[DESCRIPTION]
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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.
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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.
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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 20
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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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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
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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."
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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."
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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%
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*"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.
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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
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* 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.
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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.
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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
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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
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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
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Investment Objective and Policies (continued)
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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-
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Investment Objective and Policies (continued)
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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
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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>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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>
- --------------------------------------------------------------------------------
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
<PAGE>
- --------------------------------------------------------------------------------
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.
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Appendix A
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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
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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
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Appendix A (continued)
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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
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Appendix A (continued)
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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.
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Appendix B
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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
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Smith Barney
------------
A Member of TravelersGroup[Logo]
Managed
Municipals
Portfolio Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD01205 9/97
