may also pay additional
dividends shortly before December 31 from certain amounts of undistributed
ordinary income and capital gains, in order to avoid a Federal excise tax
liability. If a shareholder does not otherwise instruct, monthly income
dividends and capital gain distributions will be reinvested automatically in
additional shares of the same Class at net asset value, with no additional sales
charge or CDSC.
The per share amounts of dividends from net investment income on Class B
shares may be lower than that of Class A shares, mainly as a result of the
service fees applicable to the Class B shares. Capital gain distributions, if
any, will be the same across both Classes of Fund shares.
Taxes
The following is a summary of the material federal tax considerations
affecting the separate Portfolios and their shareholders. In addition to the
considerations described below and in the SAI, there may be other federal,
state, local, and/or foreign tax applications to consider. Because taxes are a
complex matter, prospective shareholders are urged to consult their tax advisors
for more detailed information with respect to the tax consequences of any
investment.
Each Portfolio of the Fund will be treated as a separate entity for tax
purposes. The Portfolios intend to qualify, as in prior years, under Subchapter
M of the Internal Revenue Code (the "Code") for tax treatment as regulated
investment companies. In each taxable year that the separate Portfolios qualify,
so long as such qualification is in the best interests of its shareholders, the
Portfolios will pay no federal income tax on the net investment company taxable
income and long-term capital gain that is distributed to its shareholders. The
Municipal Portfolio also intends to satisfy conditions that will enable it to
pay "exempt-interest dividends" to its shareholders. Exempt-interest dividends
are generally not subject to regular federal income taxes, although, may be
considered taxable for certain state and local income (or intangible) tax
purposes.
Dividends paid from net investment income (other than "exempt-interest
dividends") and net realized short-term securities gain, are subject to federal
income tax as ordinary income. Distributions, if any, from net realized
long-term securities gains, derived from the sale of securities held by the
Portfolio for more than one year, are taxable as long-term capital gains,
regardless of the length of time a shareholder has owned Portfolio shares.
17
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Dividends, Automatic Reinvestment and Taxes (continued)
- --------------------------------------------------------------------------------
Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional shares. None of
the dividends paid will qualify for the corporate dividends received deduction.
Dividends consisting of interest from U.S. government securities may be exempt
from state and local income taxes. Shareholders will be informed of the source
and tax status of all distributions promptly after the close of each calendar
year.
The Portfolios are required to withhold ("backup withholding") 31 % of all
taxable dividends, capital gain distributions, and the proceeds of any
redemption, regardless of whether gain or loss is realized upon the redemption,
for shareholders who do not provide the Portfolios with a correct taxpayer
identification number (social security or employer identification number).
Withholding from taxable dividends and capital gain distributions also is
required for shareholders who otherwise are subject to backup withholding. Any
tax withheld as a result of backup withholding does not constitute an additional
tax, and may be claimed as a credit on the shareholders' federal income tax
return.
The Municipal Portfolio
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. In addition to the alternative minimum tax, corporate shareholders
must include this percentage as a component in the corporate environmental tax
computation. Exempt-interest dividends derived from the interest earned on
private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds. `
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowing made to
purchase, or carry Portfolio shares, is not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all, or a portion
of, any gains realized from the sale or other disposition of certain market
discount bonds are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains, derived
from the sale of bonds held by the Portfolio for more than one year, are taxable
as long-term capital gains, regardless of the length of time a shareholder has
owned Fund shares.
18
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Purchase of Shares
- --------------------------------------------------------------------------------
Purchases of Portfolio shares may be made directly through the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data"), through
a brokerage account maintained with Salomon Smith Barney or with a broker that
clears securities transactions through Salomon Smith Barney on a fully disclosed
basis (an "Introducing Broker"). Salomon 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. 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.
Class B shares are available for purchase by institutional investors on behalf
of their clients. The minimum initial investment in each portfolio is
$1,000,000. The minimum subsequent investment is $50.
The issuance of shares of a Portfolio is recorded on the books of the
Fund, and, to avoid additional operating costs and for investor convenience,
stock certificates will not be issued unless expressly requested in writing by a
shareholder. Certificates will not be issued for fractional shares.
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 First Data, Salomon 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 Board) that are either in the
client's brokerage account at Salomon Smith Barney or the Introducing broker
before the Portfolio's close of business. 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 Salomon Smith Barney or the Introducing Broker, the order becomes effective
on the day of receipt if the order is received prior to 12 noon (New York time)
which is the close of business with respect to orders for the Municipal
Portfolio and 2:00 p.m. (New York time) which is the close of business with
respect to orders for the Cash and Government Portfolios, on any day the Fund
calculates its net asset value. See "Valuation of Shares." Purchase orders
received after the close of business or with respect to which Federal funds are
not available, or when orders for the purchase of shares are paid for other than
in Federal funds, will not be accepted and a new purchase order will need to be
submitted on the next day the Fund calculates the Portfolio's net asset value.
Shares purchased begin to accrue income dividends on the business day the
purchase order becomes effective.
19
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Exchange Privilege
- --------------------------------------------------------------------------------
Shareholders of a Portfolio may exchange their shares for shares of any
other Portfolio on the basis described below. To qualify for the Exchange
Privilege, a shareholder must exchange shares with a current value of at least
$1,000. Under the Exchange Privilege, each of the Portfolios offers to exchange
its shares for shares of any other Portfolio, on the basis of relative net asset
value per share. Since all of the Portfolios seek to maintain a constant $1.00
net asset value per share, it is expected that any exchange with those funds
would be on a share-for-share basis. If in utilizing the Exchange Privilege the
shareholder exchanges all his shares of a Portfolio, all dividends accrued on
such shares for the month to date will be invested in shares of the Portfolio
into which the exchange is being made. An exchange between Portfolios pursuant
to the Exchange Privilege is treated as a sale for Federal income tax purposes
and depending upon the circumstances, a short- or long-term capital gain or loss
may be realized.
To exercise the Exchange Privilege, shareholders should contact First
Data, or their Salomon Smith Barney Financial Consultants, who will advise the
applicable Portfolio of the exchange. A shareholder may make exchanges by
telephone, provided that (i) he has elected the telephone exchange option on the
account application, (ii) the registration of the account for the new Portfolio
will be the same as for the Portfolio from which it is exchanged, and (iii) the
shares to be exchanged are not in certificate form. To make exchanges by
telephone, a shareholder should call the telephone number listed above. The
shareholder should identify himself by name and account number and give the name
of the Portfolio into which he wishes to make the exchange, the name of the
Portfolio and the number of shares he wishes to exchange. The shareholder also
may write to First Data requesting that the exchange be effected. Such letter
must be signed exactly as the account is registered with signature(s) guaranteed
by a commercial bank which is a member of the FDIC or by a trust company or a
member firm of a domestic securities exchange. The Fund reserves the right to
acquire a properly completed Exchange Application.
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Redemption of Shares
- --------------------------------------------------------------------------------
These exchange privileges may be modified or terminated at any time.
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 prior to 2:00 p.m. (12:00 noon in
the case of the Municipal Portfolio), New York time, are priced at the net asset
value as next determined. Redemption requests received after 2:00 p.m. (12:00
noon in the case of the Municipal Portfolio), New York time, will not be
accepted and a new redemption request should be submitted on the following day
that the Fund
20
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
calculates its net asset value. Redemption requests must be made through Salomon
Smith Barney, an Introducing Broker or the securities dealer in the selling
group through whom the shares were purchased, except that shareholders who
purchased shares of the Fund from First Data may also redeem shares directly
through First Data. A shareholder desiring to redeem shares represented by
certificates also must present the certificates to Salomon 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 represented by certificates will not be deemed
received until certificates are received by First Data in proper form.
Shares held at Salomon Smith Barney. A redemption request received by
Salomon Smith Barney in proper form before 2:00 p.m. (12:00 noon in the case of
the Municipal Portfolio) will not earn a dividend on the day the request is
received and redemption proceeds will be credited to a shareholder's account on
the same day.
Shares held at First Data. A shareholder who purchased shares of the Fund
directly through First Data may redeem shares through First Data in the manner
described in the Prospectus under "Expedited Redemption Procedures" and
"Ordinary Redemption Procedures".
Expedited Redemption Procedures
Shareholders meeting the requirements stated below may initiate
redemptions by submitting their redemption requests by telephone at 800-451-2010
or mail to First Data and have the proceeds sent by a Federal Funds wire to a
previously designated bank account. A redemption request received prior to 2:00
p.m. (12:00 noon in the case of the Municipal Portfolio) (New York time) will
not earn a dividend on the day the request is received and payment will be made
in Federal Funds wired on the same business day. If an expedited redemption
request for which the redemption proceeds will be wired is received after 2:00
p.m. (12:00 noon in the case of the Municipal Portfolio) (New York time), and
prior to the close of regular trading on the NYSE on a day on which First Data
is open for business, the redemption proceeds will be wired on the next business
day following the redemption request that First Data is open for business. A
redemption request received after 2:00 p.m. (12:00 noon in the case of the
Municipal Portfolio) (New York time) will earn a dividend on the day the request
is received. If an expedited redemption request is received after the regular
close of trading on the NYSE or on a day that Salomon Smith Barney or First Data
is closed, the redemption proceeds will be wired on the next business day
following receipt of the redemption request. Therefore, a redeeming shareholder
will receive a dividend on the day the request is received, but not on the day
that shares are redeemed out of his account. The Fund or First Data will not be
liable for following instructions communicated by telephone that they reasonably
believe to be genuine. In this regard,
21
<PAGE>
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
the Fund and First Data will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. Telephone redemptions and
exchanges are not available for shares for which certificates have been issued.
To utilize the expedited redemption procedure, all shares must be held in
non-certificate form in the shareholder's account. In addition, an account
application with the expedited section properly completed must be on file with
First Data before an expedited redemption request is submitted. This form
requires a shareholder to designate the bank account to which its redemption
proceeds should be sent. Any change in the bank account designated to receive
the proceeds must be submitted in proper form on a new account application with
signature guaranteed. In making a telephone redemption request, a shareholder
must provide the shareholder's name and account number, the dollar amount of the
redemption requested, the name of the Portfolio, and the name of the bank to
which the redemption proceeds should be sent. If the information provided by the
shareholder does not correspond to the information on the application, the
transaction will not be approved. If, because of unusual circumstances, a
shareholder is unable to contact First Data at the telephone number listed above
to make an expedited redemption request, he may contact his Smith Barney
Financial Consultant to effect such a redemption or request redemption in
writing as described under "Ordinary Redemption Procedures" below.
Ordinary Redemption Procedures
If this method of redemption is used, the shareholder may submit his
redemption request in writing to First Data. A Portfolio will make payment for
shares redeemed pursuant to the ordinary redemption procedure by check sent to
the shareholder at the address on such shareholder's account application. Such
checks will normally be sent out within one business day, but in no event more
than three business days after receipt of the redemption request in proper form.
If certificates have been issued representing the shares to be redeemed, prior
to effecting a redemption with respect to such shares First Data must have
received such certificates. A shareholder's signature must be guaranteed by an
"eligible guarantor institution", as such term is defined by Rule 17 Ad-15 of
the Securities Exchange Act of 1934, as amended, the existence and validity of
which may be verified by First Data through use of industry publications. A
notary public is not an acceptable guarantor. In certain instances, First Data
may request additional documentation which it believes necessary to insure
proper authorization such as, but not limited to: trust instruments, death
certificates, appointment of executor or administrator, or certificates of
corporate authority. Shareholders having questions regarding proper
documentation should contact First Data.
22
<PAGE>
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to redeem involuntarily any shareholder's account
if the aggregate net asset value of the shares of a Portfolio held in the
account is less than $100,000 (if a shareholder has more than one account in a
Portfolio, each account must satisfy the minimum account size.) Before the
Directors of the Fund elect to exercise such right, shareholders will receive
prior written notice and will be permitted 60 days to bring accounts up to the
minimum to avoid involuntary redemption.
- --------------------------------------------------------------------------------
Yield Information
- --------------------------------------------------------------------------------
The Portfolios may measure performance in several ways, including "yield",
"effective yield" and "tax equivalent yield" (for the Municipal Portfolio only).
A Portfolio's yield is a way of showing the rate of income the Portfolio earns
on its investments as a percentage of the Portfolio's share price. Yield
represents the income, less expenses generated by the investments, in the
Portfolio over a seven-day period expressed as an annual percentage rate.
Effective yield is similar in that it is calculated over the same time frame,
but instead the net investment income is compounded and then annualized. Due to
the compounding effect, the effective yield will normally be higher than the
yield. The Municipal Portfolio may also quote its tax-equivalent yield, which
shows the taxable yield an investor would have to earn before taxes to equal the
Portfolio's tax-free yield. Portfolio yield figures are based upon historical
earnings and are not intended to indicate future performance.
