As filed with the Securities and Exchange Commission on September
12, 1997
Securities Act Registration
No. 33-47116
Investment Company Act Registration
No. 811-6629
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 8 x
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 9 x
__________________
Managed Municipals Portfolio Inc.
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 723-9218
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Managed Municipals Portfolio Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M.Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
_______________
Approximate Date of Proposed Public Offering: As soon as
practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be
offered on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following
box. x_______________
This Registration Statement relates to the registration of
an indeterminate number of shares solely for market-making
transactions. Pursuant to Rule 429, this Registration Statement
relates to shares previously registered on Form N-2. (Registration
No. 33-47116).
It is proposed that this fiing will become effective: x when
declared effective pursuant to section 8(c).
Registrant amends this Registration Statement under the
Securities Act of 1933, as amended, on such date as may be
necessary to delay its effective date until Registrant files a
further amendment that specifically states that this Registration
Statement will thereafter become effective in accordance with the
provisions of Section 8(a) of the Securities Act of 1933, as
amended, or until the Registration Statement becomes effective on
such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
MANAGED MUNICIPALS PORTFOLIO INC.
Form N-2
Cross Reference Sheet
Part A
Item No. Caption Prospectus Caption
1. Outside Front Cover Outside Front
Cover of Prospectus
2. Inside Front and Outside Back Cover Page Inside Front and
Outside Back Cover Page
of Prospectus
3. Fee Table and Synopsis Prospectus
Summary; Portfolio Expenses
4. Financial Highlights Financial
Highlights
5. Plan of Distribution Prospectus
Summary; The Offering;
Certain Provisions
of the Articles of
Incorporation and Market Discount.
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds;
8. General Description of the
Registrant......................................... Prospectus
Summary; The Portfolio;
Investment Objectives and Policies;
Description of Common Stock; Net Asset Value;
Share PriceData; Certain Provisions of of
the Articles of Incorporation;
Appendix.
9. Management Management of the
Portfolio; Description of
Common Stock;
Custodian and Transfer Agent
10. Capital Stock, Long-Term Debt, and Other
Securities Taxation; Dividend
Reinvestment Plan;
Dividends and
Distributions; Description of Common
Stock; Share Price Data
11. Defaults and Arrears on Senior Securities Not
Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Further
Information
Part B Statement of
Additional
Item No. Information
Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General
Information and
History................................................ The
Portfolio; Description of Common Stock
(see Prospectus)
17. Investment Objective and Policies Investment
Objective and Policies; Invest-
ment Restrictions
18.
Management.....................................................
.......................... Management of the
Portfolio; Directors and Executive
Officers of the Portfolio
19. Control Persons and Principal Holders of
Securities Not Applicable
20. Investment Advisory and Other Services Management of the
Portfolio
21. Brokerage Allocation and Other Practices Portfolio
Transactions
22. Tax Status Taxes; Taxation
(see Prospectus)
23. Financial Statements Financial
Statements
PART A. PROSPECTUS
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Prospectus September 26, 1997
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Managed Municipals Portfolio Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Managed Municipals Portfolio Inc. (the "Portfolio") is a non-diversified,
closed-end management investment company that seeks as high a level of current
income exempt from federal income tax as is consistent with the preservation of
principal. Under normal conditions, the Portfolio will, in seeking its
investment objective, invest substantially all of its assets in long-term,
investment grade obligations issued by state and local governments, political
subdivisions, agencies and public authorities ("Municipal Obligations"). For a
discussion of the risks associated with certain of the Portfolio's investments,
see "Investment Objective and Policies."
This Prospectus sets forth concisely the information about the Portfolio
that a prospective investor ought to know before investing and should be
retained for future reference. A Statement of Additional Information (the "SAI")
dated September 26, 1997 containing additional information about the Portfolio
has been filed with the Securities and Exchange Commission (the "SEC") and is
hereby incorporated by reference in its entirety into this Prospectus. A copy of
the SAI may be obtained without charge by calling or writing to the Portfolio at
the telephone number or address set forth above or by contacting a Smith Barney
Financial Consultant.
(Continued on page 2)
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUND MANAGEMENT INC.
Investment Manager and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Prospectus (continued) September 26, 1997
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Smith Barney intends to make a market in the Common Stock, although it is
not obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of Smith Barney.
The shares of Common Stock that may be offered from time to time pursuant to
this Prospectus were issued and sold by the Portfolio in a public offering which
commenced June 18, 1992, at a price of $12.00 per share. No assurance can be
given as to the liquidity of, or the trading market for, the Common Stock as a
result of any market-making activities undertaken by Smith Barney. The Portfolio
will not receive any proceeds from the sale of any Common Stock offered pursuant
to this Prospectus.
All dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a Prospectus.
2
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Table of Contents
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Prospectus Summary 4
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Portfolio Expenses 7
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Financial Highlights 8
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The Portfolio 9
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The Offering 9
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Use of Proceeds 9
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Investment Objective and Policies 9
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Net Asset Value 17
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Share Price Data 17
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Taxation 18
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Management of the Portfolio 19
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Dividends and Distributions; Dividend Reinvestment Plan 21
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Certain Provisions of the Articles of Incorporation and
Market Discount 23
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Description of Common Stock 24
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Custodian and Transfer Agent 25
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Experts 25
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Further Information 26
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Appendix A A-1
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Appendix B B-1
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Fund or the
distributor. This Prospectus does not constitute an offer by the Fund or the
distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such an offer or solicitation in such jurisdiction.
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3
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Prospectus Summary
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The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the SAI.
THE PORTFOLIO The Portfolio is a non-diversified, closed-end management
investment company. See "The Portfolio."
INVESTMENT OBJECTIVE The Portfolio seeks as high a level of current income
exempt from federal income tax as is consistent with the preservation of
principal. See "Investment Objective and Policies."
TAX-EXEMPT INCOME The Portfolio is intended to operate in such a manner that
dividends paid by the Portfolio may be excluded by the Portfolio's shareholders
from their gross incomes for federal income tax purposes. See "Investment
Objective and Policies" and "Taxation."
INVESTMENTS The Portfolio will invest substantially all of its assets in
long-term investment grade Municipal Obligations. At least 80% of the
Portfolio's total assets will be invested in securities rated investment grade
by Moody's Investors Service, L.P. ("Moody's"), Standard & Poor's Ratings Group
("S&P"), Fitch Investors Service, Inc. ("Fitch") or another
nationally-recognized rating agency (that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch). Up to 20%
of the Portfolio's total assets may be invested in unrated securities that are
deemed by the Portfolio's investment adviser to be of a quality comparable to
investment grade. See "Investment Objective and Policies."
THE OFFERING The Common Stock is listed for trading on the New York Stock
Exchange, Inc. ("NYSE"). In addition, Smith Barney intends to make a market in
the Common Stock. Smith Barney, however, is not obligated to conduct
market-making activities and any such activities may be discontinued at any time
without notice, at the sole discretion of Smith Barney.
LISTING NYSE
SYMBOL MMU
INVESTMENT MANAGER Greenwich Street Advisors, a division of Smith Barney Mutual
Funds Management Inc. ("SBMFM"), serves as the Portfolio's investment manager
(the "Investment Manager"). The Investment Manager provides investment advisory
and management services to investment companies affiliated with Smith Barney.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Travelers Group Inc.
("Travelers"). Subject to the supervision and direction of the Portfolio's Board
of Directors, the Investment Manager manages the securities held by the
Portfolio in accordance with the Portfolio's stated investment objective and
policies, makes investment decisions for the Portfolio, places orders to
purchase and sell securities on behalf of the Portfolio and employs professional
portfolio managers. SBMFM acts
4
<PAGE>
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Prospectus Summary (continued)
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as administrator of the Portfolio and in that capacity provides certain
administrative services, including overseeing the Portfolio's non-investment
operations and its relations with other service providers and providing
executive and other officers to the Portfolio. The Portfolio pays the Investment
Manager a fee ("Management Fee") for services provided to the Fund that is
computed daily and paid monthly at the annual rate of 0.90% of the value of the
Portfolio's average daily net assets. The Portfolio will bear other expenses and
costs in connection with its operation in addition to the costs of investment
management services. See "Management of the Portfolio -- Investment Manager."
CUSTODIAN PNC Bank, National Association ("PNC Bank") serves as the Portfolio's
custodian. See "Custodian and Transfer Agent."
TRANSFER AGENT First Data Investor Services Group, Inc. ("First Data"), serves
as the Portfolio's transfer agent, dividend-paying agent and registrar. See
"Custodian and Transfer Agent."
DIVIDENDS AND DISTRIBUTIONS The Portfolio expects to pay monthly dividends of
net investment income (income other than net realized capital gains) and to
distribute net realized capital gains, if any, annually. All dividends or
distributions with respect to shares of Common Stock are reinvested
automatically in additional shares through participation in the Portfolio's
Dividend Reinvestment Plan, unless a shareholder elects to receive cash. See
"Dividends and Distributions; Dividend Reinvestment Plan."
INVESTMENT OBJECTIVE AND POLICIES The Portfolio will not purchase securities
that are rated lower than Baa by Moody's, BBB by S&P or BBB by Fitch at the time
of purchase. Although obligations rated Baa by Moody's, BBB by S&P or BBB by
Fitch are considered to be investment grade, they may be subject to greater
risks than other higher rated investment grade securities. See "Investment
Objective and Policies."
The Portfolio may invest up to 20% of its total assets in unrated
securities that the Investment Manager determines to be of comparable quality to
the securities rated investment grade in which the Portfolio may invest. Dealers
may not maintain daily markets in unrated securities and retail secondary
markets for many of them may not exist; this lack of markets may affect the
Portfolio's ability to sell these securities when the Investment Manager deems
it appropriate. The Portfolio has the right to invest without limitation in
state and local obligations that are "private activity bonds," the income from
which may be taxable as a specific preference item for purposes of the federal
alternative minimum tax. Thus, the Portfolio may not be a suitable investment
for investors who are subject to the alternative minimum tax. See "Investment
Objective and Policies" and "Taxation."
5
<PAGE>
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Prospectus Summary (continued)
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RISK FACTORS AND SPECIAL CONSIDERATIONS Certain of the instruments held by the
Portfolio, and certain of the investment techniques that the Portfolio may
employ, might expose the Portfolio to special risks. The instruments presenting
the Portfolio with risks are municipal leases, zero coupon securities, custodial
receipts, municipal obligation components, floating and variable rate demand
notes and bonds, and participation interests. Entering into securities
transactions on a when-issued or delayed delivery basis, entering into
repurchase agreements, lending portfolio securities, and engaging in financial
futures and options transactions, are investment techniques involving risks to
the Portfolio. As a non-diversified fund within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"), the Portfolio may invest a
greater proportion of its assets in the obligations of a smaller number of
issuers and, as a result, may be subject to greater risk than a diversified fund
with respect to its holdings of securities. See "Investment Objective and
Policies" and "Risk Factors and Special Considerations."
MANAGEMENT OF THE PORTFOLIO The combined annual rate of fees paid by the
Portfolio for advisory and administrative services, 0.90% of the value of the
Portfolio's average daily net assets, is higher than the rates for similar
services paid by other publicly offered, closed-end, management investment
companies that have investment objectives and policies similar to those of the
Portfolio. The Portfolio will bear, in addition to the costs of advisory and
administrative services, other expenses and costs in connection with its
operation. See "Management of the Portfolio."
The Portfolio's Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Portfolio and of depriving shareholders of an opportunity to sell
their shares of Common Stock at a premium over prevailing market prices. See
"Certain Provisions of the Articles of Incorporation and Market Discount."
6
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Portfolio Expenses
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The following tables are intended to assist investors in understanding the
various costs and expenses associated with investing in the Portfolio.
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Annual Expenses
(as a percentage of net assets attributable to Common Stock)
Management Fees .90%
Other Expenses* .10
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TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES 1.00%
================================================================================
*"Other Expenses," as shown above are based upon amounts for the fiscal year
ending May 31, 1997.
EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Portfolio, assuming a 5% annual return:
One Year Three Years Five Years Ten Years
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$10 $32 $55 $122
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While the example assumes a 5% annual return, the Portfolio's performance
will vary and may result in a return greater or less than 5%. In addition, while
the example assumes reinvestment of all dividends and distributions at net asset
value, participants in the Portfolio's Dividend Reinvestment Plan may receive
shares purchased or issued at a price or value different from net asset value.
See "Dividend Reinvestment Plan." This example should not be considered a
representation of future expenses of the Portfolio and actual expenses may be
greater or less than those shown.
7
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Financial Highlights
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The following information for the two years ended May 31, 1997 has been
audited by KPMG Peat Marwick LLP, independent auditors whose report thereon
appears in the Portfolio's annual report dated May 31, 1997. The following
information for the fiscal years ended May 31, 1993 through May 31, 1995 has
been audited by other independent auditors. This information should be read in
conjunction with the financial statements and related notes that also appear in
the Portfolio's Annual Report, which is incorporated by reference into this
Prospectus.
<TABLE>
<CAPTION>
For a share of capital stock outstanding
throughout each year 1997 1996 1995 1994 1993*
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<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ 12.11 $ 12.55 $ 12.26 $ 13.00 $ 12.00
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Income from operations:
Net investment income 0.67 0.67 0.72 0.67 0.63
Net realized and unrealized gain (loss) 0.08 (0.35) 0.49 (0.23) 0.97
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Total Income from operations 0.75 0.32 1.21 0.44 1.60
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Offering Cost Charged to Paid-In Capital -- -- -- -- (0.02)
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Distributions:
Dividends from net investment income (0.66) (0.75) (0.67) (0.67) (0.55)
Distributions from net realized capital gains (0.30) (0.01) (0.25) (0.51) (0.03)
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Total distributions (0.96) (0.76) (0.92) (1.18) (0.58)
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Net asset value, end of year $ 11.90 $ 12.11 $ 12.55 $ 12.26 $ 13.00
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Total Return Based on Market Value 7.89% 8.26% 8.40% 2.98% 7.02%++
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Total Return, Based on Net Asset Value** 6.59% 2.79% 10.96% 3.45% 13.58%++
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Net Assets, End of Year (in 000's) $ 411,286 $ 417,924 $ 432,920 $ 422,792 $ 443,938
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Ratios to Average Net Assets:
Ratio of operating expenses to average
net assets 1.00% 1.00% 1.02% 1.00% 0.98%+
Ratio of net investment income to average
net assets 5.56 5.35 5.97 5.15 5.48+
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Portfolio turnover rate 113% 45% 93% 72% 169%
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Market value, end of year 11.625 11.69 11.50 11.50 12.25
==============================================================================================================================
</TABLE>
* For the period from June 26, 1992 (commencement of operations) to May 31,
1993.
** The total return assumes the purchase and redemption of shares using the
Portfolio's net asset value rather than market value. Dividends are
reinvested in accordance with the Portfolio's Dividend Reinvestment Plan.
+ Annualized.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
8
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The Portfolio
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The Portfolio is a non-diversified, closed-end management investment
company that seeks as high a level of current income exempt from federal income
tax as is consistent with the preservation of principal. The Portfolio, which
was incorporated under the laws of the State of Maryland on April 9, 1992, is
registered under the 1940 Act, and has its principal office at 388 Greenwich
Street, New York, New York 10013. The Portfolio's telephone number is (800)
451-2010.
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The Offering
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Smith Barney intends to make a market in the Common Stock, although it is
not obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice at the sole discretion of Smith Barney.
No assurance can be given as to the liquidity of, or the trading market for, the
Common Stock as a result of any market-making activities undertaken by Smith
Barney. This Prospectus is to be used by Smith Barney in connection with offers
and sales of the Common Stock in market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of the sale.
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Use of Proceeds
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The Portfolio will not receive any proceeds from the sale of any Common
Stock offered pursuant to this Prospectus. Proceeds received by Smith Barney as
a result of its market-making in the Common Stock will be utilized by Smith
Barney in connection with its secondary market operations and for general
corporate purposes.
