As filed with the Securities and Exchange Commission on December 6, 1996
Securities Act Registration No. 33-49982
Investment Company Act Registration No. 811-7046
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 4 x
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5 x
__________________
Managed Municipals Portfolio II Inc.
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 723-9218
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Managed Municipals Portfolio Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
_______________
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. x_______________
This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.
Pursuant to Rule 429, this Registration Statement relates to shares previously
registered on Form N-2. (Registration No. 33-47116).
It is proposed that this filing will become effective: x when declared
effective pursuant to section 8(c).
Registrant amends this Registration Statement under the Securities Act
of 1933, as amended, on such date as may be necessary to delay its effective
date until Registrant files a further amendment that specifically states that
this Registration Statement will thereafter become effective in accordance
with the provisions of Section 8(a) of the Securities Act of 1933, as amended,
or until the Registration Statement becomes effective on such date as the
Securities and Exchange Commission, acting pursuant to Section 8(a), may
determine.
MANAGED MUNICIPALS PORTFOLIO II INC.
Form N-2
Cross Reference Sheet
Part A
Item No. Caption Prospectus Caption
1. Outside Front Cover Outside Front Cover of
Prospectus
2. Inside Front and Outside Back Cover Page Inside Front and Outside Back
Cover Page
of Prospectus
3. Fee Table and Synopsis Prospectus Summary; Fund
Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Prospectus Summary; The
Offering;
6. Selling Shareholders Not Applicable
7. Use of Proceeds.. Use of Proceeds
8. General Description of the
Registrant......................................... Prospectus Summary; The
Portfolio; Investment
Objectives and Policies; Description of
Common Stock; Share Price Data; Certain
Provisions of the Articles of Incorporation;
Appendix.
9. Management Management of the Portfolio;
Description of
Common Stock; Custodian and
Transfer Agent
10. Capital Stock, Long-Term Debt, and Other
Securities Taxation; Dividend
Reinvestment Plan;
Dividends and Distributions;
Description of Common Stock; Share
Price Data
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Further Information
Part B Statement of Additional
Item No. Information Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and
History................................................ The Portfolio;
Description of Common Stock (see
Prospectus)
17. Investment Objective and Policies Investment Objective and
Policies; Invest-
ment Restrictions
18.
Management.................................................................
.............. Management of the Portfolio;
Directors and Executive Officers of
the Portfolio
19. Control Persons and Principal Holders of
Securities Not Applicable
20. Investment Advisory and Other Services Management of the Portfolio
21. Brokerage Allocation and Other Practices Portfolio Transactions
22. Tax Status Taxes; Taxation (see
Prospectus)
23. Financial Statements Financial Statements
Part C
Item No.
Information required to be included in Part C is set forth, under
the appropriate item so numbered, in Part C of this Registration
Statement.
SMITH BARNEY
------------
A Member of TravelersGroup [Logo]
Managed
Municipals
Portfolio II
Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD0505
<PAGE>
Managed Municipals Portfolio II Inc.
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Prospectus December 9, 1996
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388 Greenwich Street
New York, New York 10013
(212) 723-9218
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 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 Ratings Group ("S&P"),
Fitch Investors Service, Inc. ("Fitch") or another nationally-recognized
statistical rating agency (that is, no lower than Baa, MIG or Prime-I 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 sets forth concisely the information about the Portfolio
that a prospective investor ought to know before investing and should be
retained for future reference. A Statement of Additional Information dated
December 9, 1996 (the "SAI") containing additional information about the
Portfolio has been filed with the Securities and Exchange Commission and is
hereby incorporated by reference in its entirety into this Prospectus. A copy of
the Statement of Additional Information may be obtained without charge by
calling or writing to the Portfolio at the telephone number or address set forth
above or by contacting a Smith Barney Financial Consultant.
(Continued on page 2)
SMITH BARNEY INC.
Distributor
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 ADEOUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Managed Municipals Portfolio II Inc.
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Prospectus (continued) December 9, 1996
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Smith Barney Inc. ("Smith Barney") intends to make a market in the
Portfolio's Common Stock, although it is not obligated to conduct market-making
activities and any such activities may be discontinued at any time without
notice, at the sole discretion of Smith Barney. The shares of Common Stock that
may be offered from time to time pursuant to this Prospectus were issued and
sold by the Portfolio in a public offering which commenced September 24, 1992,
at a price of $12.00 per share. No assurance can be given as to the liquidity
of, or the trading market for, the Common Stock as a result of any market-making
activities undertaken by Smith Barney. The Portfolio will not receive any
proceeds from the sale of any Common Stock offered pursuant to this Prospectus.
2
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Managed Municipals Portfolio II Inc.
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Table of Contents
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Prospectus Summary 4
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Portfolio Expenses 8
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Financial Highlights 9
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The Portfolio 10
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The Offering 10
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Use of Proceeds 10
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Investment Objective and Policies 10
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Share Price Data 18
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Management of the Portfolio 18
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Dividends and Distributions; Dividend Reinvestment Plan 20
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Taxation 22
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Description of Common Stock 24
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Certain Provisions of the Articles of Incorporation 25
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Custodian and Transfer Agent 25
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Experts 26
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Further Information 26
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Appendix A A-1
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3
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Managed Municipals Portfolio II Inc.
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Prospectus Summary
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The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the SAI. Cross
references in this summary are to headings in the Prospectus.
THE PORTFOLIO The Portfolio is a non-diversified, closed-end management
investment company. See "The Portfolio."
INVESTMENT OBJECTIVE The Portfolio seeks as high a level of current income
exempt from Federal income tax as is consistent with the preservation of
principal. See "Investment Objective and Policies."
TAX-EXEMPT INCOME The Portfolio is intended to operate in such a manner that
dividends paid by the Portfolio may be excluded by the Portfolio's shareholders
from their gross income for Federal income tax purposes. See "Investment
Objective and 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 inves tment manager to
be of a quality comparable to investment grade. See "Investment Objective and
Policies."
THE OFFERING The Common Stock is listed for trading on the New York Stock
Exchange, Inc. ("NYSE"). In addition, Smith Barney intends to make a market in
the Common Stock. Smith Barney, however, is not obligated to conduct
market-making activities and any such activities may be discontinued at any time
without notice, at the sole discretion of Smith Barney.
LISTING NYSE
SYMBOL MTU
INVESTMENT MANAGER AND ADMINISTRATOR Greenwich Street Advisors (the "Investment
Manager"), a division of Smith Barney Mutual Funds Management Inc. ("SBMFM"),
serves as the Portfolio's investment manager. The Investment Manager provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc. ("Holdings"), which is in turn a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"). Subject to the supervision and direction of the Portfolio's
Board of Directors, the Investment Manager manages the securities held by the
Portfolio in accordance with the Portfolio's stated investment objective and
policies, makes investment decisions for the Portfolio, places orders to
purchase and sell securities on behalf of the Portfolio and employs professional
portfolio
4
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Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
managers. SBMFM acts as administrator of the Portfolio and in that
capacity provides certain administrative services, including overseeing the
Portfolio's non-investment operations and its relations with other service
providers and providing executive and other officers to the Portfolio. The
Portfolio pays the Investment Manager a fee ("Management Fee") for services
provided to the Portfolio that is computed daily and paid monthly at the annual
rate of 0.70% of the value of the Portfolio's average daily net assets. The
Portfolio will bear other expenses and costs in connection with its operation in
addition to the costs of investment management services. See "Management of the
Portfolio -- Investment Manager."
CUSTODIAN PNCBank, National Association ("PNCBank") serves as the Fund's
custodian. See "Custodian and Transfer Agent."
TRANSFER AGENT First Data Investor Services Group, Inc. ("First Data") serves as
the Portfolio's transfer agent, dividend-paying agent and registrar. See
"Custodian and Transfer Agent."
DIVIDENDS AND DISTRIBUTIONS The Portfolio expects to pay monthly dividends of
net investment income (income other than net realized capital gains) and to
distribute net realized capital gains, if any, annually. All dividends or
distributions with respect to shares of common stock are reinvested
automatically in additional shares through participation in the Portfolio's
Dividend Reinvestment Plan (the "Plan"), unless a shareholder elects to receive
cash. See "Dividends and Distributions" and "Dividend Reinvestment Plan."
DISCOUNT FROM NET ASSET VALUE The shares of closed-end 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 the 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."
Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium. Shares
of closed-end investment companies investing primarily in fixed income
securities tend to trade on the basis of income yield on the market price of the
shares and the
5
<PAGE>
Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
market price may also be affected by trading volume, general market conditions
and economic conditions and other factors beyond the control of the Portfolio.
As a result, the market price of the Portfolio's shares may be greater or less
than the net asset value. Since the commencement of the Portfolio's
operations, the
Portfolio's shares have traded in the market at prices that were equal to, but
generally were below net asset value.
Some closed-end companies have taken certain actions, including the
repurchase of common stock in the market at market prices and the making of one
or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value. The
Portfolio's Board of Directors has seen no reason to adopt any of the steps,
which some other closed-end funds have used to address the discount. In
addition, the experience of many closed-end funds suggests that the effect of
many of these steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, there can be no assurance that any of these actions
will be taken or, if undertaken, will cause the Portfolio's shares to trade at a
price equal to their net asset value.
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 the Investment Manager determines to be of comparable quality to
the securities rated investment grade in which the Portfolio may invest. Dealers
may not maintain daily markets in unrated securities and retail secondary
markets for many of them may not exist; this lack of markets may affect the
Portfolio's ability to sell these securities when the Investment Manager deems
it appropriate. The Portfolio has the right to invest without limitation in
state and local obligations that are "private activity bonds," the income from
which may be taxable as a specific preference item for purposes of the Federal
alternative minimum tax. Thus, the Portfolio may not be a suitable investment
for investors who are subject to the alternative minimum tax. See "Investment
Objective and Policies" and "Taxation."
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
6
<PAGE>
Managed Municipals Portfolio II Inc.
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 -- Risk Factors and Special Considerations."
The combined annual rate of fees paid by the Portfolio for advisory and
administrative services, 0.90% of the value of the Portfolio's average daily net
assets, is higher than the rates for similar services paid by other publicly
offered, closed-end, management investment companies that have investment
objectives and policies similar to those of the Portfolio. The Portfolio will
bear, in addition to the costs of advisory and administrative services, other
expenses and costs in connection with its operation. See "Management of the
Portfolio."
The Portfolio's Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Portfolio and of depriving shareholders of an opportunity to sell
their shares of Common Stock at a premium over prevailing market prices. See
"Certain Provisions of the Articles of Incorporation."
7
<PAGE>
Managed Municipals Portfolio II Inc.
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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.
================================================================================
Annual Expenses
(as a percentage of net assets attributable to Common Stock)
Management Fees ..................................................... 0.90%
Other Expenses* ..................................................... 0.19%
================================================================================
Total Annual Operating Expenses* ........................................ 1.09%
================================================================================
* "Other Expenses," as shown above, are based upon amounts of expenses for the
fiscal period ended August 31, 1996.
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Portfolio. These amounts are based upon payment
by the Portfolio of operating expenses at the levels set forth in the table
above.
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) reinvestment of all dividends and
distributions at net asset value:
One Year Three Years Five Years Ten Years
================================================================================
$11 $35 $60 $133
================================================================================
This example should not be considered a representation of future expenses
of the Portfolio and actual expenses may be greater or less than those shown.
Moreover, while the example assumes a 5% annual return, the Portfolio's
performance will vary and may result in a return greater or less than 5%. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Portfolio's Dividend
Reinvestment Plan may receive shares purchased or issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan."
8
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Managed Municipals Portfolio II Inc.
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Financial Highlights
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The following information for the two year period ended 8/31/96
has been audited by KMPG Peat Marwick LLP, independent
auditors, whose report thereon appears in the Fund's Annual Report dated August
31, 1996. The information for the fiscal years ended August 31, 1993 and August
31, 1994 has been audited by other independent auditors.
The following information should be read in conjunction with the financial
statements and related notes that also appear in the Portfolio's Annual Report,
which is incorporated by reference into this Prospectus.
Per Share Operating Performance For a Share of the
Portfolio's Common Stock Outstanding Throughout each Year
<TABLE>
<CAPTION>
=================================================================================================
Year Year Year Period
Ended Ended Ended Ended
8/31/96(1) 8/31/95 8/31/94 8/31/93*
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<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $12.36 $12.15 $13.37 $12.00
- -------------------------------------------------------------------------------------------------
Net investment income 0.66 0.69 0.64 0.62
Net realized and unrealized
gains (loss) on investments (0.21) 0.32 (0.61) 1.34
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Total Income From Operations 0.45 1.01 0.03 1.96
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Offering Cost Credited/
(Charged) to Paid-in Capital -- -- 0.01 (0.04)
Less distributions from:
Net investment income (0.67) (0.68) (0.67) (0.55)
Net realized gains (0.16) (0.12) (0.59) --
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Total Distributions (0.83) (0.80) (1.26) (0.55)
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Net Asset Value, End of Year $11.98 $12.36 $12.15 $13.37
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Total Return 4.01% 8.86% 0.72%** 9.97%+**
=================================================================================================
Market value, End of Year $11.750 $11.625 $11.500 $12.625
- -------------------------------------------------------------------------------------------------
Net Assets, End of Year
(in 000's) $134,429 $138,649 $136,248 $149,970
=================================================================================================
Ratios/supplemental data
Ratios to Average Net Assets:
Expenses 1.09% 1.14% 1.12% 1.10%+
Net Investment Income 5.31% 5.80% 5.08% 5.21%(1)
Portfolio Turnover Rate 63% 95% 85% 163%
=================================================================================================
</TABLE>
* For the period from September 24, 1992 (commencement of operations) to
August 31, 1993.
** Total return represents aggregate total returns based on market value for
the periods indicated and does not reflect any sales load. The total return
figures assume reinvestment of dividends and distributions at prices
obtained under the Portfolio's Dividend Reinvestment Plan.
+ Total return is not annualized, as it may not be representative of the
total return for the year.
(1) Annualized
9
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Managed Municipals Portfolio II Inc.
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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 388 Greenwich
Street, New York, New York 10013. The Portfolio's telephone number is (212)
723-9218.
