As filed with the Securities and Exchange Commission on September 21,
1998
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. 9 ?
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 10 ?
__________________
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) 816-6474
(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
787 Seventh Avenue
New York, New York 10019-6099
_______________
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.
?_______________
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: ? when
declared effective pursuant to section 8(c).
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 C
Item No.
Information required to be included in Part C is set forth,
under the appropriate item so numbered, in Part C of this
Registration Statement.
MANAGED MUNICIPALS PORTFOLIO INC.
PART A
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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 9/98
<PAGE>
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Prospectus September 28, 1998
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Managed Municipals Portfolio Inc.
388 Greenwich Street
New York, New York 10013
(800) 331-1710
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 28, 1998 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 Salomon Smith
Barney Financial Consultant.
Salomon Smith Barney Inc. ("Salomon Smith Barney") currently 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 Salomon 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
Salomon Smith Barney Inc. (Continued on page 2)
Mutual Management Corp.
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.
<PAGE>
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Prospectus September 28, 1998
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liquidity of, or the trading market for, the Common Stock as a result of any
market-making activities undertaken by Salomon 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 18
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Share Price Data 18
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Taxation 19
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Management of the Portfolio 20
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Dividends and Distributions; Dividend Reinvestment Plan 22
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Certain Provisions of the Articles of Incorporation and
Market Discount 24
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Description of Common Stock 26
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Custodian and Transfer Agent 27
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Experts 27
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Further Information 27
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Appendix A A-1
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Appendix B B-1
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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, Inc. ("Moody's"), Standard & Poor's Ratings Group
("S&P"), Fitch IBCA, Inc. ("Fitch") or another nationally-recognized rating
agency ("NRSRO") (for example, 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, Salomon Smith Barney currently intends to
make a market in the Common Stock. Salomon Smith Barney, however, is
notobligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole discretion of Salomon Smith
Barney.
Listing NYSE
Symbol MMU
Investment Manager Mutual Management Corp. (formerly known as Smith Barney
Mutual Funds Management Inc.) ("MMC"), serves as the Portfolio's investment
manager (the "Investment Manager"). The Investment Manager provides investment
advisory and management services to investment companies affiliated with Salomon
Smith Barney. MMC is a wholly owned subsidiary of Salomon 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
4
<PAGE>
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Prospectus Summary (continued)
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investment decisions for the Portfolio, places orders to purchase and sell
securities on behalf of the Portfolio and employs professional portfolio
managers. MMC acts 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 not rated in one of the highest four categories by any NRSRO 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* ................................................... 0.90%*
Other Expenses** ................................................... 0.09%
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Total Annual Operating Expenses ........................................ 0.99%
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* On September 1, 1998, MMC instituted a voluntary waiver of a portion of
its management fees in order to enable the Portfolio to increase its
dividend yield. The waiver is a temporary measure and may be terminated at
any time by MMC.
** "Annual Expenses," as shown above, are based upon amounts of expenses for
the fiscal year ended May 31, 1998.
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 $121
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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 three years ended May 31, 1998 has been
audited by KPMG Peat Marwick LLP, independent auditors whose report thereon
appears in the Portfolio's annual report dated May 31, 1998. 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 period 1998 1997 1996 1995 1994 1993*
=========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of year $11.90 $12.11 $12.55 $12.26 $13.00 $12.00
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Income from operations:
Net investment income 0.54 0.67 0.67 0.72 0.67 0.63
Net realized and unrealized gain (loss) 0.83 0.08 (0.35) 0.49 (0.23) 0.97
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Total Income from operations 1.37 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:
Net investment income (0.61) (0.66) (0.75) (0.67) (0.67) (0.55)
Net realized gains (0.29) (0.30) (0.01) (0.25) (0.51) (0.03)
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Total distributions (0.90) (0.96) (0.76) (0.92) (1.18) (0.58)
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Net asset value, end of year $12.37 $11.90 $12.11 $12.55 $12.26 $13.00
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Total Return Based on
Market Value 2.08% 7.89% 8.26% 8.40% 2.98% 7.02%++
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Total Return, Based on
Net Asset Value** 12.14% 6.59% 2.79% 10.96% 3.45% 13.58%++
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Net Assets, End of Year (millions) $428 $411 $418 $433 $423 $444
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Ratios to Average Net Assets:
Ratio of operating expenses to average
net assets 0.99% 1.00% 1.00% 1.02% 1.00% 0.98%+
Ratio of net investment income to
average net assets 4.35 5.56 5.35 5.97 5.15 5.48+
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Portfolio Turnover Rate 87% 113% 45% 93% 72% 169%
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Market value, End of Year $11.00 11.63 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 calculation assumes that 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)
331-1710.
