SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND INC
Cash Portfolio
Government Portfolio
Municipal Portfolio
Class A Shares
Supplement dated August 9, 2000
to Prospectus dated September 28, 1999
The Smith Barney Institutional Cash Management Fund Inc. (the
"Fund") currently accepts investments in Class A shares of the Cash
Portfolio and effective immediately will accept investments in
Class A shares of the Government and Municipal Portfolios, from any
investor that meets the $1 million investment minimum.
The Fund is also extending its special access period through
October 31, 2000, during which period Class A shares of the Cash
Portfolio are available to those investors who invest a minimum of
$1,000 and who previously invested at least $500,000 at a single
time in another institutional money market fund previously made
available by Salomon Smith Barney.
FD01979
SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND, INC.
388 Greenwich Street
New York, NY 10013
800-451-2010
STATEMENT OF ADDITIONAL INFORMATION
September 28,1999
as amended August 9, 2000
The Cash Portfolio, the Government Portfolio and the Municipal
Portfolio.
Smith Barney Institutional Cash Management Fund, Inc. (the "Company")
is a money market fund that invests in high quality money market
instruments. The Company is a no-load, open-end management investment
company that offers shares in three funds: the Cash Portfolio, the
Government Portfolio and the Municipal Portfolio (individually, a
"fund" and collectively, the "funds").
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 fund is neither insured nor guaranteed by the U.S.
government. There is no assurance that a fund will be able to
maintain a stable net asset value of $1.00 per share.
Each fund is designed as an economical and convenient means for the
investment of short-term funds. Each fund currently offers two
classes of shares. Class A shares of the Cash, Government and
Municipal Portfolios may be purchased by any investor meeting the
investment minimum. Class B shares may be purchased by institutional
investors on behalf of their clients.
This statement of additional information ("SAI") expands upon and
supplements the information contained in the current prospectuses of
Class A shares dated September 28, 1999, as amended August 9, 2000,
and Class B shares dated September 28, 1999, respectively, as amended
or supplemented from time to time (the "prospectuses"), 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 Company 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
Management of the Company 3
Investment Objectives 6
Types of Securities and Investment Techniques 6
Risk Factors 19
Investment Restrictions 20
Yield Information 23
Determination of Net Asset Value 25
Purchase of Shares 26
Exchange Privilege 26
Redemption of Shares 27
Management Agreement, Plan of Distribution and Other Services 28
Taxes 31
Additional Information About the Company 32
Financial Statements 34
Appendix A Description of Securities Ratings A-1
Appendix B Description of Municipal Securities B-1
MANAGEMENT OF THE COMPANY
Directors and Executive Officers of the Company
Overall responsibility for management and supervision of the Company
rests with its Directors. The Directors approve all significant
agreements between the Company and the companies that furnish services
to the Company, including agreements with the Company's distributor,
investment adviser, custodian and transfer agent. The day-to-day
operations of each fund are delegated to SSB Citi Fund Management LLC
("SSBC" or the "Manager") (formerly Mutual Management Corp.).
The following are the names of the Directors and executive officers of
the Company together with a brief description of their principal
occupations during the last five years. Each Director who is an
"interested person" of the Company, as defined in the Investment
Company Act of 1940 as amended (the "1940 Act"), is indicated by an
asterisk.
Paul R. Ades, Director (Age 59). Partner in the law firm of Murov &
Ades. His address is 272 South Wellwood Avenue, Lindenhurst, New York
11757.
Herbert Barg, Director (Age 76). Private investor. His address is
273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Dwight B. Crane, Director (Age 62). 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 66). Managing Director of Salomon Smith Barney
Inc. ("Salomon Smith Barney) and President if SSBC Fund Management
Inc. ("SSBC")(formerly known as Mutual Management Corp.) and Travelers
Investment Advisers, Inc. ("TIA"); Chairman and Co-Chairman of the
Board of 64 investment companies associated with Citigroup, Inc.
("Citigroup") formerly Chairman of the Board of Smith Barney Strategy
Advisers Inc.
Jerome Miller, Director (Age 61). Retired, Former President, Asset
Management Group of Shearson Lehman Brothers. His address is 27
Hemlock Road, Manhasset, New York, New York 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 42).
Managing Director of Salomon Smith Barney; Senior Vice President and
Treasurer of 59 investment companies affiliated with Citigroup,
Director and Senior Vice President of SSBC and TIA. His address is
388 Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 48). Managing Director of Salomon
Smith Barney; General Counsel and Secretary of SSBC and TIA. Ms.
Sydor also serves as Secretary of 59 investment companies associated
with Citigroup. Her address is 388 Greenwich Street, New York, New
York 10013.
Phyllis M. Zahorodny, Vice President and Investment Officer (Age 40).
