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MANAGED MUNICIPALS
PORTFOLIO II INC.
PROSPECTUS
January 7, 1994
[LOGO]
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C O M M O N S T O C K
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PROSPECTUS JANUARY 7,
1994
COMMON STOCK
MANAGED MUNICIPALS PORTFOLIO II INC.
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Managed Municipals Portfolio II 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." The Portfolio's address is Two
World
Trade Center, New York, New York 10048 and the Portfolio's telephone number
is
(212) 720-9218.
The Portfolio seeks to invest substantially all of its assets in
Municipal
Obligations and, under normal conditions, at least 80% of the Portfolio's
assets
will be invested in Municipal Obligations rated investment grade by
Moody's
Investors Service Inc. ("Moody's"), Standard & Poor's Corporation ("S&P"),
Fitch
Investors Service, Inc. ("Fitch") or another nationally-recognized
statistical
rating agency (that is, no lower than Baa, MIG or Prime-1 by Moody's, BBB,
Sp-2
or A-1 by S&P or BBB or F-1 by Fitch). 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."
This Prospectus is to be used by Smith Barney Shearson Inc. ("Smith
Barney
Shearson") in connection with offers and sales of the Portfolio's Common
Stock
(the "Common Stock") in market-making activities in the over-the-counter
market
at negotiated prices related to prevailing market prices at the time of
sale.
The Common Stock is listed on the New York Stock Exchange, Inc. (the
"NYSE")
under the symbol "MTU."
Smith Barney Shearson intends to make a market in the Common Stock,
although
it is not obligated to conduct market-making activities and any such
activities
may be discontinued at any time without notice, at the sole discretion of
Smith
Barney Shearson. 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 September 17, 1992, at a price of $12.00
per
share. No assurance can be given as to the liquidity of, or the trading
market
for, the Common Stock as a result of any market-making activities undertaken
by
Smith Barney Shearson. The Portfolio will not receive any proceeds from the
sale
of any Common Stock offered pursuant to this Prospectus.
Investors are advised to read this Prospectus, which sets forth concisely
the
information about the Portfolio that a prospective investor ought to know
before
investing, and to retain it for future reference. A Statement of
Additional
Information ("SAI") dated January 7, 1994 has been filed with the Securities
and
Exchange Commission ("SEC") and is incorporated by reference in its
entirety
into this Prospectus. A Table of Contents for the SAI is set forth on page 24
of
this Prospectus. A copy of the SAI can be obtained without charge by calling
or
writing to the Portfolio at the telephone number or address set forth above
or
by contacting any Smith Barney Shearson Financial Consultant.
------------------------
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.
------------------------
SMITH BARNEY SHEARSON INC.
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ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR
NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
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TABLE OF CONTENTS
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PAGE
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Prospectus Summary........................................................
3
Portfolio Expenses........................................................
7
Financial Highlights......................................................
8
The Portfolio.............................................................
9
The Offering..............................................................
9
Investment Objective and Policies.........................................
9
Share Price Data..........................................................
15
Management of the Portfolio...............................................
15
Dividends and Distributions; Dividend Reinvestment Plan...................
17
Net Asset Value...........................................................
18
Taxation..................................................................
19
Description of Common Stock...............................................
21
Stock Purchases and Tenders...............................................
21
Certain Provisions of the Articles of Incorporation.......................
22
Custodian, Transfer Agent and Dividend-Paying Agent and Registrar.........
24
Further Information.......................................................
24
Appendix A................................................................
A-1
Appendix B................................................................
B-1
</TABLE>
2
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PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE
DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE SAI.
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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 Management
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 Management
Policies" and
"Taxation."
Quality 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, S&P, Fitch
or another
nationally-recognized rating agency (that is, rated
no lower than
Baa, MIG 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.......... Smith Barney Shearson intends to make a market in the
Common Stock
in addition to trading of the Common Stock on the
NYSE. Smith Barney
Shearson, however, is not obligated to conduct
market-making
activities and any such activities may be
discontinued at any time
without notice, at the sole discretion of Smith
Barney Shearson.
Listing............... NYSE
Symbol................ MTU
Investment Adviser.... The Greewich Street Advisors Division of Mutual
Management Corp.
("Greenwich Street Advisors") serves as the
Portfolio's investment
adviser. Greenwich Street Advisors is a
division of Mutual
Management Corp. ("MMC"), which is a wholly-owned
subsidiary of
Smith Barney Inc., the parent company of Smith
Barney Shearson.
Greenwich Street Advisors renders investment
advice to a wide
variety of individuals and institutional
clients that had
aggregate assets under management, as of November
30, 1993, in
excess of $43 billion. The Portfolio pays
Greenwich Street
Advisors a fee for services provided to the
Portfolio that is
computed daily and paid monthly at the annual rate
of .70% of the
value of the Portfolio's average daily net assets.
See "Management
of the Portfolio -- Investment Adviser."
</TABLE>
3
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Administrator......... The Boston Company Advisors, Inc. ("Boston Advisors")
serves as the
Portfolio's administrator. The Portfolio pays
Boston Advisors a
fee for services provided to the Portfolio that is
computed daily
and paid monthly at the annual rate of .20% of
the value of the
Portfolio's average daily net assets. See
"Management of the
Portfolio -- Administrator."
Custodian, Transfer
Agent and Dividend
Paying Agent and
Registrar........... Boston Safe Deposit and Trust Company ("Boston Safe")
serves as the
Portfolio's custodian. The Shareholder Services
Group, Inc.
("TSSG"), a subsidiary of First Data Corporation,
serves as the
Portfolio's transfer agent, dividend-paying agent
and registrar.
See "Custodian, Transfer Agent and Dividend-
Paying Agent and
Registrar."
Dividends and
Distributions;
Dividend
Reinvestment Plan... The Portfolio expects to pay monthly dividends of
net investment
income (that is, income other than net realized
capital gains) and
to distribute net realized capital gains, if any,
annually. All
dividends or distributions will be 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."
Discount from Net
Asset Value......... The shares of closed-end investment companies often,
although not
always, trade at a discount from their net asset
value. Whether
investors will realize gains or losses upon the
sale of Common
Stock will not depend upon the Portfolio's net
asset value, but
will depend entirely on whether the market price
of the Common
Stock at the time of sale is above or below the
original purchase
price of the shares. Since the market price of the
Common Stock
will be determined by factors such as relative
demand for and
supply of such shares in the market, general market
and economic
conditions and other factors beyond the control of
the Portfolio,
the Portfolio cannot predict whether the
Common Stock will
continue to trade at, below or above net asset
value. For that
reason, shares of the Portfolio's Common Stock
are designed
primarily for long-term investors, and
investors in the
Portfolio's Common Stock should not view the
Portfolio as a
vehicle for trading purposes. See "Investment
Objective and
Policies -- Risk Factors and Special
Considerations" and "Share
Price Data."
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4
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Risk Factors and
Special
Considerations...... The Portfolio will not purchase securities that are
rated lower than
Baa by Moody's, BBB by S&P or BBB by Fitch at the
time of purchase.
Although obligations rated Baa by Moody's, BBB by
S&P or BBB by
Fitch are considered to be investment grade, they
may be subject
to greater risks than other higher-rated
investment-grade
securities.
The Portfolio may invest up to 20% of its total
assets in unrated
securities that Greenwich Street Advisors
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
Greenwich Street
Advisors 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."
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."
The combined annual rate of fees paid by the Portfolio
for advisory
and administrative services, .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.
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5
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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."
Stock Purchases and
Tenders............. The Portfolio's Board of Directors currently
contemplates that the
Portfolio may from time to time consider the
repurchase of its
Common Stock on the open market or make tender
offers of the
Common Stock. See "Stock Purchases and Tenders."
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6
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PORTFOLIO EXPENSES
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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SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price)................. None
Dividend Reinvestment and Cash Purchase Plan Fee............... None
ANNUAL PORTFOLIO OPERATING EXPENSES (as a percentage of net assets)
(1)
Investment Advisory and Administration Fees....................
.90%
Other Expenses.................................................
.08%
TOTAL ANNUAL PORTFOLIO OPERATING EXPENSES..........................
.98%
<FN>
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(1) See "Management of the Portfolio" for additional information. "Other
Expenses" have been estimated for the current fiscal year.
</TABLE>
HYPOTHETICAL EXAMPLE
An investor would directly or indirectly pay the following expenses on
a
$1,000 investment in the Portfolio, assuming a 5% annual return:
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ONE YEAR THREE YEARS FIVE YEARS TEN YEARS
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$ 10 $ 31 $ 54 $ 120
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This Hypothetical Example assumes that all dividends and other
distributions
are reinvested at net asset value and that the percentage amounts listed
under
Annual Portfolio Operating Expenses remain the same in the years shown.
