As filed with the Securities and Exchange Commission
on December 19, 1997
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. 5 x
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 6 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)
(800) 451-2010
(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;
Portfolio 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 Table of Contents
16. General Information
and History The Portfolio; Description
of Common Stock (see Prospectus)
17. Investment Objective
and Policies Investment Objective and Policies;
Investment 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 Investment Objectives and Policies;
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.
Part A:
================================================================================
================================================================================
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Prospectus December 26, 1997
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388 Greenwich Street
New York, New York 10013
(800) 451-2010
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."
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 26, 1997 (the "SAI") containing additional information about the
Portfolio has been filed with the Securities and Exchange Commission (the "SEC")
and is hereby incorporated by reference in its entirety into this Prospectus. A
copy of the SAI may be obtained without charge by calling or writing to the
Portfolio at the telephone number or address set forth above or by contacting a
Smith Barney Financial Consultant.
Smith Barney Inc. ("Smith Barney" or the "Distributor") 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.
All dealers effecting transactions in the registered securities, whether
or not participating in this distribution, may be required to deliver a
prospectus.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Table of Contents
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Prospectus Summary 3
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Portfolio Expenses 5
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Financial Highlights 7
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The Portfolio 8
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The Offering 8
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Use of Proceeds 8
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Investment Objective and Policies 8
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Net Asset Value 15
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Share Price Data 16
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Taxation 17
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Management of the Portfolio 18
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Dividends and Distributions; Dividend Reinvestment Plan 19
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Certain Provisions of the Articles of Incorporation 21
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Description of Common Stock 22
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Custodian and Transfer Agent 23
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Independent Auditors 23
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Further Information 23
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Appendix A A-1
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================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information or representations
must not be relied upon as having been authorized by the Portfolio or the
Distributor. This Prospectus does not constitute an offer by the Portfolio or
the Distributor to sell or a solicitation of an offer to buy any of the
securities offered hereby in any jurisdiction to any person to whom it is
unlawful to make such offer or solicitation in such jurisdiction.
================================================================================
2
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Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the SAI. 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 regular Federal income tax purposes. See "Investment
Objective and Policies" and "Taxation." 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."
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 Investor Services L.P. ("Moody's"), Standard & Poor's Ratings Group
("S&P"), Fitch Investor Services, Inc. ("Fitch") or another
nationally-recognized rating agency (that is, rated no lower than Baa, MIG3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch). Up to 20%
of the Portfolio's total assets may be invested in unrated securities that are
deemed by the Portfolio's investment 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 Smith Barney Mutual Funds Management Inc.
("SBMFM" or the "Investment Manager"), 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 Salomon Smith Barney Holdings Inc.
3
<PAGE>
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Prospectus Summary (continued)
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("Holdings"), which is in turn a wholly owned subsidiary of Travelers Group Inc.
("Travelers"). Subject to the supervision and direction of the Portfolio's Board
of Directors, the Investment Manager manages the securities held by the
Portfolio in accordance with the Portfolio's stated investment objective and
policies, makes investment decisions for the Portfolio, places orders to
purchase and sell securities on behalf of the Portfolio and employs professional
portfolio managers. SBMFM acts 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 Portfolio's
custodian. See "Custodian and Transfer Agent."
TRANSFER AGENT First Data Investor Services Group, Inc. ("First Data") serves as
the Portfolio's transfer agent, dividend-paying agent and registrar. See
"Custodian and Transfer Agent."
DIVIDENDS AND DISTRIBUTIONS The Portfolio expects to pay monthly dividends of
net investment income (income other than net realized capital gains) and to
distribute net realized capital gains, if any, annually. All dividends or
distributions with respect to shares of Common Stock are reinvested
automatically in additional shares through participation in the Portfolio's
Dividend Reinvestment Plan (the "Plan"), unless a shareholder elects to receive
cash. See "Dividends and Distributions; Dividend Reinvestment Plan."
INVESTMENT OBJECTIVES AND POLICIES The Portfolio will not purchase securities
that are rated lower than Baa by Moody's, BBB by S&P or BBB by Fitch at the time
of purchase. Although obligations rated Baa by Moody's, BBB by S&P or BBB by
Fitch are considered to be investment grade, they may be subject to greater
risks than other higher-rated investment grade securities. See "Investment
Objectives and Policies."
The Portfolio may invest up to 20% of its total assets in unrated
securities that the Investment Manager determines to be of comparable quality to
the securities rated investment grade in which the Portfolio may invest. Dealers
may not maintain daily markets in unrated securities and retail secondary
markets for many of them may not exist; this lack of markets may affect the
Portfolio's ability to sell these securities when the Investment Manager deems
it appropriate.
4
<PAGE>
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Prospectus Summary (continued)
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RISK FACTORS AND SPECIAL CONSIDERATIONS Certain of the instruments held by the
Portfolio, and certain of the investment techniques that the Portfolio may
employ, might expose the Portfolio to special risks. The instruments presenting
the Portfolio with risks are municipal leases, zero coupon securities, custodial
receipts, municipal obligation components, floating and variable rate demand
notes and bonds, and participation interests. Entering into securities
transactions on a when-issued or delayed delivery basis, entering into
repurchase agreements, lending portfolio securities, and engaging in financial
futures and options transactions are investment techniques involving risks to
the Portfolio. As a non-diversified fund within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act"), the Portfolio may invest a
greater proportion of its assets in the obligations of a smaller number of
issuers and, as a result, may be subject to greater risk than a diversified fund
with respect to its holdings of securities. See "Investment Objective and
Policies -- Risk Factors and Special Considerations."
MANAGEMENT OF THE PORTFOLIO The combined annual rate of fees paid by the
Portfolio for advisory and administrative services, 0.90% of the value of the
Portfolio's average daily net assets, is higher than the rates for similar
services paid by other publicly offered, closed-end management investment
companies that have investment objectives and policies similar to those of the
Portfolio. The Portfolio will bear, in addition to the costs of advisory and
administrative services, other expenses and costs in connection with its
operation. See "Management of the Portfolio."
The Portfolio's Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons to acquire
control of the Portfolio and of depriving shareholders of an opportunity to sell
their shares of Common Stock at a premium over prevailing market prices. See
"Certain Provisions of the Articles of Incorporation."
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Portfolio Expenses
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The following tables are intended to assist investors in understanding the
various costs and expenses associated with investing in the Portfolio.
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Annual Expenses
(as a percentage of net assets attributable to Common Stock)
Management Fees.................................................. 0.90%
Other Expenses*.................................................. 0.20%
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Total Annual Operating Expenses*....................................... 1.10%
================================================================================
* "Other Expenses," as shown above, are based upon amounts of expenses for
the fiscal period ended August 31, 1997.
5
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Portfolio Expenses (continued)
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EXAMPLE
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) reinvestment of all dividends:
One Year Three Years Five Years Ten Years
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$11 $35 $61 $134
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While the example assumes a 5% annual return, the Portfolio's performance
will vary and may result in a return greater or less than 5%. In addition, while
the example assumes reinvestment of all dividends and distributions at net asset
value, participants in the Portfolio's Dividend Reinvestment Plan may receive
shares purchased or issued at a price or value different from net asset value.
See "Dividends and Distributions; Dividend Reinvestment Plan." This example
should not be considered a representation of future expenses of the Portfolio
and actual expenses may be greater or less than those shown.
6
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Financial Highlights
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The following information for the three years ended August 31, 1997 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Portfolio's Annual Report dated August 31, 1997. The information
for the two years ended 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.