From time to time in advertisements or sales material, the Portfolios may
discuss their performance ratings or other information as published by
recognized statistical or rating services, such as Lipper Analytical Services,
Inc., IBC Money Fund Report, Morningstar, or by publications of general
interest, such as Forbes or Money. In addition, the Portfolios may compare their
yields to those of certain U.S. Treasury obligations or other money market
instruments.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
Directors
Overall responsibility for management and supervision of the Fund rests
with its Directors. The Directors approve all significant agreements between the
Fund and the companies that furnish services to the Fund and each Portfolio,
including agreements with the Fund's distributor, investment manager, custodian
and transfer agent. The day-to-day operations of each Portfolio are delegated to
the Portfolio's
23
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
investment manager. The Statement of Additional Information contains background
information regarding each Director and executive officer of the Fund.
Investment 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,
subject to the direction of the Directors of the Fund. As compensation for MMC's
services to the Portfolios, each Portfolio pays a monthly fee at the annual rate
of 0.27% of the value of that Portfolio's average daily net assets.
MMC waived a portion of its management fee for the Fund for the
fiscal year ended May 31, 1998, and the effective rate of the
management fee was 0.15%, 0.11% and 0.09% for the Cash Portfolio,
Government Portfolio and Municipal Portfolio, respectively. For the
past fiscal year, total operating expenses without the management fee
waiver for the Cash portfolio was 0.48% of the daily net assets. No
Class B shares were outstanding for the Government Portfolio or the
Municipal Portfolio during the period, however management estimates
that total operating expenses without the management fee waiver would
have been 0.64% and 0.66% of average daily net assets, respectively.
MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.,
which is a wholly owned subsidiary of Travelers Group, Inc. ("Travelers"), a
diversified financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services,
including Asset Management, Consumer Finance Services, Life Insurance Services
and Property & Casualty Services. Salomon Smith Barney and Salomon Smith Barney
Holdings Inc. are each located at 388 Greenwich Street, New York, New York
10013.
MMC was incorporated on March 12, 1968 under the laws of Delaware. As of
August 31, 1998 MMC had aggregate assets under management in excess of $106
billion.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction was approved by the
stockholders of both Travelers and Citicorp on June 22, 1998 and by the
Federal Reserve Board on September 23, 1998. The companies expect the
merger to close on or about October 8, 1998, creating a new entity to
be called Citigroup. By approving the merger, the Federal Reserve
Board approved Travelers, as the surviving entity, becoming 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. MMC does not believe that its
compliance with the applicable law 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.
- --------------------------------------------------------------------------------
Distributor and Service Organizations
- --------------------------------------------------------------------------------
Salomon Smith Barney serves as Principal Underwriter of shares of the
Fund. The Fund has adopted a Distribution and Shareholder Servicing Plan (the
"Plan") pursuant to Rule 12b-1 under the 1940 Act. The Plan permits the Fund to
make payments to institutional investors such as banks, savings and loans
associations
24
<PAGE>
- --------------------------------------------------------------------------------
Distributor and Service Organizations (continued)
- --------------------------------------------------------------------------------
and other financial institutions ("service organizations") who are purchasing
Class B shares on behalf of their customers, at an annual rate of 0.25% of that
Class' average daily net assets.
The Glass-Steagall Act currently prohibits certain financial institutions
from underwriting securities of open-end investment companies, such as the Fund.
Therefore, in connection with the merger of Travelers and Citicorp
and as a consequence of the applicability of the BHCA and the
Glass-Steagall Act, the Fund plans to retain the services of a new entity (which
is not otherwise affiliated with Travelers) to act as distributor of the
Portfolio's shares.
The Fund will enter into an agreement with each service organization which
purchases Class B shares to provide certain services to the beneficial owners of
such shares. Such services include aggregating and processing purchase and
redemption requests from customers and placing net purchase and redemption
orders with Salomon Smith Barney; processing dividend payments from the Fund on
behalf of the customers; providing information periodically to customers showing
their positions in shares; arranging for bank wires; responding to customer
inquiries relating to the services provided by the service organization and
handling correspondence; and acting as shareholder of record and nominee. Under
terms of the agreements, service organizations are required to provide to their
customers a schedule of any fees that they may charge customers in connection
with their investment in Class B shares. The service organizations may be
subject to various state laws regarding the services described above, and may be
required to register as dealers pursuant to state law.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund, an open-end, management investment company, was organized under
the laws of the State of Maryland on March 28, 1995. The Directors have
authorized the issuance of three series of shares, each representing shares in
one of three separate Portfolios, and may also authorize the creation of
additional series of shares. Each share of a Portfolio represents an equal
proportionate interest in the net assets of that Portfolio or Class with each
other share of the same Portfolio or Class and is entitled to such dividends and
distributions out of the net income of that Portfolio or Class as are declared
in the discretion of the Directors. Shareholders are entitled to one vote for
each share held and will vote in the aggregate and not by Portfolio or Class
except as otherwise required by the 1940 Act or Maryland General Corporation
Law. As described under "Voting Rights" in the Statement of Additional
Information, the Portfolio ordinarily will not hold shareholder meetings;
however, shareholders have the right to call a meeting upon a vote of 10% of the
Portfolio's outstanding shares for the purpose of voting to remove Directors and
the
25
<PAGE>
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
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, is the custodian of each Portfolio's assets.
First Data, located at Exchange Place, Boston, Massachusetts 02109,
provides transfer agency and shareholder services for the Fund.
The Fund sends to each shareholder a semi-annual report and an audited
annual report, each of which includes a list of the investment securities held
by the Fund at the end of the period covered.
26
<PAGE>
SALOMON SMITH BARNEY
----------------------------------
A Member of TravelersGroup[LOGO]
Smith Barney Institutional Cash
Management Fund, Inc.
Class B Shares
388 Greenwich Street
New York, New York 10013
FD 0959 9/981
PART B
STATEMENT OF ADDITIONAL INFORMATION
SMITH BARNEY
INSTITUTIONAL CASH MANAGEMENT FUND, INC.
388 Greenwich Street
New York, NY 10013
800-451-2010
STATEMENT OF ADDITIONAL INFORMATION
September 28, 1998
The Cash Portfolio, the Government Portfolio and the
Municipal Portfolio.
This Statement of Additional Information ("SAI")
expands upon and supplements the information contained
in the current prospectuses of Class A shares and
Class B shares each dated September 28, 1998, as
amended or supplemented from time to time (the
"Prospectuses"), of Smith Barney Institutional Cash
Management Fund, Inc. (the "Fund") relating to the
Cash Portfolio, the Government Portfolio and the
Municipal Portfolio (each, a "Portfolio" and
collectively, the "Portfolios"), each a series of the
Fund, and should be read in conjunction with the
Prospectuses. The Prospectuses may be obtained from a
Salomon Smith Barney Financial Consultant or by
writing or calling the Fund at the address or
telephone number set forth above. This SAI, although
not in itself a prospectus, is incorporated by
reference into the Prospectuses in its entirety.
TABLE OF CONTENTS
For ease of reference, the same section headings are
used in the Prospectuses and in this Statement of
Additional Information, except where shown below:
Management of the Fund..............................................
..........................................
2
Counsel and Auditors......................................................
......................................
5
Investment Objectives (See in the Prospectuses
"Investment Objectives and Policies")...............
5
Investment Restrictions.....................................................
.....................................
5
Types of Securities and Investment Techniques
( See in Prospectuses "Common Investment
Techniques").................................................
9
Yield Information.....................................................
...........................................
18
Determination of Net Asset Value (See in Prospectuses
"Valuation of Shares")........................
20
Management Agreement, Plan of Distribution and Other
Services
(See in Prospectuses "Management of the
Fund").........................................................
20
Voting Rights............................................................
.......................................
22
Additional Information....................................................
......................................
23
Financial Statements.....................................................
........................................
23
Appendix A-Description of Securities
Ratings...............................................................
A1
Appendix B-Description of Municipal
Securities............................................................
B1
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of
certain of the organizations that provide services to
the Fund. These organizations are the following:
Name Service
Mutual Management Corp. ("MMC"
or the "Manager")(formerly Smith Barney
Mutual Funds Management
Inc.).......................... Investment Adviser
and Administrator
PNC Bank, National Association
("PNC")...............................................
................. Custodian
First Data Investor Services Group, Inc.
("First
Data").................................................
....... Transfer Agent and Dividend Disbursing
Agent
These organizations and the services they perform for
the Fund and the Portfolios are discussed in the
Prospectuses and in this SAI.
Directors and Executive Officers of the Fund
The following are the names of the Directors and
executive officers of the Fund together with a brief
description of their principal occupations during the
last five years. Each Director who is an "interested
person" of the Fund, as defined in the Investment
Company Act of 1940 as amended (the "1940 Act"), is
indicated by an asterisk.
Paul R. Ades, Director (Age 58). Partner in the law
firm of Murov & Ades. His address is 272 South
Wellwood Avenue, Lindenhurst, New York 11757.
Herbert Barg, Director (Age 75). Private investor.
His address is 273 Montgomery Avenue, Bala Cynwyd,
Pennsylvania 19004.
Dwight B. Crane, Director (Age 60). Professor,
Graduate School of Business Administration, Harvard
University. His address is Graduate School of
Business Administration, Harvard University, Boston,
Massachusetts 02163.
Frank G. Hubbard, Director (Age 63). Vice President
of S&S Industries; Former Corporate Vice President,
Materials Management and Marketing Services of Huls
America, Inc. His address is 80 Centennial Avenue
P.O. Box 456, Piscataway, New Jersey 08855-0456.
*Heath B. McLendon, Chairman of the Board,
President and Chief Executive Officer (Age 65).
Managing Director of Salomon Smith Barney, Chairman of
the Board of Smith Barney Strategy Advisors Inc. and
President of MMC and Travelers Investment Adviser,
Inc. ("TIA"). Mr. McLendon is Chairman or Co-Chairman
of the Board and Director of 58 investment companies
associated with Salomon Smith Barney Holdings Inc.
His address is 388 Greenwich Street, New York, New
York 10013.
Jerome Miller, Director (Age 61). Retired, Former
President, Asset Management Group of Shearson Lehman
Brothers. His address is 27 Hemlock Road, Manhasset,
New York, NY 11030.
Ken Miller, Director (Age 56). President of Young
Stuff Apparel Group, Inc. His address is 1407
Broadway, 6th Floor, New York, New York 10018.
Joseph Benevento (Age 31), Vice President and
Investment Officer of Salomon Smith Barney and Vice
President of the Fund and four investment companies
associated with Salomon Smith Barney.
Lewis E. Daidone, Senior Vice President and Treasurer
(Age 41). Managing Director of Salomon Smith Barney;
Director and Senior Vice President of MMC and TIA.
Mr. Daidone also serves as Senior Vice President and
Treasurer of 41 other funds of the Smith Barney Mutual
Funds. His address is 388 Greenwich Street, New York,
New York 10013.
Christina T. Sydor, Secretary (Age 47). Managing
Director of Salomon Smith Barney. General Counsel and
Secretary of MMC and TIA. Ms. Sydor also serves as
Secretary of 41 other funds of the Smith Barney Mutual
Funds. Her address is 388 Greenwich Street New York,
New York, 10013.
Phyllis M. Zahorodny, Vice President and Investment
Officer (Age 40). Investment Officer of MMC and
Managing Director of Salomon Smith Barney; prior to
July 1993. Ms. Zahorodny serves as Investment Officer
of 4 other funds of the Salomon Smith Barney Mutual
Funds. Her address is 388 Greenwich Street, New York,
New York, 10013.
Lawrence T. McDermott, Vice President and Investment
Officer (Age 50). Investment Officer of MMC and
Managing Director of Salomon Smith Barney. Mr.
McDermott serves as Investment Officer of 10 other
funds of the Smith Barney Mutual Funds. His address
is 388 Greenwich Street, New York, New York, 10013.
Each Director also serves as a director, trustee
and/or general partner of certain other mutual funds
for which Salomon Smith Barney serves as distributor.
As of September 14, 1998, the Directors and officers
of the Fund, as a group, owned less than 1.00% of the
outstanding shares of common stock of each Portfolio.
To the best knowledge of the Directors, as of
September 14, 1998, the following shareholders or
"groups" (as such term is defined in section 13(d) of
the Securities Exchange Act of 1934, as amended) owned
beneficially or of record more than 5% of the shares
of the following Portfolios:
PORTFOLIO
CLASS
PERCENT
NAME
ADDRESS
CASH PORTFOLIO
A
9.7955
Horst Rechelbacher
C/O Dennis Ritchie
Ritchie, Luukkonen, Cambell& Co. LLP
800 TCF Tower
121 S 8th Street
Minneapolis MN 55402
CASH PORTFOLIO
B
99.999
Charybdis Corp.