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The Offering
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Salomon 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 Salomon 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 Salomon Smith Barney. This Prospectus is to be used by
Salomon 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 Salomon Smith
Barney as a result of its market-making in the Common Stock will be utilized by
Salomon 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 within the highest four
rating categories by any NRSRO. 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 not rated investment grade by any NRSRO, 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 25% of its assets in
issuers located in the same state. If the Portfolio were to invest
10
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Investment Objective and Policies (continued)
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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, 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 for 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 Obligations and Taxable Investments, upon a determination
by the Investment Manager that market conditions warrant such a posture. To the
extent the Portfolio
11
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Investment Objective and Policies (continued)
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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 Transactions. The Portfolio may purchase
municipal securities on a "when-issued" and "delayed delivery" basis and may
purchase or sell municipal securities on a "delayed delivery" basis in order to
hedge against anticipated changes in interest rates and prices. No income
accrues to the Portfolio on municipal securities in connection with such
transactions prior to the date the Portfolio actually takes delivery of such
securities. These transactions are subject to market fluctuation; the value of
the municipal securities at delivery may be more or less than their purchase
price, and yields generally available on municipal securities when delivery
occurs may be higher than yields on the municipal securities obtained pursuant
to such transactions. Because the Portfolio relies on the buyer or seller, as
the case may be, to consummate the transaction, failure by the other party to
complete the transaction may result in the Portfolio missing the opportunity of
obtaining a price or yield considered to be advantageous. When the Portfolio is
the buyer in such a transaction, however, it will maintain, in a segregated
account with its custodian, 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 the Investment
Manager to be liquid and unencumbered, and are marked to market daily, pursuant
to guidelines established by the Directors. When the Portfolio is the seller in
such a transaction, it will cover its commitment to deliver the security by
maintaining positions in portfolio securities that would serve to satisfy or
offset the risk of such obligations. The Portfolio will make commitments to
purchase municipal securities on such basis only with the intention of actually
acquiring these securities, but the Portfolio may sell such securities prior to
the settlement date if such sale is considered to be advisable.
To the extent that the Portfolio engages in "when-issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Portfolio's portfolio consistent with the Portfolio's investment
objective and policies. However, although the Portfolio does not intend to
engage in such transactions for speculative purposes, purchases of securities on
such basis may involve more risk than other types of purchases. For example, if
the Portfolio determines it is necessary to sell the "when-issued" or "delayed
delivery" securities before delivery, it may incur a gain or a loss because of
market fluctuations since the time the commitment to purchase such securities
was made. Subject to the requirement of maintaining a segregated account, no
specified limitation exists as to the percentage of the Portfolio's assets which
may be used to acquire securities on a "when-issued" or "delayed delivery"
basis. A significant percentage of the Portfolio's assets committed to the
purchase of securities on a "when-
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
issued" "delayed delivery" basis may increase the volatility of the Portfolio's
net asset value and may limit the flexibility to manage the Portfolio's
investments.
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 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
13
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 331/3 % 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 Portfolio 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 Portfolio 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.