<TABLE>
<CAPTION>
For a Share of Capital Stock Outstanding Throughout Each Year:
=================================================================================================================
1997 1996 1995 1994 1993(1)
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $11.98 $12.36 $12.15 $13.37 $12.00
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Income From Operations:
Net investment income 0.63 0.66 0.69 0.64 0.62
Net realized and unrealized gain (loss) 0.48 (0.21) 0.32 (0.61) 1.34
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Total Income From Operations 1.11 0.45 1.01 0.03 1.96
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Offering Cost Credited
(Charged) to Paid-in Capital -- -- -- 0.01 (0.04)
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Less Distributions From:
Net investment income (0.66) (0.67) (0.68) (0.67) (0.55)
Net realized gains (0.28) (0.16) (0.12) (0.59) --
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Total Distributions (0.94) (0.83) (0.80) (1.26) (0.55)
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Net Asset Value, End of Year $12.15 $11.98 $12.36 $12.15 $13.37
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Total Return, Based on
Market Value 7.75% 7.35% 8.86% 0.72% 9.97%++
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Total Return, Based on
Net Asset Value 9.86% 4.01% 9.20% 0.48% 16.46%++
=================================================================================================================
Net Assets, End of Year
(in 000's) $136,517 $134,429 $138,649 $136,248 $149,970
=================================================================================================================
Ratios to Average Net Assets:
Expenses 1.10% 1.09% 1.14% 1.12% 1.10%+
Net investment income 5.23 5.31 5.80 5.08 5.21+
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Portfolio Turnover Rate 97% 63% 95% 85% 163%
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Market Value, End of Period $11.688 $11.750 $11.625 $11.500 $12.625
=================================================================================================================
</TABLE>
(1) For the period from September 24, 1992 (commencement of operations) to
August 31, 1993.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
7
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The Portfolio
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The Portfolio is a non-diversified, closed-end management investment
company that seeks as high a level of current income exempt from Federal income
tax as is consistent with the preservation of principal. The Portfolio, which
was incorporated under the laws of the State of Maryland on 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 (800)
451-2010.
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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
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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
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The Portfolio's investment objective is to seek as high a level of current
income exempt from Federal income taxes as is consistent with the preservation
of principal. The Portfolio's investment objective may not be changed without
the affirmative vote of the holders of a "majority of the Portfolio's
outstanding voting securities" (as defined in the 1940 Act). In seeking its
objective, the Portfolio will invest in long-term Municipal Obligations. The
Portfolio will operate subject to a fundamental investment policy providing
that, under normal conditions, the Portfolio will invest at least 80% of its net
assets in Municipal Obligations. No assurance can be given that the Portfolio's
investment objective will be achieved.
The Portfolio will invest at least 80% of its total assets in Municipal
Obligations rated investment grade, that is, rated no lower than Baa, MIG 3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20% of
the
8
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Investment Objective and Policies (continued)
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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 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 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
9
<PAGE>
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
full faith, credit and taxing power for the payment of principal and interest.
Revenue bonds are payable from the revenue derived from a particular facility or
class of facilities or, in some cases, from the proceeds of a special excise tax
or other specific revenue source, but not from the general taxing power. Notes
are short-term obligations of issuing municipalities or agencies and are sold in
anticipation of a bond sale, collection of taxes or receipt of other revenues.
Municipal Obligations bear fixed, floating and variable rates of interest, and
variations exist in the security of Municipal Obligations, both within a
particular classification and between classifications. The types of Municipal
Obligations in which the Portfolio may invest are described in Appendix A to
this Prospectus.
The yields on, and values of, Municipal Obligations are dependent on a
variety of factors, including general economic and monetary conditions, money
market factors, conditions in the Municipal Obligations markets, size of a
particular offering, maturity of the obligation and rating of the issue.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields or values, whereas obligations of the same maturity
and coupon with different ratings may have the same yield or value.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal 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 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:
10
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
When-Issued and Delayed Delivery Securities. The Portfolio may purchase
securities on a when-issued basis, or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but no payment or
delivery will be made by the Portfolio prior to the actual delivery or payment
by the other party to the transaction. The Portfolio will not accrue income with
respect to a when-issued or delayed delivery security prior to its stated
delivery date. The Portfolio will establish with PNC Bank a segregated account
consisting of cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Portfolio's purchase commitments, provided
such securities have been determined by SBMFM to be liquid and unencumbered, and
are marked to market daily, pursuant to guidelines established by the Directors.
Placing securities rather than cash in the segregated account may have a
leveraging effect on the Portfolio's net asset value per share; that is, to the
extent that the Portfolio remains substantially fully invested in securities at
the same time that it has committed to purchase securities on a when-issued or
delayed delivery basis, greater fluctuations in its net asset value per share
may occur than if it had set aside cash to satisfy its purchase commitments.
Stand-By Commitments. The Portfolio may acquire "stand-by commitments"
with respect to Municipal Obligations it holds. Under a stand-by commitment,
which resembles a put option, a broker, dealer or bank is obligated to
repurchase at the Portfolio's option specified securities at a specified price.
Each exercise of a stand-by commitment, therefore, is subject to the ability of
the seller to make payment on demand. The Portfolio will acquire stand-by
commitments solely to facilitate liquidity and does not intend to exercise the
rights afforded by the commitments for trading purposes.
Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase, the Portfolio may enter into
financial futures contracts and invest in options on financial futures contracts
that are traded on a U.S. exchange or board of trade. The futures contracts or
options on futures contracts that may be entered into by the Portfolio will be
restricted to those that are either based on an index of Municipal Obligations
or relate to debt securities the prices of which are anticipated by the
Investment Manager to correlate with the prices of the Municipal Obligations
owned or to be purchased by the Portfolio. Regulations of the Commodity Futures
Trading Commission ("CFTC") applicable to the Portfolio require that its
transactions in futures and options be engaged in for "bona fide hedging"
purposes or other permitted purposes, provided that aggregate initial margin
deposits and premiums required to establish positions other than those
considered by the CFTC to be "bona fide hedging" will not exceed 5% of the
Portfolio's net asset value, after taking into account unrealized profits and
unrealized losses on such contracts.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at a
specified
11
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 1/43 % 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 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
12
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 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
13
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 should
the borrower fail financially.
Financial Futures and Options. Although the Portfolio intends to enter
into financial futures contracts and options on financial futures contracts that
are traded on a U.S. exchange or board of trade only if an active market exists
for those instruments, no assurance can be given that an active market will
exist for them at any particular time. If closing a futures position in
anticipation of adverse price movements is not possible, the Portfolio would be
required to make daily cash payments of variation margin. In those
circumstances, an increase in the value of the portion of the Portfolio's
investments being hedged, if any, may offset partially or completely losses on
the futures contract. No assurance can be given, however, that the price of the
securities being hedged will correlate with the price movements in a futures
contract and, thus, provide an offset to losses on the futures contract or
option on the futures contract. In addition, in light of the risk of an
imperfect correlation between securities held by the Portfolio that are the
subject of a hedging transaction and the futures or options used as a hedging
device, the hedge may not be fully effective because, for example, losses on the
securities held by the Portfolio may be in excess of gains on the futures
contract or losses on the futures contract may be in excess of gains on the
securities held by the Portfolio that were the subject of the hedge. If the
Portfolio has hedged against the possibility of an increase in interest rates
adversely affecting the value of securities it holds and rates decrease instead,
the Portfolio will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures or options positions.
Non-Diversified Classification. Investment in the Portfolio, which is
classified as a non-diversified fund under the 1940 Act, may present greater
risks to investors than an investment in a diversified fund. The investment
return on a non-diversified fund typically is dependent upon the performance of
a smaller number of securities relative to the number of securities held in a
diversified fund. The Portfolio's assumption of large positions in the
obligations of a small number of issuers will affect the value of the securities
it holds to a greater extent than that of a diversified fund in the event of
changes in the financial condition, or in the market's assessment, of the
issuers.
14
<PAGE>
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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
- -- 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.
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
The Portfolio's net asset value will be calculated as of the close of
regular trading on the NYSE, currently 4:00 p.m., New York time, on the last day
on which the NYSE is open for trading of each week and month. Net asset value is
calculated by dividing the value of the Portfolio's net assets (the value of its
assets less its liabilities, exclusive of capital stock and surplus) by the
total number of shares of Common Stock outstanding. Investments in U.S.