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The Offering
- --------------------------------------------------------------------------------
Smith Barney intends to make a market in the Portfolio's Common Stock,
although it is not obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice at the sole discretion
of Smith Barney. No assurance can be given as to the liquidity of, or the
trading market for, the Common Stock as a result of any market-making activities
undertaken by Smith Barney. This Prospectus is to be used by Smith Barney in
connection with offers and sales of the Common Stock in market-making
transactions in the over-the-counter market at negotiated prices related to
prevailing market prices at the time of sale.
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Use of Proceeds
- --------------------------------------------------------------------------------
The Portfolio will not receive any proceeds from the sale of Common Stock
offered pursuant to this Prospectus. Proceeds received by Smith Barney as a
result of its market-making in Common Stock will be utilized by Smith Barney in
connection with its secondary market operations and for general corporate
purposes.
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Investment Objective and Policies
- --------------------------------------------------------------------------------
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
10
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Managed Municipals Portfolio II Inc.
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
rated investment grade, that is, rated no lower than Baa, MIG-3 or Prime-1 by
Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20% of the
Portfolio's total assets may be invested in unrated securities that are deemed
by the Investment Manager to be of a quality comparable to investment grade. The
Portfolio will not invest in Municipal Obligations that are rated lower than Baa
by Moody's, BBB by S&P or BBB by Fitch, at the time of purchase. A description
of 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 the Portfolio of any liability
for Federal income tax to the extent that its earnings are distributed to
shareholders. To qualify as a regulated investment company, the Portfolio will,
among other things, limit its investments so that, at the close of each quarter
of its taxable year (1) not more than 25% of the market value of the Portfolio's
total assets will be invested in the securities of a single issuer and (2) with
respect to 50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities of a single
issuer. See "Taxation."
The Portfolio generally will not invest more than 25% of its total assets
in any industry. Governmental issuers of Municipal Obligations are not
considered part of any "industry." Municipal Obligations backed only by the
assets and revenues of non-governmental users may be deemed to be issued by the
non-governmental users, and would be subject to the Portfolio's 25% industry
limitation. The Portfolio may invest more than 25% of its total assets in a
broad segment of the Municipal Obligations market if the Investment Manager
determines that the yields available from obligations in a particular segment of
the market justify the additional risks associated with a large investment in
the segment. The Portfolio reserves the right to invest more than 25% of its
assets in industrial development bonds or in issuers located in the same state,
although it has no current intention of investing more than 25% of its assets in
issuers located in the same state. If the Portfolio were to invest
11
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Managed Municipals Portfolio II Inc.
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 particularly
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal Obligations bear fixed, floating and
variable rates of interest, and variations exist in the security of Municipal
Obligations, both within a particular classification and between
classifications. The types of Municipal Obligations in which the Portfolio may
invest are described in Appendix A to this Prospectus.
The yields on, and values of, Municipal Obligations are dependent on a
variety of factors, including general economic and monetary conditions, money
market factors, conditions in the Municipal Obligations markets, size of a
particular offering, maturity of the obligation and rating of the issue.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields or values, whereas obligations of the same maturity
and coupon with different ratings may have the same yield or value.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal taxes are rendered by bond counsel to
the respective issuers at the time of issuance. Neither the Portfolio nor the
Investment Manager will review the procedures relating to the issuance of
Municipal Obligations or the basis for opinions of counsel. Issuers of Municipal
Obligations may be subject to the provisions of bankruptcy, insolvency and other
laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the rights
and remedies of creditors. In addition, the obligations of those issuers may
become subject to laws enacted in the future by Congress, state legislatures or
referenda extending the time for payment of principal and/or interest, or
imposing other constraints upon enforcement of the obligations or upon the
ability of municipalities to levy taxes. The possibility also exists that, as a
result of litigation or other conditions, the power or ability of any issuer to
pay, when due, the principal of, and interest on, its obligations may be
materially affected.
Under normal conditions, the Portfolio may hold up to 20% of its total
assets in cash or money market instruments, including taxable money market
instruments (collectively, "Taxable Investments"). In addition, the Portfolio
may take a temporary defensive posture and invest without limitation in
short-term Municipal Obligations and Taxable Investments, upon a determination
by the Investment Manager that market conditions warrant such a posture. To the
extent the Portfolio
12
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Managed Municipals Portfolio II Inc.
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
holds Taxable Investments, the Portfolio may not be fully achieving its
investment objective.
INVESTMENT TECHNIQUES
The Portfolio may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued basis, or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but no payment or
delivery will be made by the Portfolio prior to the actual delivery or payment
by the other party to the transaction. The Portfolio will not accrue income with
respect to a when-issued or delayed delivery security prior to its stated
delivery date. The Portfolio will establish with PNC Bank a segregated account
consisting of cash, 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 the
Investment Manager to correlate with the prices of the Municipal Obligations
owned or to be purchased by the Portfolio. Regulations of the Commodity Futures
Trading Commission ("CFTC") applicable
13
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Managed Municipals Portfolio II Inc.
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
to the Portfolio require that its transactions in futures and options be engaged
in for "bona fide hedging" purposes or other permitted purposes, provided that
aggregate initial margin deposits and premiums required to establish positions
other than those considered by the CFTC to be "bona fide hedging" will not
exceed 5% of the Portfolio's net asset value, after taking into account
unrealized profits and unrealized losses on such contracts.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at a
specified price, date, time and place. Unlike the direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the 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 the Investment Manager unless the Portfolio
applies for and receives specific authority to do so from the SEC. Loans of the
Portfolio's securities, if and when made, may not exceed 331\3 % of the value of
the Portfolio's total assets 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 PNC Bank in an
amount equal to the current market value of the loaned securities.
Repurchase Agreements. The Portfolio may enter into repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Portfolio and with certain dealers on the Federal Reserve Bank
of New York's list of reporting dealers. A repurchase agreement is a contract
under which the buyer of a security simultaneously commits to resell the
security to the seller at an agreed-upon price on an agreed-upon date. Under the
terms of a typical repurchase agreement, the Portfolio would acquire an
underlying debt obligation for a relatively short period subject to an
obligation of the seller to repurchase, and the Portfolio to resell, the
obligation at an agreed-upon price and time, thereby determining the yield
during the Portfolio's holding period. This arrangement results in
14
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Managed Municipals Portfolio II Inc.
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
a fixed rate of return that is not subject to market fluctuations during the
Portfolio's holding period. Under each repurchase agreement, the selling
institution will be required to maintain the value of the securities subject to
the repurchase agreement at not less than their repurchase price.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Portfolio involves risk factors and special
considerations, such as those described below:
Municipal Obligations. Market rates of interest available with respect to
Municipal Obligations generally may be lower than those available with respect
to taxable securities, although the differences may be wholly or partially
offset by the effects of Federal income tax on income derived from taxable
securities. The amount of available information about the financial condition of
issuers of Municipal Obligations may be less extensive than that for corporate
issuers with publicly traded securities, and the market for Municipal
Obligations may be less liquid than the market for corporate debt obligations.
Although the Portfolio's policy will generally be to hold Municipal Obligations
until their maturity, the relative illiquidity of some of the Portfolio's
securities may adversely affect the ability of the Portfolio to dispose of the
securities in a timely manner and at a fair price. The market for less liquid
securities tends to be more volatile than the market for more liquid securities,
and market values of relatively illiquid securities may be more susceptible to
change as a result of adverse publicity and investor perceptions than are the
market values of more liquid securities. Although the issuer of certain
Municipal Obligations may be obligated to redeem the obligations at face value,
redemption could result in capital losses to the Portfolio to the extent that
the Municipal Obligations were purchased by the Portfolio at a premium to face
value.
Although the Municipal Obligations in which the Portfolio may invest will
be rated, at the time of investment, investment grade, municipal securities,
like other debt obligations, are subject to the risk of non-payment by their
issuers. The ability of issuers of Municipal Obligations to make timely payments
of interest and principal may be adversely affected in general economic
downturns and as relative governmental cost burdens are allocated and
reallocated among Federal, state and local governmental units. Non-payment by an
issuer would result in a reduction of income to the Portfolio, and could result
in a reduction in the value of the Municipal Obligations experiencing
non-payment and a potential decrease in the net asset value of the Portfolio.
Unrated Securities. The Portfolio may invest in unrated securities that the
Investment Manager determines to be of comparable quality to the rated
securities in which the Portfolio may invest. Dealers may not maintain daily
markets in unrated securities, and retail secondary markets for many of them may
not exist. As a result, the Portfolio's ability to sell these securities when
the Investment
15
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Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
Manager deems it appropriate may be diminished.
Municipal Leases. Municipal leases in which the Portfolio may invest have
special risks not normally associated with Municipal Obligations. 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.
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 sub-
16
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Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
ject 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, and then only in amounts
not exceeding 15% of its total assets (not including the amount borrowed) and as
otherwise described in this Prospectus. When the Portfolio's borrowings exceed
5% of the value of its total assets, the Portfolio will not make any additional
investments. In addition, the Portfolio will not invest more than 25% of its
total assets in the securities of issuers in any single industry, except that
this limitation will not be applicable to the purchase of U.S. government
securities. Also, the Portfolio may not purchase securities other than Municipal
Obligations and Taxable Investments. For a complete listing of the investment
restrictions applicable to the Portfolio, see "Investment Objective and Policies
N 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.
17
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Managed Municipals Portfolio II Inc.
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Share Price Data
- --------------------------------------------------------------------------------
The Portfolio's Common Stock is listed on the NYSE under the symbol "MTU."
Smith Barney 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 13.50 12.875 (4.63) 13.26 12.250 (7.62)
2/28/94 12.96 13.000 0.31 12.05 11.875 (1.45)
5/31/94 12.33 12.250 (0.65) 11.94 11.125 (6.83)
8/31/94 12.16 12.000 (1.32) 11.45 11.250 (1.75)
11/30/94 12.16 11.750 (3.37) 10.85 9.875 (8.99)
2/28/95 12.18 11.625 (4.55) 11.35 10.250 (9.69)
5/31/95 12.61 11.560 (8.32) 12.07 11.125 (7.82)
8/31/95 12.50 12.000 (4.00) 12.10 11.250 (7.02)
11/30/95 12.72 11.875 (6.64) 12.28 11.375 (7.37)
2/29/96 12.84 12.500 (2.65) 12.59 11.750 (6.67)
5/31/96 12.75 12.125 (0.62) 12.15 11.625 (0.525)
8/31/96 12.37 11.875 (4.00) 11.98 11.250 (6.09)
==================================================================
</TABLE>
As of November 29, 1996, the price of Common Stock as quoted on the
NYSE was $11.50, representing a 7.93% discount from the Common Stock's net
asset value calculated on that day.
Since the commencement of the Portfolio's operations, the Portfolio's
Common Stock has traded in the market at prices that were at times above,
but generally below, net asset value.
- --------------------------------------------------------------------------------
Management of the Portfolio
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Portfolio
rests
18
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Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
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 MANAGER AND ADMINISTRATOR
SBMFM, through its Greenwich Street Advisors division, located at 388
Greenwich Street, New York, New York 10013, serves as the Portfolio's investment
manager. SBMFM (through its predecessor entities) has been in the investment
counseling business since 1934 and is a registered investment adviser. SBMFM
renders investment advice to a wide variety of individuals and institutional
clients that had aggregate assets under management as of Septemb er 30, 1996 in
excess of $77 billion.
Subject to the supervision and direction of the Portfolio's Board of
Directors, the Investment Manager manages the securities held by the Portfolio
in accordance with the Portfolio's stated investment objective and policies,
makes investment decisions for the Portfolio, places orders to purchase and sell
securities on behalf of the Portfolio and employs managers and securities
analysts who provide research services to the Portfolio. The Portfolio pays the
Investment Manager a fee for investment advisory services provided to the
Portfolio that is computed daily and paid monthly at the annual rate of 0.70% of
the value of the Portfolio's average daily net assets. In addition, SBMFM serves
as the Portfolio's administrator and is paid a fee by the Portfolio that is
computed daily and paid monthly at a rate of 0.20% of the value of its average
daily net assets.
Transactions on behalf of the Portfolio are allocated to various dealers by
the Investment Manager in its best judgment. The primary consideration is prompt
and effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for their research, statistical
or other services to enable the Investment Manager to supplement its own
research and analysis with the views and information of other securities firms.
The Portfolio may use Smith Barney in connection with the purchase or sale of
securities when the Investment Manager believes that the broker's charge for the
transaction does not exceed usual and customary levels. The same standard
applies to the use of Smith Barney as a broker in connection with entering into
options and futures contracts. The Portfolio paid no brokerage commissions in
the last fiscal year.
PORTFOLIO MANAGEMENT
Joseph P. Deane, Vice President and Investment Officer of the Portfolio, is
pri-
19
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Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
marily 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 an Investment Officer of SBMFM and is the
senior asset manager for a number of investment companies and other accounts
investing in tax-exempt securities.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Portfolio expects to pay monthly dividends of net investment income
(income other than net realized capital gains) and to distribute net
realized capital gains, if any annually. All dividends or distributions
with respect to shares of
Common Stock are reinvested automatically in additional shares through
participation in the Portfolio's Dividend Reinvestment Plan (the "Plan"), unless
a shareholder elects to receive cash.
Under the Portfolio's Dividend Reinvestment Plan, a shareholder whose
shares of Common Stock are registered in his or her own name will have all
distributions from the Portfolio reinvested automatically by First Data as 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 servi ce is not provided by the
broker or nominee or the shareholder elects to receive distributions in cash.
Investors who own Common Stock registered in street name should consult their
broker-dealers for details regarding reinvestment. All distributions to
Portfolio shareholders who do not participate in the Plan will be paid by check
mailed directly to the record holder by or under the direction of First Data as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds the net asset value
per share at the time shares are valued for purposes of determining the number
of shares equivalent to the cash dividend or capital gains distribution, Plan
participants 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.
20
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Managed Municipals Portfolio II Inc.