The
above tables and assumptions in the Hypothetical Example of a 5% annual
return
and reinvestment at net asset value are required by regulations of the
SEC
applicable to all investment companies; the assumed 5% return is not
a
prediction of, and does not represent, the projected or actual performance
of
the Common Stock.
THIS HYPOTHETICAL EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST
OR FUTURE EXPENSES, AND THE PORTFOLIO'S ACTUAL EXPENSES MAY BE MORE OR LESS
THAN
THOSE SHOWN.
7
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FINANCIAL HIGHLIGHTS
THE TABLES BELOW SET FORTH SELECTED FINANCIAL DATA FOR AN OUTSTANDING
SHARE
OF COMMON STOCK THROUGH-OUT THE PERIOD PRESENTED. THE PER SHARE
OPERATING
PERFORMANCE AND RATIOS FOR THE PERIOD SHOWN HAVE BEEN AUDITED BY COOPERS
&
LYBRAND, THE PORTFOLIO'S INDEPENDENT ACCOUNTANTS, AS STATED IN THEIR
REPORT
DATED OCTOBER 20, 1993, THAT IS CONTAINED IN THE PORTFOLIO'S ANNUAL REPORT
DATED
AUGUST 31, 1993 AND CAN BE OBTAINED BY SHAREHOLDERS. THE FOLLOWING
INFORMATION
SHOULD BE READ IN CONJUNCTION WITH THE PORTFOLIO'S FINANCIAL STATEMENTS
DATED
AUGUST 31, 1993 AND NOTES TO THOSE FINANCIAL STATEMENTS, WHICH ARE
INCORPORATED
BY REFERENCE INTO THIS PROSPECTUS.
PER SHARE OPERATING PERFORMANCE FOR A SHARE OF THE
PORTFOLIO'S COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD
<TABLE>
<CAPTION>
9/24/92
TO
8/31/93*
<S> <C>
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Net asset value, beginning of period $ 12.00
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Net investment income 0.62
Net realized and unrealized gains (or losses) on investments 1.34
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Total from investment operations 1.96
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Offering cost
Charged to paid-in capital
(0.04)
Less distributions
Dividends from net investment income
(0.55)
Total distributions
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Net asset value, end of period $ 13.37
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Per share market value, end of period $ 12.625
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Total investment return**
12.14%
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Ratios/supplemental data $ 149,970
Net assets, end of period (in 000's)
Ratios to average net assets:
Operating expenses+
1.10%
Average net income+
5.21%
Portfolio turnover rate
163%
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<FN>
*The Portfolio commenced operations on September 24, 1992.
**Based on market value for the period indicated does not reflect any sales
load
and assumes reinvestment of dividends and distributions at prices
obtained
under the Portfolio's Dividend Reinvestment Plan.
+Annualized.
</TABLE>
8
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THE PORTFOLIO
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 July 23, 1992,
is
registered under the 1940 Act, and has its principal office at Two World
Trade
Center, New York, New York 10048. The Portfolio's telephone number is
(212)
720-9218.
THE OFFERING
Smith Barney Shearson intends to make a market in the Common Stock,
although
it is not obligated to conduct market-making activities and any such
activities
may be discontinued at any time without notice at the sole discretion of
Smith
Barney Shearson. No assurance can be given as to the liquidity of, or
the
trading market for, the Common Stock as a result of any market-making
activities
undertaken by Smith Barney Shearson. This Prospectus is to be used by
Smith
Barney Shearson 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 sale.
INVESTMENT OBJECTIVE AND POLICIES
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 (as defined in the 1940
Act)
of the Portfolio's outstanding shares. 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 net assets
in
Municipal Obligations. No assurance can be given that the Portfolio's
investment
objective will be achieved.
The Portfolio will invest at least 80% of its total assets in
Municipal
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3
or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20%
of
the Portfolio's total assets may be invested in unrated securities that
are
deemed by Greenwich Street Advisors to be of a quality comparable to
investment
grade. The Portfolio will not invest in Municipal Obligations that are
rated
lower than Baa by Moody's, BBB by S&P or BBB by Fitch, at the time of
purchase.
A description of the 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
9
<PAGE>
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 Greenwich Street
Advisors
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 more than
25%
of its total assets 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 Obligation 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 taxes are rendered by bond counsel
to
the respective issuers at the time of issuance. Neither the Portfolio
nor
Greenwich Street Advisors will review the procedures relating to the issuance
of
Municipal Obligations or the basis for opinions of counsel. Issuers of
Municipal
Obligations may be subject to the provisions of bankruptcy, insolvency and
other
laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the
rights
and remedies of creditors. In addition, the obligations of those issuers
may
become subject to laws enacted in the future by Congress, state legislatures
or
referenda extending the time for payment of principal and/or interest,
or
imposing other constraints upon enforcement of the
10
<PAGE>
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
Greenwich
Street Advisors that market conditions warrant such a posture. To the extent
the
Portfolio holds Taxable Investments, the Portfolio may not be fully
achieving
its investment objective.
INVESTMENT TECHNIQUES
The Portfolio may employ, among others, the investment techniques
described
below, which may give rise to taxable income:
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Portfolio may
purchase
securities on a when-issued basis, or may purchase or sell securities
for
delayed delivery. In when-issued or delayed delivery transactions, delivery
of
the securities occurs beyond normal settlement periods, but no payment
or
delivery will be made by the Portfolio prior to the actual delivery or
payment
by the other party to the transaction. The Portfolio will not accrue income
with
respect to a when-issued or delayed delivery security prior to its
stated
delivery date. The Portfolio will establish with Boston Safe a
segregated
account consisting of cash, U.S. Government securities, or other liquid
high
grade debt obligations, in an amount equal to the amount of the
Portfolio's
when-issued and delayed delivery purchase commitments. Placing securities
rather
than cash in the segregated account may have a leveraging effect on
the
Portfolio's net asset value per share; that is, to the extent that the
Portfolio
remains substantially fully invested in securities at the same time that it
has
committed to purchase securities on a when-issued or delayed delivery
basis,
greater fluctuations in its net asset value per share may occur than if it
had
set aside cash to satisfy its purchase commitments.
STAND-BY COMMITMENTS. The Portfolio may acquire "stand-by commitments"
with
respect to Municipal Obligations it holds. Under a stand-by commitment,
which
resembles a put option, a broker, dealer or bank is obligated to repurchase
at
the Portfolio's option specified securities at a specified price. Each
exercise
of a stand-by commitment, therefore, is subject to the ability of the seller
to
make payment on demand. The Portfolio will acquire stand-by commitments
solely
to facilitate liquidity and does not intend to exercise the rights afforded
by
the commitments for trading purposes.
FINANCIAL FUTURES AND OPTIONS TRANSACTIONS. To hedge against a decline
in
the value of Municipal Obligations it owns or an increase in the price
of
Municipal Obligations it proposes to purchase, the Portfolio may enter
into
financial futures contracts and invest in options on financial futures
contracts
that are traded on a U.S. exchange or board of trade. The futures contracts
or
options on futures contracts that may be entered into by the Portfolio will
be
restricted to those that are either based on an index of Municipal
Obligations
or relate to debt securities the prices of which are anticipated by
Greenwich
Street Advisors 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
11
<PAGE>
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
financial
futures contract at a specified exercise price at any time prior to
the
expiration date of the option. Upon exercise of an option, the delivery of
the
futures position by the writer of the option to the holder of the option will
be
accompanied by delivery of the accumulated balance in the writer's
futures
margin account, which represents the amount by which the market price of
the
futures contract exceeds, in the case of a call, or is less than, in the case
of
a put, the exercise price of the option on the futures contract. The
potential
loss related to the purchase of an option on financial futures contracts
is
limited to the premium paid for the option (plus transaction costs). The
value
of the option may change daily and that change would be reflected in the
net
asset value of the Portfolio.
LENDING SECURITIES. The Portfolio is authorized to lend securities it
holds
to brokers, dealers and other financial organizations, but it will not
lend
securities to any affiliate of Greenwich Street Advisors 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 33 1/3% of the value
of
the Portfolio's total assets taken at value. 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 Boston Safe
in
an amount equal to the current market value of the loaned securities.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase
agreement
transactions with member banks of the Federal Reserve System or with
certain
dealers listed 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.