Government securities having a maturity of 60 days or less are valued at
amortized cost. All other securities and assets are taken at fair value as
determined in good faith by or under the direction of the Board of Directors.
The valuation of the Portfolio's assets is made by the Investment Manager
after consultation with an independent pricing service (the "Service") approved
by the Board of Directors. When, in the judgment of the Service, quoted bid
prices for investments are readily available and are representative of the bid
side of the market, these investments are valued at the mean between the quoted
bid prices and asked prices. Investments for which, in the judgment of the
Service, no readily obtainable market quotation is available (which may
constitute a majority of the
15
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value (continued)
- --------------------------------------------------------------------------------
Portfolio's portfolio securities), are carried at fair value as determined by
the Service. The Service may use electronic data processing techniques and/or a
matrix system to determine valuations. The procedures of the Service are
reviewed periodically by the officers of the Portfolio under the general
supervision and responsibility of the Board of Directors, which may replace the
Service at any time if it determines it to be in the best interests of the
Portfolio to do so.
- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------
The 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 for the two most recent fiscal years and each full fiscal quarter since
the beginning of the current fiscal year.
Quarterly High Price Quarterly Low Price
-------------------- -------------------
Premium Premium
Net Asset NYSE (Discount) Net Asset NYSE (Discount)
Value Price to NAV Value Price to NAV
================================================================================
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)
11/30/96 12.49 11.188 (10.42) 11.99 11.313 (6.20)
2/28/97 12.36 11.750 (4.94) 11.86 11.125 (6.20)
5/31/97 11.87 11.625 (2.06) 11.53 11.188 (2.97)
8/31/97 12.35 12.125 (1.82) 11.95 11.375 (4.81)
11/30/97 12.36 11.750 (4.94) 12.18 11.375 (6.61)
================================================================================
As of November 28, 1997, the price of Common Stock as quoted on the NYSE
was $11.50, representing a 6.96% 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.
16
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Taxation
- --------------------------------------------------------------------------------
The following is a summary of the material federal tax considerations
affecting the Portfolio and Portfolio shareholders; please refer to the SAI for
further discussion. In addition to the considerations described below and in the
SAI, there may be other federal, state, local or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisors for more detailed information with respect to the
tax consequences of any investment.
The Portfolio has qualified and intends to qualify, so long as such
qualification is in the best interests of its shareholders, under Subchapter M
of the Internal Revenue Code (the "Code") for tax treatment as a regulated
investment company. In each taxable year that the Portfolio qualifies, the
Portfolio will pay no federal income tax on its net investment income and
long-term capital gains that are distributed to shareholders. The Portfolio also
intends to satisfy conditions that will enable it to pay "exempt-interest
dividends" to shareholders. Exempt-interest dividends are generally not subject
to regular federal income taxs but may be considered taxable for state and local
income (or intangible)tax purposes.
Exempt-interest dividends attributable to interest received by the
Portfolio on certain "private-activity" bonds will be treated as a specific tax
preference item to be included in a shareholder's federal alternative minimum
tax computation. In addition to the alternative minimum tax, corporate
shareholders must include 75% of the interest as an adjustment ("the current
earnings adjustment") in computing corporate minimum taxable income.
Exempt-interest dividends derived from the interest earned on private activity
bonds will not be exempt from federal income tax for those shareholders who are
"substantial users" (or persons related to "substantial users") of the
facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to federal income tax.
The interest expense incurred by a shareholder on borrowings made to
purchase or carry Portfolio shares are not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Portfolio from interest income on taxable
investments, net realized short-term securities gains, and all or a portion of,
any gains realized from the sale or other disposition of certain market discount
bonds are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains are
taxable as long-term capital gains, regardless of the length of time a share
holder has owned Portfolio shares. The recently enacted Tax Payer Relief Act of
1997 provides that net capital gains, for taxpayers other than corporations,
generally will not be subject
17
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Taxation (continued)
- --------------------------------------------------------------------------------
to federal income taxes at a rate in excess of 28% for assets held for more than
one year but not more than 18 months, with a reduced maximum rate of 20% for
assets held more than 18 months.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Portfolio shares.
None of the dividends paid by the Portfolio will qualify for the corporate
dividends received deduction. The Portfolio will inform shareholders of the
source and tax status of all distributions, including their eligibility for the
reduced maximum 20% capital gains tax rate, promptly after the close of each
calendar year.
The Portfolio is required to withhold ("backup withholding") 31% of all
taxable dividends, capital gain distributions, and the proceeds of any
redemption, regardless of whether gain or loss is realized upon the redemption,
for shareholders who do not provide the Portfolio with a correct taxpayer
identification number (social security or employer identification number).
Withholding from taxable dividends and capital gain distributions also is
required for shareholders who otherwise are subject to backup withholding. Any
tax withheld as a result of backup withholding does not constitute an additional
tax, and may be claimed as a credit on the shareholders' federal income tax
return.
- --------------------------------------------------------------------------------
Management of the Portfolio
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Portfolio
rests with the Portfolio's Board of Directors. The Directors approve all
significant agreements with the Portfolio's investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the Portfolio are
delegated to SBMFM 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, 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 September 30, 1997 in excess of $85 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
18
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Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
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 primarily responsible for the management of the Portfolio's assets. Mr. Deane
has served the Portfolio in this capacity since the Portfolio commenced
operations in 1992 and manages the day-to-day operations of the Portfolio,
including making all investment decisions. Mr. Deane is an Investment Officer of
SBMFM and is the senior asset manager for a number of investment companies and
other accounts.
- --------------------------------------------------------------------------------
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,
19
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- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
unless the shareholder elects to receive cash. Distributions with respect to
shares registered in the name of a broker-dealer or other nominee (that is, in
"street name") will be reinvested by the broker or nominee in additional shares
under the Plan, unless the service is not provided by the broker or nominee or
the shareholder elects to receive distributions in cash. Investors who own
Common Stock registered in street name should consult their broker-dealers for
details regarding reinvestment. All distributions to Portfolio shareholders who
do not participate in the Plan will be paid by check mailed directly to the
record holder by or under the direction of First Data as dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds the net asset value
per share at the time shares are valued for purposes of determining the number
of shares equivalent to the cash dividend or capital gains distribution, Plan
participants 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.
If the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock, or if the Portfolio declares a
dividend or capital gains distribution payable only in cash, First Data will buy
Common Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts. If, following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Portfolio to issue the remaining dividend or distribution in
shares at a price equal to the greater of (a) net asset value or (b) 95% of the
then-current market price. In this case, the number of shares of Common Stock
received by a Plan participant will be based on the weighted average of prices
paid for shares purchased in the open market and the price at which the
Portfolio issues the remaining shares. To the extent First Data is unable to
stop open market purchases and cause the Portfolio to issue the remaining
shares, the average per share purchase price paid by First Data may exceed the
net asset value of the Common Stock, resulting in the acquisition of fewer
shares than if the dividend or capital gains distribution had been paid in
Common Stock issued by the Portfolio at net asset value. First Data will begin
to purchase Common Stock on the open market as soon as practicable after the
record date of the dividend or capital gains distribution, but in no event 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
20
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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 gains distribution. The Plan also may be amended or
terminated by First Data, with the Portfolio's prior written consent, on at
least 30 days' written notice to Plan participants. All correspondence
concerning the Plan should be directed by mail to First Data Investor Services
Group, P.O. Box 5128, Westborough, Massachusetts 01581-5128 or by telephone at
(617) 573-9300.
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
- --------------------------------------------------------------------------------
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 entity; or
21
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation (continued)
- --------------------------------------------------------------------------------
(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 affirmative vote of at least 75% of the
shares will be required to amend the Articles of Incorporation or Bylaws to
change any of the foregoing provisions.