Investment Officer of SSBC and Managing Director of Salomon Smith
Barney and Investment Officer of four investment companies associated
with Salomon Smith Barney. Her address is 388 Greenwich Street, New
York, New York, 10013.
Joseph Deane, Vice President and Investment Officer (Age 50).
Managing Director of Salomon Smith Barney and Investment Officer of
other investment companies associated with Salomon Smith Barney.
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 7, 1999, the Directors and
officers of the Company, as a group, owned less than 1.00% of the
outstanding shares of common stock of each fund.
To the best knowledge of the Directors, as of September 7, 1999, 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
funds:
FUND
CLASS
PERCENT
NAME
ADDRESS
Cash Portfolio
A
6.0350
Software.Com
Attn: Amy Brown
525 Anacapa Street
Santa Barbara CA 93101-
1603
Municipal
Portfolio
A
12.8329
Joe E Taylor Jr.
47 Mahalo Lane
Columbia SC 29204-3380
Municipal
Portfolio
A
12.5496
Blair B Mohm
1431 Hunsicker Road
Lancaster PA 17601-5311
Municipal
Portfolio
A
9.3893
First Omedia
"1995" Limited
Partnership
SBAM Municipal
Account
Belfint, Lyons &
Shuman CPA's
P.O Box 2105
Wilmington DE 19899-
2105
Municipal
Portfolio
A
9.1029
First Omedia
"1995" Limited
Partnership
SBAM Municipal
Account
Belfint, Lyons &
Shuman CPA's
P.O Box 2105
Wilmington DE 19899-
2105
Municipal
Portfolio
A
7.4148
T.M. Equity
Attn: Jim Clarke
Rt. 23 box 577-A
Hendersonville NC
28792-8928
Municipal
Portfolio
A
6.0525
Saxon & Co.
C/o PNC Bank
Attn: ACI/Reorg
Lawrence Lockwood or
Maleka Young
200 Stevens Drive
Suite 260A
Lester PA 19113
FUND
CLASS
PERCENT
NAME
ADDRESS
Municipal
Portfolio
A
5.7943
SEI Trust Co.
C/o Smith Barney
One Freedom Valley
Drive
Oaks PA 19456
Government
Portfolio
A
18.2474
Computer Mgt.
Sciences, Inc. ESOP
Plan
8133 Baymeadows
Jacksonville FL 32256-
8218
Government
Portfolio
A
8.4257
Giant Industries
Inc.
Attn: Mark Cox
23733 North Scottsdale
Road
Scottsdale AZ 85255-
3465
Government
Portfolio
A
8.1962
J Ralph Beaird
Receiver
For DTC & DCL
Corporations
440 North College Ave
Athens GA 30601-2773
Government
Portfolio
A
6.0215
Ramp Networks
Attn: Scott Gordon
3100 De La Cruz Blvd.
Santa Clara CA 95054-
2402
For the fiscal year ended May 31, 1999, the Directors were paid the
following compensation as a director of the Company 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 Company for serving
as an officer or Director of the Company. The Company 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, 1999, such expenses totaled $9,443.
Name of Person
Aggregate
Compensation
from Company
Total Pension
or Retirement
Benefits
Accrued as
part of
Company
Expenses
Compensation
from Company
and Fund
Complex Paid
to Directors
Number of
Funds for
Which
Director
Serves Within
Fund Complex
Paul R. Ades
$7,700
0
$54,225
5
Herbert Barg
7,700
0
105,425
16
Dwight B. Crane
6,950
0
139,975
22
Frank G. Hubbard
7,700
0
54,125
5
Heath B. McLendon
---
---
---
58
Jerome Miller
6,950
0
44,925
5
Ken Miller
6,850
0
53,625
5
* Director Emeritus. 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 Company Directors together with reasonable
out-of-pocket expenses for each meeting attended. During the
Company's last fiscal year aggregate compensation paid by the Company
to Directors Emeritus totaled $4,690.
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 fund will achieve its investment objective or
maintain a stable net asset value of $1.00 per share. The investment
objectives of the funds are fundamental and may not be changed without
shareholder approval. Shareholders will be notified of material
changes in investment policies.
TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
The funds 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 funds 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 SSBC; and (iii) has been
determined by SSBC to present minimal credit risks pursuant to
procedures approved by the Directors. In addition, the funds will
maintain a dollar-weighted average portfolio maturity of 90 days or
less. The NRSROs currently designated as such by the SEC are Standard
& Poor's Ratings Group ("S&P"), Moody's Investors Service, Inc.
("Moody's"), FitchIBCA, Inc., Duff and Phelps Credit Rating Co. and
Thomson BankWatch. 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 described below), the Cash and
Municipal Portfolios will not invest more than 5% of their 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 fund 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
funds are typically used as a cash management vehicle, they intend to
maintain a high degree of liquidity. SSBC determines and monitors the
liquidity of portfolio securities under the supervision of the
Directors.