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Investment Objective and Policies
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The Portfolio's investment objective is to seek as high a level of current
income exempt from federal income taxes as is consistent with the preservation
of principal. The Portfolio's investment objective may not be changed without
the affirmative vote of the holders of a "majority of the Portfolio's
outstanding voting securities" (as defined in the 1940 Act). In seeking its
objective, the Portfolio will invest in long-term Municipal Obligations. The
Portfolio will operate subject to a fundamental investment policy providing
that, under normal conditions, the Portfolio will invest at least 80% of its
total assets in investment grade Municipal Obligations. No assurance can be
given that the Portfolio's investment objective will be achieved.
9
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Investment Objective and Policies (continued)
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The Portfolio will invest at least 80% of its total assets in Municipal
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20% of
the Portfolio's total assets may be invested in unrated securities that are
deemed by the Investment Manager to be of a quality comparable to investment
grade. The Portfolio will not invest in Municipal Obligations that are rated
lower than Baa by Moody's, BBB by S&P or BBB by Fitch, at the time of purchase.
A description of relevant Moody's, S&P and Fitch ratings is set forth in the
Appendix to the SAI. Although Municipal Obligations rated Baa by Moody's, BBB by
S&P or BBB by Fitch are considered to be investment grade, they may be subject
to greater risks than other higher rated investment grade securities. Municipal
Obligations rated Baa by Moody's, for example, are considered medium grade
obligations that lack outstanding investment characteristics and have
speculative characteristics as well. Municipal Obligations rated BBB by S&P are
regarded as having an adequate capacity to pay principal and interest. Municipal
Obligations rated BBB by Fitch are deemed to be subject to a higher likelihood
that their rating will fall below investment grade than higher rated bonds.
The Portfolio is classified as a non-diversified fund under the 1940 Act,
which means that the Portfolio is not limited by the 1940 Act in the proportion
of its assets that it may invest in the obligations of a single issuer. The
Portfolio intends to conduct its operations, however, so as to qualify as a
"regulated investment company" for purposes of the Internal Revenue Code of
1986, as amended (the "Code"), which will relieve the Portfolio of any liability
for federal income tax to the extent that its earnings are distributed to
shareholders. To qualify as a regulated investment company, the Portfolio will,
among other things, limit its investments so that, at the close of each quarter
of its taxable year (1) not more than 25% of the market value of the Portfolio's
total assets will be invested in the securities of a single issuer and (2) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer. See "Taxation."
The Portfolio generally will not invest more than 25% of its total assets
in any industry. Governmental issuers of Municipal Obligations are not
considered part of any "industry." Municipal Obligations backed only by the
assets and revenues of non-governmental users may be deemed to be issued by the
non-governmental users, and would be subject to the Portfolio's 25% industry
limitation. The Portfolio may invest more than 25% of its total assets in a
broad segment of the Municipal Obligations market, if the Investment Manager
determines that the yields available from obligations in a particular segment of
the market justify the additional risks associated with a large investment in
the segment. The Portfolio reserves the right to invest more than 25% of its
assets in industrial development bonds or in issuers located in the same state,
although it has no current intention of investing more than
10
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Investment Objective and Policies (continued)
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25% of its assets in issuers located in the same state. If the Portfolio were to
invest more than 25% of its total in issuers located in the same state, it would
be more susceptible to adverse economic, business or regulatory conditions in
that state.
Municipal Obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal Obligations bear fixed, floating and
variable rates of interest, and variations exist in the security of Municipal
Obligations, both within a particular classification and between
classifications. The types of Municipal Obligations in which the Portfolio may
invest are described in Appendix A to this Prospectus.
The yields on, and values of, Municipal Obligations are dependent on a
variety of factors, including general economic and monetary conditions, money
market factors, conditions in the Municipal Obligations markets, size of a
particular offering, maturity of the obligation and rating of the issue.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields or values, whereas obligations of the same maturity
and coupon with different ratings may have the same yield or value.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from federal income taxes are rendered by bond
counsel to the respective issuers at the time of issuance. Neither the Portfolio
nor the Investment Manager will review the procedures relating to the issuance
of Municipal Obligations or the basis for opinions of counsel. Issuers of
Municipal Obligations may be subject to the provisions of bankruptcy, insolvency
and other laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the
rights and remedies of creditors. In addition, the obligations of those issuers
may become subject to laws enacted in the future by Congress, state legislatures
or referenda extending the time payment of principal and/or interest, or
imposing other constraints upon enforcement of the obligations or upon the
ability of municipalities to levy taxes. The possibility also exists that, as a
result of litigation or other conditions, the power or ability of any issuer to
pay, when due, the principal of, and interest on, its obligations may be
materially affected.
Under normal conditions, the Portfolio may hold up to 20% of its total
assets in cash or money market instruments, including taxable money market
instruments (collectively, "Taxable Investments"). In addition, the Portfolio
may take a temporary defensive posture and invest without limitation in
short-term Municipal
11
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Investment Objective and Policies (continued)
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Obligations and Taxable Investments, upon a determination by the Investment
Manager that market conditions warrant such a posture. To the extent the
Portfolio holds Taxable Investments, the Portfolio may not be fully achieving
its investment objective.
INVESTMENT TECHNIQUES
The Portfolio may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued basis, or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but no payment or
delivery will be made by the Portfolio prior to the actual delivery or payment
by the other party to the transaction. The Portfolio will not accrue income with
respect to a when-issued or delayed delivery security prior to its stated
delivery date. The Portfolio will establish with PNC Bank a segregated account
consisting of cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been determined by SBMFM to be liquid and unencumbered, and
are marked to market daily, pursuant to guidelines established by the Directors.
Placing securities rather than cash in the segregated account may have a
leveraging effect on the Portfolio's net asset value per share; that is, to the
extent that the Portfolio remains substantially fully invested in securities at
the same time that it has committed to purchase securities on a when-issued or
delayed delivery basis, greater fluctuations in its net asset value per share
may occur than if it had set aside cash to satisfy its purchase commitments.
Stand-By Commitments. The Portfolio may acquire "stand-by commitments" with
respect to Municipal Obligations it holds. Under a stand-by commitment, which
resembles a put option, a broker, dealer or bank is obligated to repurchase at
the Portfolio's option specified securities at a specified price. Each exercise
of a stand-by commitment, therefore, is subject to the ability of the seller to
make payment on demand. The Portfolio will acquire stand-by commitments solely
to facilitate liquidity and does not intend to exercise the rights afforded by
the commitments for trading purposes.
Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase, the Portfolio may enter into
financial futures contracts and invest in options on financial futures contracts
that are traded on a U.S. exchange or board of trade. The futures contracts or
options on futures contracts that may be entered into by the Portfolio will be
restricted to those that are either based on an index of Municipal Obligations
or relate to debt securities the
12
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
prices of which are anticipated by the Investment Manager to correlate with the
prices of the Municipal Obligations owned or to be purchased by the Portfolio.
Regulations of the Commodity Futures Trading Commission ("CFTC") applicable to
the Portfolio require that its transactions in futures and options be engaged in
for "bona fide hedging" purposes or other permitted purposes, provided that
aggregate initial margin deposits and premiums required to establish positions
other than those considered by the CFTC to be "bona fide hedging" will not
exceed 5% of the Portfolio's net asset value, after taking into account
unrealized profits and unrealized losses on such contracts.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at a
specified price, date, time and place. Unlike the direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the futures
contract at a specified exercise price at any time prior to the expiration date
of the option. Upon exercise of an option, the delivery of the futures position
by the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss related
to the purchase of an option on financial futures contracts is limited to the
premium paid for the option (plus transaction costs). The value of the option
may change daily and that change would be reflected in the net asset value of
the Portfolio.
Lending Securities. The Portfolio is authorized to lend securities it holds
to brokers, dealers and other financial organizations, but it will not lend
securities to any affiliate of the Investment Manager unless the Portfolio
applies for and receives specific authority to do so from the SEC. Loans of the
Portfolio's securities, if and when made, may not exceed 331 1/43 % of the value
of the Portfolio's total assets. The Portfolio's loans of securities will be
collateralized by cash, letters of credit or U.S. government securities that
will be maintained at all times in a segregated account with PNC Bank in an
amount equal to the current market value of the loaned securities.
Repurchase Agreements. The Portfolio may enter into repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. A repurchase agreement is a contract under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price on an agreed-upon date. Under the terms of a
typical repurchase agreement, the Portfolio would acquire an underlying debt
obligation for a relatively short period subject to an obligation of the seller
to repurchase, and the Port-
13
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
folio to resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Portfolio's holding period. This arrangement
results in a fixed rate of return that is not subject to market fluctuations
during the Portfolio's holding period. Under each repurchase agreement, the
selling institution will be required to maintain the value of the securities
subject to the repurchase agreement at not less than their repurchase price.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Portfolio involves risk factors and special
considerations, such as those described below:
Municipal Obligations. Market rates of interest available with respect to
Municipal Obligations generally may be lower than those available with respect
to taxable securities, although the differences may be wholly or partially
offset by the effects of federal income tax on income derived from taxable
securities. The amount of available information about the financial condition of
issuers of Municipal Obligations may be less extensive than that for corporate
issuers with publicly traded securities, and the market for Municipal
Obligations may be less liquid than the market for corporate debt obligations.
Although the Portfolio's policy will generally be to hold Municipal Obligations
until their maturity, the relative illiquidity of some of the Portfolio's
securities may adversely affect the ability of the Portfolio to dispose of the
securities in a timely manner and at a fair price. The market for less liquid
securities tends to be more volatile than the market for more liquid securities
and market values of relatively illiquid securities may be more susceptible to
change as a result of adverse publicity and investor perceptions than are the
market values of more liquid securities. Although the issuer of certain
Municipal Obligations may be obligated to redeem the obligations at face value,
redemption could result in capital losses to the Portfolio to the extent that
the Municipal Obligations were purchased by the Portfolio at a premium to face
value.
Although the municipal obligations in which the Portfolio may invest will
be, at the time of investment, rated investment grade, municipal securities,
like other debt obligations, are subject to the risk of non-payment by their
issuers. The ability of issuers of Municipal Obligations to make timely payments
of interest and principal may be adversely affected in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among federal, state and local governmental units. Non-payment by an
issuer would result in a reduction of income to the Portfolio, and could result
in a reduction in the value of the Municipal Obligations experiencing
non-payment and a potential decrease in the net asset value of the Portfolio.
Unrated Securities. The Portfolio may invest in unrated securities that the
Investment Manager determines to be of comparable quality to the rated
securities
14
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
in which the Portfolio may invest. Dealers may not maintain daily markets in
unrated securities and retail secondary markets for many of them may not exist.
As a result, the Portfolio's ability to sell these securities when the
Investment Manager deems it appropriate may be diminished.
Municipal Leases. Municipal leases in which the Portfolio may invest have
special risks not normally associated with Municipal Obligations. These
obligations frequently contain non-appropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under the
lease or contract unless money is appropriated for that purpose by a legislative
body annually or on another periodic basis. Moreover, although a municipal lease
typically will be secured by financed equipment or facilities, the disposition
of the equipment or facilities in the event of foreclosure might prove
difficult.
Non-Publicly Traded Securities. As suggested above, the Portfolio may, from
time to time, invest a portion of its assets in non-publicly traded Municipal
Obligations. Non-publicly traded securities may be less liquid than publicly
traded securities. Although non-publicly traded securities may be resold in
privately negotiated transactions, the prices realized from these sales could be
less than those originally paid by the Portfolio.
When-Issued and Delayed Delivery Transactions. Securities purchased on a
when-issued or delayed delivery basis may expose the Portfolio to risk because
the securities may experience fluctuations in value prior to their delivery.
Purchasing securities on a when-issued or delayed delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Lending Securities. The risks associated with lending Portfolio securities,
as with other extensions of credit, consist of possible loss of rights in the
collateral should the borrower fail financially.
Financial Futures and Options. Although the Portfolio intends to enter into
financial futures contracts and options on financial futures contracts that are
traded on a U.S. exchange or board of trade only if an active market exists for
those instruments, no assurance can be given that an active market will exist
for them at any particular time. If closing a futures position in anticipation
of adverse price movements is not possible, the Portfolio would be required to
make daily cash payments of variation margin. In those circumstances, an
increase in the value of the portion of the Portfolio's investments being
hedged, if any, may offset partially or completely losses on the futures
contract. No assurance can be given, however, that the price of the securities
being hedged will correlate with the price movements in a futures contract and,
thus, provide an offset to losses on the futures contract or option on the
futures contract. In addition, in light of the risk of an imperfect correlation
between securities held by the Portfolio that are the subject of a hedging
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
transaction and the futures or options used as a hedging device, the hedge may
not be fully effective because, for example, losses on the securities held by
the Portfolio may be in excess of gains on the futures contract or losses on the
futures contract may be in excess of gains on the securities held by the
Portfolio that were the subject of the hedge. If the Portfolio has hedged
against the possibility of an increase in interest rates adversely affecting the
value of securities it holds and rates decrease instead, the Portfolio will lose
part or all of the benefit of the increased value of securities that it has
hedged because it will have offsetting losses in its futures or options
positions.
Non-Diversified Classification. Investment in the Portfolio, which is
classified as a non-diversified fund under the 1940 Act, may present greater
risks to investors than an investment in a diversified fund. The investment
return on a non-diversified fund typically is dependent upon the performance of
a smaller number of securities relative to the number of securities held in a
diversified fund. The Portfolio's assumption of large positions in the
obligations of a small number of issuers will affect the value of the securities
it holds to a greater extent than that of a diversified fund in the event of
changes in the financial condition, or in the market's assessment, of the
issuers.
INVESTMENT RESTRICTIONS
The Portfolio has adopted certain fundamental investment restrictions that
may not be changed without the prior approval of the holders of a majority of
the Portfolio's outstanding voting securities. A "majority of the Portfolio's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the shares of the Portfolio's Common Stock present at a meeting of
shareholders, if the holders of 50% of the outstanding shares are present or
represented by proxy at the meeting or (2) more than 50% of the outstanding
shares. Among the investment restrictions applicable to the Portfolio is that
the Portfolio is prohibited from borrowing money, except for temporary or
emergency purposes, or for clearance of transactions, in amounts not exceeding
15% of its total assets (not including the amount borrowed) and as otherwise
described in this Prospectus -- when the Portfolio's borrowings exceed 5% of the
value of its total assets, the Portfolio will not make any additional
investments. In addition, the Portfolio will not invest more than 25% of its
total assets in the securities of issuers in any single industry, except that
this limitation will not be applicable to the purchase of U.S. government
securities. Also, the Portfolio may not purchase securities other than Municipal
Obligations and Taxable Investments. For a complete listing of the investment
restrictions applicable to the Portfolio, see "Investment Restrictions" in the
SAI. All percentage limitations included in the investment restrictions apply
immediately after a purchase or initial investment, and any subsequent change in
any applicable percentage resulting from market fluctuations will not require
the Portfolio to dispose of any security that it holds.
16
<PAGE>
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Net Asset Value
- --------------------------------------------------------------------------------
The Portfolio's net asset value will be calculated as of the close of
regular trading on the NYSE, currently 4:00 p.m., New York time, on the last day
on which the NYSE is open for trading of each week and month. Net asset value is
calculated by dividing the value of the Portfolio's net assets (the value of its
assets less its liabilities, exclusive of capital stock and surplus) by the
total number of shares of Common Stock outstanding. Investments in U.S.
Government securities having a maturity of 60 days or less are valued at
amortized cost. All other securities and assets are taken at fair value as
determined in good faith by or under the direction of the Board of Directors.
The valuation of the Portfolio's assets is made by the Investment Manager
after consultation with an independent pricing service (the "Service") approved
by the Board of Directors. When, in the judgment of the Service, quoted bid
prices for investments are readily available and are representative of the bid
side of the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments for which, in the judgment of the
Service, no readily obtainable market quotation is available (which may
constitute a majority of the Portfolio's portfolio securities), are carried at
fair value as determined by the Service. The Service may use electronic data
processing techniques and/or a matrix system to determine valuations. The
procedures of the Service are reviewed periodically by the officers of the
Portfolio under the general supervision and responsibility of the Board of
Directors, which may replace the Service at any time if it determines it to be
in the best interests of the Portfolio to do so.
- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------
The Common Stock is listed on the NYSE under the symbol "MMU." Smith Barney
intends to make a market in the Portfolio's Common Stock.