James L. Rathmann, President
600 Dorset Road
Devon PA 19333-1813
MUNICIPAL PORTFOLIO
A
38.5754
Saxon & Co.
PNC Bank NA
ABC International Court 2
200 Stevens Drive
Lester PA 19113
Attn: ACI/REORG- Lawrence Lockwood
PORTFOLIO
CLASS
PERCENT
NAME
ADDRESS
MUNICIPAL PORTFOLIO
A
25.7804
Staples Inc.
C/O Mary Delong
8 Technology Dr.
Westborough MA 01581-6020
MUNICIPAL PORTFOLIO
A
13.1948
Saxon & Co.
PNC Bank NA
FBO Wolf Block Schorr #11
A/C 35-35-008-0364587
P.O. Box 7780-1888
Philadelphia PA 19182
MUNICIPAL PORTFOLIO
A
7.4401
Vault Self Storage
Mini Warehouse Inc.
Attn: Bernard Sherman
3682 Princeston Place
Boca Raton FL 33496-2710
MUNICIPAL PORTFOLIO
B
100.00
Smith Barney Inst. Cash Management Fund
Seed account
Attn: Irving David
388 Greenwich Street
22nd Floor
New York, NY 10013
GOVERNMENT PORTFOLIO
A
17.9352
V. Salandria, Esq.,
E. Colson, Esq. and
M. L. Kameron Personal Reps.
Estate of Morris Rodman
K and S
11400 Rockville Pike, Ste 800
Rockville MD 20852-3004
GOVERNMENT PORTFOLIO
A
13.1274
Giant Industries Inc.
Attn: Mark Cox
23733 North Scottsdale Road
Scottsdale AZ 85255-3465
GOVERNMENT PORTFOLIO
A
7.2441
Empire Heath Centers Group
P.O. Box 248
Spokane WA 99210-0248
GOVERNMENT PORTFOLIO
A
6.7535
Chickasaw Nation
Attn: Nathan Hart
P.O. Box 1548
ADA OK 74821-1548
GOVERNMENT PORTFOLIO
A
5.5085
Widata Inc.
1259 Oakhead Parkway
Sunnyvale CA 94086-4040
GOVERNMENT PORTFOLIO
A
5.1871
Caliber Holdings Corporation
18400 Von Karman Ave
Ste 250
Irvine CA 92612
GOVERNMENT PORTFOLIO
B
100.00
Smith Barney Inst. Cash Management Fund
Seed account
Attn: Irving David
388 Greenwich Street
22nd Floor
New York, NY 10013
For the fiscal year ended May 31, 1998, the Directors
were paid the following compensation as a director of
the Fund and as, trustee and/or general partner of
other Smith Barney Mutual Funds.
No officer, director or employee of Salomon Smith
Barney or any parent or subsidiary receives any
compensation from the Fund for serving as an officer
or Director of the Fund. The Fund pays each Director
who is not an officer, director or employee of Salomon
Smith Barney or any of its affiliates a fee of $3,000
per annum plus $750 per meeting attended and
reimburses travel and out-of-pocket expenses. For the
fiscal year ended May 31, 1998, such expenses totaled
$10,096.58:
Name of Person
Aggregate Compensation
from Fund
Total Pension or Retirement Benefits Accrued as part
of Fund Expenses
Compensation from Fund and Fund Complex Paid to
Directors
Number of Funds for Which Director Serves Within Fund
Complex
Paul R. Ades
$6,200
0
$49,000
5
Herbert Barg
6,200
0
101,600
16
Dwight B. Crane
6,200
0
133,850
22
Frank G. Hubbard
6,200
0
52,000
5
Heath B. McLendon
- --
- --
- --
58
Jerome Miller
6,200
0
12,400
5
Ken Miller
6,200
0
52,000
5
John White*
19,659**
0
52,000
5
* Upon attainment of age 80 Directors are required to
change to emeritus status. 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 Directors together with
reasonable out-of-pocket expenses for each meeting
attended. During the Fund's last fiscal year
aggregate compensation paid by the Fund to Directors
Emeritus totaled $3,225. Effective March 9, 1998 Mr.
White became a Director Emeritus.
** Mr. White received the first of 10 deferred
compensation payments.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as legal counsel to
the Fund. The Directors who are not "interested
persons" of the Fund have selected Stroock & Stroock &
Lavan LLP as their counsel.
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 May 31, 1999,
to examine and report on the financial statements and
financial highlights of the Fund.
INVESTMENT OBJECTIVES
As discussed in the Prospectuses, the investment
objective of each of the Cash Portfolio and the
Government Portfolio is to seek maximum current income
to the extent consistent with preservation of capital
and the maintenance of liquidity. The investment
objective of the Municipal Portfolio is to seek
maximum current income that is exempt from Federal
income taxes to the extent consistent with
preservation of capital and the maintenance of
liquidity. There can be no assurance that a Portfolio
will achieve its investment objective or maintain a
stable net asset value of $1.00 per share. The
investment objectives of the Portfolios are
fundamental and may not be changed without shareholder
approval.
INVESTMENT RESTRICTIONS
As indicated in the Prospectus, each Portfolio has
adopted certain fundamental investment restrictions
that cannot be changed without shareholder approval.
Shareholder approval means approval by the lesser of
(i) more than 50% of the outstanding voting securities
of the Fund (or a particular Portfolio if a matter
affects just that Portfolio), or (ii) 67% or more of
the voting securities present at a meeting if the
holders of more than 50% of the outstanding voting
securities of the Fund (or a particular Portfolio) are
present or represented by proxy.
As used in the restrictions set forth below and as
used elsewhere in this SAI, the term "U.S. Government
Securities" shall have the meaning set forth in the
1940 Act. The 1940 Act defines U.S. Government
Securities as securities issued or guaranteed by the
United States government, its agencies or
instrumentalities and has been interpreted to include
repurchase agreements collateralized and municipal
securities refunded with escrowed U.S. Government
Securities ("U.S. Government Securities").
If a percentage restriction described below is
complied with at the time of an investment, a later
increase or decrease in percentage resulting from a
change in values or assets will not constitute a
violation of such restriction. The identification of
the issuer of a Municipal Obligation depends on the
terms and conditions of the obligation. If the assets
and revenues of an agency, authority, instrumentality
or other political subdivision are separate from those
of the government creating the issuing entity and a
security is backed only by the assets and revenues of
the entity, the entity would be deemed to be the sole
issuer of the security. Similarly, in the case of a
private activity bond, if that bond is backed only by
the assets and revenues of the non-governmental user,
then the non-governmental user would be deemed to be
the sole issuer. If, however, in either case, the
creating government or some other entity guarantees a
security, such a guarantee would be considered a
separate security and would be treated as an issue of
such government or other entity.
Each Portfolio may make commitments more restrictive
than the fundamental restrictions listed below so as
to permit the sale of Portfolio shares in certain
states. Should a Portfolio determine that any such
commitment is no longer in the best interests of the
Portfolio and its shareholders, it will revoke the
commitment by terminating sales of its shares in the
state involved.
The Portfolios have adopted the following fundamental
policies:
(1) With respect to 75% of its assets, a Portfolio may
not purchase a security other than a U.S. Government
Security, if, as a result, more than 5% of the
Portfolio's total assets would be invested in the
securities of a single issuer or the Portfolio would
own more than 10% of the outstanding voting securities
of any single issuer.
(2) A Portfolio may not purchase securities if more
than 25% of the value of a Portfolio's total assets
would be invested in the securities of issuers
conducting their principal business activities in the
same industry; provided that: (i) there is no limit on
investments in U.S. Government Securities or in
obligations of domestic or foreign commercial banks
(including U.S. branches of foreign banks subject to
regulations under U.S. laws applicable to domestic
banks and, to the extent that its parent is
unconditionally liable for the obligation, foreign
branches of U.S. banks); (ii) this limitation shall
not apply to the Municipal Portfolio's investments in
municipal securities; (iii) there is no limit on
investments in issuers domiciled in a single country;
(iv) financial service companies are classified
according to the end users of their services (for
example, automobile finance, bank finance and
diversified finance are each considered to be a
separate industry); and (v) utility companies are
classified according to their services (for example,
gas, gas transmission, electric, and telephone are
each considered to be a separate industry).
(3) A Portfolio may not act as an underwriter of
securities issued by others, except to the extent that
a Portfolio may be deemed an underwriter in connection
with the disposition of portfolio securities of such
Portfolio.
(4) A Portfolio may not make loans, except that this
restriction shall not prohibit (a) purchase and
holding of a portion of an issue of publicly
distributed debt securities, (b) the lending of
portfolio securities, or (c) entry into repurchase
agreements. A Portfolio may not lend any security if,
as a result, more than 20% of a Portfolio's total
assets would be lent to other parties.
(5) A Portfolio may not purchase or sell real estate
or any interest therein, except that the Portfolio may
invest in debt obligations secured by real estate or
interests therein or securities issued by companies
that invest in real estate or interests therein.
(6) A Portfolio may borrow money for emergency
purposes (not for leveraging) in an amount not
exceeding 33 1/3% of the value of its total assets
(including the amount borrowed) less liabilities
(other than borrowings). If borrowings exceed 5% of
the value of a Portfolio's total assets by reason of a
decline in net assets, the Portfolio will reduce its
borrowings within three business days to the extent
necessary to comply with the 33 1/3% limitation.
Reverse repurchase agreements or the segregation of
assets in connection with such agreements shall not be
considered borrowing for the purposes of this limit.
(7) Each Portfolio may, notwithstanding any other
investment policy or restriction (whether or not
fundamental), invest all of its assets in the
securities of a single open-end management investment
company with substantially the same fundamental
investment objectives, policies and restrictions as
that Portfolio.
Each Portfolio has adopted the following
nonfundamental investment restrictions that may be
changed by the Board of Directors of the Fund (the
"Directors") without shareholder approval:
(1) A Portfolio may not invest in securities or enter
into repurchase agreements with respect to any
securities if, as a result, more than 10% of the
Portfolio's net assets would be invested in repurchase
agreements not entitling the holder to payment of
principal within seven days and in other securities
that are not readily marketable ("illiquid
securities"). The Directors, or the Portfolio's
Investment Adviser acting pursuant to authority
delegated by the Directors, may determine that a
readily available market exists for certain securities
such as securities eligible for resale pursuant to
Rule 144A under the Securities Act of 1933, as
amended, or any successor to such rule, Section 4(2)
commercial paper and municipal lease obligations.
Accordingly, such securities may not be subject to the
foregoing limitation.
(2) A Portfolio may not purchase the securities of an
issuer if one or more of the Directors or Officers of
the Portfolio individually own beneficially more than
1/2 of 1% of the outstanding securities of such issuer
or together own beneficially more than 5% of such
securities.
(3) A Portfolio may not invest more than 15% of its
assets in the securities of any unseasoned issuer or
in illiquid securities. Solely for the purposes of
this paragraph, illiquid securities include securities
eligible for resale pursuant to Rule 144A.
(4) A Portfolio may not invest in the securities of
another investment company except in connection with a
merger, consolidation, reorganization or acquisition
of assets.
(5) A Portfolio may not purchase securities on margin,
or make short sales of securities, except for short
sales against the box and the use of short-term credit
necessary for the clearance of purchases and sales of
portfolio securities.
(6) A Portfolio may not invest more than 5% of the
value of its total assets in the securities of any
issuer that has conducted continuous operations for
less than three years, including operations of
predecessors, except that this shall not affect the
Portfolio's ability to invest in US. Government
Securities, fully collateralized debt obligations,
municipal obligations, securities that are rated by at
least one nationally recognized statistical rating
organization and securities guaranteed as to principal
and interest by an issuer in whose securities the
Portfolio could invest.
(7) A Portfolio may not pledge, mortgage, hypothecate
or encumber any of its assets except to secure
permitted borrowings or in connection with permitted
short sales.
(8) A Portfolio may not invest directly in interests
in oil and gas or interests in other mineral
exploration or development programs or leases;
however, the Portfolio may own debt securities of
companies engaged in those businesses.
(9) A Portfolio may not invest in companies for the
purpose of exercising control of management.
Portfolio Turnover
The Portfolios do not intend to seek profits through
short-term trading. Nevertheless, the Portfolios will
not consider turnover rate a limiting factor in making
investment decisions.