If the funds acquire securities that are unrated (other than U.S.
government securities, as described below), the acquisition must be
approved under the procedures adopted by the Board of Directors.
Under Rule 2a-7, each fund 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 fund does
not make more than one such investment at any one time.
Pursuant to Rule 2a-7, each fund 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 fund may
invest in "second-tier" securities, which are defined as eligible
securities that are not first-tier securities. However, a fund 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 fund 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).
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 $1,000,000 in the Second Tier Securities of
any one issuer.
U.S. Government Securities. Each fund invests in securities issued or
guaranteed by the U.S. government or one of its agencies, authorities
or instrumentalities. Securities in which the funds 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 funds will invest in obligations issued by an
instrumentality of the U.S. government unless SSBC determines that the
instrumentality's credit risk does not make its securities unsuitable
for investment by the fund.
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 funds as initial criteria for the
selection of portfolio securities, but the funds also will rely upon
the independent advice of SSBC to evaluate potential investments.
Subsequent to the purchase of a particular security by a fund, its
rating may be reduced below the minimum required for purchase by the
fund or the issuer of the security may default on its obligations with
respect to the security. In that event, the fund 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
fund. 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 fund, but the
Directors will promptly consider such event in their determination of
whether the fund 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 fund will attempt to use
comparable ratings as standards for its investments in accordance with
its investment objective and policies.
Repurchase Agreements. Each fund may engage in repurchase agreement
transactions with banks which are issuers of instruments acceptable
for purchase by such fund and with certain dealers listed on the
Federal Reserve Bank of New York's list of reporting dealers.
Repurchase agreements are transactions in which a fund 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 fund may
incur costs in disposing of the collateral and may experience losses
if there is any delay in its ability to do so. The Company's custodian
maintains possession of the underlying collateral, which is maintained
at not less than 100% of the repurchase price. SSBC, acting under the
supervision of the Directors, reviews the creditworthiness of those
banks and dealers with which a fund enters into repurchase agreements
to evaluate potential risks.
Reverse Repurchase Agreements. Each fund may enter into reverse
repurchase agreements. Reverse repurchase agreements are transactions
in which a fund 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.
Lending of Portfolio Securities. Each fund 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 fund's total assets, taken at value. A fund may not lend its
portfolio securities to SSBC or its affiliates without specific
authorization from the SEC. Loans of portfolio securities by a fund
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
fund 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 fund or with SSBC, and
which is acting as a "finder."
By lending portfolio securities, each fund 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 fund 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 fund
must be able to terminate the loan at any time; (d) the fund 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 fund 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 Company must terminate the loan and regain the right
to vote the securities.
The limit of 20% of each fund's total assets to be committed to
securities lending is a fundamental policy of each fund, which means
that it cannot be changed without approval of a majority of a fund's
outstanding shares. However, the funds do not currently intend to
engage in securities lending.
Floating Rate and Variable Rate Obligations. Each fund may purchase
floating rate and variable rate obligations, including participation
interests therein. 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.
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 fund may purchase floating rate and variable rate
obligations which carry a demand feature that would permit the fund to
tender them back to the issuer or remarketing agent at par value prior
to maturity. Each fund 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. Securities with ultimate
maturities of greater than 13 months may be purchased only pursuant to
Rule 2a-7. Frequently, floating rate and variable rate obligations
are secured by letters of credit or other credit support arrangements
provided by banks. As determined by SSBC, 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, SSBC 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. The funds may invest in participation
interests in any type of security in which the funds may invest. Each
fund 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 fund'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 SSBC, under the supervision of the
Directors, has determined meets the prescribed quality standards of
the fund. Each fund 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 fund's participation interest in the obligation, plus
accrued interest. Each fund 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 fund. 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 fund 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
fund will purchase securities on a when-issued basis only with the
intention of actually acquiring the securities, the fund 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 fund'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 fund 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 fund's assets will vary from $1.00 per
share. Interest will not accrue on fixed income securities purchased
by a fund until delivery and payment for the securities take place.
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 other liquid securities equal
to the amount of the when-issued commitments will be established with
the Company's custodian with respect to a fund's when-issued
obligations. When the time comes to pay for when-issued securities, a
fund 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 fund'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 "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. The funds 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 section "Obligations of Financial Institutions,"
below.
In evaluating municipal lease obligations, SSBC 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 SSBC 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
fund, 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 fund.
Demand Features -- The funds may invest in securities that are subject
to puts and standby commitments, also known as demand features.
Demand features give the fund 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
funds' investments may be dependent in part on the credit quality of
the banks supporting the funds' investments and changes in the credit
quality of these financial institutions could cause losses to the
funds and affect 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.
The Cash Portfolio
The Cash Portfolio pursues its objective by investing primarily in
high quality commercial paper and obligations of financial
institutions. The fund may also invest in U.S. government securities
and municipal securities, although the fund expects to invest in such
securities to a lesser degree.