The percentage votes required under these provisions, which are greater
than the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Portfolio's business or management and may have the
effect of depriving shareholders of an opportunity to sell shares at a premium
over prevailing market prices by discouraging a third party from seeking to
obtain control of the Portfolio in a tender offer or similar transaction. The
Portfolio's Board of Directors, however, has considered these anti-takeover
provisions and believes they are in the best interests of shareholders.
- --------------------------------------------------------------------------------
Description of Common Stock
- --------------------------------------------------------------------------------
Amount Outstanding
Exclusive of Shares
Amount Held Held by Portfolio for
by Portfolio for its Own Account as of
Title of Class Amount Authorized its Own Account December 12, 1997
================================================================================
Common Stock 500,000,000 Shares -- 11,239,705.413
================================================================================
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.
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
22
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Description of Common Stock (continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Custodian and Transfer Agent
- --------------------------------------------------------------------------------
PNC Bank, 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103 acts
as custodian of the Portfolio's investments. First Data, One Exchange Place,
Boston, Massachusetts 02109, serves as agent in connection with the Plan and
serves as the Portfolio's transfer agent, dividend-paying agent and registrar.
- --------------------------------------------------------------------------------
Independent Auditors
- --------------------------------------------------------------------------------
The audited financial statements have been incorporated by reference in
the SAI in reliance upon the report of KPMG Peat Marwick LLP, independent
auditors, and upon the authority of said firm as experts in accounting and
auditing.
- --------------------------------------------------------------------------------
Further Information
- --------------------------------------------------------------------------------
This Prospectus does not contain all of the information set forth in the
Registration Statement filed with the SEC. The complete Registration Statement
may be obtained from the SEC upon payment of the fee prescribed by its Rules and
Regulations.
No person has been authorized to give any information or make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Portfolio, the 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.
23
<PAGE>
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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 damage or destruction of
the leased property, there is substantial interference with
A-1
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Appendix A (continued)
- --------------------------------------------------------------------------------
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 components of Municipal
Obligations from which the interest components have been stripped and sold
separately by the holders of the underlying Municipal Obligations. Zero coupon
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to changing
rates than obligations of comparable maturity that make current distributions of
interest. While zero coupon Municipal Obligations will not contribute to the
cash available to the Portfolio, SBMFM believes that limited investments in such
securities may facilitate the Portfolio's ability to preserve capital while
generating tax-exempt income through the accrual of original interest discount.
Zero coupon Municipal Obligations generally are liquid, although such liquidity
may be reduced from time to time due to interest rate volatility and other
factors.
FLOATING RATE OBLIGATIONS
The Portfolio may purchase floating and variable rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obliga-
A-2
<PAGE>
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Appendix A (continued)
- --------------------------------------------------------------------------------
tions 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 possible financial difficulties of its
borrowers, adverse interest rate or economic conditions, regulatory limitations
or other factors. SBMFM will monitor the pricing, quality and liquidity of the
participation interests held by the Portfolio and the credit standing of the
banks issuing letters of credit or guarantees supporting such participation
interests on the basis of published financial information reports of rating
services and bank analytical services.
CUSTODIAL RECEIPTS
The Portfolio may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain Municipal Obligations. The
underwriter of these certificates or receipts typically purchases Municipal
Obligations and deposits the obligations in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Custodial receipts evidencing specific
coupon or principal payments have the same economic attributes as zero coupon
Municipal Obligations described above. Although under the terms of the custodial
receipt the Portfolio would be typically authorized to assert its rights
directly against the issuer of the underlying obligation,
A-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
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 certain Municipal Obligations, the interest
rate on which has been divided by the issuer into two different and variable
components, which together result in a fixed interest rate. Typically, the first
of the components (the "Auction Component") pays an interest rate that is reset
periodically through an auction process, whereas the second of the components
(the "Residual Component") pays a residual interest rate based on the difference
between the total interest paid by the issuer on the Municipal Obligation and
the auction rate paid on the Auction Component. The Portfolio may purchase both
Auction and Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
component holders will decrease as the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the extent of the
increases and decreases in market value of Residual Components may be larger
than comparable changes in the market value of an equal principal amount of a
fixed rate Municipal Obligation having similar credit quality, redemption
provisions and maturity.
A-4
<PAGE>
================================================================================
================================================================================
SMITH BARNEY
------------
A Member of TravelersGroup[LOGO]
Managed
Municipals
Portfolio II
Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD0505 12/97
Part B:
Managed Municipals Portfolio II Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
STATEMENT OF ADDITIONAL INFORMATION
December 26, 1997
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 26, 1997, as amended or supplemented from
time to time (the "Prospectus"), and should be read in
conjunction with the Prospectus. The Prospectus may
be obtained from any Smith Barney Financial Consultant
or by writing or calling the Portfolio at the address
or telephone number set forth above. This SAI,
although not itself a prospectus, is incorporated by
reference into the Prospectus in its entirety.
No person has been authorized to give any
information or to make any representations not
contained in the Prospectus or this SAI and, if given
or made, such information must not be relied upon as
having been authorized by the Portfolio or the
Portfolio's investment adviser. The Prospectus and
this SAI do not constitute an offer to sell or a
solicitation of any offer to buy any security other
than the shares of Common Stock. The Prospectus and
this SAI do not constitute an offer to sell or a
solicitation of an offer to buy the shares of 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")
22
Certain Provisions of the Articles of
Incorporation (see in the Prospectus
"Certain Provisions of the Articles of
Incorporation")
22
Additional Information (see in the
Prospectus "Custodian and Transfer
Agent")
24
Financial Statements
25
Appendix Description of Moody's Investor
Service, Inc. (Moody's), Standard &
Poors Ratings Group (S&P) and Fitch
Investors Service, L.P. (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, S&P and
Fitch represent the opinions of those agencies as to
the quality of the Municipal Obligations and long-term
investments which they rate. It should be emphasized,
however, that such ratings are relative and
subjective, are not absolute standards of quality and
do not evaluate the market risk of securities. These
ratings will be used as initial criteria for the
selection of securities, but the Portfolio also will
rely upon the independent advice of its investment
adviser, 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 a Municipal Obligation index and interest rate
futures contracts as a hedging device. Successful use
of these futures contracts by the Portfolio is subject
to the Investment Manager's ability to predict
correctly movements in the direction of interest
rates. Such predictions involve skills and techniques
which may be different from those involved in the
management of a long-term Municipal Obligation
portfolio. In addition, there can be no assurance
that a correlation would exist between movements in
the price of the Municipal Obligation index or the
debt security underlying the futures contract and
movement in the price of the Municipal Obligations
which are the subject of the hedge. The degree of
imperfection of correlation depends upon various
circumstances, such as variations in speculative
market demand for futures contracts and Municipal
Obligations and technical influences on futures
trading. The Portfolio's Municipal Obligations and the
Municipal Obligations in the index may also differ in
such respects as interest rate levels, maturities and
creditworthiness of issuers. A decision of whether,
when and how to hedge involves the exercise of skill
and judgment and even a well-conceived hedge may be
unsuccessful to some degree because of market behavior
or unexpected trends in interest rates.
Although the Portfolio intends to enter into
futures contracts only if an active market exists for
such contracts, there can be no assurance that an
active market will exist for a contract at any
particular time. Most domestic futures exchanges and
boards of trade limit the amount of fluctuation
permitted in futures contract prices during a single
trading day. The daily limit establishes the maximum
amount the price of a futures contract may vary either
up or down from the previous day's settlement price at
the end of a trading session. Once the daily limit
has been reached in a particular contract, no trades
may be made that day at a price beyond that limit.
The daily limit governs only price movement during a
particular trading day and therefore does not limit
potential losses because the limit may prevent the
liquidation of unfavorable positions. It is possible
that futures contract prices could move to the daily
limit for several consecutive trading days with little
or no trading, thereby preventing prompt liquidation
of futures positions and subjecting some futures
traders to substantial losses. In such event it will
not be possible to close a futures position and in the
event of adverse price movements, the Portfolio would
be required to make daily cash payments of variation
margin. In such circumstances, an increase in the
value of the portion of the portfolio being hedged, if
any, may partially or completely offset losses on the
futures contract. As described above, however, there
is no guarantee the price of Municipal Obligations
will, in fact, correlate with the price movements in a
futures contract and thus provide an offset to losses
on a futures contract.
