SMITH BARNEY INSTITUTIONAL CASH MANAGEMENT FUND INC
Cash Portfolio
Government Portfolio
Municipal Portfolio
Class A Shares
Supplement dated July 28, 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 November 1, 2000 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.
FD01976
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 July 28, 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 Government and Municipal
Portfolios may be purchased by institutional investors on their own
behalf. Class A shares of the Cash Portfolio 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 July 28, 2000 and
Class B shares dated September 28, 1999, 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 uncon-
ditional, 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 rep-
resented 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 newspapers 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 depre-
ciation 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
Government and Municipal Portfolio are available for purchase by
institutional investors on their own behalf. Class B shares are
available for purchase by institutional investors on behalf of their
clients. Class A shares of the
Cash Portfolio are available for purchase by any investor meeting the
investment minimum.
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 of the Government and Municipal Portfolios are sold to
institutions that have not entered into servicing agreements with the
Company in connection with their investments. Class A shares of the
Cash Portfolio are sold to any investor meeting the investment
minimum (See "Purchase of Shares," above)
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 revenues 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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