Debt Securities -- The fund 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 fund 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,
SSBC 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.
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 fund, depending upon the principal
amount of certificates of deposit ("CDs") of each bank held by the
fund) 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 Financial Institutions -- The fund may invest in
obligations of financial institutions. Examples of obligations in
which the fund 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
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 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 fund
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 above-mentioned size criteria. The fund 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 fund may also invest in Eurodollar and Yankee
bank obligations.
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,
SSBC will carefully evaluate such investments on a case-by-case basis.
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.
U.S. Government Securities -- The fund may invest without limit in
U.S. government securities as described under "The Government
Portfolio."
Municipal Securities -- The fund may invest in obligations of states,
territories or possessions of the United States and their
subdivisions, authorities and corporations as described under "The
Municipal Portfolio." These obligations may pay interest that is
exempt from federal income taxation, but only the Municipal
Portfolio's distributions of tax-exempt interest will be tax-exempt
for shareholders.
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"),
"Certificates of Accrual on Treasury Securities" ("CATS") and FICO
Strips. 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.
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 fund's investment objective
and policies and, subject to the review and approval of the Company's
Board of Directors, the fund 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 fund may invest. Any participation purchased by the
fund 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 fund 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 fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the
fund had purchased a direct obligation, such as commercial paper, of
the borrower. Moreover, under the terms of the loan participation,
the fund may be regarded as a creditor of the issuing bank, rather
than of the underlying corporate borrower, so that the fund 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 SSBC does not believe that price quotations
currently obtainable from banks, dealers or pricing services
consistently represent the market values of participation interests,
SSBC 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, SSBC 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 Company'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 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, for the purpose of describing
permitted investments, repurchase agreements collateralized and
municipal securities refunded with escrowed U.S. government securities
("U.S. Government Securities"). U.S. Government Securities in which
the fund 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 fund 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 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
tax. Under normal market conditions, the fund will invest at least
80% of its assets in municipal securities whose interest is exempt
from federal income tax. However, the fund reserves the right to
invest up to 20% of the value of its assets in securities whose
interest is federally taxable. In addition, the fund 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 fund'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
SSBC is unable to locate investment opportunities with desirable
risk/reward characteristics, the fund may invest without limit in cash
and cash equivalents, including obligations that may be federally
taxable.
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.
At times, the fund 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 fund may also invest more than 25% of its assets in
industrial development bonds or participation interests therein.
The Municipal Portfolio (and each of the other funds) 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 fund 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 fund
generally must ensure that, at the close of each quarter of the
taxable year, (i) not more than 25% of the market value of the fund'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 fund 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 fund'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 fund'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 fund's investment objective is dependent in
part on the continuing ability of the issuers of municipal securities
in which the fund 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.
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 gross
income for federal income tax purposes 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. These
obligations generally have maturities of thirteen months or less. 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 fund generally
will invest in taxable obligations only if and when the Directors
believe it would be in the best interests of the fund'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 fund shares or of portfolio
securities, (b) pending settlement of purchases of portfolio
securities or (c) when the fund is attempting to maintain liquidity
for the purpose of meeting anticipated redemptions. The fund
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 fund'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 fund 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 fund paid on
the acquisition), less any amortization of market premium or plus any
amortization of market or original issue discount during the period
the fund 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 fund. Absent unusual circumstances, the
fund 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 fund could not
transfer a stand-by commitment, the fund 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 fund
without the payment of any direct or indirect consideration. The fund
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 fund would not exceed 1/2 of 1% of
the value of the fund'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 fund'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 fund will be evaluated on an
ongoing basis by SSBC 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 fund 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 fund 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 fund's portfolio.
The Municipal Portfolio understands that the Internal Revenue Service
has issued a revenue ruling to the effect that, in specific factual
circumstances, 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 fund. There can be no
assurance that all of the fund's stand-by commitments will be
factually the same as those described in this ruling or governed by
its conclusions.
Municipal Leases -- The fund 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. SSBC 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 fund will
attempt to invest substantially all of its assets in municipal
securities whose interest is exempt from federal income tax, the fund
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. Income from securities lending transactions is
also taxable.
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 fund holds an interest in one or more
underlying bonds coupled with a conditional right to sell ("put") the
fund's interest in the underlying bonds at par plus accrued interest
to a financial institution (a "Liquidity Provider"). Typically, a
derivative product is structured as a trust or partnership which
provides for pass-through tax-exempt income. There are currently
three principal types of derivative structures: (1) "Tender Option
Bonds", which are instruments which grant the holder thereof the right
to put an underlying bond at par plus accrued interest at specified
intervals to a Liquidity Provider; (2) "Swap Products", in which the
trust or partnership swaps the payments due on an underlying bond with
a swap counterparty who agrees to pay a floating municipal money
market interest rate; and (3) "Partnerships", which allocate to the
partners income, expenses, capital gains and losses in accordance with
a governing partnership agreement.