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
If the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock, or if the Portfolio declares a
dividend or capital gains distribution payable only in cash, First Data will buy
Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts. If, following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Portfolio to issue the remaining dividend or distribution in
shares at 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 First Data is
unable to stop open market purchases and cause the Portfolio to issue the
remaining shares, the average per share purchase price paid by First Data may
exceed the net asset value of the Common Stock, resulting in the acquisition of
fewer shares than if the dividend or capital gains distribution had been paid in
Common Stock issued by the Portfolio at net asset value. First Data will begin
to purchase Common Stock on the open market as soon as practicable after the
record date of the dividend or capital gains distribution, but in no event shall
such purchases continue later than 30 days after the payment date thereof,
except when necessary to comply with applicable provisions of the Federal
securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of each Plan participant, and
each shareholder's proxy will include those shares purchased pursuant to the
Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. First Data's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Portfolio. No
brokerage charges apply with respect to shares of Common Stock issued directly
by the Portfolio as a result of dividends or capital gains distributions payable
either in Common Stock or in cash. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to open
market purchases made in connection with the reinvestment of dividends or
capital gains distributions.
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
21
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Managed Municipals Portfolio II Inc.
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
gains distribution. The Plan also may be amended or terminated by First Data,
with the Portfolio's prior written consent, on at least 30 days' written notice
to Plan participants. All correspondence concerning the Plan should be directed
by mail to First Data, P.O. Box 9134, Boston, Massachusetts 02205-9134 or by
telephone at (800) 331-1710.
- --------------------------------------------------------------------------------
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
adivsors with respect to the consequences to them of an inve stment 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).
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.
22
<PAGE>
Managed Municipals Portfolio II Inc.
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Taxation (continued)
- --------------------------------------------------------------------------------
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.
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 or her
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.
Investors also should be aware that if shares of 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 gains 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
or she has pro-
23
<PAGE>
Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
vided a correct taxpayer identification number and that he or she is not subject
to "backup withholding," the shareholder may be subject to a 31% "backup
withholding" tax with respect to (1) taxable dividends and distributions and (2)
the proceeds of any sales or repurchases of shares of Common Stock. An
individual's taxpayer identification number is his or her 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 4, 1996, there were
11,216,668 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 the 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 holders of a majority of the Portfolio's outstanding shares.
24
<PAGE>
Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
- --------------------------------------------------------------------------------
The Portfolio presently has provisions in its Articles of Incorporation and
Bylaws (commonly referred to as "anti-takeover" provisions) which may have the
effect of limiting the ability of other entities or persons to acquire control
of the Portfolio, to cause it to engage in certain transactions or to modify its
structure.
The Board of Directors is classified into three classes, each with a term
of three years with only one class of directors standing for election in any
year. Such classification may prevent replacement of a majority of the directors
for up to a two-year period. Directors may be removed from office only for cause
by vote of at least 75% of the shares entitled to be voted on the matter. If
approved by two-thirds of the Portfolio's Board Members, a majority of the
shares entitled to vote may approve the conversion of the Portfolio from a
closed-end to an open-end investment company. If fewer than two-thirds of the
Board Members approve such conversion, the affirmative vote of shareholders
holding at least two-thirds of the outstanding shares will be required to
approve such action. If approved by three-fourths of the Portfolio's Board
Members, a majority of the shares entitled to vote may approve: (i) the
dissolution or liquidation of the Portfolio; (ii) the merger, consolidation or
share exchange of the Portfolio with or into any other person; or (iii) any
sale, lease, exchange or other disposition by the Portfolio of any assets of the
Portfolio having an aggregate market value of $1,000,000, except for
transactions in securities in the ordinary course of business. If fewer than
three-fourths of the Board Members approve the actions described in (i) through
(iii) above, or in the case of any business combination described above, the
affirmative vote of shareholders holding at least three-fourths of the
outstanding shares will be required. The affirmativ e vote of at least 75% of
the shares will be required to amend the Articles of Incorporation or Bylaws to
change any of the foregoing provisions.
The percentage votes required under these provisions, which are greater
than the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Portfolio's business or management and may have the
effect of depriving shareholders of an opportunity to sell shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Fund in a tender offer or similar transaction. The
Portfolio's Board of Directors, however, has considered these anti-takeover
provisions and believes they are in the best interests of shareholders.
- --------------------------------------------------------------------------------
Custodian and Transfer Agent
- --------------------------------------------------------------------------------
PNC Bank, 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103 acts
as custodian of the Portfolio's investments. First Data, 53 State Street,
Boston, Massachusetts 02109, serves as agent in connection with the Plan and
serves as the Portfolio's transfer agent, dividend-paying agent and registrar.
25
<PAGE>
Managed Municipals Portfolio II Inc.
- --------------------------------------------------------------------------------
Experts
- --------------------------------------------------------------------------------
The audited financial statements have been incorporated by reference in the
Statement of Additional Information in reliance upon the report of KPMG Peat
Marwick LLP, independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
- --------------------------------------------------------------------------------
Further Information
- --------------------------------------------------------------------------------
This Prospectus does not contain all of the information set forth in the
Registration Statement filed with the SEC. The complete Registration Statement
may be obtained from the SEC upon payment of the fee prescribed by its Rules and
Regulations.
No person has been authorized to give any information or make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Portfolio, the Investment Manager, or Smith Barney. This Prospectus does
not constitute an offer to sell or a solicitation of any offer to buy any
security other than the shares of Common Stock, 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.
26
<PAGE>
Managed Municipals Portfolio II Inc.
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Appendix A
- --------------------------------------------------------------------------------
TYPES OF MUNICIPAL OBLIGATIONS
The Portfolio may invest in the following types of Municipal Obligations
and in such other types of Municipal Obligations as become available on the
market from time to time.
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
A-1
<PAGE>
Managed Municipals Portfolio II Inc.
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Appendix A (continued)
- --------------------------------------------------------------------------------
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 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 com ponents of Municipal
Obligations from which the interest components have been stripped and sold
separately by the holders of the underlying Municipal Obligations. Zero coupon
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to changing
rates than obligations of comparable maturity that make current distributions of
interest. While zero coupon Municipal Obligations will not contribute to the
cash available to the Portfolio, SBMFM believes that limited investments in such
securities may facilitate the Portfolio's ability to preserve capital while
generating tax-exempt income through the accrual of original interest discount.
Zero coupon Municipal Obligations generally are liquid, although such liquidity
may be reduced from time to time due to interest rate volatility and other
factors.
FLOATING RATE OBLIGATIONS
The Portfolio may purchase floating and variable rate municipal notes and
A-2
<PAGE>
Managed Municipals Portfolio II Inc.
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Appendix A (continued)
- --------------------------------------------------------------------------------
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, 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 possibl e financial difficulties of its
borrowers, adverse interest rate or economic conditions, regulatory limitations
or other factors. SBMFM will monitor the pricing, quality and liquidity of the
participation interests held by the Portfolio and the credit standing of the
banks issuing letters of credit or guarantees supporting such participation
interests on the basis of published financial information reports of rating
services and bank analytical services.
CUSTODIAL RECEIPTS
The Portfolio may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain Municipal Obligations. The
underwriter of these certificates or receipts typically purchases Municipal
Obligations and deposits the obligations in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic
<PAGE>
Managed Municipals Portfolio II Inc.
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Appendix A (continued)
- --------------------------------------------------------------------------------
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-4
Managed Municipals Portfolio II Inc.
388 Greenwich Street
New York, New York 10013
(212) 720-9218
STATEMENT OF ADDITIONAL INFORMATION
December 9, 1996
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"). 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 December 9, 1996, as amended or supplemented from time to
time (the "Prospectus"), and should be read in conjunction with the
Prospectus. The Prospectus may be obtained from any Smith Barney Financial
Consultant or by writing or calling the Portfolio at the address or telephone
number set forth above. This SAI, although not itself a prospectus, is
incorporated by reference into the Prospectus in its entirety.
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or this SAI and, if given or
made, such information must not be relied upon as having been authorized by
the Portfolio or the Portfolio's investment adviser. The Prospectus and this
SAI do not constitute an offer to sell or a solicitation of any offer to buy
any security other than the shares of Common Stock. The Prospectus and this
SAI do not constitute an offer to sell or a solicitation of an offer to buy
the shares of the Portfolio's common stock (the "Common Stock") by anyone in
any jurisdiction in which such offer or solicitation would be unlawful.
Neither the delivery of the Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has been no change
in the affairs of the Portfolio since the date hereof. If any material change
occurs while the Prospectus is required by law to be delivered, however, the
Prospectus or this SAI will be supplemented or amended accordingly.
TABLE OF CONTENTS
PAGE
Investment Objective and Policies (see
in the Prospectus "Investment Objective
and Policies" and "Appendix A")
2
Management of the Portfolio (see in the
Prospectus "Management of the
Portfolio")
13
Taxes (see in Prospectus "Taxation")
18
Stock Purchases and Tenders (see in the
Prospectus "Description of Common Stock"
21
Certain Provisions of the Articles of
Incorporation
22
Additional Information (see in the
Prospectus "Custodian and Transfer
Agent")
24
Appendix-- Description of Moody's, S&P
and Fitch Ratings
A-1
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 to seek as high a level
of current income exempt from Federal income taxes as is consistent with the
preservation of principal by investing substantially all of its assets in a
variety of 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 Ratings Group ("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, Smith Barney Mutual Funds Management Inc. ("SBMFM" or
the "Investment Manager"). Among the factors that will also be considered by
the Investment Manager in evaluating potential Municipal Obligations to be
held by the Portfolio are the price, coupon and yield to maturity of the
obligations, the Investment Manager's assessment of the credit quality of the
issuer of the obligations, the issuer's available cash flow and the related
coverage ratios, the property, if any, securing the obligations, and the terms
of the obligations, including subordination, default, sinking fund and early
redemption provisions. To the extent the Portfolio invests in lower-rated and
comparable unrated securities, the Portfolio's achievement of its investment
objective may be more dependent on the Investment Manager's credit analysis of
such securities than would be the case for a portfolio consisting entirely of
higher-rated securities. The Appendix to this SAI contains information
concerning the ratings of Moody's, S&P and Fitch and their significance.
Subsequent to its purchase by the Portfolio, an issue of Municipal
Obligations may cease to be rated or its rating may be reduced below the
rating given at the time the securities were acquired by the Portfolio.
Neither event will require the sale of such Municipal Obligations by the
Portfolio, but the Investment Manager will consider such event in its
determination of whether the Portfolio should continue to hold the Municipal
Obligations. In addition, to the extent the ratings change as a result of
changes in the rating systems or due to a corporate restructuring of Moody's,
S&P or Fitch, the Portfolio will attempt to use comparable ratings as
standards for its investments in accordance with its investment objectives and
policies.
The Portfolio will seek to invest substantially all of its assets in
Municipal Obligations, and under normal conditions at least 80% of the
Portfolio's total assets will be invested in investment grade Municipal
Obligations.
The Portfolio may invest in Municipal Obligations rated as low as Baa by
Moody's, BBB by S&P or BBB by Fitch or in unrated Municipal Obligations deemed
to be of comparable quality. Although such securities are considered
investment grade, they may be subject to greater risks than other higher-rated
investment grade securities.
While the market for Municipal Obligations is considered to be generally
adequate, the existence of limited markets for particular lower-rated and
comparable unrated securities may diminish the Portfolio's ability to (1)
obtain accurate market quotations for purposes of valuing such securities and
calculating its net asset value and (2) sell the securities at fair value to
respond to changes in the economy or in the financial markets. The market for
certain lower-rated and comparable unrated securities is relatively new and
has not fully weathered a major economic recession. Any such economic
downturn could adversely affect the ability of the issuers of such securities
to repay principal and pay interest thereon.
Taxable Investments
Under normal conditions the Portfolio may hold up to 20% of its assets
in cash or money market instruments, including taxable money market
instruments (collectively, "Taxable Investments").
Money market instruments in which the Portfolio may invest include: U.S.
government securities; tax-exempt notes of municipal issuers rated, at the
time of purchase no lower than 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-l by
Fitch or the equivalent from another nationally recognized rating service or,
if unrated, of an issuer having an outstanding, unsecured debt issue then
rated within the three highest rating categories; and repurchase agreements.
At no time will the Portfolio's investments in bank obligations, including
time deposits, exceed 25% of the value of its assets.
U.S. government securities in which the Portfolio may invest include
direct obligations of the United States and obligations issued by U.S.
government agencies and instrumentalities. Included among direct obligations
of the United States are Treasury bills, Treasury notes and Treasury bonds,
which differ principally in terms of their maturities. Included among the
securities issued by U.S. government agencies and instrumentalities are:
securities that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association certificates);
securities that are supported by the right of the issuer to borrow from the
U.S. Treasury (such as securities of Federal Home Loan Banks); and securities
that are supported by the credit of the instrumentality (such as Federal
National Mortgage Association and Federal Home Loan Mortgage Corporation
bonds).
Lending Securities
By lending its securities, the Portfolio can increase its income by
continuing to receive interest on the loaned securities, by investing the cash
collateral in short-term instruments or by obtaining yield in the form of
interest paid by the borrower when U.S. government securities are used as
collateral. The Portfolio will adhere to the following conditions whenever it
lends its securities: (1) the Portfolio must receive at least 100% cash
collateral or equivalent securities from the borrower, which will be
maintained by daily marking-to-market; (2) the borrower must increase the
collateral whenever the market value of the securities loaned rises above the
level of the collateral; (3) the Portfolio must be able to terminate the loan
at any time; (4) the Portfolio must receive reasonable interest on the loan,
as well as any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (5) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and (6) voting rights
on the loaned securities may pass to the borrower, except that, if a material
event adversely affecting the investment in the loaned securities occurs, the
Portfolio's Board of Directors must terminate the loan and regain 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. The Investment Manager, acting under the supervision of the
Portfolio's Board of Directors, reviews on an ongoing basis the value of the
collateral and the creditworthiness of those banks and dealers with which the
Portfolio enters into such transactions, the Portfolio will bear a risk of
loss in the event that the other party to the transaction defaults on its
obligations and the Portfolio is delayed or prevented from exercising its
rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period
in which the Portfolio seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of
losing all or a part of the income from the agreement.
Investments in Municipal Obligation Index and Interest Rate Futures Contracts
and Options on Interest Rate Futures Contracts
The Portfolio may invest in Municipal Obligation index and interest rate
futures contracts and options on interest rate futures contracts that are
traded on a domestic exchange or board of trade. Such investments may be made
by the Portfolio solely for the purpose of hedging against changes in the
value of its portfolio securities due to anticipated changes in interest rates
and market conditions, and not for purposes of speculation. Further, such
investments will be made only in unusual circumstances such as when the
Investment Manager anticipates an extreme change in interest rates or market
conditions.