Under certain market conditions, a Portfolio may
experience increased portfolio turnover as a result of
its options activities. For instance, the exercise of
a substantial number of options written by a Portfolio
(due to appreciation of the underlying security in the
case of call options or depreciation of the underlying
security in the case of put options) could result in a
turnover rate in excess of 100%. The portfolio
turnover rate of a Portfolio is calculated by dividing
the lesser of purchases or sales of portfolio
securities for the year by the monthly average value
of portfolio securities. Securities with remaining
maturities of one year or less on the date of
acquisition are excluded from the calculation.
Portfolio Transactions
Most of the purchases and sales of securities for a
Portfolio, whether transacted on a securities exchange
or in the over-the-counter market, will be effected in
the primary trading market for the securities. The
primary trading market for a given security generally
is located in the country in which the issuer has its
principal office. Decisions to buy and sell securities
for a Portfolio are made by MMC which also is
responsible for placing these transactions, subject to
the overall review of the Fund's Board of Directors.
Although investment decisions for each Portfolio are
made independently from those of the other accounts
managed by its Investment Manager, investments of the
type the Portfolio may make also may be made by those
other accounts. When a Portfolio and one or more other
accounts managed by its MMC are prepared to invest in,
or desire to dispose of, the same security, available
investments or opportunities for sales will be
allocated in a manner believed by the Investment
Manager to be equitable to each. In some cases, this
procedure may adversely affect the price paid or
received by a Portfolio or the size of the position
obtained or disposed of by the Portfolio.
Transactions on domestic stock exchanges and some
foreign stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on
which commissions are negotiated, the cost of
transactions may vary among different brokers. On most
foreign exchanges, commissions are generally fixed.
There is generally no stated commission in the case of
securities traded in domestic or foreign over-the-
counter markets, but the prices of those securities
include undisclosed commissions or mark-ups. The cost
of securities purchased from underwriters includes an
underwriting commission or concession, and the prices
at which securities are purchased from and sold to
dealers include a dealer's mark-up or mark-down. U.S.
Government Securities are generally purchased from
underwriters or dealers, although certain newly issued
U.S. Government Securities may be purchased directly
from the United States Treasury or from the issuing
agency or instrumentality, respectively.
In selecting brokers or dealers to execute portfolio
transactions on behalf of a Portfolio, the Portfolio's
Investment Manager seeks the best overall terms
available. In assessing the best overall terms
available for any transaction, each the Manager will
consider the factors it deems relevant, including the
breadth of the market in the security, the price of
the security, the financial condition and the
execution capability of the broker or dealer and the
reasonableness of the commission, if any, for the
specific transaction and on a continuing basis. In
addition, each advisory agreement between the Fund and
the Manager relating to a Portfolio authorizes the
Manager, in selecting brokers or dealers to execute a
particular transaction and in evaluating the best
overall terms available, to consider the brokerage and
research services (as those terms are defined in
Section 28(e) of the Securities Exchange Act of 1934)
provided to the Portfolio, the other Portfolios and/or
other accounts over which the Manager or its
affiliates exercise investment discretion. The fees
under the advisory agreements relating to the
Portfolios between the Fund and the Managers are not
reduced by reason of their receiving such brokerage
and research services. The Fund's Board of Directors
periodically will review the commissions paid by the
Portfolios to determine if the commissions paid over
representative periods of time were reasonable in
relation to the benefits inuring to the Portfolios.
To the extent consistent with applicable provisions of
the 1940 Act and the rules and exemptions adopted by
the SEC thereunder, the Board of Directors has
determined that transactions for a Portfolio may be
executed through Salomon Smith Barney and other
affiliated broker-dealers if, in the judgment of the
Portfolio's Investment Manager, the use of such
broker-dealer is likely to result in price and
execution at least as favorable as those of other
qualified broker-dealers, and if, in the transaction,
such broker-dealer charges the Portfolio a rate
consistent with that charged to comparable
unaffiliated customers in similar transactions.
Salomon Smith Barney may directly execute such
transactions for the Portfolios on the floor of any
national securities exchange, provided (a) the Board
of Directors has expressly authorized Salomon Smith
Barney to effect such transactions, and (b) Salomon
Smith Barney annually advises the Fund of the
aggregate compensation it earned on such transactions.
Over-the-counter purchases and sales are transacted
directly with principal market makers except in those
cases in which better prices and executions may be
obtained elsewhere.
TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
The Portfolios will invest only in eligible high-
quality, short-term money market instruments that
present minimal credit risks determined by the Manager
pursuant to procedures adopted by the Directors.
Each of the Portfolios may invest only in "eligible
securities" as defined in Rule 2a-7 adopted under the
1940 Act. Generally, an eligible security is a
security that (i) is denominated in U. S. dollars and
has a remaining maturity of 13 months or less (as
calculated pursuant to Rule 2a-7); (ii) is rated, or
is issued by an issuer with short-term debt
outstanding that is rated, in one of the two highest
rating categories by any two nationally recognized
statistical rating organizations ("NRSROs") or, if
only one NRSRO has issued a rating, by that NRSRO (the
"Requisite NRSROs"), or is unrated and of comparable
quality to a rated security, as determined by MMC; and
(iii) has been determined by MMC to present minimal
credit risks pursuant to procedures approved by the
Directors. In addition, the Portfolios will maintain a
dollar-weighted average portfolio maturity of 90 days
or less. A description of the ratings of some NRSROs
appears in Appendix A.
Except to the limited extent permitted by Rule 2a-7
and except for U.S. Government Securities (as defined
below), the Cash and Municipal Portfolios will not
invest more than 5% of its total assets in the
securities of any one issuer, except when the
securities are subject to demand features and/or
guarantees that meet the requirements of Rule 2a-7 (as
to diversification and other requirements of the
Rule). To ensure adequate liquidity, no Portfolio may
invest more than 10% of its net assets in illiquid
securities, including repurchase agreements maturing
in more than seven days and time deposits that mature
in more than two business days. Because the Portfolios
are typically used as a cash management vehicle, they
intend to maintain a high degree of liquidity. MMC
determines and monitors the liquidity of portfolio
securities under the supervision of the Directors.
If the Portfolios acquire securities that are unrated
(other than U.S. Government Securities, as defined
below), the acquisition must be approved under the
procedures adopted by the Board of Directors.
Under Rule 2a-7, each Portfolio may invest more than
5% (but no more than 25%) of the then-current value of
its total assets in the securities of a single issuer
for a period of up to three business days, provided
that (a) the securities either are rated by the
Requisite NRSROs in the highest short-term rating
category or are securities of issuers that have
received such rating with respect to other short-term
debt securities or are comparable unrated securities,
and (b) the Portfolio does not make more than one such
investment at any one time.
Pursuant to Rule 2a-7, each Portfolio invests in
''first-tier" securities. First-tier securities are
U.S. Government Securities, shares of other money
market funds, and securities that are rated, or are
issued by an issuer with short-term debt outstanding
that is rated, in the highest short-term rating
category by the Requisite NRSROs, or are unrated and
of comparable quality to a rated security. In
addition, a Portfolio may invest in "second-tier"
securities, which are defined as eligible securities
that are not first-tier securities. However, a
Portfolio may not invest in a second-tier security (in
the case of the Municipal Portfolio, second tier
conduit securities), if immediately after the
acquisition thereof the Portfolio would have invested
more than (i) the greater of one percent of its total
assets or $1,000,000 in second-tier securities (in the
case of the Municipal Portfolio, second tier conduit
securities) issued by that issuer, or (ii) five
percent of its total assets in second-tier securities
(in the case of the Municipal Portfolio, second tier
conduit securities).
The following discussion of types of securities in
which the Portfolios may invest supplements and should
be read in conjunction with the Prospectus.
Certain Portfolio Strategies
U.S. Government Securities. Securities issued or
guaranteed by the U.S. Government or one of its
agencies, authorities or instrumentalities in which
the Portfolios may invest include debt obligations of
varying maturities issued by the U.S. Treasury or
issued or guaranteed by an agency or instrumentality
of the U.S. Government, including the Federal Housing
Administration, Farmers Home Administration,
Export-Import Bank of the United States, Small
Business Administration, Government National Mortgage
Association, General Services Administration, Central
Bank for Cooperatives, Federal Farm Credit Banks,
Federal Home Loan Banks, Federal Home Loan Mortgage
Corporation, Federal Intermediate Credit Banks,
Federal Land Banks, Federal National Mortgage
Association, Maritime Administration, Tennessee Valley
Authority, District of Columbia Armory Board, Student
Loan Marketing Association and Resolution Trust
Corporation. Direct obligations of the U.S. Treasury
include a variety of securities that differ in their
interest rates, maturities and dates of issuance.
Because the U.S. Government is not obligated by law to
provide support to an instrumentality that it
sponsors, none of the Portfolios will invest in
obligations issued by an instrumentality of the U.S.
Government unless MMC determines that the
instrumentality's credit risk does not make its
securities unsuitable for investment by the Portfolio.
Ratings as Investment Criteria. In general, the
ratings of NRSROs represent the opinions of those
organizations as to the quality of the securities that
they rate. It should be emphasized, however, that
such ratings are relative and subjective, are not
absolute standards of quality and do not evaluate the
market risk of securities. These ratings will be used
by the Portfolios as initial criteria for the
selection of portfolio securities, but the Portfolios
also will rely upon the independent advice of MMC to
evaluate potential investments.
Subsequent to the purchase of a particular security by
a Portfolio, its rating may be reduced below the
minimum required for purchase by the Portfolio or the
issuer of the security may default on its obligations
with respect to the security. In that event, the
Portfolio will dispose of the security as soon as
practicable, consistent with achieving an orderly
disposition of the security, unless the Directors
determine that disposal of the security would not be
in the best interest of the Portfolio. In addition,
it is possible that a security may cease to be rated
or an NRSRO might not timely change its rating of a
particular security to reflect subsequent events.
Neither of these events will necessarily require the
sale of the security by the Portfolio, but the
Directors will promptly consider such event in its
determination of whether the Portfolio should continue
to hold the security. In addition, to the extent that
the ratings change as a result of changes in such
organizations or their rating systems, the Portfolio
will attempt to use comparable ratings as standards
for its investments in accordance with its investment
objective and policies.
Repurchase Agreements. Each of the Portfolios may
engage in repurchase agreement transactions with banks
which are issuers of instruments acceptable for
purchase by such Portfolio and with certain dealers
listed on the Federal Reserve Bank of New York's list
of reporting dealers. Repurchase agreements are
contracts under which the buyer of a security
simultaneously commits to resell the security to the
seller at an agreed-upon price and date. Under each
repurchase agreement, the selling institution will be
required to maintain the value of the securities
subject to the repurchase agreement at not less than
their repurchase price. Repurchase agreements could
involve certain risks in the event of default or
insolvency of the other party, including possible
delays or restrictions upon the relevant Portfolio's
ability to dispose of the underlying securities. MMC,
acting under the supervision of the Directors, reviews
the creditworthiness of those banks and dealers with
which a Portfolio enters into repurchase agreements to
evaluate potential risks.
Lending of Portfolio Securities. Each Portfolio has
the ability to lend securities from its portfolio to
brokers, dealers and other financial organizations.
Such loans, if and when made, will not exceed 20% of
the Portfolio's total assets, taken at value. A
Portfolio may not lend its portfolio securities to MMC
or its affiliates without specific authorization from
the SEC. Loans of portfolio securities by a Portfolio
will be collateralized by cash, letters of credit or
securities issued or guaranteed by the U.S. Government
or its agencies which will be maintained at all times
in an amount equal to at least 100% of the current
market value of the loaned securities. From time to
time, a Portfolio may return a part of the interest
earned from the investment of collateral received for
securities loaned to the borrower and/or a third
party, which is unaffiliated with the Portfolio or
with MMC, and which is acting as a "finder."
By lending portfolio securities, each Portfolio can
increase its income by continuing to receive interest
on the loaned securities as well as by either
investing the cash collateral in short-term
instruments or obtaining yield in the form of interest
paid by the borrower when government securities are
used as collateral. Requirements of the SEC, which
may be subject to future modifications, currently
provide that the following conditions must be met
whenever portfolio securities are loaned: (a) the
Portfolio must receive at least 100% cash collateral
or equivalent securities from the borrower; (b) the
borrower must increase such collateral whenever the
market value of the securities rises above the level
of such collateral; (c) the Portfolio must be able to
terminate the loan at any time; (d) the Portfolio must
receive reasonable interest on the loan, as well as an
amount equal to any dividends, interest or other
distributions on the loaned securities and any
increase in market value; (e) the Portfolio may pay
only reasonable custodian fees in connection with the
loan; and (f) voting rights on the loaned securities
may pass to the borrower; however, if a material event
adversely affecting the investment occurs, the
Directors of the Fund must terminate the loan and
regain the right to vote the securities.