Investments in derivative products raise certain tax, legal,
regulatory and accounting issues which may not be presented by
investments in other municipal obligations. There is some risk that
certain issues could be resolved in a manner which could adversely
impact the performance of the fund. For example, the tax-exempt
treatment of the interest paid to holders of derivative products is
premised on the legal conclusion that the holders of such derivative
products have an ownership interest in the underlying bonds. While
the fund receives an opinion of legal counsel to the effect that the
income from each derivative product is tax-exempt to the same extent
as the underlying bond, the Internal Revenue Service (the "IRS") has
not issued a ruling on this subject. Were the IRS to issue an adverse
ruling, there is a risk that the interest paid on such derivative
products would be deemed taxable.
The fund intends to limit the risk of derivative products by
purchasing only those derivative products that are consistent with the
fund's investment objective and policies. The fund will not use such
instruments to leverage securities. Hence, derivative products'
contributions to the overall market risk characteristics of a fund
will not materially alter its risk profile and will be fully
consistent with the fund's maturity guidelines.
RISK FACTORS
Although each fund only invests in high quality money market
instruments, an investment in a fund is subject to risk even if all
securities in a fund'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.
Each fund 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 fund. The market value of the obligations in each fund
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 fund will tend to be somewhat higher
than prevailing market rates, and in periods of rising interest rates,
the yield of each fund will tend to be somewhat lower. Also, when
interest rates are falling, the inflow of net new money to each fund
from the continuous sale of its shares will likely be invested in
portfolio instruments producing lower yields than the balance of the
fund, thereby reducing the current yield of the fund. In periods of
rising interest rates, the opposite can be expected to occur. In
addition, securities in which the funds 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.
INVESTMENT RESTRICTIONS
As indicated in the prospectus, each fund 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 Company (or a particular fund if a matter affects just that fund),
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 Company (or a particular fund) 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
(other than for tax purposes) to include repurchase agreements
collateralized and municipal securities refunded with escrowed 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 fund may make commitments more restrictive than the fundamental
restrictions listed below so as to permit the sale of fund shares in
certain states. Should a fund determine that any such commitment is
no longer in the best interests of the fund and its shareholders, it
will revoke the commitment by terminating sales of its shares in the
state involved.
The funds have adopted the following fundamental policies:
(1) With respect to 75% of its assets, a fund may not purchase a
security other than a U.S. Government Security, if, as a result, more
than 5% of the fund's total assets would be invested in the securities
of a single issuer or the fund would own more than 10% of the
outstanding voting securities of any single issuer.
(2) A fund may not purchase securities if more than 25% of the value
of a fund'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 fund may not act as an underwriter of securities issued by
others, except to the extent that a fund may be deemed an underwriter
in connection with the disposition of portfolio securities of such
fund.
(4) A fund 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 fund may not
lend any security if, as a result, more than 20% of a fund's total
assets would be lent to other parties.
(5) A fund may not purchase or sell real estate or any interest
therein, except that the fund 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 fund 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 fund's
total assets by reason of a decline in net assets, the fund will
reduce its borrowings within three business days to the extent neces-
sary 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 fund 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 fund.
Each fund has adopted the following nonfundamental investment
restrictions that may be changed by the Board of Directors of the
Company without shareholder approval:
(1) A fund may not invest in securities or enter into repurchase
agreements with respect to any securities if, as a result, more than
10% of the fund'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 fund'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 fund may not invest in the securities of another investment
company except in connection with a merger, consolidation,
reorganization or acquisition of assets.
(3) A fund 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.
(4) A fund 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 fund'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 fund could invest.
(5) A fund may not pledge, mortgage, hypothecate or encumber any of
its assets except to secure permitted borrowings or in connection with
permitted short sales.
(6) A fund may not invest directly in interests in oil and gas or
interests in other mineral exploration or development programs or
leases; however, the fund may own debt securities of companies engaged
in those businesses.
(7) A fund may not invest in companies for the purpose of exercising
control of management.
Portfolio Turnover
The funds do not intend to seek profits through short-term trading.
Nevertheless, the funds will not consider turnover rate a limiting
factor in making investment decisions. Because the funds invest in
securities with relatively short-term maturities, each fund is
expected to have a high portfolio turnover rate. However, a high
turnover rate should not increase a fund's costs because brokerage
commissions are not normally charged on the purchase and sale of money
market instruments.
Under certain market conditions, a fund 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
fund (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 fund 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 fund, 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 fund are made by SSBC which also is
responsible for placing these transactions, subject to the overall
review of the Company's Board of Directors.