Year 2000. The investment management services provided to the Portfolio by
MMC and the services provided to shareholders by Salomon Smith Barney depend on
the smooth functioning of their computer systems. Many computer software systems
in use today cannot recognize the year 2000, but revert to 1900 or some other
date, due to the manner in which dates were encoded and calculated. That failure
could have a negative impact on the Portfolio's operations, including the
handling of securities trades, pricing and account services. MMC and Salomon
Smith Barney have advised the Portfolio that they have been reviewing all of
their computer systems and actively working on necessary changes to their
systems to prepare for the year 2000 and expect that their systems will be
compliant before that date. In addition, MMC has been advised by the Portfolio's
custodian, transfer agent and accounting service agent that they are also in the
process of modifying their systems with the same goal. There can, however, be no
assurance that MMC, Salomon Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer systems will
not impair Portfolio or shareholder services at that time.
14
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
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 in which the Portfolio may invest. Dealers may not maintain daily
markets in
15
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 transaction and the futures or options used as a hedging
device, the hedge may not
16
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 may assume large positions in the obligations of
a small number of issuers, which would 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 those
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 outstanding voting securities of the Portfolio," within the meaning of the
1940 Act. A "majority of the 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 at the time of an investment by the Fund, 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.
17
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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.
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Share Price Data
- --------------------------------------------------------------------------------
The Common Stock is listed on the NYSE under the symbol "MMU." Salomon
Smith Barney currently 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 during the
last two fiscal years and for the first quarter of 1998.
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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
================================================================================
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)
11/30/97 12.450 12.000 (3.61) 12.220 11.375 (6.91)
2/28/98 12.620 12.375 (1.94) 12.350 11.438 (7.38)
5/31/98 12.420 11.625 (6.40) 12.220 10.875 (11.00)
8/31/98 12.450 11.313 (9.13) 12.300 10.688 (13.10)
As of September 11, 1998, the price of Common Stock as quoted on the NYSE
was $10.938, representing an 8.00% 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 shareholders
must include 75% of the interest as an adjustment (the "current earnings
adjustment") in computing corporate mini-
19
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Taxation (continued)
- --------------------------------------------------------------------------------
mum taxable income. Exempt-interest dividends derived from the interest earned
on private activity bonds will not be exempt from federal income tax for those
shareholders who are "substantial users" (or persons related to "substantial
users") of the facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on 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.
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 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 agreements with the Portfolio's investment manager, administrator,
custodian
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Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
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
MMC, 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 1968 and
renders investment advice to a wide variety of individual, institutional and
investment company clients with aggregate assets under management as of August
31, 1998 in excess of $106 billion. The Investment Manager is wholly-owned by
Holdings, the parent company of Salomon Smith Barney. Holdings is a wholly-owned
subsidiary of Travelers, a financial service holdings company engaged through
its subsidiaries, principally in four business segments: Investment Services
including Asset Management, Consumer Finance Services, Life Insurance Services
and Property & Casualty Insurance Services. MMC, Holdings and Salomon 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, MMC serves as administrator
and is paid a fee by the Portfolio that is computed daily and paid monthly at an
annual 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 Salomon Smith Barney or a Salomon 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 Salomon 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, because transactions in fixed income
securities are executed as principal transactions by the various dealers.
21
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Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which was originally expected to be
completed during the third quarter of 1998, is subject to various regulatory
approvals, including approval by the Federal Reserve Board. The transaction has
been approved by the stockholders of each of Travelers and Citicorp. Travelers
has filed an application to become a bank holding company so that, upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"). The requirements of the BHCA, the Glass-Steagall Act and certain other
laws and regulations will then be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Portfolio with the same level
of investment advisory services that it currently receives. Salomon Smith Barney
and the Manager believe that the Manager's services under the Management
Agreement and the market-making activities performed by Salomon Smith Barney are
not underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory and
administrative activities by subsidiaries of bank holding companies. If Salomon
Smith Barney and the Manager, or their affiliates, were to be prevented from
acting as the manager or administrator, the Portfolio would seek alternative
means for obtaining these services. The Portfolio does not expect that
shareholders would suffer any adverse financial consequences as a result of any
such occurrence.