The limit of 20% of each Portfolio's total assets to
be committed to securities lending is a fundamental
policy of each Portfolio, which means that it cannot
be changed without approval of a majority of a
Portfolio's outstanding shares. See "Investment
Restrictions" above.
Floating Rate and Variable Rate Obligations Each
Portfolio may purchase floating rate and variable rate
obligations, including participation interests
therein. Floating rate or variable rate obligations
provide that the rate of interest is set as a specific
percentage of a designated base rate (such as the
prime rate at a major commercial bank). Variable rate
obligations provide for a specified periodic
adjustment in the interest rate, while floating rate
obligations have an interest rate which changes
whenever there is a change in the external interest
rate. Each Portfolio may purchase floating rate and
variable rate obligations which carry a demand feature
that would permit the Portfolio to tender them back to
the issuer or remarketing agent at par value prior to
maturity. Each Portfolio currently is permitted to
purchase floating rate and variable rate obligations
with demand features in accordance with requirements
established by the SEC, which, among other things,
permit such instruments to be deemed to have remaining
maturities of 13 months or less, notwithstanding that
they may otherwise have a stated maturity in excess of
13 months. Frequently, floating rate and variable
rate obligations are secured by letters of credit or
other credit support arrangements provided by banks.
As determined by MMC, under the supervision of the
Directors, the quality of the underlying creditor or
of the bank, as the case may be, also must be
equivalent to the quality standards set forth above.
In addition, MMC will monitor on an ongoing basis the
earning power, cash flow and other liquidity ratios of
the issuers of the obligations, and similarly will
monitor the creditworthiness of the institution
responsible for paying the principal amount of the
obligation under the demand feature.
Participation Interests. Each Portfolio may invest in
participation interests in floating rate or variable
rate obligations owned by banks. A participation
interest gives the purchaser an undivided interest in
the obligation in the proportion that the Portfolio's
participation interest bears to the total principal
amount of the obligation and provides the demand
repurchase feature. Each participation is backed by
an irrevocable letter of credit or guarantee of a bank
that MMC, under the supervision of the Directors, has
determined meets the prescribed quality standards of
the Portfolio. Each Portfolio has the right to sell
the instrument back to the issuing bank or draw on the
letter of credit on demand for all or any part of the
Portfolio's participation interest in the obligation,
plus accrued interest. Each Portfolio currently is
permitted to invest in participation interests when
the demand provision complies with conditions
established by the SEC. Banks will retain or receive
a service fee, letter of credit fee and a fee for
issuing repurchase commitments in an amount equal to
the excess of the interest paid on the obligations
over the negotiated yield at which the instruments
were purchased by the Portfolio. Participation
interests in the form to be purchased by the Municipal
Portfolio are relatively new instruments, and no
ruling of the Internal Revenue Service has been
secured relating to their tax-exempt status. Each of
the Cash Portfolio and the Municipal Portfolio intends
to purchase participation interests based upon
opinions of counsel.
When-Issued Securities. Each Portfolio may purchase
securities on a when-issued basis, in which case
delivery of and payment for the securities normally
take place within 45 days after the date of the
commitment to purchase. The payment obligation and
the interest rate to be received on the securities
purchased on a when-issued basis are each fixed when
the buyer enters into a commitment. Although each
Portfolio will purchase securities on a when-issued
basis only with the intention of actually acquiring
the securities, the Portfolio may sell these
securities before the settlement date if it is deemed
advisable as a matter of investment strategy.
Securities purchased on a when-issued basis and the
securities held in a Portfolio's portfolio are subject
to changes in market value based upon the public's
perception of the creditworthiness of the issuer and
changes, real or anticipated, in the level of interest
rates (which generally will result in similar changes
in value, i.e., both experiencing appreciation when
interest rates decline and depreciation when interest
rates rise). Therefore, to the extent a Portfolio
remains substantially fully invested at the same time
it has purchased securities on a when-issued basis,
there will be a greater possibility that the market
value of the Portfolio's assets will vary from $1.00
per share. Purchasing securities on a when-issued
basis can involve a risk that the yields available in
the market when the delivery takes place may actually
be higher than those obtained in the transaction.
A separate account consisting of cash or liquid debt
securities equal to the amount of the when-issued
commitments will be established with the Fund's
custodian with respect to a Portfolio's when-issued
obligations. When the time comes to pay for
when-issued securities, a Portfolio will meet its
obligations from then-available cash flow, sale of
securities held in the separate account, sale of other
securities or, although it normally would not expect
to do so, from the sale of the when-issued securities
themselves (which may have a value greater or less
than the Portfolio's payment obligations). Sales of
securities to meet such obligations carries with it a
greater potential for the realization of capital
gains, which are not exempt from federal income tax.
Municipal Leases. The Cash Portfolio and the
Municipal Portfolio may invest in municipal leases.
Municipal leases frequently have special risks not
normally associated with general obligation or revenue
bonds. Leases and installment purchase or conditional
sales contracts (which normally provide for title to
the leased asset to pass eventually to the government
issuer) have evolved as a means for governmental
issuers to acquire property and equipment without
meeting the constitutional and statutory requirements
for the issuance of debt. The debt-issuance
limitations of many state constitutions and statutes
are deemed to be inapplicable because of the inclusion
in many leases or contracts of "nonappropriation"
clauses that provide that the governmental issuer has
no obligation to make future payments under the lease
or contract unless money is appropriated for such
purpose by the appropriate legislative body on a
yearly or other periodic basis. The Portfolios will
only purchase municipal leases subject to a
non-appropriation clause when the payment of principal
and accrued interest is backed by an unconditional,
irrevocable letter of credit, or guarantee of a bank
or other entity that meets the criteria described in
the Prospectus under "Taxable Investments".
In evaluating municipal lease obligations, MMC will
consider such factors as it deems appropriate,
including: (a) whether the lease can be canceled; (b)
the ability of the lease obligee to direct the sale of
the underlying assets; (c) the general
creditworthiness of the lease obligor; (d) the
likelihood that the municipality will discontinue
appropriating funding for the leased property in the
event such property is no longer considered essential
by the municipality; (e) the legal recourse of the
lease obligee in the event of such a failure to
appropriate funding; (f) whether the security is
backed by a credit enhancement such as insurance; and
(g) any limitations which are imposed on the lease
obligor's ability to utilize substitute property or
services other than those covered by the lease
obligation. If a lease is backed by an unconditional
letter of credit or other unconditional credit
enhancement, then MMC may determine that a lease is an
eligible security solely on the basis of its
evaluation of the credit enhancement.
Municipal leases, like other municipal debt
obligations, are subject to the risk of non-payment.
The ability of issuers of municipal leases to make
timely lease payments may be adversely impacted in
general economic downturns and as relative
governmental cost burdens are allocated and
reallocated among federal, state and local
governmental units. Such non-payment would result in a
reduction of income to the Portfolio, and could result
in a reduction in the value of the municipal lease
experiencing non-payment and a potential decrease in
the net asset value of the Portfolio.
The Cash Portfolio
Bank Obligations. Domestic commercial banks organized
under federal law ("national banks") are supervised
and examined by the U.S. Comptroller of the Currency
and are required to be members of the Federal Reserve
System and to be insured by the Federal Deposit
Insurance Corporation (the "FDIC"). Domestic banks
organized under state law are supervised and examined
by state banking authorities but are members of the
Federal Reserve System only if they elect to join.
Most state banks are insured by the FDIC (although
such insurance may not be of material benefit to the
Portfolio, depending upon the principal amount of
certificates of deposit ("CDs") of each bank held by
the Portfolio) and are subject to federal examination
and to a substantial body of federal law and
regulation. As a result of government regulations,
domestic branches of domestic banks are, among other
things, generally required to maintain specified
levels of reserves, and are subject to other
supervision and regulation designed to promote
financial soundness.
Obligations of foreign branches of domestic banks and
of foreign branches of foreign banks, such as CDs and
time deposits ("TDs"), may be general obligations of
the parent bank in addition to the issuing branch, or
may be limited by the terms of a specific obligation
or by governmental regulation. Such obligations are
subject to different risks than are those of domestic
banks or domestic branches of foreign banks. These
risks include foreign economic and political
developments, foreign governmental restrictions that
may adversely affect payment of principal and interest
on the obligations, foreign exchange controls and
foreign withholding and other taxes on interest
income. Foreign branches of domestic banks and
foreign branches of foreign banks are not necessarily
subject to the same or similar regulatory requirements
that apply to domestic banks, such as mandatory
reserve requirements, loan limitations, and
accounting, auditing and financial record keeping
requirements. In addition, less information may be
publicly available about a foreign branch of a
domestic bank or about a foreign bank than about a
domestic bank.
Obligations of domestic branches of foreign banks may
be general obligations of the parent bank in addition
to the issuing branch, or may be limited by the terms
of a specific obligation and by governmental
regulation as well as governmental action in the
country in which the foreign bank has its head office.
A domestic branch of a foreign bank may or may not be
subject to reserve requirements imposed by the Federal
Reserve System or by the state in which the branch is
located if the branch is licensed in that state. In
addition, branches licensed by the Comptroller of the
Currency and branches licensed by certain states
("State Branches") may or may not be required to: (a)
pledge to the regulator by depositing assets with a
designated bank within the state, an amount of its
assets equal to a specific percentage of its total
liabilities; and (b) maintain assets within the state
in an amount equal to a specified percentage of the
aggregate amount of liabilities of the foreign bank
payable at or through all of its agencies or branches
within the state. The deposits of State Branches may
not necessarily be insured by the FDIC. In addition,
there may be less publicly available information about
a domestic branch of a foreign bank than about a
domestic bank.
In view of the foregoing factors associated with the
purchase of CDs and TDs issued by foreign branches of
domestic banks, by domestic branches of foreign banks
or by foreign branches of foreign banks, MMC will
carefully evaluate such investments on a case-by-case
basis.
Custodial Receipts. The Cash Portfolio may acquire
custodial receipts that evidence ownership of future
interest payments, principal payments or both on
certain U.S. Government notes or bonds. These notes
and bonds are held in custody by a bank on behalf of
the owners. These custodial receipts are known by
various names, including "Treasury Receipts,"
"Treasury Investors Growth Receipts" ("TIGRs"), and
"Certificates of Accrual on Treasury Securities"
("CATS"). Custodial receipts are not considered U.S.
Government Securities.
Asset-Backed and Receivable-Backed Securities. The
Cash Portfolio may invest in asset-backed and
receivable-backed securities. Several types of
asset-backed and receivable-backed securities have
been offered to investors, including "Certificates for
Automobile Receivables" ("CARs") and interests in
pools of credit card receivables. CARs represent
undivided fractional interests in a trust, the assets
of which consist of a pool of motor vehicle retail
installment sales contracts and security interests in
the vehicles securing the contracts. Payments of
principal and interest on CARs are passed through
monthly to certificate holders and are guaranteed up
to certain amounts and for a certain time period by a
letter of credit issued by a financial institution
unaffiliated with the trustee or originator of the
trust. An investor's return on CARs may be affected
by early prepayment of principal on the underlying
vehicle sales contracts. If the letter of credit is
exhausted, the trust may be prevented from realizing
the full amount due on a sales contract because of
state law requirements and restrictions relating to
foreclosure sales of vehicles and the availability of
deficiency judgments following such sales, because of
depreciation, damage or loss of a vehicle, because of
the application of federal and state bankruptcy and
insolvency laws or other factors. As a result,
certificate holders may experience delays in payment
if the letter of credit is exhausted. Consistent with
the Portfolio's investment objective and policies and,
subject to the review and approval of the Fund's Board
of Directors, the Portfolio also may invest in other
types of asset-backed and receivable-backed
securities.
Participation Interests. The Cash Portfolio may
purchase participation interests in loans with
remaining maturities of 13 months or less. These
loans must be made to issuers in whose obligations the
Portfolio may invest. Any participation purchased by
the Portfolio must be issued by a bank in the United
States with assets exceeding $1 billion. Because the
issuing bank does not guarantee the participation in
any way, they are subject to the credit risks
generally associated with the underlying corporate
borrower. In addition, because it may be necessary
under the terms of the loan participation for the
Portfolio to assert through the issuing bank such
rights as may exist against the underlying corporate
borrower, in the event the underlying corporate
borrower fails to pay principal and interest when due,
the Portfolio may be subject to delays, expenses and
risks that are greater than those that would have been
involved if the Portfolio had purchased a direct
obligation, such as commercial paper, of the borrower.
Moreover, under the terms of the loan participation,
the Portfolio may be regarded as a creditor of the
issuing bank, rather than of the underlying corporate
borrower, so that the Portfolio may also be subject to
the risk that the issuing bank may become insolvent.