The following table sets forth the high and low sales prices for the Common
Stock, the net asset value per share and the discount or premium to net asset
value represented by the quotation for each quarterly period since the
Portfolio's commencement of operations.
17
<PAGE>
- --------------------------------------------------------------------------------
Share Price Data (continued)
- --------------------------------------------------------------------------------
Quarterly High Price Quarterly Low Price
-------------------- -------------------
Net Asset NYSE Discount Net Asset NYSE Discount
Value Price to NAV Value Price to NAV
================================================================================
5/31/95 $ 12.41 $11.250 (9.35)% $ 12.32 $10.630 (13.72)%
8/31/95 12.42 12.250 (1.37) 12.49 11.500 (7.93)
11/30/95 12.67 12.625 (0.36) 12.30 11.625 (5.49)
2/28/96 12.83 12.625 (1.60) 12.62 11.875 (5.90)
5/31/96 12.68 12.250 (3.39) 12.11 11.125 (8.13)
8/31/96 12.28 12.000 (2.28) 11.97 11.375 (4.97)
11/30/96 12.510 11.875 (5.08) 12.030 11.500 (4.41)
2/28/97 12.370 12.000 (2.99) 11.880 11.125 (6.36)
5/31/97 11.930 11.875 (0.46) 11.570 11.250 (2.77)
8/31/97 12.430 12.188 (1.95) 12.020 11.625 (3.29)
================================================================================
As of September 5, 1997, the price of Common Stock as quoted on the NYSE
was $11.750, representing a 3.85% discount from the Common Stock's net asset
value calculated on that day.
- --------------------------------------------------------------------------------
Taxation
- --------------------------------------------------------------------------------
The following is a summary of the material federal tax considerations
affecting the Portfolio and Portfolio shareholders, please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local, 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
consequences of any investment.
The Portfolio has qualified and intends to qualify, as it has in prior
years, under Subchapter M of the Code for tax treatment as a regulated
investment company. In each taxable year that the Portfolio qualifies, so long
as such qualification is in the best interests of its shareholders, the
Portfolio will pay no federal income tax on its net investment income and
long-term capital gain that is distributed to shareholders. The Portfolio also
intends to satisfy conditions that will enable it to pay "exempt-interest
dividends" to shareholders. Exempt-interest dividends are generally not subject
to regular federal income taxes, but, may be considered taxable for state
and local income (or intangible) tax purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's alternative minimum tax
computation. In addition to the alternative minimum tax, corporate share holders
must include 75% of the interest as an adjustment
(the "current earnings adjustment")
in computing corporate minimum taxable income.
Exempt-interest dividends derived
18
<PAGE>
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Taxation (continued)
- --------------------------------------------------------------------------------
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 borrowings made to
purchase, or carry Portfolio shares, are not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and, all, or a portion
of, any gains realized from the sale or other disposition of certain market
discount bonds are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Portfolio shares. The recently enacted Taxpayer Relief Act
of 1997 provides that net capital gain, for taxpayers other than
corporations, generally will not be subject to federal income taxes at a rate in
excess of 28% for assets held for more than one year but not more than
18 months, with a reduced maximum rate of 20% for assets held more
than 18 months..
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Portfolio shares.
None of the dividends paid by the Portfolio will qualify for the corporate
dividends received deduction. The Portfolio will inform shareholders of the
source and tax status of all distributions, including their eligiblity for
the reduced maximum 20% capital gains tax rate, promptly after the close
of each calendar year.
The Portfolio is required to withhold ("backup withholding") 31% of all
taxable dividends, capital gain distributions, and the proceeds of any
redemption, regardless of whether gain or loss is realized upon the redemption,
for shareholders who do not provide the Portfolio with a correct taxpayer
identification number (social security or employer identification number).
Withholding from taxable dividends and capital gain distributions also is
required for shareholders who otherwise are subject to backup withholding. Any
tax withheld as a result of backup withholding does not constitute an additional
tax, and may be claimed as a credit on the shareholders' federal income tax
return.
- --------------------------------------------------------------------------------
Management of the Portfolio
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Portfolio
rests with the Portfolio's Board of Directors. The Directors approve all
significant
19
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Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
agreements with the Portfolio's investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to the Portfolio's Investment Manager. The SAI contains background
information regarding each Director and executive officer of the Portfolio.
INVESTMENT MANAGER AND ADMINISTRATOR
SBMFM, through its Greenwich Street Advisors division, located at 388
Greenwich Street, New York, New York 10013, serves as the Portfolio's investment
manager. The Investment Manager, through its predecessors, has been in the
investment counseling business since 1934 and renders investment advice to a
wide variety of individual, institutional and investment company clients with
aggregate assets under management in excess of $81 billion. The Investment
Manager is wholly-owned by Smith Barney Holdings Inc. ("Holdings"), the parent
company of Smith Barney. Holdings is a wholly-owned subsidiary of Travelers
Group Inc. ("Travelers"), a financial service holdings company engaged through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. SBMFM, Smith Barney Holdings Inc. and Smith Barney are
located at 388 Greenwich Street, New York, New York 10013.
Subject to the supervision and direction of the Portfolio's Board of
Directors, the Investment Manager manages the securities held by the Portfolio
in accordance with the Portfolio's stated investment objective and policies,
makes investment decisions for the Portfolio, places orders to purchase and sell
securities on behalf of the Portfolio and employs managers and securities
analysts who provide research services to the Portfolio. The Portfolio pays the
Investment Manager a fee for services provided to the Portfolio that is computed
daily and paid monthly at the annual rate of 0.70% of the value of the
Portfolio's average daily net assets. In addition, SBMFM serves as administrator
and is paid a fee by the Portfolio that is computed daily and paid monthly at a
rate of 0.20% of the value of the Portfolio's average daily net assets.
Transactions on behalf of the Portfolio are allocated to various dealers by
the Investment Manager in its best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for their research, statistical
or other services to enable the Investment Manager to supplement its own
research and analysis with the views and information of other securities firms.
The Portfolio may use Smith Barney or a Smith Barney-affiliated broker in
connection with the purchase or sale of securities when the Investment Manager
believes that the broker's charge for the transaction does not exceed usual and
customary levels. The same standard applies to the use of Smith Barney as a
broker in connection with entering into options and futures contracts. The
Portfolio paid no brokerage commissions in the last fiscal year.
20
<PAGE>
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Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
Joseph P. Deane, Vice President and Investment Officer of the Portfolio, is
primarily responsible for the management of the Portfolio's assets. Mr. Deane
has served in this capacity since the Portfolio commenced operations in 1992 and
manages the day-to-day operations of the Portfolio, including making all
investment decisions. Mr. Deane is an Investment Officer of SBMFM and is the
senior asset manager for a number of investment companies and other accounts
investing in tax-exempt securities.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Portfolio expects to pay monthly dividends of substantially all net
investment income (that is, income (including its tax-exempt income and its
accrued original issue discount income) other than net realized capital gains)
to the holders of Common Stock. Under the Portfolio's current policy, which may
be changed at any time by its Board of Directors, the Portfolio's monthly
dividends will be made at a level that reflects the past and projected
performance of the Portfolio, which policy over time will result in the
distribution of all net investment income of the Portfolio. Net income of the
Portfolio consists of all interest income accrued on the Portfolio's assets less
all expenses of the Portfolio. Expenses of the Portfolio are accrued each day.
Net realized capital gains, if any, will be distributed to the shareholders at
least once a year. Net income available for distribution will also be reduced by
dividends on any preferred stock.
Under the Portfolio's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose shares of Common Stock are registered in his or her own name
will have all distributions from the Portfolio reinvested automatically by First
Data as agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "Street Name") will be reinvested by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. Investors who own Common Stock registered in Street Name should consult
their broker-dealers for details regarding reinvestment. All distributions to
Portfolio shareholders who do not participate in the Plan will be paid by check
mailed directly to the record holder by or under the direction of First Data as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds the net asset value
per share at the time shares are valued for purposes of determining the number
of shares equivalent to the cash dividend or capital gains distribution, Plan
participants
21
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
will be issued shares of Common Stock valued at the greater of (1) the net asset
value per share most recently determined as described under "Net Asset Value" or
(2) 95% of the then current market value. To the extent the Portfolio issues
shares to participants in the Plan at a discount to net asset value, the
remaining shareholders' interests in the Portfolio's net assets will be
proportionately diluted.
If the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock or if the Portfolio declares a
dividend or capital gains distribution payable only in cash, First Data will buy
Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts. If, following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Portfolio to issue the remaining dividend or distribution in
shares at a price equal to the greater of (a) net asset value or (b) 95% of the
then-current market price. In this case, the number of shares of Common Stock
received by a Plan participant will be based on the weighted average of prices
paid for shares purchased in the open market and the price at which the
Portfolio issues the remaining shares. To the extent First Data is unable to
stop open market purchases and cause the Portfolio to issue the remaining
shares, the average per share purchase price paid by First Data may exceed the
net asset value of the Common Stock, resulting in the acquisition of fewer
shares than if the dividend or capital gains distribution had been paid in
Common Stock issued by the Portfolio at net asset value. First Data will begin
to purchase Common Stock on the open market as soon as practicable after the
record date of the dividend or capital gains distribution, but in no event later
than 30 days after the payment date therefor, except when necessary to comply
with applicable provisions of the federal securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of each Plan participant, and
each shareholder's proxy will include those shares purchased pursuant to the
Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. First Data's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Portfolio. No
brokerage charges apply with respect to shares of Common Stock issued directly
by the Portfolio as a result of dividends or capital gains distributions payable
either in Common Stock or in cash. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to open
market purchases made in connection with the reinvestment of dividends or
capital gains distributions.
22
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
Experience under the Plan may indicate that changes to it are desirable.
The Portfolio reserves the right to amend or terminate the Plan as applied to
any dividend or capital gains distribution paid subsequent to written notice of
the change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Portfolio's prior written consent, on at
least 30 days' written notice to Plan participants. All correspondence
concerning the Plan should be directed by mail to First Data Investor Services
Group, P.O. Box 5128, Westborough, Massachusetts 01581-5128 or by telephone at
(617) 573-9300.
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
and Market Discount
- --------------------------------------------------------------------------------
ANTI-TAKEOVER PROVISIONS
The Portfolio presently has provisions in its Articles of Incorporation and
Bylaws (commonly referred to as "anti-takeover" provisions) which may have the
effect of limiting the ability of other entities or persons to acquire control
of the Portfolio, to cause it to engage in certain transactions or to modify its
structure.
The Board of Directors is classified into three classes, each with a term
of three years with only one class of directors standing for election in any
year. Such classification may prevent replacement of a majority of the directors
for up to a two-year period. Directors may be removed from office only for cause
by vote of at least 75% of the shares entitled to be voted on the matter. In
addition, unless 70% of the Board of Directors approves the transaction, the
affirmative vote of the holders of at least 75% of the shares will be required
to authorize the Portfolio's conversion from a closed-end to an open-end
investment company, or generally to authorize any of the following transactions:
(i) merger, consolidation or share exchange of the Portfolio with or into any
other corporation; (ii) dissolution or liquidation of the Portfolio; (iii) sale,
lease, exchange or other disposition of all or substantially all of the assets
of the Portfolio; (iv) change in the nature of the business of the Portfolio so
that it would cease to be an investment company registered under the 1940 Act;
or (v) sale, lease or exchange to the Portfolio, in exchange for securities of
the Portfolio, of any assets of any entity or person (except assets having an
aggregate fair market value of less than $1,000,000). The affirmative vote of at
least 75% of the shares will be required to amend the Articles of Incorporation
or Bylaws to change any of the foregoing provisions.
The percentage votes required under these provisions, which are greater
than the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Portfolio's business or management and may have the
23
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Certain Provisions of the Articles of Incorporation
and Market Discount (continued)
- --------------------------------------------------------------------------------
effect of depriving shareholders of an opportunity to sell shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Portfolio in a tender offer or similar transaction. The
Portfolio's Board of Directors, however, has considered these anti-takeover
provisions and believes they are in the best interests of shareholders.
MARKET DISCOUNT
Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium. Shares
of closed-end investment companies investing primarily in fixed-income
securities tend to trade on the basis of income yield on the market price of the
shares and the market price may also be affected by trading volume, general
market conditions and economic conditions and other factors beyond the control
of the Portfolio. As a result, the market price of the Portfolio's shares may be
greater or less than the net asset value. Since the commencement of the
Portfolio's operations, the Portfolio's shares have traded in the market at
prices that were at times equal to, but generally were below, net asset value.
Some closed-end investment companies have taken certain actions, including
the repurchase of common stock in the market at market prices and the making of
one or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value.
The Portfolio's Board of Directors has seen no reason to adopt any of the
steps, which some other closed-end Portfolios have used to address the discount.
In addition, the experience of many closed-end funds suggests that the effect of
many of these steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, there can be no assurance that any of these actions
will be taken or, if undertaken, will cause the Portfolio's shares to trade at a
price equal to their net asset value.
- --------------------------------------------------------------------------------
Description of Common Stock
- --------------------------------------------------------------------------------
Amount Outstanding
Exclusive of Shares
Amount Held Held by Portfolio for
by Portfolio for its Own Account as of
Title of Class Amount Authorized its Own Account September 5, 1997
================================================================================
Common Stock 500,000,000 Shares -- 34,564,283
No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock have equal
non-cumulative voting
24
<PAGE>
- --------------------------------------------------------------------------------
Description of Common Stock (continued)
- --------------------------------------------------------------------------------
rights and equal rights with respect to dividends, assets and liquidations.
Shares of Common Stock will be fully paid and non-assessable when issued and
have no preemptive, conversion or exchange rights. A majority of the votes cast
at any meeting of shareholders is sufficient to take or authorize action, except
for election of Directors or as otherwise provided in the Portfolio's Articles
of Incorporation as described under "Certain Provisions of the Articles of
Incorporation and Market Discount."
Under the rules of the NYSE applicable to listed companies, the Portfolio
will be required to hold an annual meeting of shareholders in each year. If the
Portfolio's shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of shareholders),
the Portfolio may decide not to hold annual meetings of shareholders.
The Portfolio has no current intention of offering additional shares,
except that additional shares may be issued under the Plan. See "Dividends and
Distributions; Dividend Reinvestment Plan." Other offerings of shares, if made,
will require approval of the Portfolio's Board of Directors and will be subject
to the requirement of the 1940 Act that shares may not be sold at a price below
the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the Portfolio's outstanding shares.
- --------------------------------------------------------------------------------
Custodian and Transfer Agent
- --------------------------------------------------------------------------------
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, acts as custodian of the Portfolio's
investments. First Data, located at One Exchange Place, Boston, Massachusetts
02109, serves as agent in connection with the Plan and serves as the Portfolio's
transfer agent, dividend-paying agent and registrar.
- --------------------------------------------------------------------------------
Experts
- --------------------------------------------------------------------------------
The audited financial statements have been incorporated by reference in the
SAI in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
and upon the authority of said firm as experts in accounting and auditing.
25
<PAGE>
- --------------------------------------------------------------------------------
Further Information
- --------------------------------------------------------------------------------
This Prospectus does not contain all of the information set forth in the
Registration Statement filed with the SEC. The complete Registration Statement
may be obtained from the SEC upon payment of the fee prescribed by its Rules and
Regulations.
No person has been authorized to give any information or make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Portfolio, the Portfolio's Investment Manager or Smith Barney. This
Prospectus does not constitute an offer to sell or a solicitation of any offer
to buy any security other than the shares of Common Stock offered by this
Prospectus, nor does it constitute an offer to sell or a solicitation of any
offer to buy the shares of Common Stock by anyone in any jurisdiction in which
the offer or solicitation would be unlawful. Neither the delivery of this
Prospectus nor any sale made hereunder will, under any circumstances, create any
implication that there has been no change in the affairs of the Portfolio since
the date of this Prospectus. If any material change occurs while this Prospectus
is required by law to be delivered, however, this Prospectus will be
supplemented or amended accordingly.
