As filed with the Securities and Exchange Commission on November 18,
1998
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. 6 ?
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 ?
__________________
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
787 Seventh Avenue
New York, New York 10019
_______________
Approximate Date of Proposed Public Offering: As soon as practicable
after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on
a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in connection with
a dividend reinvestment plan, check the following box. ?
_______________
This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.
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: ? when
declared effective pursuant to section 8(c).
Registrant amends this Registration Statement under the Securities
Act of 1933, as amended, on such date as may be necessary to delay its
effective date until Registrant files a further amendment that
specifically states that this Registration Statement will thereafter
become effective in accordance with the provisions of Section 8(a) of
the Securities Act of 1933, as amended, or until the Registration
Statement becomes effective on such date as the Securities and Exchange
Commission, acting pursuant to Section 8(a), may determine.
MANAGED MUNICIPALS PORTFOLIO II INC.
Form N-2
Cross Reference Sheet
Part A
Item No. Caption Prospectus Caption
1. Outside Front Cover Outside Front Cover of
Prospectus
2. Inside Front and Outside Back Cover Page Inside Front and Outside
Back Cover Page
of Prospectus
3. Fee Table and Synopsis Prospectus Summary; Fund
Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Prospectus Summary; The
Offering;
6. Selling Shareholders Not Applicable
7. Use of Proceeds...........................................................
Use of Proceeds
8. General Description of the
Registrant......................................... Prospectus
Summary; The Fund; Investment
Objectives and Policies; Description
of Common Stock; Share Price Data;
Certain Provisions of the Articles of
Incorporation; Appendix.
9. Management Management of the Fund;
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 Fund;
Description of Common Stock (see
Prospectus)
17. Investment Objective and Policies Investment Objective and
Policies; Invest-
ment Restrictions
18.
Management...........................................................
.................... Management of the Fund;
Directors and Executive Officers
of the Fund
19. Control Persons and Principal Holders of
Securities Not Applicable
20. Investment Advisory and Other Services Management of the Fund
21. Brokerage Allocation and Other Practices Investment Objectives
and Policies;
Fund Transactions
22. Tax Status Taxes; Taxation (see
Prospectus)
23. Financial Statements Financial Statements
Part A
Prospectus
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SALOMON SMITH BARNEY
A member of citigroup[LOGO]
Managed
Municipals
Portfolio II
Inc.
388 Greenwich Street
New York, New York 10013
Common Stock
All dealers effecting transactions in the fund's securities, whether or not
participating in this distribution, may be required to give investors a
prospectus.
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. This prospectus does not offer any
security other than the fund's shares of common stock. Neither the fund nor
Salomon Smith Barney is offering to sell shares of the fund to any person to
whom the fund may not lawfully sell its shares.
There may be changes in the fund's affairs that occur after the date of the
prospectus. The fund will publish a supplement to the prospectus if there are
any material changes in its business.
<PAGE>
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Prospectus December 31, 1998
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Managed Municipals Portfolio II Inc.
Common Stock
Listed on the New York Stock Exchange
Trading symbol--MTU
Managed Municipals Portfolio II Inc. is a non-diversified, closed-end management
investment company. The fund's investment objective is to seek as high a level
of current income exempt from federal income tax as is consistent with
preservation of principal. The fund invests primarily in long- term, investment
grade municipal debt securities issued by state and local governments, political
subdivisions, agencies and public authorities (municipal obligations).
Shares of closed-end funds frequently have market prices that are less
than the net asset value per share. For more information about this or other
risks of investing in the fund, see "Risk Factors" on page 14.
The prospectus contains important information about the fund. For your
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
Shareholder reports can be obtained without charge from your Salomon Smith
Barney Financial Consultant or from the fund by calling 1-800-451-2010 or
writing to the fund at 388 Greenwich Street, New York, New York 10013. You can
review the fund's shareholder reports at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. The Commission charges a
fee for this service. Information about the Public Reference Room may be
obtained by calling 1-800-SEC-0330. You can get the same information free from
the Commission's Internet web site at www.sec.com
The Securities and Exchange Commission has not approved the fund's shares
as an investment or determined whether this prospectus is accurate or complete.
Any statement to the contrary is a crime.
SALOMON SMITH BARNEY INC.