Municipal Obligation Index and Interest Rate Futures Contracts. A
Municipal Obligation index futures contract is an agreement to take or make
delivery of an amount of cash equal to a specific dollar amount times the
difference between the value of the index at the close of the last trading day
of the contract and the price at which the index contract is originally
written. No physical delivery of the underlying Municipal Obligations in the
index is made. Interest rate futures contracts are contracts for the future
purchase or sale of specified interest rate sensitive debt securities of the
U.S. Treasury, such as U.S. Treasury bills, bonds and notes, obligations of
the Government National Mortgage Association and bank certificates of deposit.
Although most interest rate futures contracts require the delivery of the
underlying securities, some settle in cash. Each contract designates the
price date, time and place of delivery.
The purpose of the Portfolio's entering into a Municipal Obligation
index or interest rate futures contract, as the holder of long-term Municipal
Obligations, is to protect the Portfolio from fluctuation in interest rates on
tax-exempt securities without actually buying or selling Municipal
Obligations. The Portfolio will, with respect to its purchases of financial
futures contracts establish a segregated account consisting of cash 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 the
Investment Manager' ability to predict correctly movements in the direction of
interest rates. Such predictions involve skills and techniques which may be
different from those involved in the management of a long-term Municipal
Obligation portfolio. In addition, there can be no assurance that a
correlation would exist between movements in the price of the Municipal
Obligation index or the debt security underlying the futures contract and
movement in the price of the Municipal Obligations which are the subject of
the hedge. The degree of imperfection of correlation depends upon various
circumstances, such as variations in speculative market demand for futures
contracts and Municipal Obligations and technical influences on futures
trading. The Portfolio's Municipal Obligations and the Municipal Obligations
in the index may also differ in such respects as interest rate levels,
maturities and creditworthiness of issuers. A decision of whether, when and
how to hedge involves the exercise of skill and judgment and even a well-
conceived hedge may be unsuccessful to some degree because of market behavior
or unexpected trends in interest rates.
Although the Portfolio intends to enter into futures contracts only if
an active market exists for such contracts, there can be no assurance that an
active market will exist for a contract at any particular time. Most domestic
futures exchanges and boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single trading day. The daily
limit establishes the maximum amount the price of a futures contract may vary
either up or down from the previous day's settlement price at the end of a
trading session. Once the daily limit has been reached in a particular
contract, no trades may be made that day at a price beyond that limit. The
daily limit governs only price movement during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. It is possible that futures contract
prices could move to the daily limit for several consecutive trading days with
little or no trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial losses. In such
event it will not be possible to close a futures position and in the event of
adverse price movements, the Portfolio would be required to make daily cash
payments of variation margin. In such circumstances, an increase in the value
of the portion of the portfolio being hedged, if any, may partially or
completely offset losses on the futures contract. As described above,
however, there is no guarantee the price of Municipal Obligations will, in
fact, correlate with the price movements in a futures contract and thus
provide an offset to losses on a futures contract.
If the Portfolio has hedged against the possibility of an increase in
interest rates adversely affecting the value of Municipal Obligations it holds
and rates decrease instead, the Portfolio will lose part or all of the benefit
of the increased value of the Municipal Obligations it has hedged because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Portfolio has insufficient cash, it may have to sell
securities to meet daily variation margin requirements. Such sales of
securities may, but will not necessarily, be at increased prices which reflect
the decline in interest rates. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
Options on Interest Rate Futures Contracts. The Portfolio may purchase
put and call options on interest rate futures contracts which are traded on a
domestic exchange or board of trade as a hedge against changes in interest
rates, and may enter into closing transactions with respect to such options to
terminate existing positions. The Portfolio will sell put and call options on
interest rate futures contracts only as part of closing sale transactions to
terminate its options positions. There is no guarantee such closing
transactions can be effected.
Options on interest rate futures contracts, as contrasted with the
direct investment in such contracts, give the purchaser the right, in return
for the premium paid, to assume a position in interest rate futures contracts
at a specified exercise price at any time prior to the expiration date of the
options. Upon exercise of an option, the delivery of the futures position by
the writer of the option to the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract
exceeds, in the case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The potential loss
related to the purchase of an option on interest rate futures contracts is
limited to the premium paid for the option (plus transaction costs). Because
the value of the option is fixed at the point of sale, there are no daily cash
payments to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected
in the net asset value of the Portfolio.
There are several risks relating to options on interest rate futures
contracts. The ability to establish and close out positions on such options
will be subject to the existence of a liquid market. In addition, the
Portfolio's purchase of put or call options will be based upon predictions as
to anticipated interest rate trends by the Investment Manager, which could
prove to be inaccurate. Even if the Investment Manager' expectations are
correct, there may be an imperfect correlation between the change in the value
of the options and of the Portfolio's securities.
Municipal Obligations
General Information. Municipal Obligations generally are understood to
include debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities, refunding of
outstanding obligations, payment of general operating expenses and extensions
of loans to public institutions and facilities. Private activity bonds that
are issued by or on behalf of public authorities to obtain funds to provide
privately operated facilities are included within the term Municipal
Obligations if the interest paid thereon qualifies as excludable from gross
income (but not necessarily from alternative minimum taxable income) for
Federal income tax purposes in the opinion of bond counsel to the issuer.
The yields on Municipal Obligations are dependent upon a variety of
factors, including general economic and monetary conditions, general money
market conditions, general conditions of the Municipal Obligations market, the
financial condition of the issuer, the size of a particular offering, the
maturity of the obligation offered and the rating of the issue. Municipal
Obligations are also subject to the provisions of bankruptcy, insolvency and
other laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Code, and laws, if any, that may be enacted by Congress or state
legislatures extending the time for payment of principal or interest, or both,
or imposing other constraints upon enforcement of the obligations or upon the
ability of municipalities to levy taxes. There is also the possibility that
as a result of litigation or other conditions the power or ability of any one
or more issuer to pay, when due, principal of and interest on its, or their,
Municipal Obligations may be materially affected.
The net asset value of the Common Stock will change with changes in the
value of the Portfolio's securities. Because the Portfolio will invest
primarily in fixed-income securities, the net asset value of the Common Stock
can be expected to change as levels of interest rates fluctuate; generally,
when prevailing interest rates increase, the value of fixed-income securities
held by the Portfolio can be expected to decrease and when prevailing interest
rates decrease, the value of the fixed-income securities held by the Portfolio
can be expected to increase. The value of the fixed-income securities held by
the Portfolio and thus the Portfolio's net asset value, may also be affected
by other economic, market and credit factors.
From time to time, the Portfolio's investments may include securities as
to which the Portfolio, by itself or together with other funds or accounts
managed by the Investment Manager, holds a major portion or all of an issue of
Municipal Obligations. Because relatively few potential purchasers may be
available for these investments and, in some cases, contractual restrictions
may apply on resales, the Portfolio may find it more difficult to sell these
securities at a time when the Investment Manager believes it is advisable to
do so.
When-Issued Securities. The Portfolio may purchase Municipal
Obligations on a "when-issued" basis (i.e., for delivery beyond the normal
settlement date at a stated price and yield). The payment obligation and the
interest rate that will be received on the Municipal Obligations purchased on
a when-issued basis are each fixed at the time the buyer enters into the
commitment. Although the Portfolio will purchase Municipal Obligations on a
when-issued basis only with the intention of actually acquiring the
securities, the Portfolio may sell these securities before the settlement date
if it is deemed advisable as a matter of investment strategy.
Municipal Obligations are subject to changes in value based upon the
public's perception of the creditworthiness of the issuers and changes, real
or anticipated, in the level of interest rates. In general, Municipal
Obligations tend to appreciate when interest rates decline and depreciate when
interest rates rise. Purchasing Municipal Obligations on a when-issued basis,
therefore, can involve the risk that the yields available in the market when
the delivery takes place actually may be higher than those obtained in the
transaction itself. To account for this risk, a separate account of the
Portfolio consisting of cash 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 the Investment Manager deems to be comparable in quality to rated
issues in which the Portfolio is authorized to invest. A determination by the
Investment Manager that an unrated lease obligation is comparable in quality
to a rated lease obligation will be made on the basis of, among other things,
consideration of whether the nature of the leased equipment or other property
is such that its ownership or use is reasonably essential to a governmental
function of the issuing municipality. In addition, all such determinations
made by the Investment Manager will be subject to oversight and approval by
the Portfolio's Board of Directors.
Municipal leases held by the Portfolio will be considered illiquid
securities unless the Portfolio's Board of Directors determines on an ongoing
basis that the leases are readily marketable. An unrated municipal lease with
a non-appropriation risk that is backed by an irrevocable bank letter of
credit or an insurance policy issued by a bank or insurer deemed by the
Investment Manager to be of high quality and minimal credit risk is not be
deemed to be illiquid solely because the underlying municipal lease is
unrated, if the Investment Manager determines that the lease is readily
marketable because it is backed by the letter of credit or insurance policy.
Investment Restrictions
The Portfolio has adopted certain fundamental investment restrictions
that may not be changed without the prior approval of the holders of a
majority of the Portfolio's outstanding voting securities. A "majority of the
Portfolio's outstanding voting securities" for this purpose means the lesser
of (1) 67% or more of the shares of the Portfolio's Common Stock present at a
meeting of shareholders, if the holders of 50% of the outstanding shares are
present or represented by proxy at the meeting or (2) more than 50% of the
outstanding shares. For purposes of the restrictions listed below, all
percentage limitations apply immediately after a purchase or initial
investment, and any subsequent change in applicable percentage resulting from
market fluctuations will not require elimination of any security from the
portfolio. Under its fundamental restrictions, the Portfolio may not:
1. Purchase securities other than Municipal Obligations and Taxable
Investments as those terms are described in the Prospectus and this SAI.
2. Borrow money, except for temporary or emergency purposes, or for
clearance of transactions, and then only in amounts not exceeding 15% of
its total assets (not including the amount borrowed) and as otherwise
described in the Prospectus and this SAI. When the Portfolio's
borrowings exceed 5% of the value of its total assets, the Portfolio will
not make any additional investments.
3. Sell securities short or purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions,
but the Portfolio may make margin deposits in connection with
transactions in options futures and options on futures.
4. Underwrite any issue of securities, except to the extent that the
purchase of Municipal Obligations may be deemed to be an underwriting.
5. Purchase, hold or deal in real estate or oil and gas interests, except
that the Portfolio may invest in Municipal Obligations secured by real
estate or interests in real estate.
6. Invest in commodities, except that the Portfolio may enter into futures
contracts, including those relating to indexes and options on futures
contracts or indexes described in the Prospectus and this SAI.
7. Lend any funds or other assets except through purchasing Municipal
Obligations or Taxable Investments, lending portfolio securities and
entering into repurchase agreements consistent with the Portfolio's
investment objective.
8. Issue senior securities.
9. Invest more than 25% of its total assets in the securities of issuers in
any single industry, except that this limitation will not be applicable
to the purchase of Municipal Obligations and U.S. government securities.
10. Make any investments for the purpose of exercising control or management
of any company.
Portfolio Transactions
Newly issued securities normally are purchased directly from the issuer
or from an underwriter acting as principal. Other purchases and sales usually
are placed with those dealers from which it appears the best price or
execution will be obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Portfolio to underwriters of newly
issued securities usually includes a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers normally
are executed at a price between the bid and asked prices. The Portfolio has
paid no brokerage commissions since its commencement of operations.
Allocation of transactions, including their frequency, to various
dealers is determined by the Investment Manager in its best judgment and in a
manner deemed fair and reasonable to shareholders. The primary considerations
are availability of the desired security and the prompt execution of orders in
an effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment research and
statistical or other services to the Investment Manager may receive orders for
portfolio transactions by the Portfolio. Information so received is in
addition to, and not in lieu of, services required to be performed by the
Investment Manager, and the fees of the Investment Manager are not reduced as
a consequence of their receipt of such supplemental information. Such
information may be useful to the Investment Manager in serving both the
Portfolio and other clients and conversely, supplemental information obtained
by the placement of business of other clients may be useful to the Investment
Manager in carrying out its obligations to the Portfolio.
The Portfolio will not purchase Municipal Obligations during the
existence of any underwriting or selling group relating thereto of which Smith
Barney Inc. ("Smith Barney") or its affiliates are members except to the
extent permitted by the Securities and Exchange Commission (the "SEC"). Under
certain circumstances, the Portfolio may be at a disadvantage because of this
limitation in comparison with other investment companies which have a similar
investment objective but which are not subject to such limitation.
While investment decisions for the Portfolio are made independently from
those of the other accounts managed by the Investment Manager, investments of
the type the Portfolio may make also may be made by those other accounts.
When the Portfolio and one or more other accounts managed by the Investment
Manager are prepared to invest in, or desire to dispose of, the same security,
available investments or opportunities for sales will be allocated in a manner
believed by the Investment Manager to be equitable to each. In some cases,
this procedure may adversely affect the price paid or received by the
Portfolio or the size of the position obtained or disposed of by the
Portfolio.
The Portfolio's Board of Directors will review periodically the
commissions paid by the Portfolio to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Portfolio.
Portfolio Turnover
The Portfolio's portfolio turnover rate (the lesser of purchases or
sales of portfolio securities during the last fiscal year, excluding purchases
or sales of short-term securities, divided by the monthly average value of
portfolio securities) generally is not expected to exceed 100%, but the
portfolio turnover rate will not be a limiting factor whenever the Portfolio
deems it desirable to sell or purchase securities. Securities may be sold in
anticipation of a rise in interest rates (market decline) or purchased in
anticipation of a decline in interest rates (market rise) and later sold. In
addition, a security may be sold and another security of comparable quality
may be purchased at approximately the same time in order to take advantage of
what the Portfolio believes to be a temporary disparity in the normal yield
relationship between the two securities. These yield disparities may occur
for reasons not directly related to the investment quality of particular
issues or the general movement of interest rates, such as changes in the
overall demand for or supply of various types of tax-exempt securities. For
the fiscal years ended August 31, 1995 and 1996 the Portfolio's portfolio
turnover rate was 95% and 63%, respectively.