Although investment decisions for each fund are made independently
from those of the other accounts managed by its Investment Manager,
investments of the type the fund may make also may be made by those
other accounts. When a fund and one or more other accounts managed by
its SSBC 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 fund or the size of the position
obtained or disposed of by the fund.
Transactions on 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.
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 fund, the fund's Investment Manager seeks the best overall
terms available. In assessing the best overall terms available for any
transaction, 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 Company and the Manager relating to a
fund 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 fund, the other funds and/or other
accounts over which the Manager or its affiliates exercise investment
discretion. The fees under the advisory agreements relating to the
funds between the Company and the Managers are not reduced by reason
of their receiving such brokerage and research services. The Company's
Board of Directors periodically will review the commissions paid by
the funds to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits inuring to
the funds.
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 fund may be
executed through Salomon Smith Barney and other affiliated broker-
dealers if, in the judgment of the fund'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 fund 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.
YIELD INFORMATION
The funds may measure performance in several ways, including "yield",
"effective yield" and "tax equivalent yield" (for the Municipal
Portfolio only). A fund's yield is a way of showing the rate of income
the fund earns on its investments as a percentage of the fund's share
price. Yield represents the income, less expenses generated by the
investments, in the fund 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 fund's tax-free yield. Fund yield figures are based upon
historical earnings and are not intended to indicate future
performance. A fund 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 funds in advertising is
historical and is not intended to indicate future returns.
In performance advertising, the funds may compare any of their
performance information with data published by independent evaluators
such as Morningstar, Inc., Lipper Analytical Services, Inc.,
CDA/Wiesenberger, IBC Money Fund Report or other companies which track
the investment performance of investment companies ("Fund Tracking
Companies"). The funds 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 Brothers 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 funds 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 funds 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 funds and comparative mutual fund
data and ratings reported in independent periodicals, such as news-
papers and financial magazines.
Any current yield quotation of a fund 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 fund'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 fund 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 fund's yield after taxes. Tax equivalent yields are calculated by
dividing the Municipal Portfolio's yield by one minus the stated
federal tax rate. If only a portion of the fund's yield is tax-exempt,
only that portion is adjusted in the calculation.
Although published yield information is useful to investors in
reviewing a fund's performance, investors should be aware that the
fund's yield fluctuates from day to day and that the fund's yield for
any given period is not an indication or representation by the
Portfolio of future yields or rates of return on the fund's shares.
Also, Processing Organizations may charge their customers direct fees
in connection with an investment in a fund, which will have the effect
of reducing the fund's net yield to those shareholders. The yield of a
fund is not fixed or guaranteed, and an investment in a fund is not
insured. Accordingly, a fund's yield information may not necessarily
be used to compare fund 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 funds are
not insured or guaranteed, a fund's yield information may not
necessarily be used to compare the fund with investment alternatives
which are insured or guaranteed.
For the seven-day period ended May 31, 1999, 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)*
4.71%
4.82%
Government Portfolio (Class A)*
4.59
4.69
Municipal Portfolio+ (Class A)*
3.07
3.12
* As at May 31, 1999, (No Class B shares of were outstanding,
accordingly, no comparable information is available on that
class.)
+ The Municipal Portfolio's tax-equivalent yield (assuming a
federal income tax rate of 36%) for the same period for Class A
shares was 4.80% and its tax-equivalent effective yield
(assuming a federal income tax rate of 36%) for the same period
was 4.88%.
DETERMINATION OF NET ASSET VALUE
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 Company'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 Company's custodian are open. The net asset value per share of
each fund is determined by dividing the fund'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 fund may also
determine net asset value per share on days when the NYSE is not open,
but when the settlement of securities may otherwise occur. The 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 fund 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 fund'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 fund would receive if it sold
the instrument. During such periods the yield to investors in the
fund may differ somewhat from that obtained in a similar company that
uses mark-to-market values for all its portfolio securities. For
example, if the use of amortized cost resulted in a lower (higher)
aggregate portfolio value on a particular day, a prospective investor
in the fund would be able to obtain a somewhat higher (lower) yield
than would result from investment in such similar company, and
existing investors would receive less (more) investment income. The
purpose of this method of valuation is to attempt to maintain a
constant net asset value per share, and it is expected that the price
of the fund's shares will remain at $1.00; however, shareholders
should be aware that despite procedures that will be followed to have
a stabilized price, including maintaining a maximum dollar-weighted
average portfolio maturity of 90 days and investing in securities with
remaining maturities of only 13 months or less, there is no assurance
that at some future date there will not be a rapid change in
prevailing interest rates, a default by an issuer or some other event
that could cause the fund's price per share to change from $1.00.
PURCHASE OF SHARES
Purchases of fund shares may be made directly through the Company'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 Company 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 of the Cash, Government
and Municipal Portfolios are available for purchase by any investor
meeting the investment minimum. Class B shares are available for
purchase by institutional investors on behalf of their clients.