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
12
<PAGE>
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
Greenwich Street Advisors determines to be of comparable quality to the
rated
securities in which the Portfolio may invest. Dealers may not maintain
daily
markets in unrated securities and retail secondary markets for many of them
may
not exist. As a result, the Portfolio's ability to sell these securities
when
Greenwich Street Advisors 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.
Municipal
leases 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.
13
<PAGE>
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 be fully effective because, for example, losses on the securities held
by
the Portfolio may be in excess of gains on the futures contract or losses on
the
futures contract may be in excess of gains on the securities held by
the
Portfolio that were the subject of the hedge. If the Portfolio has
hedged
against the possibility of an increase in interest rates adversely affecting
the
value of securities it holds and rates decrease instead, the Portfolio will
lose
part or all of the benefit of the increased value of securities that it
has
hedged because it will have offsetting losses in its futures or
options
positions.
NON-DIVERSIFIED CLASSIFICATION. Investment in the Portfolio, which
is
classified as a non-diversified fund under the 1940 Act, may present
greater
risks to investors than an investment in a diversified fund. The
investment
return on a non-diversified fund typically is dependent upon the performance
of
a smaller number of securities relative to the number of securities held in
a
diversified fund. The Portfolio's assumption of large positions in
the
obligations of a small number of issuers will affect the value of the
securities
it holds to a greater extent than that of a diversified fund in the event
of
changes in the financial condition, or in the market's assessment, of
the
issuers.
INVESTMENT RESTRICTIONS
The Portfolio has adopted certain fundamental investment restrictions
that
may not be changed without the prior approval of the holders of a majority
of
the Portfolio's outstanding voting securities. A "majority of the
Portfolio's
outstanding voting securities" for this purpose means the lesser of (1) 67%
or
more of the shares of the Portfolio's Common Stock present at a meeting
of
shareholders, if the holders of 50% of the outstanding shares are present
or
represented by proxy at the meeting or (2) more than 50% of the
outstanding
shares. Among the investment restrictions applicable to the Portfolio is
that
the Portfolio is prohibited from borrowing money, except for temporary
or
emergency purposes, or for clearance of transactions, in amounts not
exceeding
15% of its total assets (not including the amount borrowed) and as
otherwise
described in this Prospectus -- when the Portfolio's borrowings exceed 5% of
the
value of its total assets, the Portfolio will not make any
additional
investments. In addition, the Portfolio will not invest more than 25% of
its
total assets in the securities of issuers in any single industry, except
that
this limitation will not be applicable to the purchase of U.S.
government
securities. Also, the Portfolio may not purchases securities other
than
Municipal Obligations and Taxable Investments. For a complete listing of
the
investment restrictions applicable
14
<PAGE>
to the Portfolio, see "Investment Restrictions" in the SAI. All
percentage
limitations included in the investment restrictions apply immediately after
a
purchase or initial investment, and any subsequent change in any
applicable
percentage resulting from market fluctuations will not require the Portfolio
to
dispose of any security that it holds.
SHARE PRICE DATA
The Portfolio's Common Stock is listed on the NYSE under the symbol
"MTU."
Smith Barney Shearson also intends to make a market in the Portfolio's
Common
Stock.
The following table sets forth the high and low sales prices for
the
Portfolio's Common Stock, the net asset value per share and the discount
or
premium to net asset value represented by the quotation for each
quarterly
period since the Portfolio's commencement of operations.
<TABLE>
<CAPTION>
QUARTERLY HIGH PRICE QUARTERLY LOW
PRICE
----------------------------------- -----------------------
- ----------
PREMIUM
PREMIUM
NET ASSET NYSE (DISCOUNT) NET ASSET NYSE
(DISCOUNT)
VALUE PRICE TO NAV VALUE PRICE
TO NAV
----------- -------- ------------ --------- -------- --
- ----------
<S> <C> <C> <C> <C> <C>
<C>
11/30/92 11.62 11.875 2.19% 11.61 11.125
(4.18)%
2/28/93 13.06 12.375 (5.25)% 12.20 11.250
(7.79)%
5/31/93 13.11 12.750 (2.75)% 12.81 12.000
(6.32)%
8/31/93 13.37 12.750 (4.64)% 13.03 12.125
(6.95)%
11/30/93 13.26 12.875 (2.90)% 13.50 12.250
(9.26)%
</TABLE>
As of December 31, 1993 the price of Common Stock as quoted on the NYSE
was
$12.125 representing a discount from the Common Stock's net asset
value
calculated on that day. Since the Portfolio's commencement of operations,
the
Common Stock has generally traded at a slight discount from its net asset
value.
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 adviser, administrator, custodian
and
transfer agent. The day-to-day operations of the Portfolio are delegated to
the
Portfolio's investment adviser and administrator. The SAI contains
background
information regarding each Director and executive officer of the Portfolio.
INVESTMENT ADVISER
Greenwich Street Advisors, a division of Mutual Management Corp., which
is
controlled by Smith Barney Shearson Holdings Inc. ("Holdings"), located at
Two
World Trade Center, New York, New York 10048, serves as the
Portfolio's
investment adviser. Greenwich Street Advisors (through predecessor entities)
has
been in the investment counseling business since 1934 and renders
investment
advice to a wide variety of individuals and institutional clients that
had
aggregate assets under management, as of November 30, 1993, in excess of
$43
billion.
15
<PAGE>
Smith Barney Shearson is located at 388 Greenwich Street, New York, New
York
10013. Smith Barney Shearson is a wholly owned subsidiary of Holdings, which
in
turn is a wholly owned subsidiary of Travelers Inc., a financial
services
holding company which provides through its subsidiaries investment,
consumer
finance and insurance services, is a registered investment adviser and
a
registered broker-dealer incorporated in 1960 under the laws of the State
of
Delaware.
Subject to the supervision and direction of the Portfolio's Board
of
Directors, Greenwich Street Advisors 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 Greenwich Street Advisors a fee for services provided to
the
Portfolio that is computed daily and paid monthly at the annual rate of .70%
of
the value of the Portfolio's average daily net assets.
Transactions on behalf of the Portfolio are allocated to various dealers
by
Greenwich Street Advisors in its best judgement. 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 Greenwich Street Advisors to
supplement
its own research and analysis with the views and information of other
securities
firms. The Portfolio may use Smith Barney Shearson or a Smith Barney
Shearson
affiliated broker in connection with the purchase or sale of securities
when
Greenwich Street Advisors believes that the broker's charge for the
transaction
does not exceed usual and customary levels. The same standard applies to the
use
of Smith Barney Shearson as a broker in connection with entering into
options
and futures contracts. The Portfolio paid no brokerage commissions in the
last
fiscal year.
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 the Portfolio 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 a Senior Vice
President
and Managing Director of Greenwich Street Advisors and, as such, is the
senior
asset manager for investment companies and other accounts investing
in
tax-exempt securities.
Mr. Deane's management discussion and analysis, and additional
performance
information regarding the Portfolio during the fiscal year ended August 31,
1993
is included in the Annual Report dated August 31, 1993. A copy of the
Annual
Report may be obtained upon request without charge from your Smith
Barney
Shearson Financial Consultant or by writing or calling the Portfolio at
the
address or phone number listed on page one of this Prospectus.
ADMINISTRATOR
Boston Advisors, located at One Boston Place, Boston, Massachusetts
02108,
serves as the Portfolio's administrator. Boston Advisors is a wholly
owned
subsidiary of The Boston Company, Inc., a financial services holding
company,
which is in turn an indirect, wholly owned subsidiary of Mellon Bank
Corporation
("Mellon"). Boston Advisors provides investment management, investment
advisory
and/or administrative services to investment companies with total assets, as
of
November 30, 1993, in excess of $86 billion.
16
<PAGE>
As the Portfolio's administrator, Boston Advisors calculates the net
asset
value of the Portfolio's shares of Common Stock and generally manages
all
aspects of the Portfolio's administration and operation. The Portfolio
pays
Boston Advisors a fee for services provided to the Portfolio that is
computed
daily and paid monthly at the annual rate of .20% of the value of
the
Portfolio's average daily net assets. The combined annual rate of fees paid
by
the Portfolio for advisory and administrative services 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.
Greenwich Street Advisors and Boston Advisors each bears all expenses
in
connection with the performance of the services it provides to the
Portfolio.