Further, in the event of the bankruptcy or insolvency
of the corporate borrower, the loan participation may
be subject to certain defenses that can be asserted by
the borrower as a result of improper conduct by the
issuing bank. The secondary market, if any, for these
loan participation interests is limited and any
participation interest may be regarded as illiquid.
In the event that MMC does not believe that price
quotations currently obtainable from banks, dealers or
pricing services consistently represent the market
values of participation interests, MMC will, following
guidelines established by the Board of Directors,
value the participation interests held by the Cash
Portfolio at fair value, which approximates market
value. In valuing a participation interest, MMC will
consider the following factors, among others: (i) the
characteristics of the participation interest,
including the cost, size, interest rate, period until
next interest rate reset, maturity and base lending
rate of the participation interest, the terms and
conditions of the loan and any related agreements and
the position of the loan in the borrower's debt
structure; (ii) the nature, adequacy and value of the
collateral, including the Fund's rights, remedies and
interests with respect to the collateral; (iii) the
creditworthiness of the borrower based on an
evaluation of its financial condition, financial
statements and information about the borrower's
business, cash flows, capital structure and future
prospects; (iv) the market for the participation
interest, including price quotations for and trading
in the participation interest and similar
participation interests or instruments and the market
environment and investor attitudes toward the
participation interest or participation interests
generally; (v) the quality and creditworthiness of any
intermediary participants; and (vi) general economic
or market conditions.
The Municipal Portfolio
Description of Municipal Obligations. Municipal
obligations in which the Municipal Portfolio may
invest are short-term debt obligations of states,
cities, counties, municipalities, municipal agencies
and regional districts (generally referred to as
"municipalities") that pay interest which is excluded
from gross income for federal income tax purposes
("Municipal Obligations"). The three principal
classifications of Municipal Obligations are Municipal
Bonds, Municipal Commercial Paper and Municipal Notes.
Municipal Bonds. Municipal Bonds, which generally
have a maturity of more than one year when issued,
have two principal classifications: General
Obligation Bonds and Revenue Bonds. A private
activity bond is a particular kind of Revenue Bond.
The classifications of Municipal Bonds and private
activity bonds are discussed below.
1. General Obligation Bonds. The proceeds of these
obligations are used to finance a wide range of public
projects including construction or improvement of
schools, highways and roads, and water and sewer
systems. General Obligation Bonds are secured by the
issuer's pledge of its faith, credit and taxing power
for the payment of principal and interest.
2. Revenue Bonds. Revenue Bonds are issued to
finance a wide variety of capital projects, including
electric, gas, water and sewer systems; highways,
bridges and tunnels; port and airport facilities;
colleges and universities; and hospitals. The
principal security for a Revenue Bond is generally the
net revenues derived from a particular facility, group
of facilities or, in some cases, the proceeds of a
special excise or other specific revenue source.
Although the principal security behind these bonds may
vary, many provide additional security in the form of
a debt service reserve fund whose money may be used to
make principal and interest payments on the issuer's
obligations. Some authorities provide further
security in the form of a state's ability (without
obligation) to make up deficiencies in the debt
service reserve fund.
3. Private Activity Bonds. Private activity bonds
are considered Municipal Bonds if the interest paid on
them is excluded from federal income tax and are
issued by or on behalf of public authorities to raise
money to finance, for example, various privately
operated facilities for manufacturing and housing.
These bonds also are used to finance facilities such
as airports, docks, wharves and mass commuting
facilities. The payment of the principal and interest
on these bonds is dependent solely on the ability of
the facility's user to meet its financial obligations
and the pledge, if any, of real and personal property
so financed as security for such payment.
Municipal Commercial Paper. Issues of Municipal
Commercial Paper typically represent short-term,
unsecured, negotiable promissory notes. These
obligations are issued by agencies of state and local
governments to finance seasonal working capital needs
of municipalities or are refinanced with long-term
debt. In most cases, Municipal Commercial Paper is
backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility
agreements offered by banks or other institutions.
1. Tax Anticipation Notes. Tax Anticipation Notes
are issued to finance working capital needs of
municipalities. Generally, they are issued in
anticipation of various seasonal tax revenues, such as
income, sales, use and business taxes and are payable
from these specific future taxes.
2. Revenue Anticipation Notes. Revenue
Anticipation Notes are issued in expectation of
receipt of other kinds of revenue, such as federal
revenues available under the Federal Revenue Sharing
Program.
3. Bond Anticipation Notes. Bond Anticipation
Notes are issued to provide interim financing until
long-term financing can be arranged. In most cases,
the long-term bonds provide the money for the
repayment of the Notes.
4. Construction Loan Notes. Construction Loan
Notes are sold to provide construction financing.
Permanent financing, the proceeds of which are applied
to the payment of Construction Loan Notes, is
sometimes provided by a commitment by the Government
National Mortgage Association ("GNMA") to purchase the
loan, accompanied by a commitment by the Federal
Housing Administration to insure mortgage advances
thereunder. In other instances, permanent financing
is provided by commitments of banks to purchase the
loan. The Municipal Portfolio will purchase only
construction Loan Notes that are subject to GNMA or
bank purchase commitments.
There are a number of other types of Municipal
Commercial Paper issued for specified purposes and
secured in manners that may vary from those described
above.
Taxable Investments. Because the Municipal
Portfolio's objective is to provide income exempt from
federal income taxes, the Portfolio generally will
invest in taxable obligations only if and when the
Directors believe it would be in the best interests of
the Portfolio's shareholders to do so.
Situations in which the Municipal Portfolio may invest
up to 20% of its total assets in taxable securities
include: (a) pending investment of proceeds of sales
of Portfolio shares or of portfolio securities, (b)
pending settlement of purchases of portfolio
securities or (c) when the Portfolio is attempting to
maintain liquidity for the purpose of meeting
anticipated redemptions. The Portfolio temporarily
may invest more than 20% of its total assets in
taxable securities to maintain a defensive posture
when, in the opinion of Salomon Smith Barney, it is
advisable to do so because of adverse market
conditions affecting the market for Municipal
Obligations.
Purchase of Securities with Stand-By Commitments. The
Municipal Portfolio may acquire stand-by commitments
with respect to Municipal Obligations held in its
portfolio. Under a stand-by commitment, a
broker-dealer, dealer or bank would agree to purchase
at the Portfolio's option a specified Municipal
Obligation at a specified price. Thus, a stand-by
commitment may be viewed as the equivalent of a "put"
option acquired by the Portfolio with respect to a
particular Municipal Obligation held in the
Portfolio's portfolio.
The amount payable to the Municipal Portfolio upon its
exercise of a stand-by commitment normally would be
(a) the acquisition cost of the Municipal Obligation
(excluding any accrued interest the Portfolio paid on
the acquisition), less any amortization of market
premium or plus any amortization of market or original
issue discount during the period the Portfolio owned
the security, plus (b) all interest accrued on the
security since the last interest payment date during
the period that the security was owned by the
Portfolio. Absent unusual circumstances, the
Portfolio would value the underlying Municipal
Obligation at amortized cost. As a result, the amount
payable by the broker-dealer, dealer or bank during
the time a stand-by commitment is exercisable would be
substantially the same as the value of the underlying
Municipal Obligation.
The Municipal Portfolio's right to exercise a stand-by
commitment would be unconditional and unqualified.
Although the Portfolio could not transfer a stand-by
commitment, the Portfolio could sell the underlying
Municipal Obligation to a third party at any time. It
is expected that stand-by commitments generally will
be available to the Portfolio without the payment of
any direct or indirect consideration. The Portfolio
may pay for stand-by commitments, however, if such
action is deemed necessary. In any event, the total
amount paid for outstanding stand-by commitments held
by the Portfolio would not exceed 1/2 of 1% of the
value of the Portfolio's total assets calculated
immediately after each stand-by commitment is
acquired.
The Municipal Portfolio intends to enter into stand-by
commitments only with broker-dealers, dealers or banks
that Salomon Smith Barney believes present minimum
credit risks. The Portfolio's ability to exercise a
stand-by commitment will depend on the ability of the
issuing institution to pay for the underlying
securities at the time that the stand-by commitment is
exercised. The credit of each institution issuing a
stand-by commitment to the Portfolio will be evaluated
on an ongoing basis by MMC in accordance with
procedures established by the Board of Directors.
The Municipal Portfolio intends to acquire stand-by
commitments solely to facilitate portfolio liquidity
and does not intend to exercise its rights thereunder
for trading purposes. The acquisition of a stand-by
commitment would not affect the valuation of the
underlying Municipal Obligation, which will continue
to be valued in accordance with the amortized cost
method. Each stand-by commitment will be valued at
zero in determining net asset value. Should the
Portfolio pay directly or indirectly for a stand-by
commitment, its costs will be reflected in realized
gain or loss when the commitment is exercised or
expires. The maturity of a Municipal Obligation
purchased by the Portfolio will not be considered
shortened by any stand-by commitment to which the
obligation is subject. Thus, stand-by commitments
will not affect the dollar-weighted average maturity
of the Portfolio's portfolio.
The Municipal Portfolio understands that the Internal
Revenue Service has issued a revenue ruling to the
effect that a registered investment company will be
treated for federal income tax purposes as the owner
of Municipal Obligations acquired subject to a
stand-by commitment and the interest on the Municipal
Obligations will be tax-exempt to the Portfolio.
YIELD INFORMATION
A Portfolio may provide current annualized and
effective annualized yield quotations based on its
daily dividends. These quotations may from time to
time be used in advertisements, shareholder reports or
other communications to shareholders. All performance
information supplied by the Portfolios in advertising
is historical and is not intended to indicate future
returns.
In performance advertising, the Portfolios may compare
any of their performance information with data
published by independent evaluators such as
Morningstar, Inc., Lipper Analytical Services, Inc.,
CDC/Wiesenberger, IBC Money Fund Report or other
companies which track the investment performance of
investment companies ("Fund Tracking Companies"). The
Portfolios may also compare their performance
information with the performance of recognized stock,
bond and other indexes, including but not limited to
the Municipal Bond Buyers Indices, the Salomon Smith
Barney Bond Index, the Lehman Bond Index, the Standard
& Poor's 500 Composite Stock Price Index, the Dow
Jones Industrial Average, U.S. Treasury bonds, bills
or notes and changes in the Consumer Price Index as
published by the U.S. Department of Commerce. The
Portfolios may refer to general market performance
over past time periods such as those published by
Ibbotson Associates (for instance, its "Stocks, Bonds,
Bills and Inflation Yearbook"). The Portfolios may
also refer in such materials to mutual fund
performance rankings and other data published by Fund
Tracking Companies. Performance advertising may also
refer to discussions of the Portfolios and comparative
mutual fund data and ratings reported in independent
periodicals, such as newspapers and financial
magazines.
Any current yield quotation of a Portfolio which is
used in such a manner as to be subject to the
provisions of Rule 482(d) under the Securities Act of
1933, as amended, shall consist of an annualized
historical yield, carried at least to the nearest
hundredth of one percent, based on a specific seven
calendar day period. The Portfolio's current yield
shall be calculated by (a) determining the net change
during a seven calendar day period in the value of a
hypothetical account having a balance of one share at
the beginning of the period, (b) dividing the net
change by the value of the account at the beginning of
the period to obtain a base period return, and (c)
multiplying the quotient by 365/7 (i.e., annualizing).
For this purpose, the net change in account value
would reflect the value of additional shares purchased
with dividends declared on the original share and
dividends declared on both the original share and any
such additional shares, but would not reflect any
realized gains or losses from the sale of securities
or any unrealized appreciation or depreciation on
portfolio securities. In addition, the Portfolio may
advertise effective yield quotations. Effective yield
quotations are calculated by adding 1 to the base
period return, raising the sum to a power equal to
365/7, and subtracting 1 from the result (i.e.,
compounding).
The Municipal Portfolio's tax equivalent yield is the
rate an investor would have to earn from a fully
taxable investment in order to equal the Portfolio's
yield after taxes. Tax equivalent yields are
calculated by dividing the Municipal Portfolio's yield
by one minus the stated federal or combined federal
and state tax rate. If only a portion of the
Portfolio's yield is tax-exempt, only that portion is
adjusted in the calculation.
Although published yield information is useful to
investors in reviewing a Portfolio's performance,
investors should be aware that the Portfolio's yield
fluctuates from day to day and that the Portfolio's
yield for any given period is not an indication or
representation by the Portfolio of future yields or
rates of return on the Portfolio's shares. Also,
Processing Organizations may charge their customers
direct fees in connection with an investment in a
Portfolio, which will have the effect of reducing the
Portfolio's net yield to those shareholders. The yield
of a Portfolio is not fixed or guaranteed, and an
investment in a Portfolio is not insured. Accordingly,
a Portfolio's yield information may not necessarily be
used to compare Portfolio shares with investment
alternatives which, like money market instruments or
bank accounts, may provide a fixed rate of interest.