The minimum initial investment in each fund is $1,000,000. Class A
shares of the Cash Portfolio are also available to those investors who
invest a minimum of $1,000 and who previously invested at least
$500,000 at a single time in another institutional money market
previously made available by Salomon Smith Barney. The minimum
subsequent investment is $50.
The issuance of shares of a fund is recorded on the books of the
Company, 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 Company'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 fund's close of business. When orders for the purchase of
Company 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 Company calculates its net asset value. 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 Company calculates
the fund's net asset value. Shares purchased begin to accrue income
dividends on the business day the purchase order becomes effective.
EXCHANGE PRIVILEGE
Shareholders of a fund may exchange their shares for shares of any
other fund 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 funds
offers to exchange its shares for shares of any other fund, on the
basis of relative net asset value per share. Since all of the funds
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 fund, all dividends accrued
on such shares for the month to date will be invested in shares of the
fund into which the exchange is being made. An exchange between funds
pursuant to the exchange privilege is treated as a potentially taxable
transaction for shareholders for federal income tax purposes.
To exercise the exchange privilege, shareholders should contact First
Data or their Salomon Smith Barney Financial Consultant, who will
advise the applicable fund 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 fund will be the same as for the fund 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
fund into which he wishes to make the exchange, the name of the fund
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 Company reserves the right to require a properly
completed exchange application.
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
Company calculates its net asset value. 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 Company 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 Company 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
Company directly through First Data may redeem shares through First
Data in the manner described 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 Company or First Data will not be liable for following
instructions communicated by telephone that they reasonably 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 fund, 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 fund 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 17Ad-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.
MANAGEMENT AGREEMENT, PLAN OF DISTRIBUTION AND OTHER SERVICES
Manager
SSBC serves as investment adviser to the Funds pursuant to a separate
investment management agreement (the "Management Agreement"). SSBC is
an affiliate of Salomon Smith Barney and an indirect, wholly owned
subsidiary of Citigroup. The Management Agreement was most recently
approved by the Board of Directors, including a majority of the
Directors who are not "interested persons" of the Company or the
investment advisers (the "Independent Directors"), and by shareholders
of the respective Funds on July 22, 1999. SSBC provides investment
advisory and management services to investment companies affiliated
with Salomon Smith Barney.
SSBC manages the day-to-day operations of each fund pursuant to
management agreements entered into by the Company on behalf of each
fund. Under the management agreements, the Manager offers each fund
advice and assistance with respect to the acquisition, holding or
disposal of securities and recommendations with respect to other
aspects of the business and affairs of each fund. It also furnishes
each fund 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 Company.
Each fund's management agreement provides that all other expenses not
specifically assumed by the Manager under each management agreement
are borne by the Company. Expenses payable by the Company 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 Company) and
shareholder servicing agents, filing fees and expenses relating to the
registration and qualification of the Company's shares under federal
or state securities laws and maintaining such registrations and
qualifications (including the printing of the Company'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 1940 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 Company's corporate existence and extraordinary
expenses such as litigation and indemnification expenses. Direct
expenses are charged to each fund; 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 Company, but
expenses incurred in complying with laws regulating the issue or sale
of the Company's shares are not deemed sales or promotion expenses.
The Manager has agreed that if in any fiscal year the total expenses
of any fund, exclusive of taxes, brokerage, interest and extraordinary
expenses exceed 0.80% of the average daily net assets for that fiscal
year of the fund, 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.
As compensation for SSBC's services to the funds, each fund pays a
monthly fee at the annual rate of 0.27% of the value of that fund's
average daily net assets.
SSBC waived a portion of its management fee for the Company for the
fiscal year ended May 31, 1999, and the effective rate of the
management fee was 0.23%, 0.23% and 0.23% 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 0.31%, 0.42% and 0.39% of the
average daily net assets for the Cash Portfolio, Government Portfolio
and Municipal Portfolio, respectively.
For the fiscal year ended May 31, 1997, SSBC 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, SSBC waived a portion of the
management fees due to it. Absent this fee waiver, the management
fees for the funds would have been $1,505,040, $325,002 and $186,349,
respectively, for the Cash Portfolio, Government Portfolio and
Municipal Portfolio.
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.
For the fiscal year ended May 31, 1999, SSBC waived a portion of the
management fees due to it. Absent this fee waiver, the management
fees for the funds would have been $2,641,152, $304,826 and $368,395,
respectively, for the Cash Portfolio, Government Portfolio and
Municipal Portfolio.
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.
Plan of Distribution
CFBDS, Inc. ("CFBDS or the "distributor"), located at 20 Milk Street,
Boston, Massachusetts 02109-5408, serves as the Company's distributor
on a best efforts basis pursuant to a distribution agreement (the
"Distribution Agreement").
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 Company's prospectus
relating to Class B shares and enjoy certain exclusive voting rights
on matters relating to these service fees.