If the Portfolio has hedged against the
possibility of an increase in interest rates adversely
affecting the value of Municipal Obligations it holds
and rates decrease instead, the Portfolio will lose
part or all of the benefit of the increased value of
the Municipal Obligations it has hedged because it
will have offsetting losses in its futures positions.
In addition, in such situations, if the Portfolio has
insufficient cash, it may have to sell securities to
meet daily variation margin requirements. Such sales
of securities may, but will not necessarily, be at
increased prices which reflect the decline in interest
rates. The Portfolio may have to sell securities at a
time when it may be disadvantageous to do so.
Options on Interest Rate Futures Contracts. The
Portfolio may purchase put and call options on
interest rate futures contracts which are traded on a
domestic exchange or board of trade as a hedge against
changes in interest rates, and may enter into closing
transactions with respect to such options to terminate
existing positions. The Portfolio will sell put and
call options on interest rate futures contracts only
as part of closing sale transactions to terminate its
options positions. There is no guarantee such closing
transactions can be effected.
Options on interest rate futures contracts, as
contrasted with the direct investment in such
contracts, give the purchaser the right, in return for
the premium paid, to assume a position in interest
rate futures contracts at a specified exercise price
at any time prior to the expiration date of the
options. Upon exercise of an option, the delivery of
the futures position by the writer of the option to
the holder of the option will be accompanied by
delivery of the accumulated balance in the writer's
futures margin account, which represents the amount by
which the market price of the futures contract
exceeds, in the case of a call, or is less than, in
the case of a put, the exercise price of the option on
the futures contract. The potential loss related to
the purchase of an option on interest rate futures
contracts is limited to the premium paid for the
option (plus transaction costs). Because the value of
the option is fixed at the point of sale, there are no
daily cash payments to reflect changes in the value of
the underlying contract; however, the value of the
option does change daily and that change would be
reflected in the net asset value of the Portfolio.
There are several risks relating to options on
interest rate futures contracts. The ability to
establish and close out positions on such options will
be subject to the existence of a liquid market. In
addition, the Portfolio's purchase of put or call
options will be based upon predictions as to
anticipated interest rate trends by the Investment
Manager, which could prove to be inaccurate. Even if
the Investment Manager's expectations are correct,
there may be an imperfect correlation between the
change in the value of the options and of the
Portfolio's securities.
Municipal Obligations
General Information. Municipal Obligations
generally are understood to include debt obligations
issued to obtain funds for various public purposes,
including the construction of a wide range of public
facilities, refunding of outstanding obligations,
payment of general operating expenses and extensions
of loans to public institutions and facilities.
Private activity bonds that are issued by or on behalf
of public authorities to obtain funds to provide
privately operated facilities are included within the
term Municipal Obligations if the interest paid
thereon qualifies as excludable from gross income (but
not necessarily from alternative minimum taxable
income) for Federal income tax purposes in the opinion
of bond counsel to the issuer.
The yields on Municipal Obligations are
dependent upon a variety of factors, including general
economic and monetary conditions, general money market
conditions, general conditions of the Municipal
Obligations market, the financial condition of the
issuer, the size of a particular offering, the
maturity of the obligation offered and the rating of
the issue. Municipal Obligations are also subject to
the provisions of bankruptcy, insolvency and other
laws affecting the rights and remedies of creditors,
such as the Federal Bankruptcy Code, and laws, if any,
that may be enacted by Congress or state legislatures
extending the time for payment of principal or
interest, or both, or imposing other constraints upon
enforcement of the obligations or upon the ability of
municipalities to levy taxes. There is also the
possibility that as a result of litigation or other
conditions the power or ability of any one or more
issuer to pay, when due, principal of and interest on
its, or their, Municipal Obligations may be materially
affected.
The net asset value of the Common Stock will
change with changes in the value of the Portfolio's
securities. Because the Portfolio will invest
primarily in fixed-income securities, the net asset
value of the Common Stock can be expected to change as
levels of interest rates fluctuate; generally, when
prevailing interest rates increase, the value of
fixed-income securities held by the Portfolio can be
expected to decrease and when prevailing interest
rates decrease, the value of the fixed-income
securities held by the Portfolio can be expected to
increase. The value of the fixed-income securities
held by the Portfolio and thus the Portfolio's net
asset value, may also be affected by other economic,
market and credit factors.
From time to time, the Portfolio's investments
may include securities as to which the Portfolio, by
itself or together with other funds or accounts
managed by the Investment Manager, holds a major
portion or all of an issue of Municipal Obligations.
Because relatively few potential purchasers may be
available for these investments and, in some cases,
contractual restrictions may apply on resales, the
Portfolio may find it more difficult to sell these
securities at a time when the Investment Manager
believes it is advisable to do so.
When-Issued Securities. The Portfolio may
purchase Municipal Obligations on a "when-issued"
basis (i.e., for delivery beyond the normal settlement
date at a stated price and yield). The payment
obligation and the interest rate that will be received
on the Municipal Obligations purchased on a when-
issued basis are each fixed at the time the buyer
enters into the commitment. Although the Portfolio
will purchase Municipal Obligations on a when-issued
basis only with the intention of actually acquiring
the securities, the Portfolio may sell these
securities before the settlement date if it is deemed
advisable as a matter of investment strategy.
Municipal Obligations are subject to changes in
value based upon the public's perception of the
creditworthiness of the issuers and changes, real or
anticipated, in the level of interest rates. In
general, Municipal Obligations tend to appreciate when
interest rates decline and depreciate when interest
rates rise. Purchasing Municipal Obligations on a
when-issued basis, therefore, can involve the risk
that the yields available in the market when the
delivery takes place actually may be higher than those
obtained in the transaction itself. To account for
this risk, a separate account of the Portfolio
consisting of cash 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"),
including Rule 10f-3 under the 1940 Act. Under
certain circumstances, the Portfolio may be at a
disadvantage because of this limitation in comparison
with other investment companies which have a similar
investment objective but which are not subject to such
limitation because they are not affilated with Smith
Barney.
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, 1996 and 1997 the Portfolio's portfolio
turnover rate was 95%, 63% and 97%, 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 manager, 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 (Age) and Address
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
*+Heath B. McLendon
(64)
388 Greenwich Street
New York NY 10013
Chairman of the
Board,
Chief Executive
Officer
Managing Director of Smith
Barney Inc.; President and
Director of SBMFM; President
and Director of Travelers
Advisers, Inc. ("TIA");
Chairman of Smith Barney
Strategy Advisers Inc. Prior
to July 1993, Senior
Executive Vice President of
Shearson Lehman Brothers Inc.
; Vice Chairman of Shearson
Asset Management.
+Martin Brody (76)
c/o HMK Associates
30 Columbia Turnpike
Florham Park, NJ
07932
Director
Consultant, HMK Associates;
Retired Vice Chairman of the
Board of Restaurant
Associates Corp.; Director of
Jaclyn, Inc.
+Allan J. Bloostein
(68)
717 Fifth Avenue
21st Floor
New York, NY 10022
Director
President, Allan J. Bloostein
Associates, Consultant and
retired Vice Chairman of the
Board of May Department
Stores Company; Director of
Taubman Centers, Inc. and CVS
Corporation.
+Dwight B. Crane (59)
Harvard Business
School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business
School.
+Robert A. Frankel
(69)
102 Grand Street
Croton-on-Hudson,
New York, NY 10520
Director
Managing Partner of Robert A.
Frankel Management
Consultants; formerly
Corporate Vice President of
The Reader's Digest
Association, Inc.