The Portfolio will bear all other expenses to be incurred in its
operation,
including, but not limited to: the costs incurred in connection with
the
Portfolio's organization; investment advisory and administration fees; fees
for
necessary professional and brokerage services; fees for any pricing service;
the
costs of regulatory compliance; and the costs associated with maintaining
the
Portfolio's corporate existence; and costs of corresponding with the
Portfolio's
shareholders.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Portfolio expects to pay monthly dividends of net investment
income
(that is, income (including its tax-exempt income and its accrued original
issue
discount income) other than net realized capital gains) to the holders of
the
Common Stock. Under the Portfolio's current policy, which may be changed at
any
time by its Board of Directors, the Portfolio's monthly dividends will be
made
at a level that reflects the past and projected performance of the
Portfolio,
which policy over time will result in the distribution of all net
investment
income of the Portfolio. Expenses of the Portfolio are accrued each day.
Net
realized capital gains, if any, will be distributed to the shareholders at
least
once a year.
Under the Portfolio's Dividend Reinvestment Plan (the "Plan"), a
shareholder
whose shares of Common Stock are registered in his own name will have
all
distributions from the Portfolio reinvested automatically by TSSG as agent
under
the Plan, unless the shareholder elects to receive cash. Distributions
with
respect to shares registered in the name of a broker-dealer or other
nominee
(that is, in "Street Name") will be reinvested by the broker or nominee
in
additional shares under the Plan, unless the service is not provided by
the
broker or nominee or the shareholder elects to receive distributions in
cash.
Investors who own Common Stock registered in Street Name should consult
their
broker-dealers for details regarding reinvestment. All distributions
to
Portfolio shareholders who do not participate in the Plan will be paid by
check
mailed directly to the record holder by or under the direction of TSSG
as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan
in lieu of a cash dividend is determined in the following manner. Whenever
the
market price of the Common Stock is equal to or exceeds the net asset value
per
share at the time shares are valued for purposes of determining the number
of
shares equivalent to the cash dividend or capital gains distribution,
Plan
participants will be issued shares of Common Stock valued at the greater of
(1)
the net asset value per share most recently determined as described under
"Net
Asset Value" or (2) 95% of the market value. To the extent the Portfolio
issues
shares to participants in the Plan at a discount to net asset value,
the
remaining shareholders' interests in the Portfolio's net assets will
be
proportionately diluted.
17
<PAGE>
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, TSSG 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 TSSG
has
completed its purchases, the market price exceeds the net asset value of
the
Common Stock, TSSG will attempt to terminate purchases in the open market
and
cause the Portfolio to issue the remaining dividend or distribution in shares
at
net asset value per share. 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 TSSG is unable to stop
open
market purchases and cause the Portfolio to issue the remaining shares,
the
average per share purchase price paid by TSSG 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. TSSG will apply all cash received as
a
dividend or capital gains distribution to purchase Common Stock on the
open
market as soon as practicable after the payment date of the dividend or
capital
gains distribution, but in no event later than 30 days after that date,
except
when necessary to comply with applicable provisions of the federal
securities
laws.
TSSG 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 TSSG in uncertificated form in the name of each Plan participant, and
each
shareholder's proxy will include those shares purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting dividends
and
capital gains distributions. TSSG's fees for handling the reinvestment
of
dividends and capital gains distributions will be paid by the Portfolio.
No
brokerage charges apply with respect to shares of Common Stock issued
directly
by the Portfolio as a result of dividends or capital gains distributions
payable
either in Common Stock or in cash. Each Plan participant will, however, bear
a
proportionate share of brokerage commissions incurred with respect to
open
market purchases made in connection with the reinvestment of dividends
or
capital gains distributions.
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 TSSG, 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 The Shareholders Services Group, Inc.,
P.O.
Box 9134, Boston, Massachusetts 02104 or by telephone at (800) 331-1710.
NET ASSET VALUE
The net asset value of shares of the Common Stock will be calculated as
of
the close of regular trading on the NYSE, currently 4:00 p.m., New York time,
on
each day on which the NYSE is open for
18
<PAGE>
trading. The Portfolio reserves the right to cause its net asset value to
be
calculated on a less frequent basis as determined by the Portfolio's Board
of
Directors. For purposes of determining net asset value, futures contracts
and
options on futures contracts will be valued 15 minutes after the close
of
regular trading on the NYSE.
Net asset value per share of Common Stock is calculated by dividing the
value
of the Portfolio's total assets less liabilities by the number of
outstanding
shares. In general, the Portfolio's investments will be valued at market
value,
or in the absence of market value, at fair value as determined by or under
the
direction of the Portfolio's Board of Directors. Short-term investments
that
mature in 60 days or less are valued on the basis of amortized cost
(which
involves valuing an investment at its cost and, thereafter, assuming a
constant
amortization to maturity of any discount or premium, regardless of the effect
of
fluctuating interest rates on the market value of the investment) when the
Board
of Directors has determined that amortized cost represents fair value.
The valuation of the Portfolio's assets is made by Boston Advisors
after
consultation with an independent pricing service (the "Service") approved by
the
Portfolio's 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, are carried
at
fair value as determined by the Service, based on methods that
include
consideration of: yields or prices of Municipal Obligations of
comparable
quality, coupon, maturity and type; indications as to values from dealers;
and
general market conditions. 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.
TAXATION
The following is a summary of the material federal tax
considerations
affecting the Portfolio and its shareholders; see the SAI for a
further
discussion. In addition to the considerations described below and in the
SAI,
which are applicable to any investment in the Portfolio, there may be
other
federal, state, local or foreign tax considerations applicable to
particular
investors. Prospective shareholders are therefore urged to consult their
tax
advisors with respect to the consequences to them of an investment in
the
Portfolio.
The Portfolio has qualified and intends to qualify each year as a
"regulated
investment company" under Subchapter M of the Code. In each taxable year
that
the Portfolio so qualifies, the Portfolio will be relieved of federal income
tax
on that part of its investment company taxable income (consisting generally
of
taxable net investment income, net short-term capital gain and net
realized
gains from certain hedging transactions) and long-term capital gain that
is
distributed to its shareholders. 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).
19
<PAGE>
Interest on indebtedness incurred by a shareholder to purchase or
carry
shares of Common Stock is not deductible for federal income tax
purposes.
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.
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. 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.
The tables set out in Appendix B to this Prospectus 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 in the tables
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.
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.
The
Portfolio will notify its shareholders following the end of each calendar
year
of the amounts of exempt-interest dividends, taxable dividends and capital
gains
distributions paid (or deemed paid) that year and of any portion thereof that
is
subject to the alternative minimum tax for individuals.
Upon a sale or exchange of shares of Common Stock, a shareholder will
realize
a taxable gain or loss equal to the difference between his adjusted basis
for
the shares and the amount realized. Any such gain or loss will be treated as
a
capital gain or loss if the shares are capital assets in the shareholder's
hands
and will be a long-term capital gain or loss if the shares have been held
for
more than one year. Any loss realized on a sale or exchange of shares of
Common
Stock that were held for six months or less will be disallowed to the extent
of
any exempt-interest dividends received on those shares and (to the extent not
so
allowed) will be treated as a long-term, rather than as a short-term,
capital
loss to the extent of any capital gain distributions received thereon. A
loss
realized on a sale or exchange of shares of Common Stock also will be
disallowed
to the extent those shares are replaced by other shares of Common Stock within
a
period of 61 days beginning 30 days before and ending 30 days after the date
of
the disposition of shares (which could occur, for example, as a result
of
participation in the Plan). In that event, the basis for the replacement
shares
will be adjusted to reflect the disallowed loss.
20
<PAGE>
Investors also should be aware that if shares of the Common Stock
are
purchased shortly before the record date for any distribution, the investor
will
pay full price for the shares and could receive some portion of the price
back
as an exempt-interest dividend, a taxable dividend or capital gain
distribution.
If a shareholder fails to furnish a correct taxpayer identification
number,
fails to report fully 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 20%
"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.
DESCRIPTION OF COMMON STOCK
The Portfolio has 500,000,000 authorized shares of Common Stock, par
value
$.001 per share. At the close of business on December 20, 1993, there
were
11,216,681 shares of Common Stock outstanding. The Portfolio does not hold
any
shares for its own account.
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 liquidation. 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."
Under the rules of the NYSE applicable to listed companies, the
Portfolio
will be required to hold an annual meeting of shareholders in each year. If
the
Portfolio's shares are no longer listed on the NYSE (or any other
national
securities exchange the rules of which require annual meetings of
shareholders),
the Portfolio may decide not to hold annual meetings of shareholders. See
"Stock
Purchases and Tenders."