1
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Table of Contents
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Prospectus Summary 3
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Fund Expenses 7
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Financial Highlights 8
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The Fund 9
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The Offering 9
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Use of Proceeds 9
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Investment Objective and Policies 9
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Net Asset Value 18
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Share Price Data 18
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Taxation 19
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Management of the Fund 21
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Dividends and Distributions; Dividend Reinvestment Plan 22
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Certain Provisions of the Articles of Incorporation 24
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Description of Common Stock 25
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Custodian and Transfer Agent 26
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Independent Auditors 26
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Further Information 26
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Appendix A A-1
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2
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Prospectus Summary
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The following is a summary of more complete information appearing later in
the prospectus. You should read the entire prospectus because it contains
details that are not in the summary. Cross references in the summary to headings
in the prospectus will help you locate information.
THE FUND The fund is a non-diversified closed-end management investment company.
See "The Fund."
INVESTMENT OBJECTIVE AND PRIMARY INVESTMENTS The fund's investment objective is
to seek as high a level of current income exempt from federal income tax as is
consistent with the preservation of principal. The fund invests primarily in
long-term, investment grade municipal obligations. Investment grade debt
securities are those rated in one of the four highest rating categories by a
nationally recognized statistical rating organization (NRSRO).
Municipal obligations include bonds and notes such as:
o General obligation bonds issued for various public purposes and
supported by the municipal issuer's credit and taxing power.
o Revenue bonds whose principal and interest is payable only from the
revenues of a particular project or facility. Industrial revenue
bonds depend on the credit standing of a private issuer and may be
subject to the federal alternative minimum tax (AMT).
o Notes that are short-term obligations of municipalities or agencies
sold in anticipation of a bond sale, collection of taxes or receipt
of other revenues.
Municipal obligations may have all types of interest rate payment and
reset terms, including fixed rate, adjustable rate, zero coupon, payment in kind
and auction rate features. See "Investment Objective and Management Policies"
and Appendix A.
TAX-EXEMPT INCOME The fund invests with the objective that dividends paid by the
fund may be excluded by shareholders from their gross incomes for federal income
tax purposes. A portion of the fund's dividends may be taxable. The fund may
invest without limit in private activity bonds. Income from these bonds may be a
special preference item for purposes of the AMT. The fund may not be a suitable
investment if you are subject to the AMT. See "Investment Objective and
Management Policies" and "Taxation."
THE OFFERING The fund's shares of common stock trade on the New York Stock
Exchange. In addition, Salomon Smith Barney intends to buy and sell the fund's
shares and will make a market in the common stock. Salomon Smith Barney is not
obligated to conduct market-making activities and may stop doing so at any time
without notice to the fund or its shareholders. See "The Offering" and "Use of
Proceeds."
3
<PAGE>
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Prospectus Summary (continued)
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LISTING NYSE.
SYMBOL MTU.
INVESTMENT MANAGER Mutual Management Corp. (MMC) (formerly Smith Barney Mutual
Funds Management Inc.). The manager selects and manages the fund's investments
in accordance with the fund's investment objective and policies. MMC is also the
fund's administrator and oversees the fund's non-investment operations and its
relations with its service providers. For its services, MMC receives a fee equal
on an annual basis to 0.90% of the fund's average daily net assets.
Joseph P. Deane, a vice president of the fund, has been primarily
responsible for the day-to-day management of the fund since 1992, when the fund
commenced operations. Mr. Deane is a managing director of Salomon Smith Barney.
The manager and Salomon Smith Barney are subsidiaries of Citigroup Inc.
Citigroup businesses produce a broad range of financial services--asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world. Among these
businesses are Citibank, Commercial Credit, Primerica Financial Services,
Salomon Smith Barney, SSBC Asset Management, Travelers Life & Annuity, and
Travelers Property Casualty. See "Management of the Fund."
RISK FACTORS AND SPECIAL CONSIDERATIONS The value of the securities in the
fund's portfolio fluctuate in price and the value of your investment in the fund
will go up and down in value. This means that you could lose money on your
investment in the fund or the fund could perform less well than other possible
investments. In addition, the price of the shares is determined by market prices
on the NYSE and elsewhere, so you may receive a price that is less than net
asset value when you sell your shares. Specific risks associated with an
investment in the fund are described below.