* Director who is an "interested person" of the
Portfolio (as defined in the 1940 Act).
+ Director and/or trustee of other registered
investment companies with which Smith Barney is
affiliated.
Name (Age)and Address
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
+William R.
Hutchinson (54)
Amoco Corp.
200 East Randolph
Drive
Chicago, IL 60601
Director
Vice President, Financial
Operations of Amoco Corp.;
Director of Associated Banks
and Associated Bank Corp.
Joseph P. Deane (49)
388 Greenwich Street
New York. NY 10013
Vice President and
Investment Officer
Managing Director of Smith
Barney;. Investment Officer
of SBMFM. Prior to July
1993, Senior Vice President
and Managing Director of
Shearson Lehman Advisors.
Lewis E. Daidone
(40)
388 Greenwich Street
New York, NY 10105
Senior Vice
President
and Treasurer
Managing Director of Smith
Barney; Director and Senior
Vice President of SBMFM and
TIA.
Christina T. Sydor
(46)
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Smith
Barney; General Counsel and
Secretary of SBMFM and TIA.
________________________________
* Director who is an "interested person" 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, 1997 such fees and
expenses totaled $46,082
Director
Aggregate
Compensation from
Fund
Pension or
Retirement
Benefits
Accrued as
part of
Fund
Expenses
Total
Compensati
on from
Fund and
Fund
Complex
Total
Number of
Funds for
which
Director
Serves
Within Fund
Complex
Charles Barber*@
$5,750
$0
$38,700
6
Martin Brody
7,000
0
124,286
19
Dwight Crane
7,500
0
140,375
22
Allan Bloostein
7,500
0
83,150
8
Robert Frankel
7,500
0
66,100
8
William R.
Hutchinson
7,000
0
38,600
6
Heath B. McLendon
- ------
0
- -----
41
Pursuant to the Fund's deferred compensation plan,
Mr. Barber elected, effective January 2, 1996, to
defer the payment of some or all of the compensation
due to him from the Fund.
@Upon attainment of age 80, Fund Directors are
required to change to emeritus status. Directors
Emeritus are entitled to serve in emeritus status
for a maximum of 10 years, during which time they
are paid 50% of the annual retainer fee and meeting
fees otherwise applicable to Fund Directors,
together with reasonable out-of-pocket expenses for
each meeting attended. Effective February 26, 1997,
Mr. Barber became a Director Emeritus.
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 20, 1997.
Unless terminated sooner, the Advisory Agreement will
continue for successive annual periods provided that
such continuance is specifically approved at least
annually: (1) by a majority vote of the Non-Interested
Directors cast in person at a meeting called for the
purpose of voting on such approval; and (2) by the
Board of Directors or by a vote of a majority of the
outstanding shares of Common Stock. The Investment
Manager is a division of SBMFM, which is in turn a
wholly owned subsidiary of Salomon 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, 1995,
1996 and 1997, such fees amounted to $934,964,
$979,107 and $946,120, 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 also 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 Prospectus under
"Management of the Portfolio."
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, 1995, 1996 and
1997, SBMFM received $267,133, $279,745 and $270,320,
respectively, in administration fees.
Pursuant to the Administration Agreement, SBMFM
will exercise its best judgment in rendering its
services to the Portfolio. SBMFM will not be liable
for any error of judgment or mistake of law or for any
loss suffered by the Portfolio in connection with the
matters to which the Administration Agreement relates,
except by reason of SBMFM's reckless disregard of its
obligations and duties under the Administration
Agreement.
The Administration Agreement will continue
automatically for successive annual periods provided
that such continuance is approved at least annually by
the Board of Directors of the Portfolio including a
majority of the Non-Interested Directors by vote cast
in person at a meeting called for the purpose of
voting such approval. The 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 12, 1997
Percent of
Amount of
Common
Name and Address
Record
Stock
of Record Owner
Ownership
Outstanding
Cede & Co., as Nominee for
1
0,987,216.291
97.75%
The Depository Trust Company
P.O. Box 20
Bowling Green Station
New York, New York 10004
10,987,216.291 of the shares held of record by Cede &
Co., representing 97.75% 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 12, 1997, the Directors and
officers of the Portfolio, as a group, beneficially
owned less than 1% of the Portfolio's outstanding
shares of Common Stock.
TAXES
As described above and in the Prospectus, the
Portfolio is designed to provide investors with
current income which is excluded from gross income for
Federal income tax purposes. The Portfolio is not
intended to constitute a balanced investment program
and is not designed for investors seeking capital
gains or maximum tax-exempt income irrespective of
fluctuations in principal. Investment in the Portfolio
would not be suitable for tax-exempt institutions,
qualified retirement plans, H.R. 10 plans and
individual retirement accounts because such investors
would not gain any additional tax benefit from the
receipt of tax-exempt income.
The following is a summary of selected Federal
income tax considerations that may affect the
Portfolio and its shareholders. The summary is not
intended as a substitute for individual tax advice and
investors are urged to consult their own tax advisors
as to the tax consequences of an investment in the
Portfolio.
Taxation of the Portfolio and its Investments
The Portfolio has qualified and intends to
qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). In addition, the Portfolio
intends to satisfy conditions contained in the Code
that will enable interest from Municipal Obligations,
excluded from gross income for Federal income tax
purposes with respect to the Portfolio, to retain that
tax-exempt status when distributed to the shareholders
of the Portfolio (that is, to be classified as "exempt
interest" dividends of the Portfolio).
If it qualifies as a regulated investment
company, the Portfolio will pay no Federal income
taxes on its taxable net investment income (that is,
taxable income other than net realized capital gains)
and its net realized capital gains that are
distributed to shareholders. To qualify under
Subchapter M of the Code, the Portfolio must among
other things: (1) distribute to its shareholders at
least 90% of its taxable net investment income (for
this purpose consisting of taxable net investment
income and net realized short-term capital gains) and
90% of its tax-exempt net investment income (reduced
by certain expenses); (2) derive at least 90% of its
gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or
other disposition of securities, or other income
(including, but not limited to, gains from options,
futures, and forward contracts) derived with respect
to the Portfolio's business of investing in
securities; and (3) diversify its holdings so that at
the end of each fiscal quarter of the Portfolio (a) at
least 50% of the market value of the Portfolio's
assets is represented by cash, U.S. government
securities and other securities, with those other
securities limited with respect to any one issuer, to
an amount no greater than 5% of the Portfolio's assets
and (b) not more than 25% of the market value of the
Portfolio's assets is invested in the securities of
any one issuer (other than U.S. government securities
or securities of other regulated investment companies)
or of two or more issuers that the Portfolio controls
and that are determined to be in the same or similar
trades or businesses or related trades or businesses.
As a regulated investment company, the Portfolio will
be subject to a 4% non-deductible excise tax measured
with respect to certain undistributed amounts of
ordinary income and capital gain. The Portfolio
expects to pay dividends and distributions necessary
to avoid the application of this excise tax.
As described above in this SAI and in the
Prospectus, the Portfolio may invest in financial
futures contracts and options on financial futures
contracts that are traded on a U.S. exchange or board
of trade. The Portfolio anticipates that these
investment activities will not prevent the Portfolio
from qualifying as a regulated investment company. As
a general rule, these investment activities will
increase or decrease the amount of long-term and
short-term capital gains or losses realized by the
Portfolio and, thus, will affect the amount of capital
gains distributed to the Portfolio shareholders.