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 MMC and is the
senior portfolio manager for a number of investment companies and other accounts
investing in tax-exempt securities.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Portfolio generally 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. From time to time, when the Portfolio
makes a substantial capital gains distribution, it may do so in lieu of paying
its regular
22
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
monthly dividend. 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 (the "Plan"), unless
a shareholder elects to receive cash.
Under the Portfolio's Dividend Reinvestment 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
purchasing 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 on the date of valuation, Plan participants will be issued shares of
Common Stock at a price equal to the greater of (1) the net asset value per
share most recently determined as described under "Net Asset Value" or (2) 95%
of the market price.
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 portion of the dividend or
distribution by issuing 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 payment date of the dividend or capital gains
23
<PAGE>
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
distribution, but in no event shall such purchases continue later than 30 days
after that date, 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.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. 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 under the Plan. Each Plan participant will,
however, bear a proportionate share of brokerage commissions incurred with
respect to any open market purchases made under the Plan.
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 8030, Boston, Massachusetts 02266-8030 or by telephone at
1-800-331-1710.
- --------------------------------------------------------------------------------
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
24
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
and Market Discount (continued)
- --------------------------------------------------------------------------------
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
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.
25
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
and Market Discount (continued)
- --------------------------------------------------------------------------------
The Portfolio's Board of Directors has seen no reason to adopt any of the
steps specified above, which some other closed-end Portfolios have used to
address the discount. 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. The Portfolio's Investment
Manager may voluntarily waive its fees from time to time in order to increase
the Portfolio's dividend yield in an effort to reduce the discount. Any such
waiver may be terminated at any time, and there can be no assurance that such
actions would be successful at reducing the discount.
- --------------------------------------------------------------------------------
Description of Common Stock
- --------------------------------------------------------------------------------
Amount Outstanding
Exclusive of Shares
Amount Held Held by Portfolio for Its
Amount by Portfolio for Own Account as of
Title of Class Authorized Its Own Account September 11, 1998
================================================================================
Common Stock 500,000,000 Shares -- 34,606,943
================================================================================
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 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
is 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." Such 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 con-
26
<PAGE>
- --------------------------------------------------------------------------------
Description of Common Stock (continued)
- --------------------------------------------------------------------------------
nection 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.
- --------------------------------------------------------------------------------
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 Salomon 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.
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 as may be described in the
Prospectus.
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, MMC 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. The
Portfolio may invest up to 10% of its total assets in zero coupon Municipal
Obligations.
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
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
bank letters of credit or other credit support arrangements. There frequently
will be 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. MMC 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%
==============================================================================================
Single Joint Equivalent Taxable Yield
------------------------
<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%
24,001-58,1500 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
MANAGED MUNICIPALS PORTFOLIO INC.
PART B
Managed Municipals Portfolio Inc.
388 Greenwich Street
New York, New York 10013
800-331-1710
Statement of Additional Information
September 28, 1998
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 28, 1998, 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 Salomon 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
Certain Provisions of the Articles of
Incorporation (see in the Prospectus
"Certain Provisions of the Articles of
Incorporation and Market Discount")
23
Additional Information (see in the
Prospectus "Custodian and Transfer
Agent")
25
Financial Statements
25
Appendix-- Description of Moody's
Investors Service, Inc.("Moody's"),
Standard & Poors Ratings Group ("S&P")
and Fitch IBCA, Inc. ("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 and other
nationally recognized statistical rating organizations ("NRSROs")
represent the opinions of the NRSROs as to the quality of the Municipal
Obligations and other debt securities 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, Mutual Management Corp.