Municipal obligations The fund invests primarily in municipal obligations and
may be affected by any of the following:
o Interest rates rise, causing the value of the
fund's portfolio generally to decline
o When interest rates are declining, the issuer of a
security may exercise its right to prepay
principal
earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is
known as call or prepayment risk
o The underlying revenue source for a municipal
obligation other than a general obligation bond is
4
<PAGE>
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Prospectus Summary (continued)
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insufficient to pay principal or interest in a
timely manner
o The issuer of a security owned by the fund has its
credit rating downgraded or defaults on its
obligation to pay principal and/or interest
o The manager's judgment about the attractiveness,
value or income potential of a particular bond
proves to be incorrect
o Municipal obligations fall out of favor with
investors
o Unfavorable legislation affects the tax-exempt
status of municipal obligations
Investment grade and The fund invests in investment grade debt securities,
unrated securities and unrated securities that the manager believes are of
comparable quality. Investment grade securities that are
not in the highest rating category may be subject to
greater risk of downgrade and issuer default than higher
rated securities and may have speculative
characteristics. The fund may experience more difficulty
selling unrated securities because markets for these
securities may be less liquid.
Issuer diversification The fund is not diversified, which means that it can
invest a higher percentage of its assets in any one
issuer. Being non-diversified may magnify the fund's
losses from adverse political or economic events
affecting a particular issuer.
Possibility of taxable It is possible that some of the fund's income and gains
income or gains may be subject to federal taxation. The fund may realize
taxable gains on the sale of its securities, and some of
the fund's income may be subject to the federal
alternative minimum tax.
Derivatives The fund holds securities or uses investment techniques
that provide for payments based on or "derived" from the
performance of an underlying asset, index or other
economic benchmark.
The fund may use derivatives:
o To shorten or lengthen the fund's effective
maturity or duration
o As a substitute for purchasing or selling
securities
5
<PAGE>
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Prospectus Summary (continued)
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o To hedge against adverse changes caused by
changing interest rates in the market value of
securities held or to be bought by the fund
A derivative contract will obligate or entitle the fund
to deliver or receive an asset or cash payment that is
based on the change in value of one or more securities
or indices. Even a small investment in derivative
contracts can have a big impact on the fund's interest
rate exposure. Therefore, using derivatives can
disproportionately increase losses and reduce
opportunities for gains when interest rates are
changing. The fund may not fully benefit from or may
lose money on derivatives if changes in their value do
not correspond accurately to changes in the value of the
fund's holdings. The other parties to certain derivative
contracts present the same types of default risk as
issuers of fixed income securities. Derivatives can also
make the fund less liquid and harder to value,
especially in declining markets.
Closed-end investment The fund is a closed-end investment company and its
company shares may trade on the NYSE at a price that is less
than its net asset value.
Certain provisions in the fund's governing documents may
limit the ability of other entities to acquire control
of the fund. This could deprive shareholders of the
opportunity to sell their shares at a premium over
prevailing market prices.
See "Investment Objective and Policies."
DIVIDENDS AND DISTRIBUTIONS Any dividends from net investment income (that is,
income other than net realized capital gains) are paid monthly and any
distributions of net realized capital gains are paid annually. Your dividends or
distributions are reinvested in additional fund shares through participation in
the Dividend Reinvestment Plan, unless you elect to receive cash. The number of
shares issued to you by the plan depends on the price of the shares. The price
of the shares is determined by the market price at the time the shares are
purchased.
Market Price of Fund Shares Price of Fund Shares Issued by Plan Shares
Greater than or equal to net issued at net asset value or 95% of market
asset value price, whichever is greater
================================================================================
Less than net asset value Market price
See "Dividends and Distributions; Dividend Reinvestment Plan."
6
<PAGE>
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Prospectus Summary (continued)
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CUSTODIAN PNC Bank, National Association (PNC Bank) is the fund's custodian. See
"Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and Plan Agent."
TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT First Data
Investor Services Group, Inc. (First Data) is the fund's transfer agent,
dividend-paying agent and registrar. See "Custodian, Transfer Agent,
Dividend-Paying Agent, Registrar and Plan Agent."
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Fund Expenses
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The following table shows the expenses the fund pays. As a shareholder, you
indirectly bear these expenses.
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Annual Expenses
(as a percentage of net assets)
Management fees* ................................................. 0.90%
Other expenses** ................................................. 0.20%
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Total Annual Operating Expenses ...................................... 1.10%
================================================================================
* On September 1, 1998, MMC instituted a voluntary waiver of a portion of
its management fees in order to enable the Fund to increase its dividend
yield. The waiver is a temporary measure and may be terminated at any time
by MMC. The amount stated above does not reflect this waiver. See
"Management of the Fund--Investment Manager and Administrator" in the SAI
for further details.