In addition, because investments in the Portfolios are
not insured or guaranteed, a Portfolio's yield
information may not necessarily be used to compare the
Portfolio with investment alternatives which are
insured or guaranteed.
For the seven-day period ended May 31, 1998, the yield
and effective yield for Class A shares of the Cash
Portfolio, Government Portfolio and Municipal
Portfolio were as follows:
Portfolio
Yield
Effective
Yield
Cash Portfolio (Class A)
5.46%
5.61%
Cash Portfolio (Class B)
5.21
5.35
Government Portfolio (Class A)*
5.40
5.54
Municipal Portfolio+ (Class A)*
3.67
3.74
* As at May 31, 1998, no Class B shares of were
outstanding, accordingly, no comparable
information is available on that Class.
+ The Municipal Portfolio's tax-equivalent yield
for the same period for Class A shares was 5.73%
DETERMINATION OF NET ASSET VALUE
The Prospectus states that net asset value will be
determined on any day the New York Stock Exchange is
open. The New York Stock Exchange is closed on the
following holidays: New Year's Day, Martin Luther King
Jr. Day, President's Day, Good Friday, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
Each Portfolio uses the "amortized cost method" for
valuing portfolio securities pursuant to Rule 2a-7
under the 1940 Act. The amortized cost method of
valuation of the Portfolio's securities involves
valuing a security at its cost at the time of purchase
and thereafter assuming a constant amortization to
maturity of any discount or premium, regardless of the
impact of fluctuating interest rates on the market
value of the instrument. 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 yield to
investors in the Portfolio 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
Portfolio 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 Portfolio'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 Portfolio's
price per share to change from $1.00.
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.
Each Portfolio's management agreement provides that
all other expenses not specifically assumed by the
Manager under each management agreement are borne by
the Fund. Expenses payable by the Fund include, but
are not limited to, all charges of custodian
(including amounts as custodian and amounts 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 each Portfolio; the management fee and general
corporate expenses are allocated 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 (with the prior written
consent of the necessary state securities commissions)
extraordinary expenses exceed 0.80% 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. The 0.80% 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.
For the period ended May 31, 1996, MMC waived a
portion of the management fees due to it for that
period. Absent this fee waiver, the management fees
for the Class A shares would have been $130,059,
$30,310 and $17,858 respectively for the Cash
Portfolio, Government Portfolio and Municipal
Portfolio.
For the fiscal year ended May 31, 1997, MMC waived a
portion of the management fees due to it. Absent this
fee waiver, the management fees for the Portfolio's
Class A shares would have been $585,305, $227,516 and
$117,100, respectively, for the Cash Portfolio,
Government Portfolio and Municipal Portfolio.
For the fiscal year ended May 31, 1998, MMC waived a
portion of the management fees due to it. Absent this
fee waiver, the management fees for the Portfolio's
would have been $1,505,040, $325,002 and $186,349,
respectively, for the Cash Portfolio, Government
Portfolio and Municipal Portfolio.
Plan of Distribution
Service Organizations. Institutional investors who
are purchasing shares on behalf of their customers,
such as banks, savings and loans institutions and
other financial institutions ("service organizations")
may purchase Class B shares. These shares are
identical in all respects to Class A shares except
that they bear certain additional service fees
described in the Fund's prospectus relating to Class B
shares and enjoy certain exclusive voting rights on
matters relating to these service fees.
The Fund will enter into an agreement with each
service organization that purchases Class B shares to
provide certain services to the beneficial owners of
such shares. Such services include aggregating and
processing purchase and redemption requests from
customers and placing net purchase and redemption
orders with Salomon Smith Barney; processing dividend
payments from the Fund on behalf of their customers;
providing information periodically to customers
showing the positions in shares; arranging for bank
wires; responding to customer inquiries relating to
the services provided by the service organization and
handling correspondence: and acting as shareholder of
record and nominee. Under terms of the agreements,
service organizations are required to provide to their
customers a schedule of any fees that they may charge
customers in connection with their investment in Class
B shares.
Class A shares are sold to institutions that have not
entered into servicing agreements with the Fund in
connection with their investments.
Brokerage
The Manager places orders for the purchase and sale of
securities for the portfolios of the Portfolio. All
of each Portfolio's 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 Salomon Smith Barney.
VOTING RIGHTS
The present Directors of the Fund were elected at a
meeting of shareholders held on April 27, 1995. Under
the By-Laws, each Director will continue in office
until the dissolution of the Fund or his earlier
death, resignation, bankruptcy, incapacity or removal.
Vacancies will be filled by a majority of the
remaining Directors, subject to the 1940 Act.
Therefore, no annual or regular meetings of
shareholders normally will be held, unless otherwise
required by the By-Laws or the 1940 Act. Subject to
the foregoing, shareholders have the power to vote to
elect or remove Directors, to terminate or reorganize
their Portfolio, to amend the By-Laws, to bring
certain derivative actions and on any other matters on
which a shareholder vote is required by the 1940 Act,
the By-Laws or the Directors.
Each share of each series of the Fund has one vote
(and fractional votes for fractional shares). Shares
of all series of the Fund have noncumulative voting
rights, which means that the holders of more than 50%
of the shares of all series of the Fund voting for the
election of Directors can elect 100% of the Directors
if they choose to do so and, in such event, the
holders of the remaining shares will not be able to
elect any Directors. Each series of the Fund will vote
separately only with respect to those matters that
affect only that series.
ADDITIONAL INFORMATION
The Fund was incorporated on March 28, 1995 as a
Maryland Corporation.
PNC is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, and serves as
custodian for the Portfolios. Under its custodial
agreement with the Fund, PNC is authorized to appoint
one or more foreign or domestic banking institutions
as sub-custodians of assets owned by a Portfolio. For
its custody services, PNC receives monthly fees
charged to each Portfolio based upon the month-end,
aggregate net asset value of the Fund, plus certain
charges for securities transactions. The assets of the
Fund are held under bank custodianship in accordance
with the 1940 Act.
First Data is located at Exchange Place, Boston,
Massachusetts 02109, and serves as the Fund's transfer
agent and dividend disbursing agent. For its services
as transfer agent and dividend disbursing agent, First
Data receives fees charged to the Portfolios at an
annual rate based upon the number of shareholder
accounts maintained during the year. First Data also
is reimbursed by the Portfolios for its out-of-pocket
expenses.
FINANCIAL STATEMENTS
The Portfolios' Annual Reports for the fiscal year
ended May 31, 1998 are incorporated into this
Statement of Additional Information by reference in
their entirety.
Appendix A Description of Securities Ratings
Moody's and Standard and Poor's
Municipal and Corporate Bonds and Municipal Loans
The two highest ratings of Standard & Poor's Rating
Group ("S&P") for municipal and corporate bonds are
AAA and AA. Bonds rated AAA have the highest rating
assigned by S&P to a debt obligation. Capacity to pay
interest and repay principal is extremely strong.
Bonds rated AA have a very strong capacity to pay
interest and repay principal and differ from the
highest rated issues only in a small degree. The AA
rating may be modified by the addition of a plus (+)
or minus (-) sign to show relative standing within
that rating category
The two highest ratings of Moody's Investors Service,
Inc. ("Moody's") for municipal and corporate bonds are
Aaa and Aa. Bonds rated Aaa are judged by Moody's to
be of the best quality. Bonds 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. Moody's states that Aa bonds are
rated lower than the best bonds because margins of
protection or other elements make long-term risks
appear somewhat larger than Aaa securities. The
generic rating Aa may be modified by the addition of
the numerals 1, 2 or 3. The modifier 1 indicates that
the security ranks in the higher end of the Aa rating
category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue
ranks in the lower end of such rating category.
Short-Term Municipal Loans
S&P's highest rating for short-term municipal loans is
SP-1. S&P states that short-term municipal securities
bearing the SP-1 designation have a strong capacity to
pay principal and interest. Those issues rated SP- 1
which are determined to possess a very strong capacity
to pay debt service will be given a plus (+)
designation. Issues rated SP-2 have satisfactory
capacity to pay principal and interest with some
vulnerability to adverse financial and economic
changes over the term of the notes.
Moody's highest rating for short-term municipal loans
is MIG-1/VMIG-1. Moody's states that short-term
municipal securities rated MIG-1/VMIG-1 are of the
best quality, enjoying strong protection from
established cash flows of funds for their servicing or
from established and broad-based access to the market
for refinancing, or both. Loans bearing the
MIG-2/1/MIG-2 designation are of high quality, with
margins of protection ample although not so large as
in the MIG-1/1/MIG-1 group.
Other Short-Term Debt Securities
Prime-1 and Prime-2 are the two highest ratings
assigned by Moody's for other short-term debt
securities and commercial paper, and A-1 and A-2 are
the two highest ratings for commercial paper assigned
by S&P. Moody's uses the numbers 1, 2 and 3 to denote
relative strength within its highest classification of
Prime, while S&P uses the numbers 1, 2 and 3 to denote
relative strength within its highest classification of
A. Issuers rated Prime-1 by Moody's have a superior
ability for repayment of senior short-term debt
obligations and have many of the following
characteristics: leading market positions in
well-established industries, high rates of return on
funds employed, conservative capitalization structure
with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of
fixed financial charges and high internal cash
generation, and well established access to a range of
financial markets and assured sources of alternate
liquidity. Issuers rated Prime-2 by Moody's have a
strong ability for repayment of senior short-term debt
obligations and display many of the same
characteristics displayed by issuers rated Prime-1,
but to a lesser degree. Issuers rated A-1 by S&P carry
a strong degree of safety regarding timely repayment
Those issues determined to possess extremely strong
safety characteristics are denoted with a plus (+)
designation. Issuers rated A-2 by S&P carry a
satisfactory degree of safety regarding timely
repayment.
Appendix B Description of Municipal Securities
Municipal Notes generally are used to provide for
short-term capital needs and usually have maturities
of one year or less. They include the following:
1. Project Notes, which carry a U.S. government
guarantee, are issued by public bodies (called "local
issuing agencies") created under the laws of a state,
territory, or U.S. possession. They have maturities
that range up to one year from the date of issuance.
Project Notes are backed by an agreement between the
local issuing agency and the Federal Department of
Housing and Urban Development. These Notes provide
financing for a wide range of financial assistance
programs for housing, redevelopment, and related needs
(such as low-income housing programs and renewal
programs).
2. Tax Anticipation Notes are issued to finance
working capital needs of municipalities. Generally,
they are issued in anticipation of various seasonal
tax revenues, such as income, sales, use and business
taxes, and are payable from these specific future
taxes.
3. Revenue Anticipation Notes are issued in
expectation of receipt of other types of revenues,
such as Federal revenues available under the Federal
Revenue Sharing Programs.
4. Bond Anticipation Notes are issued to provide
interim financing until long-term financing can be
arranged. In most cases, the long-term bonds then
provide the money for the repayment of the Notes.
5. Construction Loan Notes are sold to provide
construction financing. After successful completion
and acceptance, many projects receive permanent
financing through the Federal Housing Administration
under the Federal National Mortgage Association
("Fannie Mae") or the Government National Mortgage
Association ("Ginnie Mae").
6. Tax-exempt Commercial Paper is a short-term
obligation with a stated maturity of 365 days or less.
It is issued by agencies of state and local
governments to finance seasonal working capital needs
or as short-term financing in anticipation of longer
term financing.
Municipal Bonds, which meet longer term capital needs
and generally have maturities of more than one year
when issued, have three principal classifications:
1. General Obligation Bonds are issued by such
entities as states, counties, cities, towns and
regional districts. The proceeds of these obligations
are used to fund a wide range of public projects,
including construction or improvement of schools,
highways and roads, and water and sewer systems. The
basic security behind General Obligation Bonds is the
issuer's pledge of its full faith and credit and
taxing power for the payment of principal and
interest. The taxes that can be levied for the payment
of debt service may be limited or unlimited as to the
rate or amount of special assessments.
2. Revenue Bonds in recent years have come to include
an increasingly wide variety of types of municipal
obligations. As with other kinds of municipal
obligations, the issuers of revenue bonds may consist
of virtually any form of state or local governmental
entity, including states, state agencies, cities,
counties, authorities of various kinds, such as public
housing or redevelopment authorities, and special
districts, such as water, sewer or sanitary districts.
Generally, revenue bonds are secured by the revenues
or net revenues derived from a particular facility
group of facilities, or, in some cases, the proceeds
of a special excise or other specific revenue source.
Revenue bonds are issued to finance a wide variety of
capital projects including electric, gas, water and
sewer systems; highways, bridges, and tunnels; port
and airport facilities; colleges and universities; and
hospitals. Many of these bonds provide additional
security in the form of a debt service reserve fund to
be used to make principal and interest payments.