26
<PAGE>
[This page intentionally left blank]
27
<PAGE>
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
TYPES OF MUNICIPAL OBLIGATIONS
The Portfolio may invest in the following types of Municipal Obligations
and in such other types of Municipal Obligations.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued to obtain funds for various
public purposes. The two principal classifications of municipal bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or from another specific
source, such as the user of the facility being financed. Certain municipal bonds
are "moral obligation" issues, which normally are issued by special purpose
public authorities. In the case of such issues, an express or implied "moral
obligation" of a stated government unit is pledged to the payment of the debt
service but is usually subject to annual budget appropriations.
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS
Industrial development bonds ("IDBs") and private activity bonds ("PABs")
are municipal bonds issued by or on behalf of public authorities to finance
various privately operated facilities, such as airports or pollution control
facilities. IDBs and PABs generally do not carry the pledge of the credit of the
issuing municipality, but are guaranteed by the corporate entity on whose behalf
they are issued. IDBs and PABs are generally revenue bonds and thus are not
payable from the unrestricted revenue of the issuer. The credit quality of IDBs
and PABs is usually directly related to the credit standing of the user of the
facilities being financed.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are Municipal Obligations that may take the
form of leases, installment purchase contracts or conditional sales contracts,
or certificates of participation with respect to such contracts or leases.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing authority is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain Municipal Obligations, however, provide that lease payments are subject
to partial or full abatement if, because of material damage or destruction of
the leased property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance
A-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
by the lessee of reserve funds or the provision of credit enhancements such as
letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Portfolio's
Board of Directors determines on an on-going basis that the leases are readily
marketable. Certain municipal lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. In the case of a "non-appropriation" lease, the
Portfolio's ability to recover under the lease in the event of non-appropriation
or default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition of the
property in the event of foreclosure might be difficult. The Portfolio will not
invest more than 5% of its assets in such "non-appropriation" municipal lease
obligations.
ZERO COUPON OBLIGATIONS
The Portfolio may invest in zero coupon Municipal Obligations. Such
obligations include "pure zero" obligations, which pay no interest for their
entire life (either because they bear no stated rate of interest or because
their stated rate of interest is not payable until maturity), and "zero/fixed"
obligations, which pay no interest for an initial period and thereafter pay
interest currently. Zero coupon obligations also include securities representing
the principal-only components of Municipal Obligations from which the interest
components have been stripped and sold separately by the holders of the
underlying Municipal Obligations. Zero coupon securities usually trade at a deep
discount from their face or par value and will be subject to greater
fluctuations in market value in response to changing rates than obligations of
comparable maturity that make current distributions of interest. While zero
coupon Municipal Obligations will not contribute to the cash available to the
Portfolio, SBMFM believes that limited investments in such securities may
facilitate the Portfolio's ability to preserve capital while generating
tax-exempt income through the accrual of original interest discount. Zero coupon
Municipal Obligations generally are liquid, although such liquidity may be
reduced from time to time due to interest rate volatility and other factors.
FLOATING RATE OBLIGATIONS
The Portfolio may purchase floating and variable rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obligations under the demand feature of such notes and bonds generally
are secured by bank letters of credit or other credit support arrangements.
There frequently will be
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
no secondary market for variable and floating rate obligations held by the
Portfolio, although the Portfolio may be able to obtain payment of principal at
face value by exercising the demand feature of the obligation.
PARTICIPATION INTERESTS
The Portfolio may invest up to 5% of its total assets in participation
interests in municipal bonds, including IDBs, PABs and floating and variable
rate securities. A participation interest gives the Portfolio an undivided
interest in a municipal bond owned by a bank. The Portfolio has the right to
sell the instrument back to the bank. If the participation interest is unrated,
it will be backed by an irrevocable letter of credit or guarantee of a bank that
the Portfolio's Board of Directors has determined meets certain credit quality
standards or the payment obligation will otherwise be collateralized by U.S.
government securities. The Portfolio will have the right, with respect to
certain participation interests, to draw on the letter of credit on demand,
after specified notice for all or any part of the principal amount of the
Portfolio's participation interest, plus accrued interest. Generally, the
Portfolio intends to exercise the demand under the letters of credit or other
guarantees only upon a default under the terms of the underlying bond, or to
maintain the Portfolio's assets in accordance with its investment objective and
policies. The ability of a bank to fulfill its obligations under a letter of
credit or guarantee might be affected by possible financial difficulties of its
borrowers, adverse interest rate or economic conditions, regulatory limitations
or other factors. SBMFM will monitor the pricing, quality and liquidity of the
participation interests held by the Portfolio and the credit standing of the
banks issuing letters of credit or guarantees supporting such participation
interests on the basis of published financial information reports of rating
services and bank analytical services.
CUSTODIAL RECEIPTS
The Portfolio may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain Municipal Obligations. The
underwriter of these certificates or receipts typically purchases Municipal
Obligations and deposits the obligations 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 obligations. Custodial receipts evidencing specific
coupon or principal payments have the same economic attributes as zero coupon
Municipal Obligations described above. Although under the terms of the custodial
receipt the Portfolio would be typically authorized to assert its rights
directly against the issuer of the underlying obligation, the Portfolio could be
required to assert through the custodian bank those rights that may exist
against the underlying issuer. Thus, in the event the underlying issuer
A-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
fails to pay principal or interest when due, the Portfolio may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Portfolio had purchased a direct obligation 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 non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes paid.
MUNICIPAL OBLIGATION COMPONENTS
The Portfolio may invest in Municipal Obligations, the interest rate on
which has been divided by the issuer into two different and variable components,
which together result in a fixed interest rate. Typically, the first of the
components (the "Auction Component") pays an interest rate that is reset
periodically through an auction process, whereas the second of the components
(the "Residual Component") pays a residual interest rate based on the difference
between the total interest paid by the issuer on the Municipal Obligation and
the auction rate paid on the Auction Component. The Portfolio may purchase both
Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
component holders will decrease as the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the extent of the
increases and decreases in market value of Residual Components may be larger
than comparable changes in the market value of an equal principal amount of a
fixed rate Municipal Obligation having similar credit quality, redemption
provisions and maturity.
A-4
<PAGE>
- --------------------------------------------------------------------------------
Appendix B
- --------------------------------------------------------------------------------
Tax-Exempt Income Compared to Taxable Income
The tables below show individual taxpayers how to translate the tax savings
from investments such as the Portfolio into an equivalent return from a taxable
investment. The yields used below are for illustration only and are not intended
to represent current or future yields for the Portfolio, which may be higher or
lower than those shown.
<TABLE>
<CAPTION>
Federal
Marginal Tax-Exempt Rate
Taxable Income Rate* 2.0% 3.0% 4.0% 5.0% 6.0% 7.0%
============================================================================================
Equivalent Taxable Yield
Single Joint -------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0 - 24,0000 $ 0 - 40,1000 15.0% 2.35% 3.53% 4.71% 5.88% 7.06% 8.24%
24,001 - 58,150 40,101 - 96,9000 28.0 2.78 4.17 5.56 6.94 8.33 9.72
58,151 - 121,300 96,901 - 147,700 31.0 2.90 4.35 5.80 7.25 8.70 10.14
121,301 - 263,750 147,701 - 263,750 36.0 3.13 4.69 6.25 7.81 9.38 10.94
over 263,750 over 263,750 39.6 3.31 4.97 6.62 8.28 9.93 11.59
============================================================================================
</TABLE>
* The Federal tax rates shown are those currently in effect for 1997. The
calculations assume that no income will be subject to the federal
alternative minimum tax.
B-1
<PAGE>
Smith Barney
------------
A Member of TravelersGroup[Logo]
Managed
Municipals
Portfolio Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD01205 9/97
PART B. STATEMENT OF ADDITIONAL INFORMATION
Managed Municipals Portfolio Inc.
388 Greenwich Street
New York, New York 10013
800-451-2010
Statement of Additional Information
September 26, 1997
Managed Municipals Portfolio Inc. (the "Portfolio") is a
non-diversified, closed-end management investment company that
seeks as high a level of current income exempt from federal income
tax as is consistent with the preservation of principal. Under
normal conditions, the Portfolio will, in seeking its investment
objective, invest substantially all of its assets in long-term,
investment grade obligations issued by state and local governments
political subdivisions, agencies and public authorities
("Municipal Obligations"). No assurance can be given that the
Portfolio will be able to achieve its investment objective.
This Statement of Additional Information ("SAI") expands
upon and supplements the information contained in the current
Prospectus of the Portfolio, dated September 26, 1997, as amended
or supplemented from time to time (the "Prospectus"), and should
be read in conjunction with the Prospectus. The Prospectus may be
obtained from any Smith Barney Financial Consultant or by writing
or calling the Portfolio at the address or telephone number set
forth above. This SAI, although not itself a prospectus, is
incorporated by reference into the Prospectus in its entirety.
No person has been authorized to give any information or to
make any representations not contained in the Prospectus or this
SAI and, if given or made, such information must not be relied
upon as having been authorized by the Portfolio or the Portfolio's
investment adviser. The Prospectus and this SAI do not constitute
an offer to sell or a solicitation of any offer to buy any
security other than the shares of Common Stock. The Prospectus
and this SAI do not constitute an offer to sell or a solicitation
of an offer to buy the shares of Common Stock by anyone in any
jurisdiction in which such offer or solicitation would be
unlawful. Neither the delivery of the Prospectus nor any sale
made hereunder shall, under any circumstances, create any
implication that there has been no change in the affairs of the
Portfolio since the date hereof. If any material change occurs
while the Prospectus is required by law to be delivered however,
the Prospectus or this SAI will be supplemented or amended
accordingly.
TABLE OF CONTENTS PAGE
Investment Objective and Policies (see in the Prospectus
"Investment Objective and Policies" and "Appendix A") 2
Management of the Portfolio (see in the Prospectus "Management of
the Portfolio") 13
Taxes (see in Prospectus "Taxation") 18
Stock Purchases and Tenders (see in the Prospectus "Description
of Common Stock") 22
Certian Provisions of the Articles of Incorporation (see in the
Prospectus "Certian Provisions of the Articles of Incorporation
and Market Discount") 23
Additional Information (see in the Prospectus "Custodian and
Transfer Agent") 24
Financial Statements 25
Appendix-- Description of Moody's Investors Service,
Inc.("Moody's"), Standard & Poors Ratings Group ("S&P") and Fitch
Investors Service, L.P. ("Fitch") Ratings 26
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the Portfolio's investment
objective and the policies it employs to achieve that objective.
The following discussion supplements the description of the
Portfolio's investment policies in the Prospectus. The
Portfolio's investment objective is high tax-exempt current income
by investing substantially all of its assets in a variety of
obligations issued by or on behalf of states, territories and
possessions of the United States and the District of Columbia and
their political subdivisions, agencies and instrumentalities or
multistate agencies or authorities ("Municipal Obligations"). The
Portfolio's investment objective may not be changed without the
affirmative vote of the holders of a majority (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of
the Portfolio's outstanding voting shares. No assurance can be
given that the Portfolio's investment objective will be achieved.
Use of Ratings as Investment Criteria
In general, the ratings of Moody's, S&P and Fitch represent
the opinions of those agencies as to the quality of the Municipal
Obligations and long-term investments which 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 as initial criteria for the selection of securities, but the
Portfolio also will rely upon the independent advice of its
investment adviser, Greenwich Street Advisors a division of Smith
Barney Mutual Funds Management Inc. (the "Investment Manager").
Among the factors that will also be considered by the Investment
Manager in evaluating potential Municipal Obligations to be held
by the Portfolio are the price, coupon and yield to maturity of
the obligations, the Investment Manager's assessment of the credit
quality of the issuer of the obligations, the issuer's available
cash flow and the related coverage ratios, the property, if any,
securing the obligations, and the terms of the obligations,
including subordination, default, sinking fund and early
redemption provisions. To the extent the Portfolio invests in
lower-rated and comparable unrated securities, the Portfolio's
achievement of its investment objective may be more dependent on
the Investment Manager's credit analysis of such securities than
would be the case for a portfolio consisting entirely of higher-
rated securities. The Appendix to this SAI contains information
concerning the ratings of Moody's, S&P and Fitch and their
significance.
Subsequent to its purchase by the Portfolio, an issue of
Municipal Obligations may cease to be rated or its rating may be
reduced below the rating given at the time the securities were
acquired by the Portfolio. Neither event will require the sale of
such Municipal Obligations by the Portfolio, but the Investment
Manager will consider such event in its determination of whether
the Portfolio should continue to hold the Municipal Obligations.
In addition, to the extent the ratings change as a result of
changes in the rating systems or due to a corporate restructuring
of Moody's, S&P or Fitch the Portfolio will attempt to use
comparable ratings as standards for its investments in accordance
with its investment objectives and policies.
The Portfolio will seek to invest substantially all of its
assets in Municipal Obligations, and under normal conditions at
least 80% of the Portfolio's total assets will be invested in
investment grade Municipal Obligations.
The Portfolio may invest in Municipal Obligations rated as
low as Baa by Moody's, BBB by S&P or BBB by Fitch or in unrated
Municipal Obligations deemed to be of comparable quality.
Although such securities are considered investment grade, they may
be subject to greater risks than other higher-rated investment
grade securities.
While the market for Municipal Obligations is considered to
be generally adequate, the existence of limited markets for
particular lower-rated and comparable unrated securities may
diminish the Portfolio's ability to (1) obtain accurate market
quotations for purposes of valuing such securities and calculating
its net asset value and (2) sell the securities at fair value to
respond to changes in the economy or in the financial markets.
The market for certain lower-rated and comparable unrated
securities is relatively new and has not fully weathered a major
economic recession. Any such economic downturn could adversely
affect the ability of the issuers of such securities to repay
principal and pay interest thereon.
Taxable Investments
Under normal conditions the Portfolio may hold up to 20% of
its assets in cash or money market instruments including taxable
money market instruments (collectively, "Taxable Investments").
Money market instruments in which the Portfolio may invest
include: U.S. government securities; tax-exempt notes of municipal
issuers rated, at the time of purchase no lower than MIGI by
Moody's, SP-1 by S&P or F-1 by Fitch or, if not rated by issuers
having outstanding unsecured debt then rated within the three
highest rating categories; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of
domestic banks, domestic savings and loan associations and similar
institutions); commercial paper rated no lower than P-1 by
Moody's, A-1 by S&P or F-l by Fitch or the equivalent from another
nationally recognized rating service or, if unrated, of an issuer
having an outstanding, unsecured debt issue then rated within the
three highest rating categories; and repurchase agreements. At no
time will the Portfolio's investments in bank obligations,
including time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Portfolio may invest
include direct obligations of the United States and obligations
issued by U.S. government agencies and instrumentalities.
Included among direct obligations of the United States are
Treasury bills, Treasury notes and Treasury bonds, which differ
principally in terms of their maturities. Included among the
securities issued by U.S. government agencies and
instrumentalities are: securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such
as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality (such as Federal
National Mortgage Association and Federal Home Loan Mortgage
Corporation bonds).
Lending Securities
By lending its securities, the Portfolio can increase its
income by continuing to receive interest on the loaned securities,
by investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when
U.S. government securities are used as collateral. The Portfolio
will adhere to the following conditions whenever it lends its
securities: (1) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower, which will
be maintained by daily marking-to-market; (2) the borrower must
increase the collateral whenever the market value of the
securities loaned rises above the level of the collateral; (3) the
Portfolio must be able to terminate the loan at any time; (4) the
Portfolio must receive reasonable interest on the loan, as well as
any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (5) the Portfolio
may pay only reasonable custodian fees in connection with the
loan; and (6) voting rights on the loaned securities may pass to
the borrower, except that, if a material event adversely affecting
the investment in the loaned securities occurs, the Portfolio's
Board of Directors must terminate the loan and retain the
Portfolio's right to vote the securities. From time to time, the
Portfolio may pay a part of the interest earned from the
investment of collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with the
Portfolio and that is acting as a "finder."