** "Other expenses," as shown above, are based upon amounts of expenses for
the fiscal period ended August 31, 1998.
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 fund'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 fund'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 fund. Actual
expenses may be greater or less than those shown.
7
<PAGE>
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Financial Highlights
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The following information for the four years ended August 31, 1998 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the fund's Annual Report dated August 31, 1998. The information for
the year ended August 31, 1994 and the period ended August 31, 1993 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 fund's Annual
Report, which is incorporated by reference into this Prospectus.
<TABLE>
<CAPTION>
For a share of capital stock outstanding throughout each year:
=============================================================================================================
1998 1997 1996 1995 1994 1993(1)
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<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $12.15 $11.98 $12.36 $12.15 $13.37 $12.00
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Income From Operations:
Net investment income 0.55 0.63 0.66 0.69 0.64 0.62
Net realized and unrealized
gain (loss) 0.53 0.48 (0.21) 0.32 (0.61) 1.34
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Total Income From Operations 1.08 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 (0.58) (0.66) (0.67) (0.68) (0.67) (0.55)
Net realized gains (0.17) (0.28) (0.16) (0.12) (0.59) --
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Total Distributions (0.75) (0.94) (0.83) (0.80) (1.26) (0.55)
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Net Asset Value,
End of Year $12.48 $12.15 $11.98 $12.36 $12.15 $13.37
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Total Return, Based on
Market Value (1.31)% 7.75% 7.35% 8.86% 0.72% 9.97%++
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Total Return, Based on
Net Asset Value 9.57% 9.86% 4.01% 9.20% 0.48% 16.46%++
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Net Assets, End of Year
(in 000's) $140,230 $136,517 $134,429 $138,649 $136,248 $149,970
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Ratios to Average Net Assets:
Expenses 1.10% 1.10% 1.09% 1.14% 1.12% 1.10%+
Net investment income 4.46 5.23 5.31 5.80 5.08 5.21+
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Portfolio Turnover Rate 66% 97% 63% 95% 85% 163%
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Market Value,
End of Period $10.813 $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.
8
<PAGE>
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The Fund
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The fund is a non-diversified, closed-end management investment company.
The fund was incorporated under the laws of the State of Maryland on July 23,
1992 and is registered under the Investment Company Act of 1940, as amended (the
1940 Act). Its principal office is located at 388 Greenwich Street, New York,
New York 10013. The fund's telephone number is (800) 451-2010.
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The Offering
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Salomon Smith Barney currently makes a market in the common stock. Salomon
Smith Barney is not required to make a market in the common stock and may stop
doing so at any time. You should not rely on Salomon Smith Barney's market
making activities to provide an active or liquid trading market for the common
stock. This prospectus is to be used by Salomon Smith Barney in connection with
offers and sales of the common stock in market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of sale.
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Use of Proceeds
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The fund will not receive any proceeds from the sale of common stock
offered pursuant to this prospectus. Proceeds received by Salomon Smith Barney
as a result of its market-making in common stock will be used by Salomon Smith
Barney in connection with its secondary market operations and for general
corporate purposes.
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Investment Objective and Policies
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The fund'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 fund's investment objective may only be changed by the
affirmative vote of the holders of a "majority of the fund's outstanding voting
securities" (as defined in the 1940 Act). In seeking its objective, the fund
invests in long-term municipal obligations. The fund operates subject to a
fundamental investment policy providing that, under normal conditions, the fund
invests at least 80% of its net assets in municipal obligations. The fund may
not achieve its investment objective.
The fund invests at least 80% of its total assets in municipal obligations
rated investment grade, that is, rated within the highest four categories by any
NRSRO, such as those rated no lower than Baa, MIG 3 or Prime-1 by Moody's
Investors Service, Inc. (Moody's), BBB, SP-2 or A-1 by Standard & Poor's
Ratings Group (S&P), or BBB or F1 by Fitch IBCA, Inc. (Fitch). Up to 20% of
the fund's total assets may be invested in unrated securities that are deemed by
the manager to be of a quality comparable to investment grade, but the fund will
not invest in municipal obligations that are rated
9
<PAGE>
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Investment Objective and Policies (continued)
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below investment grade by an NRSRO at the time of purchase unless they are also
rated investment grade by at least one other NRSRO at such time. 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 fund is classified as a non-diversified fund under the 1940 Act, which
means that the fund 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 fund
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 (Code), which will relieve the fund 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 fund 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 fund'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 fund generally does 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 fund's 25% industry
limitation. The fund may invest more than 25% of its total assets in a broad
segment of the municipal obligations market if the 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 fund
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 fund were to invest more than 25% of its total assets in
issuers located in the same state, it would be more susceptible to adverse
economic, business or regulatory conditions in that state.