MANAGEMENT OF THE PORTFOLIO
The executive officers of the Portfolio are employees of certain of the
organizations that provide services to the Portfolio. These organizations are
as follows:
Name Service
SBMFM Investment Manager and
Administrator
Smith Barney Distributor (Sponsor)
PNC Bank, N.A. Custodian
("PNC Bank")
First Data Investor Services Group, Inc. Transfer Agent
("First Data")
These organizations and the functions they perform for the Portfolio are
discussed in the Prospectus and this SAI.
Directors and Executive Officers of the Portfolio
The overall management of the business and affairs of the Portfolio is
vested with its Board of Directors. The Board of Directors approves all
significant agreements between the Portfolio and persons or companies
furnishing services to it, including the Portfolio's agreements with its
investment adviser, administrator, custodian and transfer agent, dividend
paying agent, registrar and plan agent. The day-to day operations of the
Portfolio are delegated to its officers and SBMFM, subject always to the
investment objective and policies of the Portfolio and to general supervision
by the Portfolio's Board of Directors.
The Directors and executive officers of the Portfolio, their addresses
together with information as to their principal business occupations during
the past five years, are shown below:
Name and Address
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
*Heath B. McLendon
388 Greenwich Street
New York NY 10013
Age 63.
Chairman of the
Board,
Chief Executive
Officer
and Director
Managing Director of Smith
Barney Inc.; Director and
President of SBMFM; Chairman
of Smith Barney Strategy
Advisers Inc. Prior to July
1993, Senior Executive Vice
President of Shearson Lehman
Brothers Inc.
Charles F. Barber
66 Glenwood Drive
Greenwich, CT 06830
Age 79.
Director
Consultant; formerly Chairman
of the Board, ASARCO
Incorporated.
Martin Brody
HMK Associates
Three ADP Boulevard
Roseland, NJ 07068
Age 75.
Director
Retired Vice Chairman of the
Board of Restaurant
Associates Corp.; Director of
Jaclyn, Inc.
Allan J. Bloostein
27 West 67th Street
Apt. 5FW
New York, NY 10023
Age 67.
Director
Consultant; formerly Vice
Chairman of the Board of May
Department Stores Company;
Director of Crystal Brands,
Inc., Melville Corp., R.G.
Barry Corp. and Hechinger Co.
Dwight B. Crane
Graduate School of
Business
Administration
Harvard University
Soldiers Field Road
Boston, MA 02163
Age 58.
Director
Professor, Graduate School of
Business Administration,
Harvard University.
Name and Address
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
Robert A. Frankel
102 Grand Street
Croton-on-Hudson,
New York, NY 10520
Age 69.
Director
Managing Partner of Robert A.
Frankel Management
Consultants; formerly Vice
President of The Reader's
Digest Association, Inc.
William R.
Hutchinson
Amoco Corp.
200 East Randolph
Drive
Chicago, IL 60601
Age 53.
Director
Vice President, Financial
Operations of Amoco Corp.;
Director of Associated Banks
and Associated Bank Corp.
Jessica M.
Bibliowicz
388 Greenwich Street
New York. NY 10013
Age 36.
President
Executive Vice President
Smith Barney Inc. and
Chairman and Chief Executive
Officer of SBMFM; prior to
1994, Director of Sales and
Marketing for Prudential
Mutual Funds;
Joseph P. Deane
388 Greenwich Street
New York. NY 10013
Age 40
Vice President and
Investment Officer
Managing Director of Smith
Barney;. Prior to July 1993,
Senior Vice President and
Managing Director of Shearson
Lehman Advisors.
Lewis E. Daidone
388 Greenwich Street
New York, NY 10105
Age 38
Senior Vice
President
and Treasurer
Managing Director of Smith
Barney; Director, Chief
Financial Officer and Senior
Vice President of SBMFM.
Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Age 45
Secretary
Managing Director of Smith
Barney; General Counsel and
Secretary of SBMFM.
________________________________
* Directors who are "interested persons" of the Portfolio (as defined in the
1940 Act).
Director and/or trustee of other registered investment companies with which
Smith Barney is affiliated.
The Portfolio pays each of its directors who is not a director, officer
or employee of SBMFM, or any of its affiliates, an annual fee of $5,000 plus
$500 for each Board of Directors meeting attended, and $100 for each Board
meeting held via telephone. In addition, the Portfolio will reimburse these
Directors for travel and out-of-pocket expenses incurred connection with Board
of Directors meetings. For the fiscal year ended August 31, 1996 such fees
and expenses totaled $44,642.
Total Compensation from
Fund
Total Compensation from entire
Smith Barney Mutual Fund complex,
for the year-ended August 31, 1996
Charles F. Barber
$7,100
$38,400
Allan J. Bloostein
7,000
82,750
Martin Brody
6,500
112,675
Dwight B. Crane
7,300
137,525
Robert A. Frankel
7,100
65,400
William Hutchinson
7,100
38,400
Heath McLendon
- -
- -
Investment Manager and Administrator-- SBMFM
The Investment Manager serves as investment adviser to the Portfolio
pursuant to a written agreement dated July 30, 1993 (the "Advisory
Agreement"), a form of which was most recently approved by the Board of
Directors, including a majority of those Directors who are not "interested
persons" of the Portfolio or the Investment Manager ("Non-Interested
Directors") on August 21, 1996. Unless terminated sooner, the Advisory
Agreement will continue for successive annual periods provided that such
continuance is specifically approved at least annually: (1) by a majority vote
of the Non-Interested Directors cast in person at a meeting called for the
purpose of voting on such approval; and (2) by the Board of Directors or by a
vote of a majority of the outstanding shares of Common Stock. The Investment
Manager is a division of SBMFM, which is in turn a wholly owned subsidiary of
Smith Barney Holdings Inc. ("Holdings"), which is in turn a wholly owned
subsidiary of Travelers Group Inc. The Investment Manager pays the salary of
any officer or employee who is employed by both it and the Portfolio. The
Investment Manager bears all expenses in connection with the performance of
its services as investment adviser.
For services rendered to the Portfolio, the Investment Manager receives
from the Portfolio a fee, computed and paid monthly at the annual rate of
0.70% of the value of the Portfolio's average daily net assets. For the
fiscal years ended August 31, 1994, 1995 and 1996, such fees amounted to
$993,763, $934,964 and $979,107 respectively.
Under the Advisory Agreement, the Investment Manager will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with the Advisory Agreement, except a loss resulting
from willful misfeasance, bad faith or gross negligence on the part of the
Investment Manager in the performance of its duties or from reckless disregard
of its duties and obligations under the Advisory Agreement. The Advisory
Agreement is terminable by vote of the Board of Directors or by the holders of
a majority of Common Stock, at any time without penalty on 60 days' written
notice to the Investment Manager. The Advisory Agreement may also be
terminated by the Investment Manager on 90 days' written notice to the
Portfolio. The Advisory Agreement terminates automatically upon its
assignment.
SBMFM serves as administrator to the Portfolio pursuant to a written
agreement dated June 1, 1994 (the "Administration Agreement"). The services
provided by SBMFM under the Administration Agreement are described in the
Prospects under "Management of the Portfolio." SBMFM is a wholly owned
subsidiary of Holdings.
For services rendered to the Portfolio, SBMFM receives from the
Portfolio an administration fee computed and paid monthly at the annual rate
of 0.20% of the value of the Portfolio's average daily assets. For the fiscal
years ended August 31, 1994, 1995 and 1996 SBMFM or its predecessor received
$283,932, $267,133 and $279,745, respectively, in administration fees.
Pursuant to the Administration Agreement, SBMFM will exercise its best
judgment in rendering its services to the Portfolio. SBMFM will not be liable
for any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with the matters to which the Administration Agreement
relates, except by reason of SBMFM's reckless disregard of its obligations and
duties under the Administration Agreement.
The Administration Agreement (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
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 SBMFM.
The Portfolio bears expenses incurred in its operation including: fees
of the investment, adviser and administrator; taxes, interest brokerage fees
and commissions, if any; fees of Directors who are not officers, directors
shareholders or employees of Smith Barney; SEC fees and state blue sky
qualification fees; charges of the custodian; transfer and dividend disbursing
agent's fees; certain insurance premiums; outside auditing and legal expenses;
costs of any independent pricing service; costs of maintaining corporate
existence; costs attributable to investor services (including allocated
telephone and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory purposes
and for distribution to shareholders; shareholders' reports and corporate
meetings of the officers, Board of Directors and shareholders of the
Portfolio.
Principal Stockholders
There are no persons known to the Portfolio to be "control persons" of
the Portfolio, as such term is defined in Section 2(a)(9) of the 1940 Act.
There is no person known to the Portfolio to hold beneficially more than 5% of
the outstanding shares of Common Stock. The following person is the only
person holding more than 5% of the Portfolio's outstanding shares of Common
Stock as of December 4, 1996
Percent of
Amount of Common
Name and Address Record Stock
of Record Owner Ownership Outstanding
The Depository Trust Company
Cede & Co., as Nominee for 11,067,985 98.67%
P.O. Box 20
Bowling Green Station
New York, New York 10004
11,067,985 of the shares held of record by Cede & Co., representing 98.67% of
the outstanding shares of Common Stock, were held by The Depository Trust
Company as nominee for Smith Barney, representing accounts for which Smith
Barney has discretionary and non-discretionary authority.
As of December 4, 1996, the Directors and officers of the Portfolio, as
a group, beneficially owned less than 1% of the Portfolio's outstanding shares
of Common Stock.
TAXES
As described above and in the Prospectus, the Portfolio is designed to
provide investors with current income which is excluded from gross income for
Federal income tax purposes. The Portfolio is not intended to constitute a
balanced investment program and is not designed for investors seeking capital
gains or maximum tax-exempt income irrespective of fluctuations in principal.
Investment in the Portfolio would not be suitable for tax-exempt institutions,
qualified retirement plans, H.R. 10 plans and individual retirement accounts
because such investors would not gain any additional tax benefit from the
receipt of tax-exempt income.
The following is a summary of selected Federal income tax considerations
that may affect the Portfolio and its shareholders. The summary is not
intended as a substitute for individual tax advice and investors are urged to
consult their own tax advisors as to the tax consequences of an investment in
the Portfolio.
Taxation of the Portfolio and its Investments
The Portfolio has qualified and intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of 1986,
as amended (the "Code"). In addition, the Portfolio intends to satisfy
conditions contained in the Code that will enable interest from Municipal
Obligations, excluded from gross income for Federal income tax purposes with
respect to the Portfolio, to retain that tax-exempt status when distributed to
the shareholders of the Portfolio (that is, to be classified as "exempt
interest" dividends of the Portfolio).
If it qualifies as a regulated investment company the Portfolio will pay
no Federal income taxes on its taxable net investment income (that is, taxable
income other than net realized capital gains) and its net realized capital
gains that are distributed to shareholders. To qualify under Subchapter M of
the Code, the Portfolio must among other things: (1) distribute to its
shareholders at least 90% of its taxable net investment income (for this
purpose consisting of taxable net investment income and net realized short-
term capital gains) and 90% of its tax-exempt net investment income (reduced
by certain expenses); (2) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities, gains from
the sale or other disposition of securities, or other income (including, but
not limited to, gains from options, futures, and forward contracts) derived
with respect to the Portfolio's business of investing in securities; (3)
derive less than 30% of its annual gross income from the sale or other
disposition of securities, options, futures or forward contracts held for less
than three months; 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 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 4% 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 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 or her shares of Common Stock will be a long-term gain or loss if
he or she has held his or her shares for more than one year and will be a
short-term capital gain or loss if he or she has held his or her shares for
one year or less. Dividends and distributions paid by the Portfolio will not
qualify for the Federal dividends-received deduction for corporations.
Exempt-Interest Dividends
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of Common Stock is not deductible for Federal income tax purposes. If a
shareholder receives exempt-interest dividends with respect to any share of
Common Stock and if the share is held by the shareholder for six months or
less, then any loss on the sale of the share may, to the extent of the exempt-
interest dividends, be disallowed. The Code may also require a shareholder if
he or she receives exempt-interest dividends to treat as taxable income a
portion of certain otherwise non-taxable social security and railroad
retirement benefit payments. In addition, the portion of any exempt-interest
dividend paid by the Portfolio that represents income derived from private
activity bonds held by the Portfolio may not retain its tax-exempt status in
the hands of a shareholder who is a "substantial user" of a facility financed
by the bonds, or a "related person" of the substantial user. Although the
Portfolio's exempt-interest dividends may be excluded by shareholders from
their gross income for Federal income tax purposes (1) some or all of the
Portfolio's exempt-interest dividends may be a specific preference item, or a
component of an adjustment item, for purposes of the Federal individual and
corporate alternative minimum taxes and (2) the receipt of dividends and
distributions from the Portfolio may affect a corporate shareholder's Federal
"environmental" tax liability. The receipt of dividends and distributions from
the Portfolio may affect a foreign corporate shareholder's Federal "branch
profits" tax liability and a corporate shareholder's Federal "excess net
passive income" tax liability. Shareholders should consult their own tax
advisors to determine whether they are (1) "substantial users" with respect to
a facility or "related" to those users within the meaning of the Code or (2)
subject to a Federal alternative minimum tax, the Federal "environmental" tax,
the Federal "branch profits" tax, or the Federal "excess net passive income"
tax.
Dividend Reinvestment Plan
A shareholder of the Portfolio receiving dividends or distributions in
additional shares pursuant to the Plan should be treated for Federal income
tax purposes as receiving a distribution in an amount equal to the amount of
money that a shareholder receiving cash dividends or distributions receives
and should have a cost basis in the shares received equal to that amount.