The Company 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 Company in connection with their
investments and to any investor meeting the investment minimum (See
"Purchase of Shares,")
Brokerage
The Manager places orders for the purchase and sale of securities for
the portfolios of the fund. All of each fund'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.
TAXES
The following is a summary of the material federal tax considerations
affecting the separate funds and their shareholders. In addition to
the considerations described below, 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 fund of the Company will be treated as a separate entity for tax
purposes. The funds intend to qualify, as in prior years, under
Subchapter M of the Internal Revenue Code (the "Code") for tax
treatment as regulated investment companies so long as such
qualification is in the best interests of shareholders. In each
taxable year that the separate funds so qualify, the funds will pay no
federal income tax on the investment company taxable income and net
capital gain that is distributed to 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 they may be considered taxable for certain state and local
income tax purposes.
Dividends paid from net investment income (other than "exempt-interest
dividends") and net realized short-term capital gain, are subject to
federal income tax as ordinary income. Distributions, if any, from net
realized long-term capital gains are taxable as long-term capital
gains, regardless of the length of time a shareholder has owned fund
shares.
Losses, if any, on the redemption, exchange or other sale of shares
held for six months or less may be disallowed or recharacterized to
the extent of any exempt-interest dividends or capital gain dividends
paid with respect to such shares.
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 funds are required to withhold ("backup withholding") 31% of all
taxable dividends and capital gain distributions for shareholders who
do not provide the funds with a correct taxpayer identification number
(social security or employer identification number and any required
certifications). 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.
Dividends and Distributions
Each fund 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 funds 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.
The Municipal Portfolio
Exempt-interest dividends attributable to interest received by the
fund 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 if such tax is reinstated,
as has been proposed. 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 fund from interest income on taxable
investments, net short-term capital 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 long-term capital gains are
taxable as long-term capital gains, regardless of the length of time a
shareholder has
owned Company shares.
ADDITIONAL INFORMATION ABOUT THE COMPANY
The Company, 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 funds, and may also
authorize the creation of additional series of shares. Each share of a
fund represents an equal proportionate interest in the net assets of
that fund or class with each other share of the same fund or class and
is entitled to such dividends and distributions out of the net income
of that fund or class as are declared in the discretion of the
Directors.
Voting Rights
Shareholders are entitled to one vote for each share held and will
vote in the aggregate and not by fund or class, except as otherwise
required by the 1940 Act or Maryland General Corporation Law. The
fund ordinarily will not hold shareholder meetings; however,
shareholders have the right to call a meeting upon a vote of 10% of
the fund's outstanding shares for the purpose of voting to remove
Directors and the Company will assist shareholders in calling such a
meeting as required by the 1940 Act.
Each share of each series of the Company has one vote (and fractional
votes for fractional shares). Shares of all series of the Company have
noncumulative voting rights, which means that the holders of more than
50% of the shares of all series of the Company 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 Company will vote
separately only with respect to those matters that affect only that
series.
The present Directors of the Company 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 Company 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 fund, 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.
Counsel
Willkie Farr & Gallagher serves as legal counsel to the Company. The
Directors who are not "interested persons" of the Company have
selected Stroock & Stroock & Lavan LLP as their counsel.
Auditors
KPMG LLP, 345 Park Avenue, New York, New York 10154, has been selected
as independent auditors for the Company for its fiscal year ending May
31, 2000, to examine and report on the financial statements and
financial highlights of the Company.
Custodian
PNC is located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, and serves as custodian for the funds. Under its
custodial agreement with the Company, PNC is authorized to appoint one
or more foreign or domestic banking institutions as sub-custodians of
assets owned by a fund. For its custody services, PNC receives monthly
fees charged to each fund based upon the month-end, aggregate net
asset value of the Company, plus certain charges for securities
transactions. The assets of the Company are held under bank
custodianship in accordance with the 1940 Act.
Transfer Agent
First Data is located at Exchange Place, Boston, Massachusetts 02109,
and serves as the Company's transfer agent and dividend disbursing
agent. For its services as transfer agent and dividend disbursing
agent, First Data receives fees charged to the funds at an annual rate
based upon the number of shareholder accounts maintained during the
year. First Data also is reimbursed by the funds for its out-of-pocket
expenses.
Minimum Account Size
The Company reserves the right to redeem involuntarily any
shareholder's account if the aggregate net asset value of the shares
of a fund held in the account is less than $100,000 (if a shareholder
has more than one account in a fund, each account must satisfy the
minimum account size.) Before the Directors of the Company 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.
Annual Reports
The Company 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 Company at the end of the period covered.
FINANCIAL STATEMENTS
The funds' Annual Reports for the fiscal year ended May 31, 1999 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. Those
issues determined to possess extremely strong safely characteristics
are denoted with a plus (+) designation. Issues 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.
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