Repurchase Agreements
The Portfolio may enter into repurchase agreements with
certain member banks of the Federal Reserve System and certain
dealers on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase
agreement, the Portfolio would acquire an underlying debt
obligation for a relatively short period (usually not more than
one week) subject to an obligation of the seller to repurchase and
the Portfolio to resell the obligation at an agreed-upon price and
timer thereby determining the yield during the Portfolio's holding
period. Under each repurchase agreement, the selling institution
will be required to maintain the value of the securities subject
to the repurchase agreement at not less than their repurchase
price. The Investment Manager acting under the supervision of the
Portfolio's Board of Directors, reviews on an ongoing basis the
value of the collateral and the creditworthiness of those banks
and dealers with which the Portfolio enters into repurchase
agreements to evaluate potential risks. In entering into a
repurchase agreement) the Portfolio will bear a risk of loss in
the event that the other party to the transaction defaults on its
obligations and the Portfolio is delayed or prevented from
exercising its rights to dispose of the underlying securities,
including the risk of a possible decline in the value of the
underlying securities during the period in which the Portfolio
seeks to assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all
or a part of the income from the agreement.
Investments in Municipal Obligation Index and Interest Rate
Futures Contracts and Options on Interest Rate Futures Contracts
The Portfolio may invest in Municipal Obligation index and
interest rate futures contracts and options on interest rate
futures contracts that are traded on a domestic exchange or board
of trade. Such investments may be made by the Portfolio solely
for the purpose of hedging against changes in the value of its
portfolio securities due to anticipated changes in interest rates
and market conditions, and not for purposes of speculation.
Further, such investments will be made only in unusual
circumstances such as when the Investment Manager anticipates an
extreme change in interest rates or market conditions.
Municipal Obligation Index and Interest Rate Futures
Contracts. A Municipal Obligation index futures contract is an
agreement to take or make delivery of an amount of cash equal to a
specific dollar amount times the difference between the value of
the index at the close of the last trading day of the contract and
the price at which the index contract is originally written. No
physical delivery of the underlying Municipal Obligations in the
index is made. Interest rate futures contracts are contracts for
the future purchase or sale of specified interest rate sensitive
debt securities of the U.S. Treasury, such as U.S. Treasury bills,
bonds and notes, obligations of the Government National Mortgage
Association and bank certificates of deposit. Although most
interest rate futures contracts require the delivery of the
underlying securities, some settle in cash. Each contract
designates the price date, time and place of delivery.
The purpose of the Portfolio's entering into a Municipal
Obligation index or interest rate futures contract, as the holder
of long-term Municipal Obligations, is to protect the Portfolio
from fluctuation in interest rates on tax-exempt securities
without actually buying or selling Municipal Obligations. The
Portflio will, with respect to its purchases of financial futures
contracts establish a segregated account consisting of cash, U.S.
government securities, equity securites or debt securities of any
grade equal in an amount equal to or greater than the total
market value of the futures contracts less the amount of initial
margin on deposit for the contracts.
Unlike the purchase or sale of a Municipal Obligation, no
consideration is paid or received by the Portfolio upon the
purchase or sale of a futures contract. Initially, the Portfolio
will be required to deposit with the futures commission merchant
an amount of cash or cash equivalents equal to approximately 5% of
the contract amount (this amount is subject to change by the board
of trade on which the contract is traded and members of such board
of trade may charge a higher amount). This amount is known as
"initial margin" and is in the nature of a performance bond or
good faith deposit on the contract which is returned to the
Portfolio upon termination of the futures contract, assuming that
all contractual obligations have been satisfied. Subsequent
payments known as "variation margin", to and from the futures
commission merchant, will be made on a daily basis as the price of
the index or securities fluctuates making the long and short
positions in the futures contract more or less valuable, a process
known as marking-to-market. At any time prior to the expiration
of the contract, the Portfolio may elect to close the position by
taking an opposite position, which will operate to terminate the
Portfolio's existing position in the futures contract.
There are several risks in connection with the use of
Municipal Obligation index and interest rate futures contracts as
a hedging device. Successful use of these futures contracts by
the Portfolio is subject to the Investment Manager's ability to
predict correctly movements in the direction of interest rates.
Such predictions involve skills and techniques which may be
different from those involved in the management of a long-term
Municipal Obligation portfolio. In addition, there can be no
assurance that a correlation would exist between movements in the
price of the Municipal Obligation index or the debt security
underlying the futures contract and movement in the price of the
Municipal Obligations which are the subject of the hedge. The
degree of imperfection of correlation depends upon various
circumstances, such as variations in speculative market demand for
futures contracts and Municipal Obligations and technical
influences on futures trading. The Portfolio's Municipal
Obligations and the Municipal Obligations in the index may also
differ in such respects as interest rate levels, maturities and
creditworthiness of issuers. A decision of whether, when and how
to hedge involves the exercise of skill and judgment and even a
well-conceived hedge may be unsuccessful to some degree because of
market behavior or unexpected trends in interest rates.
Although the Portfolio intends to enter into futures
contracts only if an active market exists for such contracts,
there can be no assurance that an active market will exist for a
contract at any particular time, most domestic futures exchanges
and boards of trade limit the amount of fluctuation permitted in
futures contract prices during a single trading day. The daily
limit establishes the maximum amount the price of a futures
contract may vary either up or down from the previous day's
settlement price at the end of a trading session. Once the daily
limit has been reached in a particular contract, no trades may be
made that day at a price beyond that limit. The daily limit
governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may
prevent the liquidation of unfavorable positions. It is possible
that futures contract prices could move to the daily limit for
several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses. In such
event it will not be possible to close a futures position and in
the event of adverse price movements, the Portfolio would be
required to make daily cash payments of variation margin. In such
circumstances, an increase in the value of the portion of the
portfolio being hedged, if any, may partially or completely offset
losses on the futures contract. As described above, however,
there is no guarantee the price of Municipal Obligations will, in
fact, correlate with the price movements in a futures contract and
thus provide an offset to losses on a futures contract.
If the Portfolio has hedged against the possibility of an
increase in interest rates adversely affecting the value of
Municipal Obligations it holds and rates decrease instead, the
Portfolio will lose part or all of the benefit of the increased
value of the Municipal Obligations it has hedged because it will
have offsetting losses in its futures positions. In addition, in
such situations, if the Portfolio has insufficient cash, it may
have to sell securities to meet daily variation margin
requirements. Such sales of securities may, but will not
necessarily, be at increased prices which reflect the decline in
interest rates. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
Options on Interest Rate Futures Contracts. The Portfolio
may purchase put and call options on interest rate futures
contracts which are traded on a domestic exchange or board of
trade as a hedge against changes in interest rates, and may enter
into closing transactions with respect to such options to
terminate existing positions. The Portfolio will sell put and
call options on interest rate futures contracts only as part of
closing sale transactions to terminate its options positions.
There is no guarantee such closing transactions can be effected.
Options on interest rate futures contracts, as contrasted
with the direct investment in such contracts, give the purchaser
the right, in return for the premium paid, to assume a position in
interest rate futures contracts at a specified exercise price at
any time prior to the expiration date of the options. Upon
exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's
futures margin account, which represents the amount by which the
market price of the futures contract exceeds, in the case of a
call, or is less than, in the case of a put, the exercise price of
the option on the futures contract. The potential loss related to
the purchase of an option on interest rate futures contracts is
limited to the premium paid for the option (plus transaction
costs). Because the value of the option is fixed at the point of
sale, there are no daily cash payments to reflect changes in the
value of the underlying contract; however, the value of the option
does change daily and that change would be reflected in the net
asset value of the Portfolio.
There are several risks relating to options on interest rate
futures contracts. The ability to establish and close out
positions on such options will be subject to the existence of a
liquid market. In addition, the Portfolio's purchase of put or
call options will be based upon predictions as to anticipated
interest rate trends by the Investment Manager which could prove
to be inaccurate. Even if the Investment Manager's expectations
are correct, there may be an imperfect correlation between the
change in the value of the options and of the Portfolio's
securities.
Municipal Obligations
General Information. Municipal Obligations generally are
understood to include debt obligations issued to obtain funds for
various public purposes, including the construction of a wide
range of public facilities, refunding of outstanding obligations,
payment of general operating expenses and extensions of loans to
public institutions and facilities. Private activity bonds that
are issued by or on behalf of public authorities to obtain funds
to provide privately operated facilities are included within the
term Municipal Obligations if the interest paid thereon qualifies
as excludable from gross income (but not necessarily from
alternative minimum taxable income) for federal income tax
purposes in the opinion of bond counsel to the issuer.
The yields on Municipal Obligations are dependent upon a
variety of factors, including general economic and monetary
conditions, general money market conditions, general conditions of
the Municipal Obligations market, the financial condition of the
issuer, the size of a particular offering, the maturity of the
obligation offered and the rating of the issue. Municipal
Obligations are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if any,
that may be enacted by Congress or state legislatures extending
the time for payment of principal or interest, or both, or
imposing other constraints upon enforcement of the obligations or
upon the ability of municipalities to levy taxes. There is also
the possibility that as a result of litigation or other conditions
the power or ability of any one or more issuer to pay, when due,
principal of and interest on its, or their, Municipal Obligations
may be materially affected.
The net asset value of the Common Stock will change with
changes in the value of the Portfolio's securities. Because the
Portfolio will invest primarily in fixed-income securities, the
net asset value of the Common Stock can be expected to change as
levels of interest rates fluctuate; generally, when prevailing
interest rates increase, the value of fixed-income securities held
by the Portfolio can be expected to decrease and when prevailing
interest rates decrease, the value of the fixed-income securities
held by the Portfolio can be expected to increase. The value of
the fixed-income securities held by the Portfolio and thus the
Portfolio's net asset value, may also be affected by other
economic, market and credit factors.
From time to time, the Portfolio's investments may include
securities as to which the Portfolio, by itself or together with
other funds or accounts managed by the Investment Manager holds a
major portion or all of an issue of Municipal Obligations.
Because relatively few potential purchasers may be available for
these investments and, in some cases, contractual restrictions may
apply on resales, the Portfolio may find it more difficult to
sell these securities at a time when the Investment Manager
believes it is advisable to do so.
When-Issued Securities. The Portfolio may purchase
Municipal Obligations on a "when-issued" basis (i.e. for delivery
beyond the normal settlement date at a stated price and yield).
The payment obligation and the interest rate that will be received
on the Municipal Obligations purchased on a when-issued basis are
each fixed at the time the buyer enters into the commitment.
Although the Portfolio will purchase Municipal Obligations on a
when-issued basis only with the intention of actually acquiring
the securities, the Portfolio may sell these securities before the
settlement date if it is deemed advisable as a matter of
investment strategy.
Municipal Obligations are subject to changes in value based
upon the public's perception of the creditworthiness of the
issuers and changes, real or anticipated, in the level of interest
rates. In general, Municipal Obligations tend to appreciate when
interest rates decline and depreciate when interest rates rise.
Purchasing Municipal Obligations on a when-issued basis,
therefore, can involve the risk that the yields available in the
market when the delivery takes place actually may be higher than
those obtained in the transaction itself. To account for this
risk, a separate account of the Portfolio consisting of cash, U.S.
government securities, equity securities or debt securities of any
grade equal to or greater than the amount of the when-issued
commitments, provided such securities have been determined by the
Investment Manager to be liquid and unencumbered, and are marked
to market daily pursuant to guidelines established by the
Portfolio's Directors, will be established at the Portfolio's
custodian bank. For the purpose of determining the adequacy of
the securities in the account, the deposited securities will be
valued at market or fair value. If the market or fair value of
such securities declines additional cash or securities will be
placed in the account on a daily basis so that the value of the
account will equal the amount of such commitments by the
Portfolio. Placing securities rather than cash in the segregated
account may have a leveraging effect on the Portfolio's net
assets. That is, to the extent the Portfolio remains
substantially fully invested in securities at the same time it has
committed to purchase securities on a when-issued basis, there
will be greater fluctuations in its net assets than if it had set
aside cash to satisfy its purchase commitment. Upon the
settlement date of the when-issued securities, the Portfolio will
meet its obligation from then-available cash flow, sale of
securities held in the segregated account, sale of other
securities or, although it would not normally expect to do so,
from the sale of the when-issued securities themselves (which may
have a value greater or less than the Portfolio's payment
obligations). Sales of securities to meet such obligations may
involve the realization of capital gains, which are not exempt
from federal income taxes.
When the Portfolio engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure of the
seller to do so may result in the Portfolio's incurring a loss or
missing an opportunity to obtain a price considered to be
advantageous.
Municipal Leases. Municipal leases may take the form of a
lease or an installment purchase contract issued by state and
local government authorities to obtain funds to acquire a wide
variety of equipment and facilities such as fire and sanitation
vehicles computer equipment and other capital assets. These
obligations have evolved to make it possible for state and local
government authorities to acquire property and equipment without
meeting constitutional and statutory requirements for the issuance
of debt. Thus, municipal leases have special risks not normally
associated with Municipal Obligations. These obligations
frequently contain "non-appropriation" clauses providing that the
governmental issuer of the obligation has no obligation to make
future payments under the lease or contract unless money is
appropriated for such purposes by the legislative body on a yearly
or other periodic basis. In addition to the "non-appropriation"
risk, municipal leases represent a type of financing that has not
yet developed the depth of marketability associated with Municipal
Obligations, moreover, although the obligations will be secured by
the leased equipment, the disposition of the equipment in the
event of foreclosure might prove difficult.
To limit the risks associated with municipal leases, the
Portfolio will invest no more than 5% of its total assets in lease
obligations that contain non-appropriation clauses and will only
purchase a non-appropriation lease obligation with respect to
which (1) the nature of the leased equipment or other property is
such that its ownership or use is reasonably essential to a
governmental function of the issuing municipality (2) the lease
payments will begin to amortize the principal balance due at an
early date, resulting in an average life of five years or less for
the lease obligation, (3) appropriate covenants will be obtained
from the municipal obligor prohibiting the substitution or
purchase of similar equipment or other property if lease payments
are not appropriated, (4) the lease obligor has maintained good
market acceptability in the past, (5) the investment is of a size
that will be attractive to institutional investors and (6) the
underlying leased equipment or other property has elements of
portability and/or use that enhance its marketability in the event
that foreclosure on the underlying equipment or other property
were ever required.
Municipal leases that the Portfolio may acquire will be both
rated and unrated. Rated leases that may be held by the Portfolio
include those rated investment grade at the time of investment
(that is, rated no lower than Baa by Moody's, BBB by S&P or BBB by
Fitch). The Portfolio may acquire unrated issues that the
Investment Manager deems to be comparable in quality to rated
issues in which the Portfolio is authorized to invest. A
determination by the Investment Manager that an unrated lease
obligation is comparable in quality to a rated lease obligation
will be made on the basis of, among other things a consideration
of whether the nature of the leased equipment or other property is
such that its ownership or use is reasonably essential to a
governmental function of the issuing municipality. In addition,
all such determinations made by the Investment Manager will be
subject to oversight and approval by the Portfolio's Board of
Directors.
Municipal leases held by the Portfolio will be considered
illiquid securities unless the Portfolio's Board of Directors
determines on an ongoing basis that the leases are readily
marketable an unrated municipal lease with a non-appropriation
risk that is backed by an irrevocable bank letter of credit or an
insurance policy issued by a bank or insurer deemed by the
Investment Manager to be of high quality and minimal credit risk
is not deemed to be illiquid solely because the underlying
municipal lease is unrated if the Investment Manager determines
that the lease is readily marketable because it is backed by the
letter of credit or insurance policy.
Investment Restrictions
The Portfolio has adopted certain fundamental investment
restrictions that may not be changed without the prior approval of
the holders of a majority of the Portfolio's outstanding voting
securities. A "majority of the Portfolio's outstanding voting
securities" for this purpose means the lesser of (1) 67% or more
of the shares of the Portfolio's Common Stock present at a meeting
of shareholders, if the holders of 50% of the outstanding shares
are present or represented by proxy at the meeting or (2) more
than 50% of the outstanding shares. For purposes of the
restrictions listed below all percentage limitations apply
immediately after a purchase or initial investment, and any
subsequent change in applicable percentage resulting from market
fluctuations will not require elimination of any security from the
Portfolio. Under its fundamental restrictions, the Portfolio may
not:
1. Purchase securities other than Municipal Obligations and
Taxable Investments as those terms are described in the
Prospectus and this SAI.