Statements and Notices
Statements as to the tax status of the dividends and distributions
received by shareholders of the Portfolio are mailed annually. These
statements show the dollar amount of income excluded from Federal income taxes
and the dollar amount, if any, subject to Federal income taxes. The statements
will also designate the amount of exempt interest dividends that are a
specific preference item for purposes of the Federal individual and corporate
alternative minimum taxes 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 31%
"backup withholding" tax with respect to (1) taxable dividends and
distributions and (2) the proceeds of any sales or repurchases of shares of
Common Stock. An individual's taxpayer identification number is his or her
social security number. The 31% backup withholding tax is not an additional
tax and may be credited against a taxpayer's Federal income tax liability
STOCK PURCHASES AND TENDERS
The Portfolio may repurchase shares of its Common Stock in the open
market or in privately negotiated transactions when the Portfolio can do so at
prices below their then current net asset value per share on terms that the
Portfolio's Board of Directors believes represent a favorable investment
opportunity. In addition, the Board of Directors currently intends to
consider, at least once a year, making an offer to each shareholder of record
to purchase at net asset value shares of Common Stock owned by the
shareholder.
No assurance can be given that repurchases and/or tenders will result in
the Portfolio's shares trading at a price that is equal to their net asset
value. The market prices of the Portfolio shares will, among other things, be
determined by the relative demand for and supply of the shares in the market,
the Portfolio's investment performance, the Portfolio's dividends and yield
and investor perception of the Portfolio's overall attractiveness as an
investment as compared with other investment alternatives. The Portfolio's
acquisition of Common Stock will decrease the total assets of the Portfolio
and therefore have the effect of increasing the Portfolio's expense ratio. The
Portfolio may borrow money to finance the repurchase of shares subject to the
limitations described in the Prospectus. Any interest on the borrowings will
reduce the Portfolio's net income. Because of the nature of the Portfolio's
investment objective, policies and securities holdings, the Investment Manager
does not anticipate that repurchases and tenders will have an adverse effect
on the Portfolio's investment performance and does not anticipate any material
difficulty in disposing of securities to consummate Common Stock repurchases
and tenders.
When a tender offer is authorized to be made by the Portfolio's Board of
Directors, it will be an offer to purchase at a price equal to the net asset
value of all (but not less than all) of the shares owned by the shareholder
(or attributed to him or her for Federal income tax purposes under Section 38
of the Code). A shareholder who tenders all shares owned or considered owned
by him or her, as required, will realize a taxable gain or loss depending upon
his or her basis in his or her shares.
If the Portfolio liquidates securities in order to repurchase shares of
Common Stock, the Portfolio may realize gains and losses. These gains, if any,
may be realized on securities held for less than three months. Because the
Portfolio must derive less than 30% of its gross income for any taxable year
from the sale or disposition of stock and securities held less than three
months (in order to retain the Portfolio's regulated investment company status
under the Code), gains realized by the Portfolio due to a liquidation of
securities held for less than three months would reduce the amount of gain on
sale of other securities held for less than three months that the Portfolio
could realize in the ordinary course of its portfolio management, which may
adversely affect the Portfolio's performance. The portfolio turnover rate of
the Portfolio may or may not be affected by the Portfolio's repurchases of
shares of Common Stock pursuant to a tender offer.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Portfolio's Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons to
acquire control of the Portfolio or to change the composition of its Board of
Directors and could have the effective of depriving shareholders of an
opportunity to sell their shares of Common Stock at a premium over the
prevailing market prices by discouraging a third party from seeking to obtain
control of the Portfolio. Commencing with the first annual meeting of
shareholders, the Board of Directors will be divided into three classes. At
the annual meeting of shareholders in each year thereafter, the term of one
class will expire and each Director elected to the class will hold office for
a term of three years. The classification of the Board of Directors in this
manner could delay for up to two years the replacement of majority of the
Board. The Articles of Incorporation provide that the maximum number of
Directors that may constitute the Portfolio's entire board is 12. A Director
may be removed from office, or the maximum number of Directors increased, only
by vote of the holder of at least 75% of shares of Common Stock entitled to be
voted on the matter.
The Portfolio's Articles of Incorporation require the favorable vote of
the holders of at least two-thirds of the shares of Common Stock then entitled
to be voted to authorized the conversion of the Portfolio from a closed-end to
an open-end investment company's defined in the 1940 Act, unless two-thirds of
the Continuing Directors (as defined below) approve such a conversion. In the
latter case, the affirmative vote of a majority of the shares outstanding will
be required to approve the amendment to the Portfolio's Articles of
Incorporation providing for the conversion of the Portfolio.
The affirmative votes of a least 75% of the Directors and the holder of
at least 75% of the shares of the Portfolio are required to authorize any of
the following transactions (referred to individually as a "Business
Combination"): (1) a merger, consolidation or share exchange of the Portfolio
with or into any other person (referred to individually as a "Reorganization
Transaction"): (2) the issuance or transfer by the Portfolio (in one or a
series of transactions in any 12-month period) of any securities of the
Portfolio to any other person or entity for cash, securities of other property
(or combinations thereof) having an aggregate fair market value of $1,000,000
or more, excluding sales of securities of the Portfolio in connection with a
public offering, issuance of securities of the Portfolio pursuant to a
dividend reinvestment plan adopted by the Portfolio and issuances of
securities of the Portfolio upon the exercise for any stock subscriptions
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 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 of the transaction is approved by a vote of a least 75% of the
Continuing Directors (as defined below) or it certain conditions regarding the
consideration paid by the person entering into, or proposing to enter into, a
Business Combination with the Portfolio and various other requirements are
satisfied. In such case, a majority of the votes entitled to be cast by
shareholders of the Portfolio will be required to approve the transaction if
its a Reorganization Transactions 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 its any other Business Combination. In
addition, a 75% shareholder vote will not be required with respect to a
Termination Transaction if it is approved by a vote of at least 75% of the
Continuing Directors, in which case a majority of the votes entitled to be
cast by shareholders of the Portfolio will be required to approve the
transaction.
The voting provisions described above could have the effect of depriving
shareholders of the Portfolio of an opportunity to sell their Common Stock at
a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Portfolio in a tender offer or similar
transaction. In the view of the Portfolio's Board of Directors, however,
these provisions offer several possible advantages including: (1) requiring
persons seeking control of the Portfolio to negotiate with its management
regarding the price to be paid for the amount of Common Stock required to
obtain control: (2) promoting continuity and stability; and (3) enhancing the
Portfolio's ability to pursue long-term strategies that are consistent with
its investment objective and management policies. The Board of Directors has
determined that the voting requirements under Maryland law and the 1940 Act,
are in the best interests of shareholders generally.
A "Continuing Director," as used in the discussion above, is any member
of the Portfolio's Board of Directors (1) who is not person or affiliate of a
person who enters or proposes to enter into a Business Combination with the
Portfolio (such person or affiliate being referred to individually as an
"Interested Party") and (2) who has been a member of the Board of Directors
for a period of least 12 months, or 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 the members of
the Board.
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
For the fiscal year ending August 31, 1997, KPMG Peat Marwick LLP, 345
Park Avenue, New York, New York 10154, have been selected independent auditors
for the Portfolio to examine and report on the Portfolio's financial
statements.
Custodian and Transfer Agent
PNC Bank, N.A. is located at 17 Chestnut Street, Philadelphia,
Pennsylvania 19103 and serves as the Portfolio's custodian pursuant to a
custody agreement. Under the custody agreement, PNC Bank holds 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.
First Data 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, First Data maintains the
shareholder account records for the Portfolio, handles certain communications
between shareholders and the Portfolio, and distributes dividends and
distributions payable by the Portfolio.
FINANCIAL STATEMENTS
The Portfolio sends unaudited semi-annual and audited annual financial
statements of the Portfolio to shareholders, including a list of the
investments held by the Portfolio.
The Portfolio's Annual Report for the fiscal year ended August 31, 1996
is incorporated into this Statement of Additional Information by reference in
it's entirety. A copy of these Reports may be obtained from any Smith Barney
Financial Consultant or by calling or writing to the Portfolio at the
telephone number or address set forth on the cover page of this 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 may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude, or other elements may be
present that make the long-term risks appear somewhat larger than in Aaa
securities
A - Bonds that are rated A possess many favorable investment attributes and
are to be considered as upper medium grade obligations. Factors giving
security to principal and interest with respect to these bonds are considered
adequate, but elements may be present that suggest a susceptibility to
impairment sometime in the fixture.
Baa - Bonds rated Baa are considered to be medium grade obligations, that is
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. These bonds lack outstanding investment characteristics and
may have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier
2 indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Description of Moody's Municipal Note Ratings:
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short- and long-term credit
risk. Loans bearing the designation MIG1/VMIG 1 are of the best quality,
enjoying strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the designation MIG 2/VMIG 2 are of high
quality, with margins of protection ample, although not as large as the
preceding group. Loans bearing the designation MIG3/VMIG 3 are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Market access for refinancing, in
particular, is likely to be less well established.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime- I (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rated Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations, normally evidenced by many of the characteristics of issuers
rated Prime-1 but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Description of S&P Municipal Bond Ratings:
AAA - These bonds are the obligations of the highest quality and have the
strongest capacity for timely payment of debt service.
General Obligation Bonds Rated AAA - In a period of economic stress the
issuers of these bonds will suffer the smallest declines in income and will be
least susceptible to autonomous decline. Debt burden is moderate. A strong
revenue structure appears more than adequate to meet fixture expenditure
requirements. Quality of management appears superior.
Revenue Bonds Rated A - Debt service coverage with respect to these bonds has
been, and is expected to remain, substantial. Stability of the pledged
revenues is also exceptionally strong due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic security
provisions (including rate covenant, earnings test for issuance of additional
bonds, debt service reserve requirements) are rigorous. There is evidence of
superior management
AA - The investment characteristics of bonds in this group are only slightly
less marked than those of the prime quality issues. Bonds rated AA have the
second strongest capacity for payment of debt service
A - Principal and interest payments on bonds in this category are regarded as
safe although the bonds are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in high rated
categories. This rating describes the third strongest capacity for payment of
debt service.
General Obligation Bonds Rated A - There is some weakness either in the local
economic base in debt burden, in the balance between revenues and expenditures
or in quality of management. Under certain adverse circumstances, any one such
weakness might impair the ability of the issuer to meet debt obligations at
some fixture date.
Revenue Bonds Rated A - Debt service coverage is good but not exceptional.
Stability of the pledged revenues could show some variations because of
increased competition or economic influences on revenues. Basic security
provisions, while satisfactory, are less stringent. Management performance
appears adequate.
BBB - The bonds in this group are regarded as having an adequate capacity to
pay interest and repay principal. Whereas bonds in this group normally exhibit
adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in higher rated categories.
Bonds rated BBB have the fourth strongest capacity for payment of debt
service.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major rating
categories except in the AAA category.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years or less are usually given
note ratings (designated SPEY 2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP- 1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-
1+. Notes rated SP-2 have a satisfactory capacity to pay principal and
interest.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A- l by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is stronger but the
relative degree of safety is not as high as issues designated A-1.
Description of Fitch Municipal Bond Ratings:
AAA - Bonds rated AAA by Fitch are considered to be investment grade and of
the highest credit quality. The obligor has an exceptionally strong ability to
pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA - Bonds rated M 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 ability to pay interest and repay principal, which is
unlikely to be affected by reasonably foreseeable events.
A - Bonds rated A by Fitch are considered to be investment grade and of high
credit quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings
BBB - Bonds rated BBB by Fitch are considered to be investment grade and of
satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for
bonds with higher ratings.
Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs, however, are not
used in the AAA category.
Description of Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch's short-term ratings are as follows:
F-l + - 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.
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
- Included in Part A:
* Financial Highlights
- Included in Part B:
* The Registrant's Annual Report for the
fiscal year ended August 31, 1996 and
Report of Independent Accountants
dated October 15, 1996 are incorporated by
reference to the Definitive 30(b)2-1 filed
on November 8, 1996,
Accession # 91155-96-454
(2) Exhibits: All references are to the Registrant's registration
statement on Form N-2 as filed with the Securities and Exchange Commission on
July 24, 1992. (File Nos. 33-49982 and 811-7046) (the "Registration
Statement")
(a) (i) Articles of Incorporation are
incorporated by reference to the
Registrant's Registration Statement
(ii) Articles of Amendment to Articles of
Incorporation are incorporated by
reference to Pre-Effective Amendment
No. 1. to the Registration Statement
as
filed on September 17, 1992
("Pre-Effective Amendment No.1")
(b) (i) Bylaws of Registrant are
incorporated by reference to the
Registration Statement.
(ii) Amended Bylaws of Registrant are
incorporated by reference to Pre-
Effective Amendment No. 1.
(c) Not Applicable
(d) Specimen Certificate of Common Stock, par
value $.001 per share is incorporated by
reference to Pre-Effective Amendment No.
1.
(e) Dividend Reinvestment Plan is incorporated
by reference to Post-Effective Amendment
No. 2 to the Registration Statement as
filed on November 18, 1994 ("Post-
Effective Amendment No. 2").
(f) Not Applicable
(g)(i) Investment Advisory Agreement
between Registrant and Greenwich Street
Advisors is incorporated by reference to
Post-Effective Amendment No.1 to the
Registration Statement as filed on
November 17, 1993.
(ii) Form of Transfer and Assumption of
Investment Advisory Agreement
between Registrant, Mutual Management Corp.
and Smith Barney Adviser, Inc is incorporated
by reference to Post-Effective Amendment No.2.
(h) Form of Underwriting Agreement between
Registrant and Smith Barney Shearson is
incorporated by reference to Pre-Effective
Amendment No.1.
(i) Not Applicable
(j) Form of Custody Agreement between Registrant
and PNC Bank, National Association (filed herewith)
(k) (i) Administration Agreement between
Registrant and Smith Barney Advisers, Inc.,
dated June 1, 1994, is incorporated by
reference to Post-Effective No.2.
(l) Opinion and Consent of Counsel is incorporated by
reference to Pre-Efeective Amendment No.1.
(m) Not Applicable
(n) Consent of Independent Auditors is filed herein.
(o) Not Applicable
(p) Purchase Agreement between Registrant and Shearson
Lehman Brothers Inc., dated as of September 11, 1992,
is incorporated by reference to Pre-Effective Amendmen
No.1.
(q) Not Applicable
(r) Financial Data Schedule for Registrant as of August 31, 1996
is filed herein.