The Portfolio has no current intention of offering additional shares,
except
that additional shares may be issued under the Plan. See "Dividends
and
Distributions; Dividend Reinvestment Plan." Other offerings of shares,
if
made,will require approval of the Portfolio's Board of Directors and will
be
subject to the requirement of the 1940 Act that shares may not be sold at
a
price below the then current net asset value (exclusive of
underwriting
discounts and commissions) except in connection with an offering to
existing
shareholders or with the consent of a majority of the Portfolio's
outstanding
shares.
STOCK PURCHASES AND TENDERS
Although shares of closed-end investment companies sometimes trade
at
premiums over net asset value, they frequently trade at discounts. Since
the
Portfolio's commencement of operations, the Common Stock has periodically
traded
at a slight discount from its net asset value per share. The Portfolio
cannot
predict whether the Common Stock will continue to trade above, at or below
net
asset value. The Portfolio believes that, if the Common Stock trades at
a
discount to net asset value, the
21
<PAGE>
share price will not adequately reflect the value of the Portfolio to
investors
and that investors' financial interests will be furthered if the price of
the
Common Stock more closely reflects its net asset value. For these reasons,
the
Portfolio's Board of Directors currently intends to consider from time to
time
repurchases of Common Stock on the open market or in private transactions or
the
making of tender offers for Common Stock.
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 Board
of
Directors believes represent a favorable investment opportunity. In
addition,
the Board of Directors currently intends to consider, at least once a
year,
making an offer to each Common Stock shareholder of record to purchase at
net
asset value shares of Common Stock owned by the shareholder.
Before authorizing any repurchase of Common Stock or tender offer to
the
Common Stock shareholders, the Portfolio's Board of Directors would consider
all
relevant factors, including the market price of the Common Stock, its net
asset
value per share, the liquidity of the Portfolio's securities positions,
the
effect an offer or repurchase might have on the Portfolio or its
shareholders
and relevant market conditions. Any offer would be made in accordance with
the
requirements of the 1940 Act and the Securities Exchange Act of 1934.
Although
the matter will be subject to Board of Directors review at the time, a
tender
offer is not expected to be made if the anticipated benefit to shareholders
and
the Portfolio would not be commensurate with the anticipated cost to
the
Portfolio, or if the number of shares expected to be tendered would not
be
material.
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 effect of depriving shareholders of an opportunity to
sell
their shares of Common Stock at a premium over prevailing market prices
by
discouraging a third party from seeking to obtain control of the Portfolio.
The
Board of Directors is divided into three classes. At the annual meeting
of
shareholders in each year, the term of one class expires 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 a 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 the 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 authorize the conversion of the Portfolio from a closed-end to
an
open-end investment company as 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 at least 75% of the Directors and the holders of
at
least 75% of the shares of the Portfolio are required to authorize any of
the
following transactions (referred to individually as
22
<PAGE>
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 or other
property
(or combination 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, issuances of securities of the Portfolio pursuant to a
dividend
reinvestment plan adopted by the Portfolio and issuances of securities of
the
Portfolio upon the exercise of any stock subscription rights distributed by
the
Portfolio; (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 an
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
a
"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 at least 75% of
the
Continuing Directors (as defined below) or if 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.
A "Continuing Director," as used in the discussion above, is any member
of
the Portfolio's Board of Directors (1) who is not a person or affiliate of
a
person who enters or proposes to enter into a Business Combination with
the
Portfolio (such a 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 at least 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 then members
of
the Board of Directors.
The Board of Directors has determined that the 75% voting
requirements
described above, which are generally greater than the minimum requirements
under
Maryland law and the 1940 Act, are in the best interests of
shareholders
generally. References should be made to the Articles of Incorporation on
file
with the SEC for the full text of their provisions.
23
<PAGE>
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT AND REGISTRAR
Boston Safe, an indirect, wholly owned subsidiary of The Boston
Company,
Inc., which is in turn an indirect, wholly owned subsidiary of Mellon,
located
at One Boston Place, Boston, Massachusetts 02108, acts as custodian of
the
Portfolio's investments. Boston Safe is also an affiliate of Boston
Advisors,
the Portfolio's administrator. TSSG, located at One Exchange Place,
Boston,
Massachusetts 02109, serves as the Portfolio's transfer agent, dividend-
paying
agent and registrar. TSSG, a subsidiary of First Data Corporation, also
serves
as agent in connection with the Plan. Neither Boston Safe nor TSSG assists in
or
is responsible for investment decisions involving assets of the Portfolio.
Under the Custody Agreement, Boston Safe holds the Portfolio's assets
in
accordance with the provisions of the 1940 Act. Under the Transfer Agency
and
Registrar Agreement, TSSG maintains the shareholder account records for
the
Portfolio, distributes dividends and distributions payable by the Portfolio
and
produces statements with respect to account activity for the Portfolio and
its
shareholders. The services to be provided by TSSG as agent under the Plan
are
described under "Dividends and Distributions; Dividend Reinvestment Plan."
FURTHER INFORMATION
Further information concerning the Common Stock and the Portfolio may
be
found in the Registration Statement, of which this Prospectus and the
SAI
constitute a part, on file with the SEC.
The Table of Contents for the SAI is as follows:
<TABLE>
<CAPTION>
PAGE
--
- --
<S>
<C>
Investment Objective and Policies.................................
2
Management of the Portfolio.......................................
14
Taxes.............................................................
19
Stock Purchases and Tenders.......................................
23
Additional Information............................................
24
Financial Statements..............................................
25
Appendix--Description of Moody's, S&P and Fitch Ratings...........
26
</TABLE>
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 OR THE PORTFOLIO'S INVESTMENT ADVISER. 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, 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 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 THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, HOWEVER,
THIS
PROSPECTUS WILL BE SUPPLEMENTED OR AMENDED ACCORDINGLY.
24
<PAGE>
APPENDIX
A
TYPES OF MUNICIPAL OBLIGATIONS
The Portfolio may invest in the following types of Municipal Obligations
and
in such other types of Municipal Obligations.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued to obtain funds for
various
public purposes. The two principal classifications of municipal bonds
are
"general obligation" and "revenue" bonds. General obligation bonds are
secured
by the issuer's pledge of its full faith, credit and taxing power for
the
payment of principal and interest. Revenue bonds are payable only from
the
revenues derived from a particular facility or class of facilities or, in
some
cases, from the proceeds of a special excise tax or from another
specific
source, such as the user of the facility being financed. Certain municipal
bonds
are "moral obligation" issues, which normally are issued by special
purpose
public authorities. In the case of such issues, an express or implied
"moral
obligation" of a stated government unit is pledged to the payment of the
debt
service but is usually subject to annual budget appropriations.
INDUSTRIAL DEVELOPMENT BONDS AND PRIVATE ACTIVITY BONDS
Industrial development bonds ("IDBs") and private activity bonds
("PABs")
are municipal bonds issued by or on behalf of public authorities to
finance
various privately operated facilities, such as airports or pollution
control
facilities. IDBs and PABs generally do not carry the pledge of the credit of
the
issuing municipality, but are guaranteed by the corporate entity on whose
behalf
they are issued. IDBs and PABs are generally revenue bonds and thus are
not
payable from the unrestricted revenue of the issuer. The credit quality of
IDBs
and PABs is usually directly related to the credit standing of the user of
the
facilities being financed.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are Municipal Obligations that may take the
form
of leases, installment purchase contracts or conditional sales contracts,
or
certificates of participation with respect to such contracts or
leases.
Municipal lease obligations are issued by state and local governments
and
authorities to purchase land or various types of equipment and
facilities.
Although municipal lease obligations do not constitute general obligations
of
the municipality for which the municipality's taxing authority is pledged,
they
ordinarily are backed by the municipality's covenant to budget for,
appropriate
and make the payments due under the lease obligation. The leases
underlying
certain Municipal Obligations, however, provide that lease payments are
subject
to partial or full abatement if, because of material damage or destruction
of
the leased property, there is substantial interference with the lessee's use
or
occupancy of such property. This "abatement risk" may be reduced by
the
existence of insurance covering the leased property, the maintenance 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
A-1
<PAGE>
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 up to 10% of its total assets 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, Greenwich Street Advisors believes that
limited
investments in such securities may facilitate the Portfolio's ability
to
preserve capital while generating tax-exempt income through the accrual
of
original interest discount. Zero coupon Municipal Obligations generally
are
liquid, although such liquidity may be reduced from time to time due to
interest
rate volatility and other factors.
FLOATING RATE OBLIGATIONS
The Portfolio may purchase floating and variable rate municipal notes
and
bonds, which frequently permit the holder to demand payment of principal at
any
time, or at specified intervals, and permit the issuer to prepay principal,
plus
accrued interest, at its discretion after a specified notice period.