For Federal income tax purposes, gain or loss on
the futures and options described above (collectively
referred to as "Section 1256 Contracts") would, as a
general rule, be taxed pursuant to a special "mark-to-
market system." Under the mark-to-market system, the
Portfolio may be treated as realizing a greater or
lesser amount of gains or losses than actually
realized. As a general rule gain or loss on Section
1256 Contracts is treated as 60% long term capital
gain or loss and 40% short-term capital gain or loss,
and as a result, the mark-to-market system will
generally affect the amount of capital gains or losses
taxable to the Portfolio and the amount of
distributions taxable to a shareholder. Moreover, if
the Portfolio invests in both Section 1256 Contracts
and offsetting positions in those contracts, then the
Portfolio might not be able to receive the benefit of
certain realized losses for an indeterminate period of
time. The Portfolio expects that its activities with
respect to Section 1256 Contracts and offsetting
positions in those Contracts (1) will not cause it or
its shareholders to be treated as receiving a
materially greater amount of capital gains or
distributions than actually realized or received and
(2) will permit it to use substantially all of its
losses for the fiscal years in which the losses
actually occur.
Taxation of the Portfolio's Shareholders
The Portfolio anticipates that all dividends it
pays, other than dividends from Taxable Investments
and from income or gain derived from securities
transactions and from the use of certain of the
investment techniques described under "Investment
Objective and Policies" will be derived from interest
on Municipal Obligations and thus will be exempt-
interest dividends that may be excluded by
shareholders from their gross income for Federal
income tax purposes if the Portfolio satisfies certain
asset percentage requirements. The Portfolio's net
realized short-term capital gains are taxable to
shareholders of the Portfolio as ordinary income, and
distributions of net realized long-term capital gains
are taxable to shareholders as long-term capital
gains, regardless of the length of time shareholders
have held shares of Common Stock and whether the
distributions are received in cash or reinvested in
additional shares. As a general rule, a shareholder's
gain or loss on a sale of his or her shares of Common
Stock will be a long-term gain or loss if he or she
has held his or her shares for more than one year and
will be a short-term capital gain or loss if he or she
has held his or her shares for one year or less. Gain
on shares held for more than 18 months will be
eligible for the reduced 20% maximum capital gains tax
rate. Dividends and distributions paid by the
Portfolio will not qualify for the Federal dividends-
received deduction for corporations.
Exempt-Interest Dividends
Interest on indebtedness incurred by a
shareholder to purchase or carry shares of Common
Stock is not deductible for Federal income tax
purposes. If a shareholder receives exempt-interest
dividends with respect to any share of Common Stock
and if the share is held by the shareholder for six
months or less, then any loss on the sale of the share
may, to the extent of the exempt-interest dividends,
be disallowed. The Code may also require a shareholder
if he or she receives exempt-interest dividends to
treat as taxable income a portion of certain otherwise
non-taxable social security and railroad retirement
benefit payments. In addition, the portion of any
exempt-interest dividend paid by the Portfolio that
represents income derived from private activity bonds
held by the Portfolio may not retain its tax-exempt
status in the hands of a shareholder who is a
"substantial user" of a facility financed by the
bonds, or a "related person" of the substantial user.
Although the Portfolio's exempt-interest dividends may
be excluded by shareholders from their gross income
for Federal income tax purposes, 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.
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 "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, including the portion, if any,
of long-term capital gains distributions eligible for
the reduced 20% maximum capital gains tax rate. 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.
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.
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.
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 holders 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 of 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 if the transaction
is approved by a vote of a least 75% of the Continuing
Directors (as defined below) or if certain conditions
regarding the consideration paid by the person
entering into, or proposing to enter into, a Business
Combination with the Portfolio and various other
requirements are satisfied. In such case, a majority
of the votes entitled to be cast by shareholders of
the Portfolio will be required to approve the
transaction if it is a Reorganization 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 it is any
other Business Combination. In addition, a 75%
shareholder vote will not be required with respect to
a Termination Transaction if it is approved by a vote
of at least 75% of the Continuing Directors, in which
case a majority of the votes entitled to be cast by
shareholders of the Portfolio will be required to
approve the transaction.
The voting provisions described above could have
the effect of depriving shareholders of the Portfolio
of an opportunity to sell their Common Stock at a
premium over prevailing market prices by discouraging
a third party from seeking to obtain control of the
Portfolio in a tender offer or similar transaction.
In the view of the Portfolio's Board of Directors,
however, these provisions offer several possible
advantages including: (1) requiring persons seeking
control of the Portfolio to negotiate with its
management regarding the price to be paid for the
amount of Common Stock required to obtain control: (2)
promoting continuity and stability; and (3) enhancing
the Portfolio's ability to pursue long-term strategies
that are consistent with its investment objective and
management policies. The Board of Directors has
determined that the voting requirements under Maryland
law and the 1940 Act are in the best interests of
shareholders generally.
A "Continuing Director," as used in the
discussion above, is any member of the Portfolio's
Board of Directors (1) who is not person or affiliate
of a person who enters or proposes to enter into a
Business Combination with the Portfolio (such person
or affiliate being referred to individually as an
"Interested Party") and (2) who has been a member of
the Board of Directors for a period of least 12
months, or 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 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 LLP as their counsel.
Independent Public Accountants
For the fiscal year ending August 31, 1998, KPMG
Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, have been selected as 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 the
Portfolio's securities and keeps all necessary
accounts and records. The assets of the Portfolio are
held under bank custodianship in compliance with the
1940 Act. 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, 1997 is incorporated into this
Statement of Additional Information by reference in
its entirety. A copy of these Reports may be obtained
from any Smith Barney Financial Consultant or by
calling or writing to the Portfolio at the telephone
number or address set forth on the cover page of this
SAI.
APPENDIX
DESCRIPTION OF MOODY'S, S&P AND FITCH RATINGS
Description of Moody's Municipal Bond Ratings:
Aaa - Bonds that are rated Aaa are judged to be of the
best quality, carry the smallest degree of investment
risk and are generally referred to as "gilt edge. "
Interest payments with respect to these bonds are
protected by a large or by an exceptionally stable
margin, and principal is secure. Although the various
protective elements applicable to these bonds are
likely to change, those changes are most unlikely to
impair the fundamentally strong position of these
bonds.
Aa - Bonds that are rated Aa are judged to be of high
quality by all standards and together with the Aaa
group comprise what are generally known as high grade
bonds. They are rated lower than the best bonds
because margins of protection may not be as large as
in Aaa securities or fluctuation of protective
elements may be of greater amplitude, or other
elements may be present that make the long-term risks
appear somewhat larger than in Aaa securities
A - Bonds that are rated A possess many favorable
investment attributes and are to be considered as
upper medium grade obligations. Factors giving
security to principal and interest with respect to
these bonds are considered adequate, but elements may
be present that suggest a susceptibility to impairment
sometime in the fixture.
Baa - Bonds rated Baa are considered to be medium
grade obligations, that is they are neither highly
protected nor poorly secured. Interest payment and
principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of
time. These bonds lack outstanding investment
characteristics and may have speculative
characteristics as well.
Moody's applies the numerical modifiers 1, 2 and
3 in each generic rating classification from Aa
through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating
category; the modifier 2 indicates a mid-range
ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Description of Moody's Municipal Note Ratings:
Moody's ratings for state and municipal notes
and other short-term loans are designated Moody's
Investment Grade (MIG) and for variable demand
obligations are designated Variable Moody's Investment
Grade (VMIG). This distinction recognizes the
differences between short- and long-term credit risk.
Loans bearing the designation MIG1/VMIG 1 are of the
best quality, enjoying strong protection from
established cash flows of funds for their servicing or
from established and broad-based access to the market
for refinancing, or both. Loans bearing the
designation MIG 2/VMIG 2 are of high quality, with
margins of protection ample, although not as large as
the preceding group. Loans bearing the designation
MIG3/VMIG 3 are of favorable quality, with all
security elements accounted for but lacking the
undeniable strength of the preceding grades. Market
access for refinancing, in particular, is likely to be
less well established.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial
paper rating assigned by Moody's. Issuers rated Prime-
1 (or related supporting institutions) are considered
to have a superior capacity for repayment of short-
term promissory obligations. Issuers rated Prime-2 (or
related supporting institutions) are considered to
have a strong capacity for repayment of short-term
promissory obligations, normally evidenced by many of
the characteristics of issuers rated Prime-1 but to a
lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation.