Item 25. Marketing Arrangements
None
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in
connection with the offering described in this Registration Statement:
Securities and Exchange Commission Fees 0
Printing and Engraving Expenses $5000
Legal Fees $0
Accounting Expenses $0
Miscellaneous Expenses $0
Item 27. Persons Controlled by or Under Common Control
None
Item 28. Number of Holders of Securities
Title of Class Number of
Record
Stockholders
as of December 4, 1996
Shares of Common Stock, 11,216,668
par value $0.01 per share
Item 29. Indemnification
Under Article VII of Registrant's Articles of Incorporation, any past
or present director or officer of Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any action, suit or proceeding to which
he may be a party or otherwise involved by reason or his being or having
been a director or officer of Registrant. This provision does not
authorize indemnification when it is determined that the director or
officer would otherwise be liable to Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties. Expenses may be paid by Registrant in advance of
the final disposition of any action, suit or proceeding upon receipt of an
undertaking by a director or officer to repay those expenses to Registrant
in the event that it is ultimately determined that indemnification of the
expenses is not authorized under Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
See "Management of the Portfolio" in the Prospectus.
Smith Barney Mutual Management Inc., ("Funds Management")
a New York corporation, is a registered investment adviser and is
wholly owned by Smith Barney Holdings Inc., which in turn is
wholly owned by The Travelers Group Inc. Funds Management is
primarily engaged in the investment advisory business. Information
as to executive officers and directors of Funds Management is
included in its Form ADV filed with the Securities and Exchange
Commission (Registration number 801-3387) and is incorporated
herein by reference.
Item 31. Location of Accounts and Records
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
PNC Bank, N.A.
17th & Chestnut Streets
Philadelphia, Pennsylvania 19103
Item 32. Management Services
None
Item 33. Undertakings
1. Not Applicable
2. Not Applicable
3. Not Applicable
4. The Portfolio hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Act");
(2) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(4)(b) For the purpose of determining any liability under the Act, each
post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(4)(c) Not Applicable
5. Not Applicable
6. The Portfolio undertakes to send by first class mail or other means
designed to ensure equally prompt delivery, within two business days of
receipt of a written or oral request, any Statement of Additional
Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, MANAGED MUNICIPALS PORTFOLIO II INC., has duly caused this
Amendment to the Registration Statement on Form N-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
New York, State of New York on the 4th day of December, 1996.
MANAGED MUNICIPALS PORTFOLIO II INC.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chief Executive Officer
We, the undersigned, hereby severally constitute and appoint Heath B.
McLendon and Christina T. Sydor, our true and lawful attorneys, with full
power,
to sign for us, and in our hands and in the capacities indicated below, any
and all
Post-Effective Amendments to this Registration Statement and to file the
same, with all exhibits thereto, and other documents therewith, with the
Securities and Exchange Commission, granting unto said attorneys full power to
do and perform each and every act and thing requisite or necessary to be done
in the premises, as fully to all intents and purposes as he might or could do
in
person, hereby ratifying and confirming all that said attorneys or any of them
may lawfully do or cause to be done by virtue thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement and the above Power
of Attorney has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon
Heath B. McLendon Chairman of the Board 12/04/96
Chief Executive Officer
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial 12/04/96
and Accounting Officer)
/s/ Charles F. Barber*
Charles F. Barber Director 12/04/96
/s/ Allan J. Bloostein*
Allan J. Bloostein Director 12/04/96
/s/ Martin Brody*
Martin Brody Director 12/04/96
/s/ Dwight B. Crane*
Dwight B. Crane Director 12/04/96
/s/ Robert A. Frankel*
Robert A. Frankel Director 12/04/96
/s/ William R. Hutchinson*
William Hutchinson Director 12/04/96
*Signed by Heath B. McLendon, their duly authorized attorney-in-fact, pursuant
to power-of-attorney dated September 27, 1994.
EXHIBIT INDEX
2(j) Form of Custodian Agreement
FORM OF
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of , 1995 by and between
Managed Municipals Portfolio II Inc, a Maryland corporation (the "Fund") and
PNC BANK, NATIONAL ASSOCIATION, a national banking association ("PNC Bank").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes to
retain PNC Bank to provide custodian services and PNC Bank wishes to
furnish such services, either directly or through an affiliate or
affiliates, as more fully
described herein. In consideration of the premises and mutual covenants herein
contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall mean
any officer of the Fund and any other person, who is duly authorized by the
Fund's Governing Board, to give Oral and Written Instructions on behalf of the
Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix, as such Appendix may be amended in writing by the
Fund's Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal agency
securities, its successor or successors, and its nominee or nominees and any
book-entry system maintained by an exchange registered with the SEC under the
1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(g) "Securities and Commodities Laws". The term "Securities and
Commodities Laws" shall mean the "1933 Act" which shall mean the Securities Act
of 1933, the "1934 Act" which shall mean the Securities Exchange Act of 1934,
the 1940 Act, and the "CEA" which shall mean the Commodities Exchange Act,
each as amended.
(h) "Shares". The term "Shares" shall mean the shares of stock of
any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items which
the Fund may from time to time deposit, or cause to be
deposited, with PNC Bank or which PNC Bank may from time
to time hold for the Fund;
(ii) all income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the
Fund, which are received by PNC Bank from time to time,
from or on behalf of the Fund.
(j) "Written Instructions". The term "Written Instructions" shall
mean written instructions signed by one Authorized Person and received by PNC
Bank. The instructions may be delivered by hand, mail, tested telegram, cable,
telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services to the Fund, and PNC Bank accepts such appointment and agrees to
furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of PNC Bank or its affiliates
to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if PNC Bank is
not providing the Fund with such services; (f) copies
of any shareholder servicing agreements made in respect of the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank
undertakes to comply with all applicable requirements of the Securities and
Commodities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed
by PNC Bank hereunder. Except as specifically set forth herein, PNC Bank
assumes no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
shall act only upon Oral and Written Instructions. PNC Bank shall be
entitled to rely upon any Oral and Written Instructions it receives from
an Authorized Person
(or from a person reasonably believed by PNC Bank to be an Authorized Person)
pursuant to this Agreement. PNC Bank may assume that any Oral or Written
Instructions received hereunder are not in any way inconsistent with the
provisions of organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's Governing Board or of the Fund's
shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming Oral
Instructions so that PNC Bank receives the Written Instructions by the close of
business on the same day that such Oral Instructions are received. The fact
that such confirming Written Instructions are not received by PNC Bank shall
in no way
invalidate the transactions or enforceability of the transactions authorized by
the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the Fund
in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any action
it should or should not take, PNC Bank may request directions or advice,
including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
questions of law pertaining to any action it should or should not take,
PNC Bank may request advice at its own cost from such counsel of its own
choosing (who may be counsel for the Fund, the Fund's advisor or PNC Bank,
at the option of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral or
Written Instructions it receives from the Fund or from counsel and which
PNC Bank believes, in good faith, to be consistent with those directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an obligation
upon PNC Bank (i) to seek such directions, advice or Oral or Written
Instructions, or (ii) to act in accordance with such directions, advice or Oral
or Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action.
7. Records. The books and records pertaining to the Fund which are in
the possession of PNC Bank, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all time
during PNC Bank's normal business hours. Upon the reasonable request of the
Fund, copies of any such books and records shall be provided by PNC Bank to the
Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records of
the Fund and information relative to the Fund and its shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall
not be unreasonably withheld and may not be withheld where PNC Bank may be
exposed to civil or criminal contempt proceedings or when required to divulge.
The Fund further agrees that, should PNC Bank be required to provide such
information or records to duly constituted authorities (who may institute civil
or criminal contempt proceedings for failure to comply), PNC Bank shall not be
required to seek the Fund's consent prior to disclosing such information.
9. Cooperation with Accountants. PNC Bank shall cooperate with the Fund's
independent public accountants and shall take all reasonable action in the
performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to
the extent appropriate equipment is available. In the event of
equipment failures, PNC Bank
shall, at no additional expense to the Fund, take reasonable steps to minimize
service interruptions but shall have no liability with respect thereto.
11. Compensation. As compensation for custody services rendered by PNC
Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee or
fees as may be agreed to from time to time in writing by the Fund and PNC Bank.
12. Indemnification. The Fund agrees to indemnify and hold harmless PNC
Bank and its nominees from all taxes, charges, expenses, assessment, claims and
liabilities (including, without limitation, liabilities arising under the
Securities and Commodities Laws and any state and foreign securities and
blue sky laws, and amendments thereto, and expenses, including
(without limitation) attorneys' fees and disbursements, arising directly or
indirectly from any action
which PNC Bank takes or does not take (i) at the request or on the direction of
or in reliance on the advice of the Fund or (ii) upon Oral or Written
Instructions. Neither PNC Bank, nor any of its nominees, shall be indemnified
against any liability to the Fund or to its shareholders (or any expenses
incident to such liability) arising out of PNC Bank's own willful misfeasance,
bad faith, negligence or reckless disregard of its duties and obligations under
this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to take
any action on behalf of the Fund except as specifically set forth herein or as
may be specifically agreed to by PNC Bank, in writing. PNC Bank shall be
obligated to exercise care and diligence in the performance of its duties
hereunder, to act in good faith and to use its best effort, within reasonable
limits, in performing services provided for under this Agreement. PNC Bank
shall be responsible for its own negligent failure to perform its duties
under this Agreement. Notwithstanding the foregoing, PNC Bank shall not be
responsible for losses beyond its control, provided that PNC Bank has acted
in accordance with
the standard of care set forth above; and provided further that PNC Bank shall
only be responsible for that portion of losses or damages suffered by the Fund
that are attributable to the negligence of PNC Bank.
Without limiting the generality of the foregoing or of any other provision
of this Agreement, PNC Bank, in connection with its duties under this
Agreement,
shall not be under any duty or obligation to inquire into and shall not be
liable for (a) the validity or invalidity or authority or lack thereof of
any Oral or Written Instruction, notice or other instrument which conforms
to the applicable
requirements of this Agreement, and which PNC Bank reasonably believes to be
genuine; or (b) delays or errors or loss of data occurring by reason of
circumstances beyond PNC Bank's control, including acts of civil or military
authority, national emergencies, labor difficulties, fire, flood or
catastrophe, acts of God, insurrection, war, riots or failure of the mails,
transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank shall
have no liability to the Fund for any consequential, special or indirect losses
or damages which the Fund may incur or suffer by or as a consequence of PNC
Bank's performance of the services provided hereunder, whether or not the
likelihood of such losses or damages was known by PNC Bank.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange for
delivery to PNC Bank, all the property owned by the Fund, including cash
received
as a result of the distribution of its Shares, during the period that is set
forth in this Agreement. PNC Bank will not be responsible for such property
until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon
Written Instructions, shall open and maintain separate account(s) in the Fund's
name using all cash received from or for the account of the Fund, subject
to the terms of this Agreement. In addition, upon Written Instructions,
PNC Bank shall
open separate custodial accounts for each separate series, class or
portfolio of
the Fund and shall hold in such account(s) all cash received from or for the
accounts of the Fund specifically designated to each separate series, class or
portfolio. PNC Bank shall make cash payments from or for the account of
the Fund only for:
(i) purchases of securities in the name of the Fund or PNC
Bank or PNC Bank's nominee as provided in sub-paragraph
j and for which PNC Bank has received a copy of the
broker's or dealer's confirmation or payee's invoice, as
appropriate;
(ii) purchase or redemption of Shares of the Fund delivered
to PNC Bank;
(iii) payment of, subject to Written Instructions, interest,
taxes, administration, accounting, distribution,
advisory, management fees or similar expenses which are
to be borne by the Fund;
(iv) payment to, subject to receipt of Written Instructions,
the Fund's transfer agent, as agent for the
shareholders, an amount equal to the amount of dividends
and distributions stated in the Written Instructions to
be distributed in cash by the transfer agent to
shareholders, or, in lieu of paying the Fund's transfer
agent, PNC Bank may arrange for the direct payment of
cash dividends and distributions to shareholders in
accordance with procedures mutually agreed upon from
time to time by and among the Fund, PNC Bank and the
Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in
connection with the conversion, exchange or surrender of
securities owned or subscribed to by the Fund and held
by or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with
respect to securities sold short; payments made to a
sub-custodian pursuant to provisions in sub-paragraph c
of this Paragraph; and
(viii) payments, upon Written Instructions made for other
proper Fund purposes. PNC Bank is hereby authorized to
endorse and collect all checks, drafts or other orders
for the payment of money received as custodian for the
account of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received by it for
the account of the Fund in a separate account that
physically segregates such securities from those of any
other persons, firms or corporations, except for
securities held in a Book-Entry System. All such
securities shall be held or disposed of only upon
Written Instructions of the Fund pursuant to the terms
of this Agreement. PNC Bank shall have no power or
authority to assign, hypothecate, pledge or otherwise
dispose of any such securities or investment, except
upon the express terms of this Agreement and upon
Written Instructions, accompanied by a certified
resolution of the Fund's Governing Board, authorizing
the transaction. In no case may any member of the
Fund's Governing Board, or any officer, employee or
agent of the Fund withdraw any securities. At PNC
Bank's own expense and for its own convenience, PNC Bank
may enter into sub-custodian agreements with other banks
or trust companies to perform duties described in this
sub-paragraph c. Such bank or trust company shall have
an aggregate capital, surplus and undivided profits,
according to its last published report, of at least one
million dollars ($1,000,000), if it is a subsidiary or
affiliate of PNC Bank, or at least twenty million
dollars ($20,000,000) if such bank or trust company is
not a subsidiary or affiliate of PNC Bank. In addition,
such bank or trust company must agree to comply with the
relevant provisions of the 1940 Act and other applicable
rules and regulations. PNC Bank shall remain
responsible for the performance of all of its duties as
described in this Agreement and shall hold the Fund
harmless from PNC Bank's own (or any sub-custodian
chosen by PNC Bank under the terms of this sub-paragraph
c) acts or omissions, under the standards of care
provided for herein.