(formerly known as Smith Barney Mutual Funds Management Inc.) ("MMC" or
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 Portfolio 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
Salomon Smith Barney Inc. ("Salomon Smith Barney") or its affiliates are
members except to the extent permitted by the Securities and Exchange
Commission (the "SEC") including under Rule 10f-3 under the 1940 Act.
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, 1997 and 1998,
the Portfolio's portfolio turnover rate was 113% and 87%, 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
MMC Investment Manager and
Administrator
Salomon Smith Barney Market Maker
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 MMC, 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
(65)
388 Greenwich Street
New York, NY 10013
Chairman of the
Board,
Chief Executive
Officer
And President
Managing Director of Salomon
Smith Barney; President of
MMC and Travelers Investment
Advisers, Inc. ("TIA");
Chairman of Salomon 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 (77)
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 of Allan J.
Bloostein Associates, a
consulting firm; Consultant
and retired Vice Chairman and
Director of the Board of May
Department Stores Company;
Director of Taubman Centers,
Inc. and CVS Corporation.
Dwight B. Crane (60)
Harvard Business
School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business
School.
Robert A. Frankel
(71)
102 Grand Street
Croton-on-Hudson
New York, NY 10520
Director
Managing Partner of Robert A.
Frankel Management
Consultants; formerly
Corporate Vice President of
The Reader's Digest
Association, Inc.
Name and Address(Age)
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
William R.
Hutchinson (55)
Amoco Corp.
200 East Randolph
Drive
Chicago, IL 60601
Director
Vice President-Financial
Operations Amoco Corp.;
Director of Associated Banks
and Associated Bank Corp.
Joseph P. Deane (50)
388 Greenwich Street
New York. NY 10013
Vice President and
Investment Officer
Managing Director of Salomon
Smith Barney; Investment
Officer of MMC. Prior to July
1993, Senior Vice President
and Managing Director of
Shearson Lehman Advisors.
David Fare (35)
388 Greenwich Street
New York, NY 10013
Investment Officer
Investment Officer of MMC.
Prior to July 1993, Vice
President of Shearson Lehman
Advisors.
Lewis E. Daidone
(41)
388 Greenwich Street
New York, NY 10013
Senior Vice
President
and Treasurer
Managing Director of Salomon
Smith Barney; Chief Financial
Officer, Director and Senior
Vice President of MMC and
TIA.
Christina T. Sydor
(47)
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Salomon
Smith Barney; General Counsel
and Secretary of MMC 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 Salomon Smith Barney is affiliated.
The Fund pays each of its Directors who is not a director, officer
or employee of MMC, 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,
1998, such fees totaled $3,677.53.
Director
Aggregate
Compensation from
Fund
Pension or
Retirement
Benefits
Accrued as
part of
Fund
Expenses
Total
Compensati
on from
Fund and
Fund
Complex
Total
Number of
Funds for
which
Director
Serves
Within Fund
Complex
Martin Brody
5,600
0
119,814
19
Dwight Crane
6,100
0
133,850
22
Allan Bloostein
6,600
0
85,850
8
Robert Frankel
6,500
0
65,900
8
William R.
Hutchinson
6,100
0
35,700
6
Heath B. McLendon*
- -----
0
- -----
58
* Designates an "interested person" of the Portfolio.
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. During the Portfolio's last fiscal year,
aggregate compensation paid by the Portfolio to Directors Emeritus
totaled $3,100.
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 September 11, 1998;
Percent
of
Name and Address Amount of Common
of Record Owner Record Stock
Ownership
Outstanding
Cede & Co., as Nominee for The Depository Trust Company
33,654,411 97.25%
P.O. Box 20
Bowling Green Station
New York, New York 10004
As of September 11, 1998, 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 19, 1998. 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 Salomon Smith Barney Holdings Inc. ("Holdings"),
which is in turn a wholly owned subsidiary of Travelers Group
("Travelers"). 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, 1997 and 1998, such fees
amounted to $2,913,886 and $2,969,275, respectively. Effective September
1, 1998, the Investment Manager instituted a voluntary fee waiver
whereby its advisory Fees were received at an annual rate of 0.46% of
average daily net assets. This voluntary waiver may be terminated at
any time by the Investment Manager without notice.