Municipal obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a
10
<PAGE>
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Investment Objective and Policies (continued)
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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 fund 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 fund nor the 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 fund 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 fund may take a
temporary defensive posture and invest without limitation in short-term
municipal obligations and taxable investments, upon a determination by the
manager that market conditions warrant such a posture. To the extent the fund
holds taxable investments, the fund may not be fully achieving its investment
objective.
INVESTMENT TECHNIQUES
The fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed Delivery Securities. The fund 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 fund prior to the actual delivery or payment by the
other party to the transaction.
11
<PAGE>
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
The fund will not accrue income with respect to a when-issued or delayed
delivery security prior to its stated delivery date. The fund will establish
with PNC Bank a segregated account consisting of cash or liquid securities,
having a value equal to or greater than the fund's purchase commitments,
provided such securities have been determined by MMC to be liquid and
unencumbered, and are marked to market daily, pursuant to guidelines established
by the fund's directors. Placing securities rather than cash in the segregated
account may have a leveraging effect on the fund's net asset value per share;
that is, to the extent that the fund 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 fund 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 fund'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 fund 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 fund 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 fund 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 manager to correlate
with the prices of the municipal obligations owned or to be purchased by the
fund. Regulations of the Commodity Futures Trading Commission ("CFTC")
applicable to the fund 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 fund's net asset value, after taking into
account unrealized profits and unrealized losses on such contracts.
A financial futures contract provides for the future sale by one party and
the purchase by the other party of a certain amount of a specified property at a
specified price, date, time and place. Unlike the direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance
12
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Investment Objective and Policies (continued)
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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 fund.
Lending Securities. The fund 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 manager unless the fund applies for and
receives specific authority to do so from the SEC. Loans of the fund's
securities, if and when made, may not exceed 33 1/3 % of the value of the fund's
total assets taken at value. The fund'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 fund may enter into repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the fund and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. A repurchase agreement is a contract under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price on an agreed-upon date. Under the terms of a
typical repurchase agreement, the fund would acquire an underlying debt
obligation for a relatively short period subject to an obligation of the seller
to repurchase, and the fund to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the fund's holding period. Under each repurchase agreement,
the selling institution will be required to maintain the value of the securities
subject to the repurchase agreement at not less than their repurchase price.
Year 2000. The investment management and administrative services provided
to the fund by MMC depend on the smooth functioning of its computer systems.
Many computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the fund's
operations, including the handling of securities trades, pricing and account
services. MMC has advised the fund that it has been reviewing all of its
computer systems and actively working on necessary changes to its systems to
prepare for the year 2000 and expect that its systems will be compliant before
that date. In addition, MMC has been advised by the fund's custodian, transfer
agent and accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be no assurance
that MMC
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Investment Objective and Policies (continued)
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or any other service provider will be successful, or that interaction with other
non-complying computer systems will not impair fund or shareholder services at
that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
RISK FACTORS AND SPECIAL CONSIDERATIONS
There are risks associated with an investment in the fund. You should
consider whether the fund is an appropriate investment for you. The fund invests
substantially all of its assets in municipal obligations, and circumstances or
events that affect the value of municipal obligations will affect the fund's net
asset value.
Interest rate sensitivity
o Municipal obligations are fixed-income securities which are sensitive to
changes in interest rates. Generally, when interest rates are rising, the value
of the fund's fixed-income securities can be expected to decrease. When interest
rates are declining, the value of the fund's fixed-income securities can be
expected to increase. The fund's net asset value may fluctuate in response to
the increasing or decreasing value of the fund's fixed-income securities.
Less liquid markets for some municipal obligations
o The market for municipal obligations may be less liquid than for
corporate bonds. The market for special obligation bonds, lease obligations,
participation certificates and variable rate instruments, which the fund may
purchase, may be less liquid than for general obligation bonds.
o Liquid secondary trading in unrated municipal obligations may not exist.