2. Borrow money, except for temporary or emergency purposes, or
for clearance of transactions, and then only in amounts not
exceeding 15% of its total assets (not including the amount
borrowed) and as otherwise described in the Prospectus and
this SAI. When the Portfolio's borrowings exceed 5% of the
value of its total assets, the Portfolio will not make any
additional investments.
3. Sell securities short or purchase securities on margin,
except for such short-term credits as are necessary for the
clearance of transactions, but the Portfolio may make margin
deposits in connection with transactions in options futures
and options on futures.
4. Underwrite any issue of securities, except to the extent that
the purchase of Municipal Obligations may be deemed to be an
underwriting.
5. Purchase, hold or deal in real estate or oil and gas
interests except that the Portfolio may invest in Municipal
Obligations secured by real estate or interests in real
estate.
6. Invest in commodities, except that the Portfolio may enter
into futures contracts, including those relating to indexes
and options on futures contracts or indexes described in the
Prospectus and this SAI.
7. Lend any funds or other assets except through purchasing
Municipal Obligations or Taxable Investments, lending
portfolio securities and entering into repurchase agreements
consistent with the Portfolio's investment objective.
8. Issue senior securities.
9. Invest more than 25% of its total assets in the securities of
issuers in any single industry, except that this limitation
will not be applicable to the purchase of Municipal
Obligations and U.S. government securities.
10. Make any investments for the purpose of exercising control or
management of any company.
Portfolio Transactions
Newly issued securities normally are purchased directly from
the issuer or from an underwriter acting as principal. Other
purchases and sales usually are placed with those dealers from
which it appears the best price or execution will be obtained;
those dealers may be acting as either agents or principals. The
purchase price paid by the Portfolio to underwriters of newly
issued securities usually includes a concession paid by the issuer
to the underwriter, and purchases of after-market securities from
dealers normally are executed at a price between the bid and asked
prices. The Portfolio has paid no brokerage commissions since its
commencement of operations.
Allocation of transactions, including their frequency, to
various dealers is determined by the Investment Manager in its
best judgment and in a manner deemed fair and reasonable to
shareholders. The primary considerations are availability of the
desired security and the prompt execution of orders in an
effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment
research and statistical or other services to the Investment
Manager may receive orders for portfolio transactions by the
Portfolio. Information so received is in addition to, and not in
lieu of, services required to be performed by the Investment
Manager and the fees of the Investment Manager are not reduced as
a consequence of their receipt of such supplemental information.
Such information may be useful to the Investment Manager in
serving both the Portfolio and other clients and conversely,
supplemental information obtained by the placement of business of
other clients may be useful to the Investment Manager in carrying
out its obligations to the Portfolio.
The Portfolio will not purchase Municipal Obligations during
the existence of any underwriting or selling group relating
thereto of which Smith Barney Inc. ("Smith Barney") or its
affiliates are members except to the extent permitted by the
Securities and Exchange Commission (the "SEC"). Under certain
circumstances, the Portfolio may be at a disadvantage because of
this limitation in comparison with other investment companies
which have a similar investment objective but which are not
subject to such limitation.
While investment decisions for the Portfolio are made
independently from those of the other accounts managed by the
Investment Manager investments of the type the Portfolio may make
also may be made by those other accounts. When the Portfolio and
one or more other accounts managed by the Investment Manager 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 the Portfolio or the size of the
position obtained or disposed of by the Portfolio.
The Portfolio's Board of Directors will review periodically
the commissions paid by the Portfolio to determine if the
commissions paid over representative periods of time were
reasonable in relation to the benefits inuring to the Portfolio.
Portfolio Turnover
The Portfolio's portfolio turnover rate (the lesser of
purchases or sales of portfolio securities during the last fiscal
year, excluding purchases or sales of short-term securities,
divided by the monthly average value of portfolio securities)
generally is not expected to exceed 100%, but the portfolio
turnover rate will not be a limiting factor whenever the Portfolio
deems it desirable to sell or purchase securities. Securities may
be sold in anticipation of a rise in interest rates (market
decline) or purchased in anticipation of a decline in interest
rates (market rise) and later sold. In addition, a security may
be sold and another security of comparable quality may be
purchased at approximately the same time in order to take
advantage of what the Portfolio believes to be a temporary
disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not
directly related to the investment quality of particular issues or
the general movement of interest rates, such as changes in the
overall demand for or supply of various types often-exempt
securities. For the fiscal years ended May 31, 1995, 1996 and
1997, the Portfolio's portfolio turnover rate was 93%, 45% and
113%, respectively.
MANAGEMENT OF THE PORTFOLIO
The executive officers of the Portfolio are employees of
certain of the organizations that provide services to the
Portfolio. These organizations are as follows:
Name Service
Smith Barney Mutual Funds Management Inc. Investment Manager
and ("SBMFM") Administrator
Smith Barney Distributor
(Sponsor)
PNC Bank, National Association. Custodian
("PNC Bank")
First Data Investor Services Group, Inc. Transfer Agent
("First Data")
These organizations and the functions they perform for the
Portfolio are discussed in the Prospectus and this SAI.
Directors and Executive Officers of the Portfolio
The overall management of the business and affairs of the
Portfolio is vested with its Board of Directors. The Board of
Directors approves all significant agreements between the
Portfolio and persons or companies furnishing services to it,
including the Portfolio's agreements with its investment adviser,
administrator, custodian and transfer agent, dividend paying
agent, registrar and plan agent. The day-to day operations of the
Portfolio are delegated to its officers and to the Investment
Manager and SBMFM, subject always to the investment objective and
policies of the Portfolio and to general supervision by the
Portfolio's Board of Directors.
The Directors and executive officers of the Portfolio, their
addresses together with information as to their principal business
occupations during the past five years, are shown below:
Name and Address(Age)
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
*+Heath B. McLendon (64)
388 Greenwich Street
New York, NY 10013
Chairman of the Board,
Chief Executive Officer
Managing Director of Smith Barney; President and Director of
SBMFM; President and Director of Travelers Investment Advisers,
Inc. ("TIA"); Chairman of Smith Barney Strategy Advisers Inc.
Prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers; Vice Chairman of Shearson Asset Management.
+Martin Brody (76)
c\o HMK Associates
30 Columbia Turnpike
Florham Park, NJ 07932
Director
Consultant, HMK Associates; Retired Vice Chairman of the Board of
Restaurant Associates Corp.; Director of Jaclyn, Inc.
+Allan J. Bloostein (68)
717 Fifth Avenue
21st Floor
New York, NY 10022
Director
President; Allan J. Bloostein Associates, Consultant and retired
Vice Chairman of the Board of May Department Stores Company;
Director of Taubman Centers, Inc. and CVS Corporation.
+Dwight B. Crane (59)
Harvard Business School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business School.
+Robert A. Frankel (70)
102 Grand Street
Croton-on-Hudson
New York, NY 10520
Director
Consultant Robert A. Frankel Management Consultants; formerly
Corporate Vice President of The Reader's Digest Association, Inc.
+William R. Hutchinson (54)
Amoco Corp.
200 East Randolph Drive
Chicago, IL 60601
Director
Vice President-Financial Operations Amoco Corp.; Director of
Associated Banks and Associated Bank Corp.
Name and Address(Age)
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
Joseph P. Deane (49)
388 Greenwich Street
New York. NY 10013
Vice President and
Investment Officer
Managing Director of Smith Barney; Investment Officer of SBMFM.
Prior to July 1993, Senior Vice President and Managing Director of
Shearson Lehman Advisors.
David Fare (34)
388 Greenwich Street
New York, NY 10013
Investment Officer
Vice President of Smith Barney. Prior to July 1993, Vice President
of Shearson Lehman Advisors.
Lewis E. Daidone (40)
388 Greenwich Street
New York, NY 10013
Senior Vice President
and Treasurer
Managing Director of Smith Barney; Director and Senior Vice
President of SBMFM and TIA.
Christina T. Sydor (46)
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Smith Barney; General Counsel and Secretary
of SBMFM and TIA.
________________________________
* Directors who are "interested persons" of the Portfolio (as
defined in the 1940 Act).
+ Director and/or trustee of other registered investment companies
with which Smith Barney is affiliated.
The Fund pays each of its Directors who is not a director,
officer or employee of SBMFM, or any of its affiliates, an annual
fee of $5,000 plus $500 for each in-person Board meeting and $100
for each telephonic Board meeting attended. In addition, the Fund
will reimburse these Directors for travel and out-of-pocket
expenses incurred in connection with Board of Directors meetings.
For the fiscal year ended May 31, 1997, such fees totaled $48,866.
Director
Total
Number
Pension or
of Funds
Retirement Total
for which
Benefits Compen
Director
Accrued sation
Serves
Aggregate as part from Fund
Within
Compensation of Fund and Fund
Fund
Director from Fund Expenses Complex
Complex
Charles Barber*$ $7,000 $0 $38,700 6
Martin Brody 6,500 0 124,286
19
Dwight Crane 7,200 0 141,375
22
Allan Bloostein 7,000 0 83,150 8
Robert Frankel 7,000 0 66,100 8
William R. Hutchinson 7,000 0
38,600 6
Heath B. McLendon ----- 0 -----
41
* Pursuant to the Fund's deferred compensation plan, Mr. Barber
elected, effective January 2, 1996, to defer the payment of some
or all of the compensation due to him from the Fund.
$ Upon attainment of age 80, Fund 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 Fund Directors, together with reasonable
out-of-pocket expenses for each meeting attended. Effective
February 26, 1997, Mr. Barber became a Director Emeritus.
Principal Stockholders
There are no persons known to the Portfolio to be control
persons of the Portfolio, as such term is defined in Section
2(a)(9) of the 1940 Act. There is no person known to the Portfolio
to hold beneficially more than 5% of the outstanding shares of
Common Stock. The following person is the only person holding more
than 5% of the Portfolio's outstanding shares of Common Stock as
of July 16, 1997;
Percent of
Name and Address Amount of
Common
of Record Owner Record
Stock
Ownership
Outstanding
Cede & Co., as Nominee for The Depository Trust Company
33,523,695.00
0 96.98%
P.O. Box 20
Bowling Green Station
New York, New York 10004
Of the shares held of record by Cede & Co., 27,245,208 shares,
representing 78.82% of the outstanding shares of Common Stock,
were held by The Depository Trust Company as nominee for Smith
Barney, representing accounts for which Smith Barney has
discretionary and non-discretionary authority.
As of July 16, 1997, the Directors and officers of the
Portfolio, as a group, beneficially owned less than 1% of the
Portfolio's outstanding shares of Common Stock.
Investment Manager and Administrator
The Investment Manager serves as investment adviser to the
Portfolio pursuant to a written agreement dated July 30, 1993 (the
"Advisory Agreement"), a form of which was most recently approved
by the Board of Directors, including a majority of those Directors
who are not "interested persons" of the Portfolio or the
Investment Manager ("Non-Interested Directors") on August 20,
1997. Unless terminated sooner, the Advisory Agreement will
continue for successive annual periods provided that such
continuance is specifically approved at least annually: (1) by a
majority vote of the Non-Interested Directors cast in person at a
meeting called for the purpose of voting on such approval; and (2)
by the Board of Directors or by a vote of a majority of the
outstanding shares of Common Stock. The Investment Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of
Travelers Group. The Investment Manager pays the salary of any
officer or employee who is employed by both it and the Portfolio.
The Investment Manager bears all expenses in connection with the
performance of its services as investment adviser.
For services rendered to the Portfolio, the Investment
Manager receives from the Portfolio a fee, computed and paid
monthly at the annual rate 0.70% of the value of the Portfolio's
average daily net assets. For the fiscal years ended May 31,
1995, 1996 and 1997, such fees amounted to $2,896,951, $3,021,241
and $2,913,886, respectively.
Under the Advisory Agreement, the Investment Manager will
not be liable for any error of judgment or mistake of law or for
any loss suffered by the Portfolio in connection with the Advisory
Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Manager in
the performance of its duties or from reckless disregard of its
duties and obligations under the Advisory Agreement. The Advisory
Agreement is terminable by vote of the Board of Directors or by
the holders of a majority of Common Stock, at any time without
penalty on 60 days written notice to the Investment Manager. The
Advisory Agreement may also be terminated by the Investment
Manager on 90 days' written notice to the Portfolio. The Advisory
Agreement terminates automatically upon its assignment.
SBMFM serves as administrator to the Portfolio pursuant to a
written agreement dated June 1, 1994 (the "Administration
Agreement"), a form of which was most recently approved by the
Board of Directors, including a majority of Non-Interested
Directors, on August 20, 1997. The services provided by SBMFM
under the Administration Agreement are described in the Prospectus
under "Management of the Portfolio."
For services rendered to the Portfolio, SBMFM received from
the Portfolio a fee computed and paid monthly at the annual rate
0.20% of the value of the Portfolio's average daily assets. For
the fiscal years ended May 31, 1995, 1996 and 1997 SBMFM or its
predecessor received $827,700, $863,212 and $832,539 respectively,
in administration fees.
Pursuant to the Administration Agreement, SBMFM will
exercise its best judgment in rendering its services to the
Portfolio. SBMFM will not be liable for any error of judgment or
mistake of law or for any loss suffered by the Portfolio in
connection with the matters to which the Administration Agreement
relates, except by reason of SBMFM's reckless disregard of its
obligations and duties under the Administration Agreement.
The Administration Agreement will continue automatically for
successive annual periods provided that such continuance is
approved at least annually by the Board of Directors of the
Portfolio including a majority of the Non-Interested Directors by
vote cast in person at a meeting called for the purpose of voting
such approval. The Administration Agreement is terminable, without
penalty, upon 60 days written notice, by the Board of Directors of
the Portfolio or by vote of holders of a majority of the
Portfolio's shares of Common Stock, or upon 90 days' written
notice, by the SBMFM.
The Portfolio bears expenses incurred in its operation
including: fees of the investment, adviser and administrator;
taxes, interest brokerage fees and commissions, if any; fees of
Directors who are not officers, directors shareholders or
employees of Smith Barney; SEC fees and state blue sky
qualification fees; charges of the custodian; transfer and
dividend disbursing agent's fees; certain insurance premiums;
outside auditing and legal expenses; costs of any independent
pricing service; costs of maintaining corporate existence; costs
attributable to investor services (including allocated telephone
and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for
regulatory purposes and for distribution to shareholders;
shareholders' reports and corporate meetings of the officers,
Board of Directors and shareholders of the Portfolio.
TAXES
As described above and in the Prospectus, the Portfolio is
designed to provide investors with current income which is
excluded from gross income for federal income tax purposes. The
Portfolio is not intended to constitute a balanced investment
program and is not designed for investors seeking capital gains or
maximum tax-exempt income irrespective of fluctuations in
principal. Investment in the Portfolio would not be suitable for
tax-exempt institutions, qualified retirement plans, H.R. 10 plans
and individual retirement accounts because such investors would
not gain any additional tax benefit from the receipt of tax-exempt
income.
The following is a summary of selected federal income tax
considerations that may affect the Portfolio and its shareholders.
The summary is not intended as a substitute for individual tax
advice and investors are urged to consult their own tax advisors
as to the tax consequences of an investment in the Portfolio.
Taxation of the Portfolio and its Investments
The Portfolio has qualified and intends to qualify as a
"regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986 as amended (the "Code"). In addition, the
Portfolio intends to satisfy conditions contained in the Code that
will enable interest from Municipal Obligations, excluded from
gross income for federal income tax purposes with respect to the
Portfolio, to retain that tax-exempt status when distributed to
the shareholders of the Portfolio (that is, to be classified as
"exempt interest" dividends of the Portfolio).