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.
MMC 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 MMC under the Administration Agreement are described in the
Prospectus under "Management of the Portfolio."
For services rendered to the Portfolio, MMC 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, 1997 and 1998, MMC or its predecessor received $832,539
and $848,364, respectively, in administration fees.
Pursuant to the Administration Agreement, MMC will exercise its
best judgment in rendering its services to the Portfolio. MMC 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 MMC'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 MMC.
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 Salomon 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; and
(3) 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. 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. Investments in both Section 1256 Contracts and offsetting
positions in those contracts, may result in the Portfolio not being able
to receive the benefit of certain realized losses for an indeterminate
period of time.
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. 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. 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.
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.
The market prices of the Portfolio shares may 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. Any acquisition of Common Stock by the Portfolio 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.
If a tender offer for the Common Stock of the Portfolio is
authorized to be made by the Portfolio 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. 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, 1999, 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,
1998 are incorporated into this SAI by reference in their entirety. A
copy of these Reports may be obtained from any Salomon 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 have the lowest expectation of credit
risk. The obligor has an exceptionally strong ability for timely payment
of financial commitments which is highly unlikely to be adversely
affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to
foreseeable events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but may be more vulnerable to changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be adequate. Adverse changes is economic conditions and
circumstances, however, are more likely to impair this capacity. This is
the lowest investment grade category assigned by Fitch.
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 financial
commitments in a timely manner.
Fitch's short-term ratings are as follows:
F-1 + - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments. The "+" denotes an
exceptionally strong credit feature.
F-1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F-2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety is not
as great as in the case of the higher ratings.
F-3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction
to non-investment grade.
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, 1998 and
Report of Independent Accountants
dated July 15, 1998 are incorporated by
reference to the Definitive 30(b)2-1 filed
on August 12, 1998,
Accession # 0000091155-98-000497
(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 Mutual
Management Corp. incorporated by reference
in Post-Effective Amendment No. 7.
(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
See Forms of Purchase Agreement and Underwriting Agreement
filed as Exhibits (h) and (p).
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 $8000
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 11, 1998
Shares of Common Stock, 614
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.
Mutual Management Corp. (formerly known as Smith Barney
Mutual Funds Management Inc.) ("MMC") a New York corporation, is
a registered investment adviser and is wholly owned by Salomon Smith
Barney Holdings Inc., which in turn is wholly owned by The Travelers
Group Inc. MMC is primarily engaged in the investment advisory
business.
Information as to executive officers and directors of MMC 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
Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
53 State Street
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.
(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.
(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 21st day of September,
1998.
MANAGED MUNICIPALS PORTFOLIO INC.
By:/s/Heath 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/Heath B. McLendon
Heath B. McLendon Chairman of the Board,
9/21/98
Chief Executive Officer
and President
/s/Lewis E. Daidone
Lewis E. Daidone Senior Vice President
and Treasurer
9/21/98
/s/ Allan J. Bloostein*
Allan J. Bloostein Director
9/21/98
/s/ Martin Brody*
Martin Brody Director
9/21/98
/s/ Dwight B. Crane*
Dwight B. Crane Director 9/21/98
/s/ Robert A. Frankel*
Robert A. Frankel Director 9/21/98
/s/ William R. Hutchinson*
William Hutchinson Director
9/21/98
* 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 15, 1998 for 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 Auditors" in the
Statement of Additional Information.
KPMG Peat Marwick LLP
New York, New York
September 21, 1998
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<NAME> MANAGED MUNICIPALS PORTFOLIO INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1998
<PERIOD-END> MAY-31-1998
<INVESTMENTS-AT-COST> 415,044,410
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<GROSS-EXPENSE> 4,229,541
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<AVG-DEBT-PER-SHARE> 0
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