The
issuer's obligations under the demand feature of such notes and bonds
generally
are secured by bank letters of credit or other credit support
arrangements.
There frequently will be 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,
A-2
<PAGE>
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. Greenwich Street Advisors 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 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-3
<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>
SAMPLE
TAXABLE INCOME
--------------------- FEDERAL TAX-
EXEMPT YIELDS
SINGLE JOINT MARGINAL --------------------------------------------
- ------------------------------------------------------
RETURN RETURN RATE* 4.00% 4.50% 5.00% 5.50%
6.00% 6.50% 7.00% 7.50% 8.00% 8.50%
---------- ---------- --------- -------- -------- -------- -------- ----
- ---- -------- -------- -------- -------- --------
EQUIVALENT TAXABLE YIELDS
--------------------------------------------
- ------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
<C> <C> <C> <C> <C>
$17,000 $27,000 15.00% 4.71% 5.29% 5.88% 6.47%
7.06% 7.65% 8.24% 8.82% 9.48% 10.00%
45,000 75,000 28.00% 5.56% 6.25% 6.94% 7.64%
8.33% 9.03% 9.72% 10.42% 11.10% 11.81%
65,000 105,000 31.00% 5.80% 6.52% 7.25% 7.97%
8.70% 9.42% 10.14% 10.87% 11.59% 12.32%
115,000 140,000 36.00 % 10.94% 11.72% 12.50% 13.28%
9.38% 9.42% 8.00% 8.50% 6.00% 12.32%
250,000 250,000 39.60% 11.56% 12.42% 13.25% 14.07%
9.93% 9.42% 8.00% 8.50% 6.00% 12.32%
<FN>
- ------------------------------
* The federal tax rates shown are those currently in effect for 1993.
The
calculations reflected in the table assume that no income will be
subject
to any federal, state or local individual alternative minimum taxes.
</TABLE>
B-1
Managed Municipals Portfolio II Inc.
Two World Trade Center
New York, New York 10048
(212) 464-8068
STATEMENT OF ADDITIONAL INFORMATION
November , 1993
Managed Municipals Portfolio II Inc. (the "Portfolio") is a non-
diversified, closed-end management investment company that seeks as high 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 November , 1993, as amended or supplemented from time to
time (the "Prospectus"), and should be read in conjunction with the
Prospectus. The Prospectus may be obtained from any Smith Barney Shearson
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 does 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"). . . . . . . . . . . . . . .
14
Taxes (see in the Prospectus "Taxation") . . . . . . . . .
19
Stock Purchases and Tenders (see in the Prospectus
"Stock Purchases and Tenders" and
"Description of Common Stock") . . . . . . . . . . . .
23
Additional Information (see in the Prospectus
"Custodian, Transfer Agent and Dividend-Paying
Agent and Registrar") . . . . . . . . . .
24
Financial Statements . . . . . . . . . . . . . . . . . . .
25
Appendix -- Description of Moody's, S&P and 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 Investors Service, Inc. ("Moody's"),
Standard & Poor's Corporation ("S&P") and Fitch Investors Service, Inc.
("Fitch") represent the opinions of those agencies as to the quality of the
Municipal Obligations and long-term investments which they rate. It should be
emphasized, however, that such ratings are relative and subjective, are not
absolute standards of quality and do not evaluate the market risk of
securities. These ratings will be used as initial criteria for the selection
of securities, but the Portfolio also will rely upon the independent advice of
its investment adviser, The Greenwich Street Advisors Division of Mutual
Management Corp. ("Greenwich Street Advisors"). Among the factors that will
also be considered by Greenwich Street Advisors in evaluating potential
Municipal Obligations to be held by the Portfolio are the price, coupon and
yield to maturity of the obligations, Greenwich Street Advisors' 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
Greenwich Street Advisors 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 Greenwich Street Advisors 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 objective 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 net assets will be invested in 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 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
have 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 MIG1 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-1 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 time, 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. Greenwich Street Advisors, acting under the supervision of
the 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 Greenwich
Street Advisors 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 or cash
equivalents in an amount equal to 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
Greenwich Street Advisors' 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 Greenwich Street Advisors, which could
prove to be inaccurate. Even if Greenwich Street Advisors' 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 Greenwich Street Advisors, 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 Greenwich Street Advisors 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 or liquid debt securities equal to the amount of
the when-issued commitments 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 obligations 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 Greenwich Street Advisors deems to be comparable in quality to
rated issues in which the Portfolio is authorized to invest. A determination
by Greenwich Street Advisors 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 Greenwich Street Advisors 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 Greenwich
Street Advisors to be of high quality and minimal credit risk will not be
deemed to be illiquid solely because the underlying municipal lease is
unrated, if Greenwich Street Advisors 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, as 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 Greenwich Street Advisors 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 Greenwich Street Advisors 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 Greenwich Street Advisors, and the fees of Greenwich Street
Advisors are not reduced as a consequence of their receipt of such
supplemental information. Such information may be useful to Greenwich Street
Advisors 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 Greenwich Street Advisors in carrying out its
obligations to the Portfolio.
The Portfolio will not purchase Municipal Obligations during the
existence of any underwriting or selling group relating thereto of which Smith
Barney Shearson or its affiliates are members except to the extent permitted
by the Securities and Exchange Commission (the "SEC"). Under certain
circumstances, the Portfolio may be at a disadvantage because of this
limitation in comparison with other investment companies which have a similar
investment objective but which are not subject to such limitation.
While investment decisions for the Portfolio are made independently from
those of the other accounts managed by Greenwich Street Advisors, 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 Greenwich Street
Advisors 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 Greenwich Street Advisors 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
incurring 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 of tax-exempt securities. For
the fiscal year ended August 31, 1993, the Portfolio's portfolio turnover rate
was 163%.
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
Greenwich Street Advisors
Division of
Mutual Management Corp.
("Greenwich Street Advisors") Investment Adviser
The Boston Company Advisors, Inc.
("Boston Advisors") Administrator
Smith Barney Shearson Inc.
("Smith Barney Shearson") Distributor
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
The Shareholder Services Group, Inc.
("TSSG") Transfer Agent
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 Greenwich Street Advisors,
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
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
* Heath B. McLendon
Two World Trade
Center
New York, NY 10048
Chairman of the
Board,
Chief Executive
Officer and
Director
Executive Vice President of Smith
Barney
Shearson; Chairman of Smith
Barney Shearson
Strategy Advisers Inc. Prior to
July 1993,
Senior Executive Vice President
of
Shearson Lehman Brothers; Vice
Chairman
of Shearson Asset Management, a
member of the
Asset Management Group of
Shearson
Lehman Brothers; a Director of
PanAgora Asset
Management, Inc. and PanAgora
Asset
Management Limited, investment
advisory
affiliates of Shearson Lehman
Brothers.
Charles Barber
66 Glenwood Drive
Greenwich, CT
06830
Director
Consultant; formerly Chairman of
the
Board, ASARCO Incorporated.
Martin Brody
Three ADP
Boulevard
Roseland, NJ 07068
Director
Vice Chairman of the Board of
Directors
of Restaurant Associates Corp.;
Director of Jaclyn, Inc.
Allan J. Bloostein
27 West 67th
Street
Apt. 5FW
New York, NY 10023
Director
Consultant; formerly Vice
Chairman of the
Board of Directors of May
Department
Stores Company; Director of
Crystal
Brands, Inc., Melville Corp.,
R.G. Barry
Corp. and Hechinger Co.
Name and Address
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
Dwight B. Crane
Graduate School of
Business
Administration
Harvard University
Soldiers Field
Road
Boston, MA 02163
Director
Professor, Graduate School of
Business
Administration, Harvard
University;
Director of Back Bay Restaurant
Group, Inc.
* Stephen J. Treadway
388 Greenwich
Street
New York, NY 10013
President
Executive Vice President and
Director of Smith
Barney Shearson; Director and
President of
Mutual Management Corp., Smith
Barney Advisers,
Inc. and other investment
companies associated
with Smith Barney Shearson; and
Director and
Chairman of Corporate Realty
Advisers, Inc.
and Trustee of Corporate Realty
Income Trust I.
* Richard P. Roelofs
Two World Trade
Center
New York, NY 10048
Executive Vice
President
Managing Director of Smith Barney
Shearson
and President of Smith Barney
Shearson
Strategy Advisers Inc.; prior to
July 1993,
Senior Vice President of Shearson
Lehman
Brothers; Vice President of
Shearson Lehman
Strategy Advisors Inc., an
investment
advisory affiliate of Shearson
Lehman Brothers.