Capitalization characteristics, while still
appropriate, may be more affected by external
conditions. Ample alternative liquidity is maintained.
Description of S&P Municipal Bond Ratings:
AAA - These bonds are obligations of the highest
quality and have the strongest capacity for timely
payment of debt service.
General Obligation Bonds Rated AAA - In a period of
economic stress the issuers of these bonds will suffer
the smallest declines in income and will be least
susceptible to autonomous decline. Debt burden is
moderate. A strong revenue structure appears more than
adequate to meet future expenditure requirements.
Quality of management appears superior.
Revenue Bonds Rated AAA - Debt service coverage with
respect to these bonds has been, and is expected to
remain, substantial. Stability of the pledged revenues
is also exceptionally strong due to the competitive
position of the municipal enterprise or to the nature
of the revenues. Basic security provisions (including
rate covenant, earnings test for issuance of
additional bonds, debt service reserve requirements)
are rigorous. There is evidence of superior management
AA - The investment characteristics of bonds in this
group are only slightly less marked than those of the
prime quality issues. Bonds rated AA have the second
strongest capacity for payment of debt service
A - Principal and interest payments on bonds in this
category are regarded as safe although the bonds are
somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than
bonds in high rated categories. This rating describes
the third strongest capacity for payment of debt
service.
General Obligation Bonds Rated A - There is some
weakness either in the local economic base, in debt
burden, in the balance between revenues and
expenditures or in quality of management. Under
certain adverse circumstances, any one such weakness
might impair the ability of the issuer to meet debt
obligations at some fixture date.
Revenue Bonds Rated A - Debt service coverage is good
but not exceptional. Stability of the pledged revenues
could show some variations because of increased
competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less
stringent. Management performance appears adequate.
BBB - The bonds in this group are regarded as having
an adequate capacity to pay interest and repay
principal. Whereas bonds in this group normally
exhibit adequate protection parameters, adverse
economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest
and repay principal for debt in this category than in
higher rated categories. Bonds rated BBB have the
fourth strongest capacity for payment of debt service.
S&P's letter ratings may be modified by the
addition of a plus or a minus sign, which is used to
show relative standing within the major rating
categories except in the AAA category.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years
or less are usually given note ratings (designated SP-
1 -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-
1 have a very strong or strong capacity to pay
principal and interest. Those issues determined to
possess overwhelming safety characteristics are given
the designation of SP- 1+. Notes rated SP-2 have a
satisfactory capacity to pay principal and interest.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A- l by S&P indicates
that the degree of safety regarding timely payment is
either overwhelming or very strong. Those issues
determined to possess overwhelming safety
characteristics are denoted A-1+. Capacity for timely
payment of commercial paper rated A-2 is stronger but
the relative degree of safety is not as high as issues
designated A-1.
Description of Fitch Municipal Bond Ratings:
AAA - Bonds rated AAA by Fitch are considered to be
investment grade and of the highest credit quality.
The obligor has an exceptionally strong ability to pay
interest and repay principal, which is unlikely to be
affected by reasonably foreseeable events.
AA - Bonds rated AA by Fitch are considered to be
investment grade and of high quality. The obligor's
ability to pay interest and repay principal, while
very strong, is somewhat less than for AAA rated
securities or more subject to possible change over the
term of the issue.
A - Bonds rated A by Fitch are considered to be
investment grade and of high credit quality. The
obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable
to adverse changes in economic conditions and
circumstances than bonds with higher ratings
BBB - Bonds rated BBB by Fitch are considered to be
investment grade and of satisfactory credit quality.
The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse
changes in economic conditions and circumstances,
however, are more likely to have adverse consequences
on these bonds, and therefore impair timely payment.
The likelihood that the ratings of these bonds will
fall below investment grade is higher than for bonds
with higher ratings.
Plus and minus signs are used by Fitch to
indicate the relative position of a credit within a
rating category. Plus and minus signs, however, are
not used in the AAA category.
Description of Fitch Short-Term Ratings
Fitch's short-term ratings apply to debt
obligations that are payable on demand or have
original maturities of generally up to three years,
including commercial paper, certificates of deposit,
medium-term notes, and municipal and investment notes.
The short-term rating places greater emphasis
than a long-term rating on the existence of liquidity
necessary to meet the issuer's obligations in a timely
manner.
Fitch's short-term ratings are as follows:
F-1 + - Issues assigned this rating are regarded as
having the strongest degree of assurance for timely
payment.
F-1 - Issues assigned this rating reflect an assurance
of timely payment only slightly less in degree than
issues rated F-1+.
F-2 - Issues assigned this rating have a satisfactory
degree of assurance for timely payment but the margin
of safety is not as great as for issues assigned F- 1+
and F-1 ratings.
F-3 - Issues assigned this rating have characteristics
suggesting that the degree of assurance for timely
payment is adequate, although near-term adverse
changes could cause these securities to be rated below
investment grade.
LOC- The symbol LOC indicates that the rating is based
on a letter of credit issued by a commercial bank.
5
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, 1997 and
Report of Independent Accountants
dated October 6, 1997 are incorporated by
reference to the Definitive 30(b)2-1 filed
on November 7, 1997,
Accession # 0000091155-97-000497
(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 is incorporated
By reference to Post-Effective Amendment No. 4 as filed
on December 6, 1996.
(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 Amendment
No.1.
(q)Not Applicable
(r)Financial Data Schedule for Registrant as of August 31, 1997
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 $141.18
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 12, 1997
Shares of Common Stock, 167
par value $0.01 per share
Item 29. Indemnification
Under Article VII of Registrant's Articles of Incorporation, any past
or present director or officer of Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any action, suit or proceeding to which
he may be a party or otherwise involved by reason or his being or having
been a director or officer of Registrant. This provision does not
authorize indemnification when it is determined that the director or
officer would otherwise be liable to Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties. Expenses may be paid by Registrant in advance of
the final disposition of any action, suit or proceeding upon receipt of an
undertaking by a director or officer to repay those expenses to Registrant
in the event that it is ultimately determined that indemnification of the
expenses is not authorized under Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item 30.Business and Other Connections of Investment Adviser
See "Management of the Portfolio" in the Prospectus.
Smith Barney Mutual Funds Management Inc., ("SBMFM")
a New York corporation, is a registered investment adviser
and is wholly owned by Salomon Smith Barney Holdings Inc.,
which in turn is wholly owned by The Travelers Group Inc.
SBMFM is primarily engaged in the investment advisory
business. Information as to executive officers and directors
of SBMFM is included in Schedule A and D of its Form
ADV filed with the Securities and Exchange Commission
(Registration number 801-3387).
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 19th day of December, 1997.
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 12/19/97
Chief Executive Officer
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial 12/19/97
and Accounting Officer)
/s/ Charles F. Barber*
Charles F. Barber Director 12/19/97
/s/ Allan J. Bloostein*
Allan J. Bloostein Director 12/19/97
/s/ Martin Brody*
Martin Brody Director 12/19/97
/s/ Dwight B. Crane*
Dwight B. Crane Director 12/19/97
/s/ Robert A. Frankel*
Robert A. Frankel Director 12/19/97
/s/ William R. Hutchinson*
William Hutchinson Director 12/19/97
*Signed by Heath B. McLendon, their duly authorized attorney-in-fact, pursuant
to power-of-attorney dated December 27, 1994, and is incorporated by reference
to Post-Effective Amendment No. 3 to the Registration Statement filed on
December 28, 1994.
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Managed Municipals Portfolio II Inc.:
We consent to the use of our report dated October 15, 1997, for the Managed
Municipals Portfolio II Inc., incorporated herein by reference, and to the
references to our Firm under the headings "Financial
Highlights" and "Independent Auditors" in the Prospectus and "Independent
Public Accountants" in the Statement of Additional Information.
KPMG
Peat Marwick LLP
New York, New York
December 19, 1997
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