Various forms of credit enhancement, such as a bank
letter of credit or municipal bond insurance, may also
be employed in revenue bond issues. Housing
authorities have a wide range of security, including
partially or fully insured mortgages, rent subsidized
and/or collateralized mortgages, and/or the net rev-
enues from housing or other public projects. Some
authorities provide further security in the form of a
state's ability (without obligation) to make up
deficiencies in the debt service reserve fund.
In recent years, revenue bonds have been issued in
large volumes for projects that are privately owned
and operated (see below).
Private Activity Bonds are considered municipal bonds
if the interest paid thereon is exempt from Federal
income tax and are issued by or on behalf of public
authorities to raise money to finance various
privately operated facilities for business and
manufacturing, housing and health. These bonds are
also used to finance public facilities such as
airports, mass transit systems and ports. The payment
of the principal and interest on such bonds is
dependent solely on the ability of the facility's user
to meet its financial obligations and the pledge, if
any, of real and personal property as security for
such payment.
While, at one time, the pertinent provisions of the
Internal Revenue Code permitted private activity bonds
to bear tax-exempt interest in connection with
virtually any type of commercial or industrial project
(subject to various restrictions as to authorized
costs, size limitations, state per capita volume
restrictions, and other matters), the types of
qualifying projects under the Code have become
increasingly limited, particularly since the enactment
of the Tax Reform Act of 1986. Under current
provisions of the Code, tax-exempt financing remains
available, under prescribed conditions, for certain
privately owned and operated rental multi-family
housing facilities, nonprofit hospital and nursing
home projects, airports, docks and wharves, mass
commuting facilities and solid waste disposal
projects, among others, and for the refunding (that
is, the tax-exempt refinancing) of various kinds of
other private commercial projects originally financed
with tax-exempt bonds. In future years, the types of
projects qualifying under the Code for tax-exempt
financing are expected to become increasingly limited.
Because of terminology formerly used in the Internal
Revenue Code, virtually any form of private activity
bond may still be referred to as an "industrial
development bond", but more and more frequently
revenue bonds have become classified according to the
particular type of facility being financed, such as
hospital revenue bonds, nursing home revenue bonds,
multi-family housing revenues bonds, single family
housing revenue bonds, industrial development revenue
bonds, solid waste resource recovery revenue bonds,
and so on.
Other Municipal Obligations, incurred for a variety of
financing purposes, include: municipal leases, which
may take the form of a lease or an installment
purchase or conditional sale contract, are issued by
state and local governments and authorities to acquire
a wide variety of equipment and facilities such as
fire and sanitation vehicles, telecommunications
equipment and other capital assets. Municipal leases
frequently have special risks not normally associated
with general obligation or revenue bonds. Leases and
installment purchase or conditional sale contracts
(which normally provide for title to the leased asset
to pass eventually to the government issuers have
evolved as a means for governmental issuers to acquire
property and equipment without meeting the
constitutional and statutory requirements for the
issuance of debt. The debt-issuance limitations of
many state constitutions and statutes are deemed to be
inapplicable because of the inclusion in many leases
or contracts of "non-appropriation" clauses that
provide that the governmental issuer has no obligation
to make future payments under the lease or contract
unless money is appropriated for such purpose by the
appropriate legislative body on a yearly or other
periodic basis. To reduce this risk, the Fund will
only purchase municipal leases subject to a
non-appropriation clause when the payment of principal
and accrued interest is backed by an unconditional
irrevocable letter of credit, or guarantee of a bank
or other entity that meets the criteria described in
the Prospectus.
Tax-exempt bonds are also categorized according to
whether the interest is or is not includible in the
calculation of alternative minimum taxes imposed on
individuals, according to whether the costs of
acquiring or carrying the bonds are or are not
deductible in part by banks and other financial
institutions, and according to other criteria relevant
for Federal income tax purposes. Due to the increasing
complexity of Internal Revenue Code and related
requirements governing the issuance of tax-exempt
bonds, industry practice has uniformly required, as a
condition to the issuance of such bonds, but
particularly for revenue bonds, an opinion of
nationally recognized bond counsel as to the
tax-exempt status of interest on the bonds.
Smith Barney
Institutional Cash
Management
Fund, Inc.
Cash Portfolio
Government Portfolio
Municipal Portfolio
Statement of
Additional Information
September 28, 1998
Smith Barney
Institutional Cash Management Fund, Inc.
388 Greenwich Street
New York, NY 10013
SALOMON SMITH BARNEY
A Member of
Travelers Group
40
U:\LEGAL\FUNDS\INST\1998\SECDOCS\SAI998.doc
SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND, INC.
PART C
OTHER INFORMATION
Item 24.
Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Reports for the fiscal year ended May 31,
1998, including the Report of Independent Accountants dated July
15, 1998, which was filed pursuant to Rule 30b-2 of the 1933 Act
on August 31, 1998 as Accession number 91155-98-000545, is
incorporated by reference in its entirety.
Included in Part C:
Consent of Independent Accountants is filed herein
(b) Exhibits
All references are to the Registrant's registration statement on Form N-
1A (the "Registration Statement") as filed with the SEC on April 5, 1995
(File Nos. 33-90952 and 811-9012)
Exhibit No. Description of Exhibits
(1) Articles of Incorporation of Registrant are
incorporated by reference to the Fund's Registration Statement
(2) By-Laws of Registrant are incorporated by
reference to Pre-Effective Amendment No. 1 to the
Registration Statement filed on
June 19, 1995 ("Pre-Effective Amendment No. 1")
(3) Not applicable
(4) Specimen Stock Certificate are incorporated by reference
to Post-Effective Amendment No. 4
(5) Investment Advisory Agreement between the
Registrant and Smith Barney Mutual Funds Management Inc. is
incorporated by reference to Pre-Effective Amendment No. 1
(6) Distribution Agreement between the Registrant
and Smith Barney Inc. is incorporated by reference to Pre-
Effective Amendment No. 1
(7) Not applicable
(8) Custody Agreement between the Registrant and PNC
Bank,National Association is incorporated by
reference to Pre-Effective Amendment No 1
(9) Form of Transfer Agency Agreement between the
Registrant and First Data Investor Services, Group Inc.
is incorporated by reference to Pre-Effective Amendment No. 1
(10)(a) Opinion and consent of Willkie Farr &
Gallagher is incorporated by reference to Pre-Effective
Amendment No. 1
(b) Opinion and consent of Venable, Baetjer &
Howard is incorporated by reference to Pre-Effective
Amendment No. 1.
(11) Consent of KPMG Peat Marwick LLP is filed
herein
(12) Not applicable
(13) Not applicable
(14) Not applicable
(15) Distribution and Service Plan under Rule 12b-1
is incorporated by reference to Pre-Effective
Amendment No. 1
(16) Schedule of 7 Day Yield Computation is incorporated by
reference to Exhibit 16 to Post-Effective Amendment No.4
(17) Financial Data Schedule is filed herein
(18) Form of Rule 18f-3(d) Multiple Class Plan of
the Registrant is incorporated by reference to Post-
Amendement No. 2
Item 25. Persons Controlled by or Under Common Control with
Registrant
None
Item 26. Number of Holders of Securities
Number of Record Holders
Title of Series as of September 14, 1998
The Cash Portfolio
Class A
260
Class B 2
The Government Portfolio
Class A 38
Class B 1
The Municipal Portfolio
Class A 28
Class B 1
Item 27. Indemnification
The response to this item is incorporated by reference to Registrant's
Pre-Effective Amendment No. 1 to the Registration Statement.
Item 28. Business and Other Connections of the Investment Advisers
Investment Adviser - - Mutual Management Corp. ("MMC") formerly known
as Smith Barney Mutual Funds Management Inc.
MMC was incorporated in December 1968 under the laws of the State of
Delaware. MMC is a wholly owned subsidiary of Salomon Smith Barney Holdings
Inc. ("Holdings"), which in turn is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"). MMC is registered as an investment
adviser under the Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and directors of MMC
together with information as to any other business, profession, vocation
or employment of a substantial nature engaged in by such officers and
directors during the past two fiscal years, is incorporated by reference
to Schedules A and D of FORM ADV filed by MMC pursuant to the Advisers
Act (SEC File No. 801-8314).
Item 29. Principal Underwriters
(a) Salomon Smith Barney Inc. ("Salomon Smith Barney ") acts as
principal underwriter for
Concert Investment Series
Consulting Group Capital Markets Funds
Global Horizons Investment Series (Cayman Islands)
Global Horizons Investment Series (Ireland)
Greenwich Street California Municipal Fund Inc.
Greenwich Street Municipal Fund Inc.
Greenwich Street Series Fund
High Income Opportunity Fund Inc.
The Italy Fund Inc.
Managed High Income Portfolio Inc.
Managed Municipals Portfolio II Inc.
Managed Municipals Portfolio Inc.
Municipal High Income Fund Inc.
Puerto Rico Daily Liquidity Fund Inc.
Puerto Rico Equity Index & Income Fund, Inc.
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Concert Allocation Series Inc.
Smith Barney Equity Funds
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc.
Smith Barney Global Enhanced Income Fund
Smith Barney Income Funds
Smith Barney Institutional Cash Management Fund, Inc.
Smith Barney Intermediate Municipal Fund, Inc.
Smith Barney Investment Funds Inc.
Smith Barney Investment Trust
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc.
Smith Barney Muni Funds
Smith Barney Municipal Fund, Inc.
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Natural Resources Fund Inc.
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund Inc.
Smith Barney Principal Return Fund
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Telecommunications Trust
Smith Barney Variable Account Funds
Smith Barney World Funds, Inc.
Smith Barney Worldwide Special Fund N.V. (Netherlands
Antilles)
Travelers Series Fund Inc.
The USA High Yield Fund N.V.(Netherlands Antilles)
Worldwide Securities Limited (Bermuda)
Zenix Income Fund Inc. and various series of unit
investment trusts.
Salomon Smith Barney is a wholly owned subsidiary of Holdings.
The information required by this Item 29 with respect
to each director, officer and partner of Salomon Smith Barney
is incorporated by reference to Schedule A of Form BD
filed by Smith Barney pursuant to the Securities
Exchange Act of 1934 (SEC File No.812-8510).
Item 30 . Location of Accounts and Records
(1) Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Institutional Cash Management Fund, Inc.
388 Greenwich Street
New York, New York 10013
(3) Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
(4) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(6) First Data Investor Services Group
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not applicable
Item 32. Undertakings
(a) None
Rule 485(b) Certification
The Registrant hereby certifies that it meets all of the
requirements for effectiveness pursuant to Rule 485(b) under the
Securities Act of 1933, as amended.
SIGNATURES
As required by the Securities Act of 1933, as amended, and the
Investment Company Act of 1940, as amended, Registrant has duly caused
this Post-Effective Amendment No. 5 to the Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in
the City of New York, State of New York, on the 28th day of
September, 1998 .
SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND, INC.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board,
President
(Chief Executive Officer)
As required by the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 5 to the Registration Statement on Form N-
1A has been signed below by the following persons in the capacities and
on the dates indicated:
Signature Title Date
/s/ Heath B. McLendon Chairman of the Board,
President and
Heath B. McLendon Director
(Chief Executive Officer)
September 28, 1998
/s/ Lewis E. Daidone Senior Vice President and
Lewis E. Daidone Treasurer (Chief Financial and
Accounting Officer)
September 28, 1998
Signature Title Date
/s/ Paul R. Ades* Director September 28, 1998
Paul R. Ades
/s/ Herbert Barg* Director September 28, 1998
Herbert Barg
/s/ Dwight B. Crane* Director September 28, 1998
Dwight B. Crane
/s/ Frank G. Hubbard* Director September 28, 1998
Frank G. Hubbard
/s/ Jerome Miller* Director September 28, 1998
Jerome Miller
/s/ Ken Miller* Director September 28, 1998
Ken Miller
* By: /s/ Heath B. McLendon
Heath B. McLendon
Attorney-in-Fact
INDEX TO EXHIBITS
Exhibit No. Description of Exhibit
(11) Consent of KPMG Peat Marwick LLP
(17) Financial Data Schedule
Cover
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Institutional Cash Management Fund,
Inc.:
We consent to the use of our report dated July 15,
1998 for Smith Barney Institutional Cash Management
Fund, Inc. incorporated herein by reference and to
the references to our Firm under the headings
"Financial Highlights" in the Prospectus and
"Counsel and Auditors" in the Statement of
Additional Information.
KPMG
Peat Marwick LLP
New York, New York
September 21, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<NAME> SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT
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<NAME> SMITH BARNEY INSTITUTIONAL CASH FUND. CLASS B
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