Joseph P. Deane
Two World Trade
Center
New York, NY 10048
Vice President
and
Investment
Officer
Senior Vice President and Managing
Director of Greenwich Street
Advisors;
Prior to July 1993, Senior Vice
President
and Managing Director of Shearson
Lehman Advisors.
David Fare
Two World Trade
Center
New York, NY 10048
Investment
Officer
Vice President of Greenwich Street
Advisors;
prior to July 1993, Vice President
of Shearson
Lehman Advisors; prior to March
1989, a senior
portfolio accountant with the firm
of Merrill Lynch Pierce, Fenner &
Smith Inc., New York, New York.
Vincent Nave
Exchange Place
Boston, MA 02109
Chief Financial
and
Accounting
Officer and
Treasurer
Senior Vice President of Boston
Advisors
and Boston Safe.
Francis J. McNamara
III, Esq.
Exchange Place
Boston, MA 02109
Secretary
General Counsel and Senior Vice
President
of Boston Advisors; prior to June
1989,
Vice President and Associate
General
Counsel of Boston Advisors.
_________________________________________
*"Interested person" of the Portfolio (as defined in the 1940 Act)
Director and/or trustee of other registered investment companies with which
Smith Barney Shearson is affiliated.
The Portfolio pays each of its directors who is not a director, officer
or employee of Greenwich Street Advisors, or any of its affiliates, an annual
fee of $5,000 plus $500 for each Board of Directors meeting attended. In
addition, the Portfolio will reimburse these directors for travel and out-of-
pocket expenses incurred in connection with Board of Directors meetings. For
the fiscal year ended August 31, 1993, such fees and expenses totaled $
41,649.
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 the Common Stock. The following person is the only
person holding more than 5% of the 11,216,669 outstanding shares of Common
Stock as of November 1, 1993:
Name and Address
of Record Owner
Amount of
Record
Ownership
Percent of
Common Stock
Outstanding
Cede & Co., as Nominee for The Depository
Trust Company
P.O. Box 20
Bowling Green Station
New York, New York 10004
10,938,171
97.5%
All of the shares held of record by Cede & Co., representing 97.5% of
the outstanding shares of Common Stock, were held by The Depository Trust
Company as nominee for Smith Barney Shearson, representing accounts for which
Smith Barney Shearson has discretionary and non-discretionary authority.
As of November 1, 1993, 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 Adviser -- Greenwich Street Advisors
Administrator -- Boston Advisors
Greenwich Street Advisors 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 Greenwich Street Advisors ("Non-Interested
Directors") on April 7, 1993 and by the shareholders at an Annual Meeting of
the Portfolio on June 9, 1993. Unless terminated sooner, the Advisory
Agreement will continue for an initial two-year period and will continue for
successive annual periods thereafter 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. Greenwich Street Advisors
is a division of Mutual Management Corp., which is in turn a wholly owned
subsidiary of Smith Barney, Inc., the parent of Smith Barney Shearson.
Greenwich Street Advisors pays the salary of any officer or employee who is
employed by both it and the Portfolio. Greenwich Street Advisors bears all
expenses in connection with the performance of its services as investment
adviser.
For services rendered to the Portfolio, Greenwich Street Advisors
receives from the Portfolio a fee, computed and paid monthly at the annual
rate of .70% of the value of the Portfolio's average daily net assets. For
the fiscal year ended August 31, 1993, such fees amounted to $ 925,705.
Under the Advisory Agreement, Greenwich Street Advisors 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 Greenwich Street Advisors 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 the Common Stock, at any time without penalty, on 60
days' written notice to Greenwich Street Advisors. The Advisory Agreement may
also be terminated by Greenwich Street Advisors on 90 days' written notice to
the Portfolio. The Advisory Agreement terminates automatically upon its
assignment.
Boston Advisors serves as administrator to the Portfolio pursuant to a
written agreement dated May 22, 1993 (the "Administration Agreement"). Boston
Advisors is an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon").
Certain of the services provided to the Portfolio by Boston Advisors
pursuant to the Administration Agreement are described in the Prospectus under
"Management of the Portfolio." In addition to those services, Boston Advisors
pays the salaries of all officers and employees who are employed by both it
and the Portfolio, maintains office facilities for the Portfolio, furnishes
the Portfolio with statistical and research data, clerical help and
accounting, data processing, bookkeeping, internal auditing and legal services
and certain other services required by the Portfolio, prepares reports to the
Portfolio's shareholders, and prepares tax returns and reports to and filings
with the SEC and state blue sky authorities. Boston Advisors bears all
expenses in connection with the performance of its services.
For services rendered to the Portfolio, Boston Advisors receives from
the Portfolio a fee computed and paid monthly at the annual rate of .20% of
the value of the Portfolio's average daily net assets. For the fiscal year
ended August 31, 1993, such fees amounted to $ 264,487.
Pursuant to the Administration Agreement, Boston Advisors will exercise
its best judgment in rendering its services to the Portfolio. Boston Advisors
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 Boston Advisors'
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 Boston Advisors.
The Portfolio bears expenses incurred in its operation including: fees
of the investment adviser and administrator; taxes, interest, brokerage fees
and commissions, if any; fees of Directors who are not officers, directors,
shareholders or employees of Smith Barney Shearson; 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 Code. In addition, the
Portfolio intends to satisfy conditions contained in the Code that will enable
interest from Municipal Obligations, excluded from gross income for federal
income tax purposes with respect to the Portfolio, to retain that tax-exempt
status when distributed to the shareholders of the Portfolio (that is, to be
classified as "exempt-interest" dividends of the Portfolio).
If it qualifies as a regulated investment company, the Portfolio will
pay no federal income taxes on its taxable net investment income (that is,
taxable income other than net realized capital gains) and its net realized
capital gains that are distributed to shareholders. To qualify under
Subchapter M of the Code, the Portfolio must, among other things: (1)
distribute to its shareholders at least 90% of its taxable net investment
income (for this purpose consisting of taxable net investment income and net
realized short-term capital gains) and 90% of its tax-exempt net investment
income (reduced by certain expenses); (2) derive at least 90% of its gross
income from dividends, interest, payments with respect to loans of securities,
gains from the sale or other disposition of securities, or other income
(including, but not limited to, gains from options, futures, and forward
contracts) derived with respect to the Portfolio's business of investing in
securities; (3) derive less than 30% of its annual gross income from the sale
or other disposition of securities, options, futures or forward contracts held
for less than three months; and (4) diversify its holdings so that, at the end
of each fiscal quarter of the Portfolio (a) at least 50% of the market value
of the Portfolio's assets is represented by cash, U.S. government securities
and other securities, with those other securities limited, with respect to any
one issuer, to an amount no greater than 5% of the Portfolio's assets and (b)
not more than 25% of the market value of the Portfolio's assets is invested in
the securities of any one issuer (other than U.S. government securities or
securities of other regulated investment companies) or of two or more issuers
that the Portfolio controls and that are determined to be in the same or
similar trades or businesses or related trades or businesses. In meeting
these requirements, the Portfolio may be restricted in the selling of
securities held by the Portfolio for less than three months and in the
utilization of certain of the investment techniques described above under
"Investment Objective and Policies." 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 Statement of Additional Information 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's 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. Moreover, if the Portfolio invests in both Section
1256 Contracts and offsetting positions in those contracts, then the Portfolio
might not be able to receive the benefit of certain realized losses for an
indeterminate period of time. The Portfolio expects that its activities with
respect to Section 1256 Contracts and offsetting positions in those Contracts
(1) will not cause it or its shareholders to be treated as receiving a
materially greater amount of capital gains or distributions than actually
realized or received and (2) will permit it to use substantially all of its
losses for the fiscal years in which the losses actually occur.