If it qualifies as a regulated investment company the
Portfolio will pay no federal income taxes on its taxable net
investment income (that is, taxable income other than net realized
capital gains) and its net realized capital gains that are
distributed to shareholders. To qualify under Subchapter M of the
Code, the Portfolio must among other things: (1) distribute to its
shareholders at least 90% of its taxable net investment income
(for this purpose consisting of taxable net investment income and
net realized short-term capital gains) and 90% of its tax-exempt
net investment income (reduced by certain expenses); (2) derive at
least 90% of its gross income from dividends, interest, payments
with respect to loans of securities, gains from the sale or other
disposition of securities, or other income (including, but not
limited to, gains from options, futures, and forward contracts)
derived with respect to the Portfolio's business of investing in
securities; (3) derive less than 30% of its annual gross income
from the sale or other disposition of securities, options, futures
or forward contracts held for less than three months(the "short-
short rule"); and (4) diversify its holdings so that at the end of
each fiscal quarter of the Portfolio (a) at least 50% of the
market value of the Portfolio's assets is represented by cash,
U.S. government securities and other securities) with those other
securities limited with respect to any one issuer, to an amount no
greater than 5% of the Portfolio's assets and (b) not more than
25% of the market value of the Portfolio's assets is invested in
the securities of any one issuer (other than U.S. government
securities or securities of other regulated investment companies)
or of two or more issuers that the Portfolio controls and that are
determined to be in the same or similar trades or businesses or
related trades or businesses. In meeting these requirements, the
Portfolio may be restricted by the short-short rule in the selling
of securities held by the Portfolio for less than three months and
in the utilization of certain of the investment techniques
described above under "Investment Objective and Policies."
However, the Taxpayer Relief Act of 1997 repeals the short-short
rule effective for the Portfolio's taxable year begining June 1,
1998. As a regulated investment company, the Portfolio will be
subject to a 4% non-deductible excise tax measured with respect to
certain undistributed amounts of ordinary income and capital gain.
The Portfolio expects to pay dividends and distributions necessary
to avoid the application of this excise tax.
As described above in this SAI and in the Prospectus, the
Portfolio may invest in financial futures contracts and options on
financial futures contracts that are traded on a U.S. exchange or
board of trade. The Portfolio anticipates that these investment
activities will not prevent the Portfolio from qualifying as a
regulated investment company. As a general rule, these investment
activities will increase or decrease the amount of long-term and
short-term capital gains or losses realized by the Portfolio and
thus will affect the amount of capital gains distributed to the
Portfolio shareholders.
For federal income tax purposes, gain or loss on the futures
and options described above (collectively referred to as "Section
1256 Contracts") would, as a general rule, be taxed pursuant to a
special "mark-to-market system." Under the mark-to-market system,
the Portfolio may be treated as realizing a greater or lesser
amount of gains or losses than actually realized. As a general
rule gain or loss on Section 1256 Contracts is treated as 60% long
term capital gain or loss and 40% short-term capital gain or loss,
and as a result, the mark-to-market system will generally affect
the amount of capital gains or losses taxable to the Portfolio and
the amount of distributions taxable to a shareholder. The portion
of gain on Section 1256 Contracts treated as long-term capital
gains may not qualify for the 20% reduced maximum rate on long-
term capital gainsmand may instead be taxable at a maximum rate of
28%.
If Portfolio invests in both Section 1256 Contracts and
offsetting positions in those contracts, then the Portfolio might
not be able to receive the benefit of certain realized losses for
an indeterminate period of time. The Portfolio expects that its
activities with respect to Section 1256 Contracts and offsetting
positions in those Contracts (1) will not cause it or its
shareholders to be treated as receiving a materially greater
amount of capital gains or distributions than actually realized or
received and (2) will permit the Fund to use substantially all of
its losses for the fiscal years in which the losses actually
occur.
Taxation of the Portfolio's Shareholders
The Portfolio anticipates that all dividends it pays, other
than dividends from Taxable Investments and from income or gain
derived from securities transactions and from the use of certain
of the investment techniques described under "Investment Objective
and Policies" will be derived from interest on Municipal
Obligations and thus will be exempt-interest dividends that may be
excluded by shareholders from their gross income for federal
income tax purposes if the Portfolio satisfies certain asset
percentage requirements. Dividends paid from the Portfolio's net
investment income and distributions of the Portfolio's net
realized short-term capital gains are taxable to shareholders of
the Portfolio as ordinary income, regardless of the length of time
shareholders have held shares of Common Stock and whether the
dividends or distributions are received in cash or reinvested in
additional shares. As a general rule, a shareholder's gain or loss
on a sale of his or her shares of Common Stock will be a long-term
gain or loss if he or she has held his or her shares for more than
one year and will be a short-term capital gain or loss if he or
she has held his or her shares for one year or less. Gain on
shares held for more than 18 months will be eligible for the
reduced 20% maximum capital gains tax rate. Dividends and
distributions paid by the Portfolio will not qualify for the
federal dividends-received deduction for corporations.
Exempt-Interest Dividends
Interest on indebtedness incurred by a shareholder to
purchase or carry shares of Common Stock is not deductible for
federal income tax purposes. If a shareholder receives exempt-
interest dividends with respect to any share of Common Stock and
if the share is held by the shareholder for six months or less,
then any loss on the sale of the share may, to the extent of the
exempt-interest dividends, be disallowed. The Code may also
require a shareholder if he or she receives exempt-interest
dividends to treat as taxable income a portion of certain
otherwise non-taxable social security and railroad retirement
benefit payments. In addition, the portion of any exempt-interest
dividend paid by the Portfolio that represents income derived from
private activity bonds held by the Portfolio may not retain its
tax-exempt status in the hands of a shareholder who is a
"substantial user" of a facility financed by the bonds, or a
"related person" of the substantial user. Although the Portfolio's
exempt-interest dividends may be excluded by shareholders from
their gross income for federal income tax purposes (1) some or all
of the Portfolio's exempt-interest dividends may be a specific
preference item, or a component of an adjustment item, for
purposes of the federal individual and corporate alternative
minimum taxes and (2) the receipt of dividends and distributions
from the Portfolio may affect a corporate shareholder's federal
"environmental" tax liability. The receipt of dividends and
distributions from the Portfolio may affect a foreign corporate
shareholder's federal "branch profits" tax liability and a
corporate shareholder's federal "excess net passive income" tax
liability. Shareholders should consult their own tax advisors to
determine whether they are (1) "substantial users" with respect to
a facility or "related" to those users within the meaning of the
Code or (2) subject to a federal alternative minimum tax the
federal "environmental" tax, the federal "branch profits" tax, or
the federal "excess net passive income" tax.
Dividend Reinvestment Plan
A shareholder of the Portfolio receiving dividends or
distributions in additional shares pursuant to the Plan should be
treated for federal income tax purposes as receiving a
distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives and
should have a cost basis in the shares received equal to that
amount.
Statements and Notices
Statements as to the tax status of the dividends and
distributions received by shareholders of the Portfolio are mailed
annually. These statements show the dollar amount of income
excluded from federal income taxes and the dollar amount, if any,
subject to federal income taxes. The statements will also
designate the amount of exempt interest dividends that are a
specific preference item for purposes of the federal individual
and corporate alternative minimum taxes and will indicate the
shareholder's share of the investment expenses of the Portfolio.
The Portfolio will notify shareholders annually as to the interest
excluded from federal income taxes earned by the Portfolio with
respect to those states and possessions in which the Portfolio has
or had investments. The dollar amount of dividends paid by the
Portfolio that is excluded from federal income taxation and the
dollar amount of dividends paid by the Portfolio that is subject
to federal income taxation, if any, will vary for each shareholder
depending upon the size and duration of the shareholder's
investment in the Portfolio. To the extent that the Portfolio
earns taxable net investment income, it intends to designate as
taxable dividends the same percentage of each day's dividend as
its taxable net investment income bears to its total net
investment income earned on that day. Therefore, the percentage of
each day's dividend designated as taxable, if any, may vary from
day to day.
Backup Withholding
If a shareholder fails to furnish a correct taxpayer
identification number fails to report filly dividend or interest
income or fails to certify that he has provided a correct taxpayer
identification number and that he is not subject to "backup
withholding," the shareholder may be subject to a 31% "backup
withholding" tax with respect to (1) taxable dividends and
distributions and (2) the proceeds of any sales or repurchases of
shares of Common Stock. An individual's taxpayer identification
number is his social security number. The 31% backup withholding
tax is not an additional tax and may be credited against a
taxpayer's federal income tax liability
STOCK PURCHASES AND TENDERS
The Portfolio may repurchase shares of its Common Stock in
the open market or in privately negotiated transactions when the
Portfolio can do so at prices below their then current net asset
value per share on terms that the Portfolio's Board of Directors
believes represent a favorable investment opportunity. In
addition, the Board of Directors currently intends to consider, at
least once a year, making an offer to each shareholder of record
to purchase at net asset value shares of Common Stock owned by the
shareholder
No assurance can be given that repurchases and/or tenders
will result in the Portfolio's shares trading at a price that is
equal to their net asset value. The market prices of the Portfolio
shares will among other things, be determined by the relative
demand for and supply of the shares in the market, the Portfolio's
investment performance, the Portfolio's dividends and yield and
investor perception of the Portfolio's overall attractiveness as
an investment as compared with other investment alternatives. The
Portfolio's acquisition of Common Stock will decrease the total
assets of the Portfolio and therefore have the effect of
increasing the Portfolio's expense ratio. The Portfolio may borrow
money to finance the repurchase of shares subject to the
limitations described in the Prospectus. Any interest on the
borrowings will reduce the Portfolio's net income. Because of the
nature of the Portfolio's investment objective, policies and
securities holdings, the Investment Manager does not anticipate
that repurchases and tenders will have an adverse effect on the
Portfolio's investment performance and does not anticipate any
material difficulty in disposing of securities to consummate
Common Stock repurchases and tenders.
When a tender offer is authorized to be made by the
Portfolio's Board of Directors, it will be an offer to purchase at
a price equal to the net asset value of all (but not less than
all) of the shares owned by the shareholder (or attributed to him
for federal income tax purposes under Section 38 of the Code). A
shareholder who tenders all shares owned or considered owned by
him or her, as required, will realize a taxable gain or loss
depending upon his or her basis in his or her shares.
If the Portfolio liquidates securities in order to
repurchase shares of Common Stock, the Portfolio may realize gains
and losses. These gains, if any, may be realized on securities
held for less than three months. Because the Portfolio must derive
less than 30% of its gross income for any taxable year from the
sale or disposition of stock and securities held less than three
months (in order to retain the Portfolio's regulated investment
company status under the Code), gains realized by the Portfolio
due to a liquidation of securities held for less than three months
would reduce the amount of gain on sale of other securities held
for less than three months that the Portfolio could realize in the
ordinary course of its portfolio management, which may adversely
affect the Portfolio's performance. The portfolio turnover rate of
the Portfolio may or may not be affected by the Portfolio's
repurchases of shares of Common Stock pursuant to a tender offer.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Portfolio's Articles of Incorporation include provisions
that could have the effect of limiting the ability of other
entities or persons to acquire control of the Portfolio or to
change the composition of its Board of Directors and could have
the effective of depriving shareholders of an opportunity to sell
their shares of Common Stock at a premium over the prevailing
market prices by discouraging a third party from seeking to obtain
control of the Portfolio. Commencing with the first annual
meeting of shareholders, the Board of Directors will be divided
into three classes. At the annual meeting of shareholders in each
year thereafter, the term of one class will expire and each
Director elected to the class will hold office for a term of three
years. The classification of the Board of Directors in this
manner could delay for up to two years the replacement of majority
of the Board. The Articles of Incorporation provide that the
maximum number of Directors that may constitute the Portfolio's
entire board is 12. A director may be removed from office, or the
maximum number of Directors increased, only by vote of the holders
of at least 75% of shares of Common Stock entitled to be voted on
the matter.
The Portfolio's Articles of Incorporation require the
favorable vote of the holders of at least two-thirds of the shares
of Common Stock then entitled to be voted to authorized the
conversion of the Portfolio from a closed-end to an open-end
investment company's defined in the 1940 Act, unless two-thirds of
the Continuing Directors (as defined below) approve such a
conversion. In the latter case, the affirmative vote of a
majority of the shares outstanding will be required to approve the
amendment to the Portfolio's Articles of Incorporation providing
for the conversion of the Portfolio.
The affirmative votes of a least 75% of the Directors and
the holder of at least 75% of the shares of the Portfolio are
required to authorize any of the following transactions (referred
to individually as a "Business Combination"): (1) a merger,
consolidation or share exchange of the Portfolio with or into any
other person (referred to individually as a "Reorganization
Transaction"); (2) the issuance or transfer by the Portfolio (in
one or a series of transactions in any 12-month period) of any
securities of the Portfolio to any other person or entity for
cash, securities of other property (or combinations thereof)
having an aggregate fair market value of $1,000,000 or more,
excluding sales of securities of the Portfolio in connection with
a public offering, issuance of securities of the Portfolio
pursuant to a dividend reinvestment plan adopted by the Portfolio
and issuance's of securities of the Portfolio upon the exercise
for any stock subscriptions rights distributed by the Portfolio;
or (3) a sale, lease, exchange, mortgage, pledge, transfer or
other disposition by the Portfolio (in one or a series of
transactions in any 12-month period) to or with any person of any
assets of the Portfolio having aggregate fair market value of
$1,000,000 or more, except for transactions in securities effected
by the Portfolio in the ordinary course of its business (each such
sale, lease, exchange, mortgage, pledge, transfer or other
disposition being referred to individually as a "Transfer
Transaction"). The same affirmative votes are required with
respect to: any proposal as to the voluntary liquidation or
dissolution of the Portfolio or any amendment to the Portfolio's
Articles of Incorporation to terminate its existence (referred to
individually as "Termination Transaction"); and any shareholder
proposal as to specific investment decisions made or to be made
with respect to the Portfolio's assets.
A 75% shareholder vote will not be required with respect to
a Business Combination if the transaction is approved by a vote of
a least 75% of the Continuing Directors (as defined below) or it
certain conditions regarding the consideration paid by the person
entering into, or proposing to enter into, a Business Combination
with the Portfolio and various other requirements are satisfied.
In such case, a majority of the votes entitled to be cast by
shareholders of the Portfolio will be required to approve the
transaction if it is a Reorganization Transaction or a Transfer
Transaction that involves substantially all of the Portfolio's
assets and no shareholder vote will be required to approve the
transaction if it is any other Business Combination. In addition,
a 75% shareholder vote will not be required with respect to a
Termination Transaction if it is approved by a vote of at least
75% of the Continuing Directors, in which case a majority of the
votes entitled to be cast by shareholders of the Portfolio will be
required to approve the transaction.
The voting provisions described above could have the effect
of depriving shareholders of the Portfolio of an opportunity to
sell their Common Stock at a premium over prevailing market prices
by discouraging a third party from seeking to obtain control of
the Portfolio in a tender offer or similar transaction. In the
view of the Portfolio's Board of Directors, however, these
provisions offer several possible advantages including: (1)
requiring persons seeking control of the Portfolio to negotiate
with its management regarding the price to be paid for the amount
of Common Stock required to obtain control; (2) promoting
continuity and stability; and (3) enhancing the Portfolio's
ability to pursue long-term strategies that are consistent with
its investment objective and management policies. The Board of
Directors has determined that the voting requirements under
Maryland law and the 1940 Act are in the best interests of
shareholders generally.
A "Continuing Director" as used in the discussion above, is
any member of the Portfolio's Board of Directors (1) who is not
person or affiliate of a person who enters or proposes to enter
into a Business Combination with the Portfolio (such person or
affiliate being referred to individually as an "Interested party")
and (2) who has been a member of the Board of Directors for a
period of least 12 months (or since the commencement of the
Portfolio's operations, if less than 12 months), or is a successor
of a Continuing Director who is unaffiliated with an Interested
party and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors.
ADDITIONAL INFORMATION
Legal Matters
Willkie Farr & Gallagher serves as legal counsel to the
Portfolio. The Directors who are not "interested persons" of the
Portfolio have selected Stroock & Stroock & Lavan LLP as their
counsel.
Independent Auditors
For the fiscal year ending May 31, 1998, KPMG Peat Marwick
LLP, 345 Park Avenue, New York, New York 10154, will serve as
auditors of the Portfolio and render an opinion on the Portfolio's
financial statements.