(d) Transactions Requiring Instructions. Upon receipt of Oral or
Written Instructions and not otherwise, PNC Bank, directly or through the
use of the Book-Entry System, shall:
(i) deliver any securities held for the Fund against the
receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be
designated in such Oral or Written Instructions,
proxies, consents, authorizations, and any other
instruments whereby the authority of the Fund as owner
of any securities may be exercised;
(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are called, redeemed,
retired or otherwise become payable; provided that, in
any such case, the cash or other consideration is to be
delivered to PNC Bank;
(iv) deliver any securities held for the Fund against receipt
of other securities or cash issued or paid in connection
with the liquidation, reorganization, refinancing,
tender offer, merger, consolidation or recapitalization
of any corporation, or the exercise of any conversion
privilege;
(v) deliver any securities held for the Fund to any
protective committee, reorganization committee or other
person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization or
sale of assets of any corporation, and receive and hold
under the terms of this Agreement such certificates of
deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such
delivery;
(vi) make such transfer or exchanges of the assets of the
Fund and take such other steps as shall be stated in
said Oral or Written Instructions to be for the purpose
of effectuating a duly authorized plan of liquidation,
reorganization, merger, consolidation or
recapitalization of the Fund;
(vii) release securities belonging to the Fund to any bank or
trust company for the purpose of a pledge or
hypothecation to secure any loan incurred by the Fund;
provided, however, that securities shall be released
only upon payment to PNC Bank of the monies borrowed,
except that in cases where additional collateral is
required to secure a borrowing already made subject to
proper prior authorization, further securities may be
released for that purpose; and repay such loan upon
redelivery to it of the securities pledged or
hypothecated therefor and upon surrender of the note or
notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in
connection with any repurchase agreement entered into on
behalf of the Fund, but only on receipt of payment
therefor; and pay out moneys of the Fund in connection
with such repurchase agreements, but only upon the
delivery of the securities;
(ix) release and deliver or exchange securities owned by the
Fund in connection with any conversion of such
securities, pursuant to their terms, into other
securities;
(x) release and deliver securities owned by the Fund for the
purpose of redeeming in kind shares of the Fund upon
delivery thereof to PNC Bank; and
(xi) release and deliver or exchange securities owned by the
Fund for other corporate purposes. PNC Bank must also
receive a certified resolution describing the nature of
the corporate purpose and the name and address of the
person(s) to whom delivery shall be made when such
action is pursuant to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
certified resolutions of the Fund's Governing Board approving, authorizing and
instructing PNC Bank on a continuous and on-going basis, to deposit in the
Book-Entry System all securities belonging to the Fund eligible for deposit
therein and to utilize the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the
Fund, and deliveries
and returns of securities loaned, subject to repurchase agreements or used as
collateral in connection with borrowings. PNC Bank shall continue to perform
such duties until it receives Written or Oral Instructions authorizing contrary
actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of the Fund which are
maintained in the Book-Entry system, established
pursuant to this sub-paragraph e hereof, the records of
PNC Bank shall identify by Book-Entry or otherwise those
securities belonging to the Fund. PNC Bank shall
furnish the Fund a detailed statement of the Property
held for the Fund under this Agreement at least monthly
and from time to time and upon written request.
(ii) Securities and any cash of the Fund deposited in the
Book-Entry System will at all times be segregated from
any assets and cash controlled by PNC Bank in other than
a fiduciary or custodian capacity but may be commingled
with other assets held in such capacities. PNC Bank and
its sub-custodian, if any, will pay out money only upon
receipt of securities and will deliver securities only
upon the receipt of money.
(iii) All books and records maintained by PNC Bank which
relate to the Fund's participation in the Book-Entry
System will at all times during PNC Bank's regular
business hours be open to the inspection of the Fund's
duly authorized employees or agents, and the Fund will
be furnished with all information in respect of the
services rendered to it as it may require.
(iv) PNC Bank will provide the Fund with copies of any report
obtained by PNC Bank on the system of internal
accounting control of the Book-Entry System promptly
after receipt of such a report by PNC Bank. PNC Bank
will also provide the Fund with such reports on its own
system of internal control as the Fund may reasonably
request from time to time.
(f) Registration of Securities. All Securities held for the Fund
which are issued or issuable only in bearer form, except such securities held
in
the Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name of the Fund;
PNC Bank;
the Book-Entry System; a sub-custodian; or any duly appointed nominee(s) of the
Fund, PNC Bank, Book-Entry system or sub-custodian. The Fund reserves the
right to instruct PNC Bank as to the method of registration and safekeeping
of the securities of the Fund. The Fund agrees to furnish to PNC Bank
appropriate instruments to enable PNC Bank to hold or deliver in proper
form for transfer, or
to register its registered nominee or in the name of the Book-Entry System, any
securities which it may hold for the account of the Fund and which may from
time
to time be registered in the name of the Fund. PNC Bank shall hold all such
securities which are not held in the Book-Entry System in a separate
account for the Fund in the name of the Fund physically segregated at all
times from those of any other person or persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee
shall vote any of the securities held pursuant to this Agreement by or for the
account of the Fund, except in accordance with Written Instructions. PNC Bank,
directly or through the use of the Book-Entry System, shall execute in blank
and promptly deliver all notice, proxies, and proxy soliciting materials to the
registered holder of such securities. If the registered holder is not the Fund
then Written or Oral Instructions must designate the person(s) who owns such
securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PNC Bank is authorized to take the following
actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund,
all income, dividends, distributions, coupons,
option premiums, other payments and similar items,
included or to be included in the Property, and,
in addition, promptly advise the Fund of such
receipt and credit such income, as collected, to
the Fund's custodian account;
(B) endorse and deposit for collection, in the name of
the Fund, checks, drafts, or other orders for the
payment of money;
(C) receive and hold for the account of the Fund all
securities received as a distribution on the
Fund's portfolio securities as a result of a stock
dividend, share split-up or reorganization,
recapitalization, readjustment or other
rearrangement or distribution of rights or similar
securities issued with respect to any portfolio
securities belonging to the Fund held by PNC Bank
hereunder;
(D) present for payment and collect the amount payable
upon all securities which may mature or be called,
redeemed, or retired, or otherwise become payable
on the date such securities become payable; and
(E) take any action which may be necessary and proper
in connection with the collection and receipt of
such income and other payments and the endorsement
for collection of checks, drafts, and other
negotiable instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver or cause to be
delivered Property against payment or other
consideration or written receipt therefor in the
following cases:
(1) for examination by a broker or dealer
selling for the account of the Fund in
accordance with street delivery custom;
(2) for the exchange of interim receipts or
temporary securities for definitive
securities; and
(3) for transfer of securities into the name of
the Fund or PNC Bank or nominee of either,
or for exchange of securities for a
different number of bonds,certificates, or
other evidence, representing the same
aggregate face amount or number of units
bearing the same interest rate, maturity
date and call provisions, if any; provided
that, in any such case, the new securities
are to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral or Written
Instructions to the contrary, PNC Bank shall:
(1) pay all income items held by it which call
for payment upon presentation and hold the
cash received by it upon such payment for
the account of the Fund;
(2) collect interest and cash dividends
received, with notice to the Fund, to the
Fund's account;
(3) hold for the account of the Fund all stock
dividends, rights and similar securities
issued with respect to any securities held
by PNC Bank; and
(4) execute as agent on behalf of the
Fund all necessary ownership certificates
required by the Internal Revenue Code or
the Income Tax Regulations of the United
States Treasury Department or under the
laws of any State now or hereafter in
effect, inserting the Fund's name, on such
certificate as the owner of the securities
covered thereby, to the extent it may
lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written or Oral
Instructions establish and maintain segregated
account(s) on its records for and on behalf of the Fund.
Such account(s) may be used to transfer cash and
securities, including securities in the Book-Entry
System:
(A) for the purposes of compliance by the Fund with
the procedures required by a securities or option
exchange, providing such procedures comply with
the 1940 Act and any releases of the SEC relating
to the maintenance of segregated accounts by
registered investment companies; and
(B) Upon receipt of Written Instructions, for other
proper corporate purposes.
(ii) PNC Bank may enter into separate custodial agreements
with various futures commission merchants ("FCMs") that
the Fund uses ("FCM Agreement"). Pursuant to an FCM
Agreement, the Fund's margin deposits in any
transactions involving futures contracts and options on
futures contracts will be held by PNC Bank in accounts
("FCM Account") subject to the disposition by the FCM
involved in such contracts and in accordance with the
customer contract between FCM and the Fund ("FCM
Contract"), SEC rules and the rules of the applicable
commodities exchange. Such FCM Agreements shall only be
entered into upon receipt of Written Instructions from
the Fund which state that:
(A) a customer agreement between the FCM and the Fund
has been entered into; and
(B) the Fund is in compliance with all the rules and
regulations of the CFTC. Transfers of initial
margin shall be made into a FCM Account only upon
Written Instructions; transfers of premium and
variation margin may be made into a FCM Account
pursuant to Oral Instructions.
Transfers of funds from a FCM Account to the FCM
for which PNC Bank holds such an account may only
occur upon certification by the FCM to PNC Bank
that pursuant to the FCM Agreement and the FCM
Contract, all conditions precedent to its right to
give PNC Bank such instructions have been
satisfied.
(iii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such share- holders holding
Shares through IRA accounts, in accordance with the
Fund's prospectuses, the Internal Revenue Code
(including regulations), and with such other procedures
as are mutually agreed upon from time to time by and
among the Fund, PNC Bank and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the securities,
including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased
and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through
whom the purchase was made. PNC Bank shall upon receipt
of securities purchased by or for the Fund pay out of
the moneys held for the account of the Fund the total
amount payable to the person from whom or the broker
through whom the purchase was made, provided that the
same conforms to the total amount payable as set forth
in such Oral or Written Instructions.
(k) Sales of Securities. PNC Bank shall settle sold securities
upon receipt of Oral or Written Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and
accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to
whom the sale was made; and
(vii) the location to which the security must be delivered and
delivery deadline, if any. PNC Bank shall deliver the
securities upon receipt of the total amount payable to
the Fund upon such sale, provided that the total amount
payable is the same as was set forth in the Oral or
Written Instructions. Subject to the foregoing, PNC
Bank may accept payment in such form as shall be
satisfactory to it, and may deliver securities and
arrange for payment in accordance with the customs
prevailing among dealers in securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions
and entries for the account of the Fund, listing
the portfolio securities belonging to the Fund
with the adjusted average cost of each issue and
the market value at the end of such month, and
stating the cash account of the Fund including
disbursement;
(C) the reports to be furnished to the Fund pursuant
to Rule 17f-4; and
(D) such other information as may be agreed upon from
time to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or
conversion or similar communication received by it as
custodian of the Property. PNC Bank shall be under no
other obligation to inform the Fund as to such actions
or events.
(m) Collections. All collections of monies or other property, in
respect, or which are to become part of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time after proper
demands
have been made, PNC Bank shall notify the Fund in writing, including copies of
all demand letters, any written responses, memoranda of all oral responses and
telephonic demands thereto, and await instructions from the Fund. PNC Bank
shall not be obliged to take legal action for collection unless and until
reasonably indemnified to its satisfaction. PNC Bank shall also notify the
Fund as soon as
reasonably practicable whenever income due on securities is not collected in
due course.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty (60) days' prior written
notice to
the other party. In the event this Agreement is terminated
(pending appointment of a successor to PNC Bank or vote of the shareholders
of the Fund to dissolve or
to function without a custodian of its cash, securities or other property), PNC
Bank shall not deliver cash, securities or other property of the Fund to the
Fund. It may deliver them to a bank or trust company of PNC Bank's choice,
having an aggregate capital, surplus and undivided profits, as shown by its
last published report, of not less than twenty million dollars ($20,000,000),
as a custodian for the Fund to be held under terms similar to those of this
Agreement.
PNC Bank shall not be required to make any such delivery or payment until full
payment shall have been made to PNC Bank of all of its fees, compensation,
costs and expenses. PNC Bank shall have a security interest in and shall
have a right of setoff against Property in the Fund's possession as
security for the payment of such fees, compensation, costs and expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address: Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, marked for the attention of the Custodian
Services Department (or its successor) (b) if to the Fund, at the
address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have
been notified to the sender of any such notice or other communication.
If notice is sent by confirming telegram, cable, telex or facsimile
sending device, it
shall be deemed to have been given immediately. If notice is sent by
first-class mail, it shall be deemed to have been given five days after it
has been mailed.
If notice is sent by messenger, it shall be deemed to have been given on the
day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought.
18. Delegation. PNC Bank may assign
its rights and delegate its duties hereunder to any wholly-owned direct or
indirect subsidiary of PNC Bank, National Association or PNC Bank Corp.,
provided that (i) PNC Bank gives the Fund thirty (30) days prior written
notice; (ii) the
delegate agrees with PNC Bank to comply with all relevant provisions of
the 1940 Act; and (iii) PNC Bank and such delegate promptly provide such
information as the Fund may request, and respond to such questions as the
Fund may ask, relative
to the assignment, including (without limitation) the capabilities of the
delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. 20. Further Actions.
Each party agrees to perform such further acts and execute such further
documents
as are necessary to effectuate the purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more separate documents their agreement, if any, with
respect to delegated duties and/or Oral Instructions. The captions in this
Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania and
governed by Pennsylvania law, without regard to principles of conflicts of
law. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not
be affected thereby. This Agreement shall be binding upon and shall inure
to the benefit of the parties hereto and their respective successors and
permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
By:
Title:
MANAGED MUNICIPALS PORTFOLIO II INC.
By:
Title:
AUTHORIZED PERSONS APPENDIX
NAME (Type) SIGNATURE
25
Independent Auditors' Consent
To the Shareholders and Directors of Managed Municipals Portfolio II Inc.:
We consent to the use of our report dated October 15, 1996 incorporated
herein by reference and to the references to our Firm under the headings
"Financial Highlights" and "Experts" in the Prospectus and "Independent
Public Accountants" in the Statement of Additional Information.
KPMG PEAT MARWICK LLP
New York, New York
December 5, 1996
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<NAME> MANAGED MUNICIPALS PORTFOLIO 2 INC.
<S> <C>
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<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 143,736,391
<INVESTMENTS-AT-VALUE> 141,203,375
<RECEIVABLES> 1,993,229
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<APPREC-INCREASE-CURRENT> (6,183,178)
<NET-CHANGE-FROM-OPS> 5,081,625
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,553,614
<DISTRIBUTIONS-OF-GAINS> 1,747,555
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<PER-SHARE-NAV-BEGIN> 12.36
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