Taxation of the Portfolio's Shareholders
The Portfolio anticipates that all dividends it pays, other than
dividends from Taxable Investments and from income or gain derived from
securities transactions and from the use of certain of the investment
techniques described under "Investment Objective and Policies," will be
derived from interest on Municipal Obligations and thus will be exempt-
interest dividends that may be excluded by shareholders from their gross
income for federal income tax purposes if the Portfolio satisfies certain
asset percentage requirements. Dividends paid from the Portfolio's net
investment income and distributions of the Portfolio's net realized short-term
capital gains are taxable to shareholders of the Portfolio as ordinary income,
regardless of the length of time shareholders have held shares of Common Stock
and whether the dividends or distributions are received in cash or reinvested
in additional shares. As a general rule, a shareholder's gain or loss on a
sale of his shares of Common Stock will be a long-term gain or loss if he has
held his shares for more than one year and will be a short-term capital gain
or loss if he has held his 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 receives exempt-interest dividends to treat as taxable income a portion of
certain otherwise non-taxable social security and railroad retirement benefit
payments. In addition, the portion of any exempt-interest dividend paid by
the Portfolio that represents income derived from private activity bonds held
by the Portfolio may not retain its tax-exempt status in the hands of a
shareholder who is a "substantial user" of a facility financed by the bonds,
or a "related person" of the substantial user. Although the Portfolio's
exempt-interest dividends may be excluded by shareholders from their gross
income for federal income tax purposes (1) some or all of the Portfolio's
exempt-interest dividends may be a specific preference item, or a component of
an adjustment item, for purposes of the federal individual and corporate
alternative minimum taxes and (2) the receipt of dividends and distributions
from the Portfolio may affect a corporate shareholder's federal
"environmental" tax liability. The receipt of dividends and distributions
from the Portfolio may affect a foreign corporate shareholder's federal
"branch profits" tax liability and a corporate shareholder's federal "excess
net passive income" tax liability. Shareholders should consult their own tax
advisors to determine whether they are (1) "substantial users" with respect to
a facility or "related" to those users within the meaning of the Code or (2)
subject to a federal alternative minimum tax, the federal "environmental" tax,
the federal "branch profits" tax, or the federal "excess net passive income"
tax.
Dividend Reinvestment Plan
A shareholder of the Portfolio receiving dividends or distributions in
additional shares pursuant to the Plan should be treated for federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that a shareholder receiving cash dividends or distributions receives,
and should have a cost basis in the shares received equal to that amount.
Statements and Notices
Statements as to the tax status of the dividends and distributions
received by shareholders of the Portfolio are mailed annually. These
statements show the dollar amount of income excluded from federal income taxes
and the dollar amount, if any, subject to federal income taxes. The
statements will also designate the amount of exempt-interest dividends that
are a specific preference item for purposes of the federal individual and
corporate alternative minimum taxes and will indicate the shareholder's share
of the investment expenses of the Portfolio. The Portfolio will notify
shareholders annually as to the interest excluded from federal income taxes
earned by the Portfolio with respect to those states and possessions in which
the Portfolio has or had investments. The dollar amount of dividends paid by
the Portfolio that is excluded from federal income taxation and the dollar
amount of dividends paid by the Portfolio that is subject to federal income
taxation, if any, will vary for each shareholder depending upon the size and
duration of the shareholder's investment in the Portfolio. To the extent that
the Portfolio earns taxable net investment income, it intends to designate as
taxable dividends the same percentage of each day's dividend as its taxable
net investment income bears to its total net investment income earned on that
day. Therefore, the percentage of each day's dividend designated as taxable,
if any, may vary from day to day.
Backup Withholding
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully 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 20%
"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 20% backup withholding tax is not an additional tax and
may be credited against a taxpayer's federal income tax liability.
STOCK PURCHASES AND TENDERS
The Portfolio may repurchase shares of its Common Stock in the open
market or in privately negotiated transactions when the Portfolio can do so at
prices below their then current net asset value per share on terms that the
Portfolio's Board of Directors believes represent a favorable investment
opportunity. In addition, the Board of Directors currently intends to
consider, at least once a year, making an offer to each shareholder of record
to purchase at net asset value shares of Common Stock owned by the
shareholder.
No assurance can be given that repurchases and/or tenders will result in
the Portfolio's shares trading at a price that is equal to their net asset
value. The market prices of the Portfolio shares will, among other things, be
determined by the relative demand for and supply of the shares in the market,
the Portfolio's investment performance, the Portfolio's dividends and yield
and investor perception of the Portfolio's overall attractiveness as an
investment as compared with other investment alternatives. The Portfolio's
acquisition of Common Stock will decrease the total assets of the Portfolio
and therefore have the effect of increasing the Portfolio's expense ratio.
The Portfolio may borrow money to finance the repurchase of shares subject to
the limitations described in the Prospectus. Any interest on the borrowings
will reduce the Portfolio's net income. Because of the nature of the
Portfolio's investment objective, policies and securities holdings, Greenwich
Street Advisors does not anticipate that repurchases and tenders will have an
adverse effect on the Portfolio's investment performance and does not
anticipate any material difficulty in disposing of securities to consummate
Common Stock repurchases and tenders.
When a tender offer is authorized to be made by the Portfolio's Board of
Directors, it will be an offer to purchase at a price equal to the net asset
value of all (but not less than all) of the shares owned by the shareholder
(or attributed to him for federal income tax purposes under Section 38 of the
Code). A shareholder who tenders all shares owned or considered owned by him,
as required, will realize a taxable gain or loss depending upon his basis in
his shares.
If the Portfolio liquidates securities in order to repurchase shares of
Common Stock, the Portfolio may realize gains and losses. These gains, if
any, may be realized on securities held for less than three months. Because
the Portfolio must derive less that 30% of its gross income for any taxable
year from the sale or disposition of stock and securities held less than three
months (in order to retain the Portfolio's regulated investment company status
under the Code), gains realized by the Portfolio due to a liquidation of
securities held for less than three months would reduce the amount of gain on
sale of other securities held for less than three months that the Portfolio
could realize in the ordinary course of its portfolio management, which may
adversely affect the Portfolio's performance. The portfolio turnover rate of
the Portfolio may or may not be affected by the Portfolio's repurchases of
shares of Common Stock pursuant to a tender offer.
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 as their counsel.
Independent Public Accountants
Coopers & Lybrand, independent accountants, One Post Office Square
Boston, Massachusetts 02109, serve as auditors of the Portfolio and render an
opinion on the Portfolio's financial statements annually.
Custodian and Transfer Agent
Boston Safe, an indirect wholly owned subsidiary of Mellon and an
affiliate of Boston Advisors, is located at One Boston Place, Boston,
Massachusetts 02108, and serves as the Portfolio's custodian pursuant to a
custody agreement. Under the custody agreement, Boston Safe holds the
Portfolio's securities and keeps all necessary accounts and records. The
assets of the Portfolio are held under bank custodianship in compliance with
the 1940 Act.
TSSG, a subsidiary of First Data Corporation, is located at Exchange
Place, Boston, Massachusetts 02109, and pursuant to a transfer agency
agreement serves as the Portfolio's transfer agent. Under the transfer
agency agreement, TSSG 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 quarterly and 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 August 31, 1993
is incorporated into this Statement of Additional Information by reference in
its entirety. A copy of the Annual Report may be obtained from any Smith
Barney Shearson Financial Consultant or by calling or writing to the Portfolio
at the telephone number or address set forth on the cover page of this
Statement of Additional Information.
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 August not be as large as in Aaa securities, or fluctuation of
protective elements August be of greater amplitude, or other elements August
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 August be present that suggest a
susceptibility to impairment sometime in the future.
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 August be lacking or August be characteristically
unreliable over any great length of time. These bonds lack outstanding
investment characteristics and August 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-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the 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-1 (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, August 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 future 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 appearance 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 August 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 of 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-1 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 on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as issues designated A-1.
Description of Fitch Municipal Bond Ratings:
AAA - Bonds rated AAA by Fitch are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely to be affected
by reasonably foreseeable events.
AA - Bonds rated AA by Fitch are considered to be investment grade and
of very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issues
is generally rated F1+ by Fitch.
A - Bonds rated A by Fitch are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and repay
principal is considered to be strong, but August be more vulnerable to adverse
changes in economic conditions and circumstances than bonds with higher
ratings.
BBB - Bonds rated BBB by Fitch are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes in economic
conditions and circumstances, however, are more likely to have adverse
consequences on these bonds, and therefore impair timely payment. The
likelihood that the ratings of these bonds will fall below investment grade is
higher than for bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs, however, are not
used in the AAA category.
Description of Fitch Short-Term Ratings:
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal
and investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch's short-term ratings are as follows:
F-1+ - Issues assigned this rating are regarded as having the
strongest degree of assurance for timely payment.
F-1 - Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.
F-2 - Issues assigned this rating have a satisfactory degree of
assurance for timely payment but the margin of safety is not as great as for
issues assigned F-1+ and F-1 ratings.
F-3 - Issues assigned this rating have characteristics suggesting that
the degree of assurance for timely payment is adequate, although near-term
adverse changes could cause these securities to be rated below investment
grade.
LOC - The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
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