Custodian and Transfer Agent
PNC Bank, is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 and serves as the Fund's
custodian pursuant to a custody agreement. Under the custody
agreement, PNC Bank holds Fund's securities and keeps all
necessary accounts and records. The assets of the Fund are held
under bank custodianship in compliance with the 1940 Act. First
Data is located at One Exchange Place Boston, Massachusetts 02109,
and serves as the Portfolio's transfer agent pursuant to a
transfer agency agreement. Under the transfer agency agreement,
First Data maintains the shareholder account records for the
Portfolio, handles certain communications between shareholders and
the Portfolio, and distributes dividends and distributions payable
by the Portfolio.
Financial Statements
The Portfolio sends unaudited semi-annual and audited annual
financial statements of the Portfolio to shareholders, including a
list of the investments held by the Portfolio.
The Portfolio's Annual Report for the fiscal year ended May
31, 1997 and its semi-annual report for the six month period ended
November 30, 1996 are incorporated into this SAI by reference in
their entirety. A copy of these Reports may be obtained from any
Smith Barney Financial Consultant or by calling or writing to the
Portfolio at the telephone number or address set forth on the
cover page of this SAI.
APPENDIX
DESCRIPTION OF MOODY'S, S&P AND FITCH RATINGS
Description of Moody's Municipal Bond Ratings:
Aaa - Bonds that are rated Aaa are judged to be of the best
quality, carry the smallest degree of investment risk and are
generally referred to as "gilt edge. " Interest payments with
respect to these bonds are protected by a large or by an
exceptionally stable margin, and principal is secure. Although the
various protective elements applicable to these bonds are likely
to change, those changes are most unlikely to impair the
fundamentally strong position of these bonds.
Aa - Bonds that are rated Aa are judged to be of high quality by
all standards and together with the Aaa group comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude, or other elements may be present that make the
long-term risks appear somewhat larger than in Aaa securities
A - Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest
with respect to these bonds are considered adequate, but elements
may be present that suggest a susceptibility to impairment
sometime in the fixture.
Baa - Bonds rated Baa are considered to be medium grade
obligations, that is they are neither highly protected nor poorly
secured. Interest payment and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. These bonds lack outstanding investment characteristics and
may have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 in each
generic rating classification from Aa through B. The modifier 1
indicates that the security ranks in the higher end of its generic
rating category; the modifier 2 indicates a mid-range ranking; and
the modifier 3 indicates that the issue ranks in the lower end of
its generic rating category.
Description of Moody's Municipal Note Ratings:
Moody's ratings for state and municipal notes and other
short-term loans are designated Moody's Investment Grade (MIG) and
for variable demand obligations are designated Variable Moody's
Investment Grade (VMIG). This distinction recognizes the
differences between short- and long-term credit risk. Loans
bearing the designation MIG1/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 designation
MIG 2/VMIG 2 are of high quality, with margins of protection
ample, although not as large as the preceding group. Loans bearing
the designation MIG3/VMIG 3 are of favorable quality, with all
security elements accounted for but lacking the undeniable
strength of the preceding grades. Market access for refinancing,
in particular, is likely to be less well established.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating
assigned by Moody's. Issuers rated Prime- I (or related supporting
institutions) are considered to have a superior capacity for
repayment of short-term promissory obligations. Issuers rated
Prime-2 (or related supporting institutions) are considered to
have a strong capacity for repayment of short-term promissory
obligations, normally evidenced by many of the characteristics of
issuers rated Prime-1 but to a lesser degree. Earnings trends and
coverage ratios, while sound, will be more subject to variation.
Capitalization characteristics, while still appropriate, may be
more affected by external conditions. Ample alternative liquidity
is maintained.
Description of S&P Municipal Bond Ratings:
AAA - These bonds are the obligations of the highest quality and
have the strongest capacity for timely payment of debt service.
General Obligation Bonds Rated AAA - In a period of economic
stress the issuers of these bonds will suffer the smallest
declines in income and will be least susceptible to autonomous
decline. Debt burden is moderate. A strong revenue structure
appears more than adequate to meet future expenditure
requirements. Quality of management appears superior.
Revenue Bonds Rated AAA - Debt service coverage with respect to
these bonds has been, and is expected to remain, substantial.
Stability of the pledged revenues is also exceptionally strong due
to the competitive position of the municipal enterprise or to the
nature of the revenues. Basic security provisions (including rate
covenant, earnings test for issuance of additional bonds, debt
service reserve requirements) are rigorous. There is evidence of
superior management
AA - The investment characteristics of bonds in this group are
only slightly less marked than those of the prime quality issues.
Bonds rated AA have the second strongest capacity for payment of
debt service
A - Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible
to the adverse effects of changes in circumstances and economic
conditions than bonds in high rated categories. This rating
describes the third strongest capacity for payment of debt
service.
General Obligation Bonds Rated A - There is some weakness either
in the local economic base in debt burden, in the balance between
revenues and expenditures or in quality of management. Under
certain adverse circumstances, any one such weakness might impair
the ability of the issuer to meet debt obligations at some fixture
date.
Revenue Bonds Rated A - Debt service coverage is good but not
exceptional. Stability of the pledged revenues could show some
variations because of increased competition or economic influences
on revenues. Basic security provisions, while satisfactory, are
less stringent. Management performance appears adequate.
BBB - The bonds in this group are regarded as having an adequate
capacity to pay interest and repay principal. Whereas bonds in
this group normally exhibit adequate protection parameters,
adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay
principal for debt in this category than in higher rated
categories. Bonds rated BBB have the fourth strongest capacity for
payment of debt service.
S&P's letter ratings may be modified by the addition of a
plus or a minus sign, which is used to show relative standing
within the major rating categories except in the AAA category.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years or less are
usually given note ratings (designated SP-1 -2 or -3) to
distinguish more clearly the credit quality of notes as compared
to bonds. Notes rated SP- 1 have a very strong or strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of
SP- 1+. Notes rated SP-2 have a satisfactory capacity to pay
principal and interest.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A- l by S&P indicates that the degree
of safety regarding timely payment is either overwhelming or very
strong. Those issues determined to possess overwhelming safety
characteristics are denoted A-1+. Capacity for timely payment of
commercial paper rated A-2 is stronger but the relative degree of
safety is not as high as issues designated A-1.
Description of Fitch Municipal Bond Ratings:
AAA - Bonds rated AAA by Fitch are considered to be investment
grade and of the highest credit quality. The obligor has an
exceptionally strong ability to pay interest and repay principal,
which is unlikely to be affected by reasonably foreseeable events.
AA - Bonds rated AA by Fitch are considered to be investment grade
and of high quality. The obligor's ability to pay interest and
repay principal, while very strong, is somewhat less than for AAA
rated securities or more subject to possible change over the term
of the issue.
A - Bonds rated A by Fitch are considered to be investment grade
and of high credit quality. The obligor's ability to pay interest
and repay principal is considered to be strong, but may be more
vulnerable to adverse changes in economic conditions and
circumstances than bonds with higher ratings
BBB - Bonds rated BBB by Fitch are considered to be investment
grade and of satisfactory credit quality. The obligor's ability to
pay interest and repay principal is considered to be adequate.
Adverse changes in economic conditions and circumstances, however,
are more likely to have adverse consequences on these bonds, and
therefore impair timely payment. The likelihood that the ratings
of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the
relative position of a credit within a rating category. Plus and
minus signs, however, are not used in the AAA category.
Description of Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that
are payable on demand or have original maturities of generally up
to three years, including commercial paper certificates of
deposit, medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-
term rating on the existence of liquidity necessary to meet the
issuer's obligations in a timely manner.
Fitch's short-term ratings are as follows:
F-1 + - Issues assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
F-1 - Issues assigned this rating reflect an assurance of timely
payment only slightly less in degree than issues rated F-1+.
F-2 - Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as
great as for issues assigned F- 1+ and F-1 ratings.
F-3 - Issues assigned this rating have characteristics suggesting
that the degree of assurance for timely payment is adequate,
although near-term adverse changes could cause these securities to
be rated below investment grade.
LOC- The symbol LOC indicates that the rating is based on a letter
of credit issued by a commercial bank.
32
u:\legal\funds\#mmu\1997\secdocs\sai97
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
- Included in Part A:
* Financial Highlights
- Included in Part B:
* The Registrant's Annual Report for the
fiscal year ended May 31, 1997 and
Report of Independent Accountants
dated July 14, 1997 are incorporated by
reference to the Definitive 30(b)2-1 filed
on July 29, 1997,
Accession # 0000091155-97-000338
(2) Exhibits:
(a) (i) Articles of Incorporation*
(ii) Articles of Amendment to Articles of Incorporation are
incorporated by reference to Pre-Effective Amendment No. 1.*
(b) (i) Bylaws of Registrant are incorporated by reference to
Pre-Effective Amendment No. 1.*
(ii) Amended Bylaws of Registrant are incorporated by
reference to Pre-Effective Amendment No. 1.*
(c) Not Applicable
(d) Specimen Certificate of Common Stock, par value $.01 per
share is incorporated by reference to Pre-Effective Amendment No.
1.*
(e) Dividend Reinvestment Plan #
(f) Not Applicable
(g)(i) Form of Investment Advisory Agreement
between Registrant and Shearson Lehman
Advisors*
(ii) Form of Investment Advisory Agreement
between Registrant and Greenwich Street
Advisers.****
(h) Form of Underwriting Agreement between
Registrant and Shearson Lehman Brothers Inc.**
(i) Not Applicable
(j) Form of Custody Agreement between Registrant
and PNC Bank, National Association ##
(k) (i) Transfer Agency and Registrar Agreement
between Registrant and TSSG***
(ii) Administration Agreement between
Registrant and Smith Barney Mutual Funds
Management Inc. (filed herewith)
(l) Not Applicable
(m) Not Applicable
(n) Consent of KPMG Peat Marwick LLP, independent
auditors for the Fund. (filed herewith).
(o) Not Applicable
(p) Purchase Agreement between Registrant and
Shearson
Lehman Brothers Inc.*
(q) Not Applicable
(r) Not Applicable
________________________________________
* Incorporated by reference to the Registrant's Pre-Effective
Amendment No. 1
to its initial Registration Statement on Form N-2, Registration
No. 33-47116,
filed with the SEC on May 14, 1992.
** Incorporated by reference to the Registrant's Pre-Effective
Amendment No. 3
to its Registration Statement on Form N-2, Registration No. 33-
47116, filed with
the SEC on June 18, 1992.
*** Incorporated by reference to the Registrant's Post-Effective
Amendment No.
4 to its Registration Statement on Form N-2, Registration No. 33-
47116,
filed with the SEC on August 4, 1993.
**** Incorporated by reference to the Registrant's Post-
Effective
Amendment No. 5 to its Registration Statement on Form N-2,
Registration No. 33-
47116, filed with the SEC on October 14, 1993.
# Incorporated by reference to Post-Effective Amendment
No. 6. to its initial Registration Statement on Form N-2,
Registration No. 33-47116, filed with the SEC on September 28,
1994 ("Post-Effective Amendment No. 6").
## Incorporated by reference to the Registrant's Post-
Effective Amendement No.8 to its initial registration statement on
form N-2, Registration No. 33-47116, filed with the SEC on
September 23, 1996.
Item 25. Marketing Arrangements
None
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred
in
connection with the offering described in this Registration
Statement:
Securities and Exchange Commission Fees 0
Printing and Engraving Expenses $5000
Legal Fees 0
Accounting Expenses 0
Miscellaneous Expenses 0
Item 27. Persons Controlled by or Under Common Control
None
Item 28. Number of Holders of Securities
Title of Class Number of
Record
Stockholders
as of September 5, 1997
Shares of Common Stock, 682
par value $0.01 per share
Item 29. Indemnification
Under Article VII of Registrant's Articles of Incorporation,
any past
or present director or officer of Registrant is indemnified to the
fullest
extent permitted by law against liability and all expenses
reasonably
incurred by him in connection with any action, suit or proceeding
to which
he may be a party or otherwise involved by reason or his being or
having
been a director or officer of Registrant. This provision does not
authorize indemnification when it is determined that the director
or
officer would otherwise be liable to Registrant or its
shareholders by
reason of willful misfeasance, bad faith, gross negligence or
reckless
disregard of his duties. Expenses may be paid by Registrant in
advance of
the final disposition of any action, suit or proceeding upon
receipt of an
undertaking by a director or officer to repay those expenses to
Registrant
in the event that it is ultimately determined that indemnification
of the
expenses is not authorized under Registrant's Articles of
Incorporation.
Insofar as indemnification for liability arising under the
Securities
Act of 1933, as amended (the "Securities Act"), may be permitted
to
directors, officers and controlling persons of Registrant pursuant
to the
foregoing provisions, or otherwise, Registrant has been advised
that in the
opinion of the Securities and Exchange Commission, such
indemnification is
against policy as expressed in the Securities Act and is,
therefore,
unenforceable. In the event that a claim for indemnification
against such
liabilities (other than the payment by Registrant of expenses
incurred or
paid by a director, officer or controlling person of Registrant in
the
successful defense of any action, suit or proceeding) is asserted
by such
director, officer or controlling person in connection with the
securities
being registered, Registrant will, unless in the opinion of its
counsel the
matter has been settled by controlling precedent, submit to a
court of
appropriate jurisdiction the question whether such indemnification
by it is
against public policy as expressed in the Securities Act and will
be
governed by the final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
See "Management of the Portfolio" in the Prospectus.
Smith Barney Mutual Funds Management Inc., ("Funds
Management") a New York corporation, is a registered investment
adviser and is wholly owned by Smith Barney Holdings Inc., which
in
turn is wholly owned by The Travelers Group Inc. Funds Management
is
primarily engaged in the investment advisory business.
Information as to
executive officers and directors of Funds Management is included
in its
Form ADV filed with the Securities and Exchange Commission
(Registration number 801-8314) and is incorporated herein by
reference.
Item 31. Location of Accounts and Records
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
PNC Bank, N.A.
17th & Chestnut Streets
Philadelphia, Pennsylvania 19103
Item 32. Management Services
None
Item 33. Undertakings
1. Not Applicable
2. Not Applicable
3. Not Applicable
4. The registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a
post-effective amendment to this Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of
the
Securities Act of 1933 (the "Act");
(2) to reflect in the Prospectus any facts or events arising
after the
effective date of the Registration Statement (or the most recent
post-
effective amendment thereof) which, individually or in the
aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the plan
of
distribution not previously disclosed in the Registration
Statement or any
material change to such information in the Registration Statement.
(4)(b) For the purpose of determining any liability under the
Act, each
post-effective amendment shall be deemed to be a new Registration
Statement
relating to the securities offered therein, and the offering of
such
securities at that time shall be deemed to be the initial bona
fide
offering thereof.
(4)(c) Not Applicable
5. Not Applicable
6. The registrant undertakes to send by first class mail or
other means
designed to ensure equally prompt delivery, within two business
days of
receipt of a written or oral request, any Statement of Additional
Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, MANAGED MUNICIPALS PORTFOLIO INC., has duly caused
this Amendment to the Registration Statement on Form N-2 to be
signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, State of New York on the
12th day of September, 1997.
MANAGED MUNICIPALS PORTFOLIO INC.
By:/s/Health B. McLendon
Heath B. McLendon
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement and the
above Power of Attorney has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/Health B. McLendon
Heath B. McLendon Chairman of the Board
9/12/97
Chief Executive Officer
/s/Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial
9/12/97
and Accounting Officer)
/s/ Allan J. Bloostein*
Allan J. Bloostein Director
9/12/97
/s/ Martin Brody*
Martin Brody Director
9/12/97
Signature Title Date
/s/ Dwight B. Crane*
Dwight B. Crane Director
9/12/97
/s/ Robert A. Frankel*
Robert A. Frankel Director
9/12/97
/s/ William R. Hutchinson*
William Hutchinson Director
9/12/97
* By: /s/Health B. McLendon
Heath B. McLendon
Attorney-in-Fact
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Managed Municipals Portfolio Inc.:
We consent to the use of our report dated July 14, 1997 for the
Managed Municipals Portfolio Inc. incorporated herein by
reference and to the references to our Firm under the headings
"Financial Highlights" and "Experts" in the Prospectus and
"Independent Public Auditors" in the Statement of Additional
Information.
KPMG Peat Marwick
LLP
New York, New York
September 12, 1997
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<NAME> MANAGED MUNICIPALS PORTFOLIO INC.
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