The fund may not be able to sell these securities when the manager determines it
appropriate.
o Less liquid markets tend to be more volatile and react more negatively
to adverse publicity and investor perception than more liquid markets. If
markets are less liquid, the fund may not be able to dispose of municipal
obligations in a timely manner and at a fair price.
o There may be no established trading markets for certain municipal
obligations, and trading in these securities may be relatively inactive. Some of
the fund's investments may be restricted as to resale. Although restricted
securities may be sold in private transactions, a security's value may be less
than the price originally paid by the fund. The ability of the manager to value
illiquid or restricted
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Investment Objective and Policies (continued)
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securities will be more difficult and the manager's judgment may play a greater
role in their valuation.
Issuer of a municipal obligation may default on its obligation to pay
o The issuer of a municipal obligation may not be able to make timely
payments of interest and principal because of general economic downturns or
adverse allocation of government cost burdens. If an issuer did not make timely
payments, the fund would not receive the anticipated income from the investment
and the value of the investment might be reduced. This could result in a
decrease in the fund's net asset value. This risk of default may be greater for
private activity bonds or other municipal obligation whose payments are
dependent upon a specific source of revenue.
o Even if the issuer does not actually default, adverse changes in the
issuer's financial condition may negatively affect its credit rating or presumed
creditworthiness. These developments would adversely affect the market value of
the issuer's obligations.
Issuer of a municipal obligation declares bankruptcy
o The issuer of a municipal obligation might declare bankruptcy and the
fund could experience delays collecting interest and principal. To enforce its
rights, the fund might be required to take possession of and manage the assets
securing the issuer's obligation. This may increase the fund's expenses, reduce
its net asset value and increase the amount of the fund's distribution that are
in taxable form.
Adverse governmental action
o The U.S. government has enacted laws that have restricted or diminished
the income tax exemption on some municipal obligations and it may do so again in
the future. If this were to happen, shareholders could receive more of the
distributions from the fund in taxable form.
Other
o The issuer of a municipal obligation may be obligated to redeem the
security at face value, but if the fund paid more than face value for the
security, the fund may lose money on the security when it is sold.
o Market rates of interest may be lower for municipal obligations than for
taxable securities but this may be offset by the federal income tax on income
derived from taxable securities.
o There may be less extensive information available about the financial
condition of issuers of municipal obligations than for corporate issuers with
publicly traded securities.
The fund may invest in municipal leases that have special risks not
associated with municipal obligations.
15
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Investment Objective and Policies (continued)
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o These leases frequently contain clauses that permit the governmental
issuer to stop making interest and principal payments if money is not
appropriated by the legislature annually or on some other periodic basis.
o These leases are less liquid than municipal obligations and may be
difficult to value and to sell at a fair price.
o If the issuer is foreclosed, the assets securing these leases may be
difficult to dispose of.
When-Issued and Delayed Delivery Transactions
The fund may use when-issued and delayed delivery transactions to purchase
securities. The value of securities purchased in these transactions may decrease
before they are delivered to the fund. Also, the yield on securities purchased
in these transactions may be higher in the market when the delivery takes place.
Repurchase Agreements
The fund may use repurchase agreements to manage its cash position. If the
other party to the agreement defaults, the fund may not be able to sell the
underlying securities. If the fund must assert its rights against the other
party to recover the securities, the fund will incur unexpected expenses, risk
losing the income on the security and bear the risk of loss in the value of the
security.
Lending Securities
If the party borrowing the fund's securities fails financially, the fund
may be unable to recover the loaned securities.
Financial Futures and Options
The fund may use financial futures contracts and options on these
contracts to protect the fund from a decline in the price of municipal
obligations it owns or an increase in the price of a municipal obligation it
plans to buy. There are risks associated with futures and options transaction.
o Because it is not possible to perfectly correlate the price of the
securities being hedged with the price movement in a futures contract, it is not
possible to provide a perfect offset on losses on the futures contract or the
option on the contract.
o Because there is imperfect correlation between the fund's securities
that are hedged and the futures contract, the hedge may not be fully effective.
Losses on the fund's security may be greater than gains on the future contract,
or losses on the futures contract may be greater than gains on the securities
subject to the hedge.
o To compensate for imperfect correlation, the fund may over-hedge or
under-hedge by entering into a futures contract or options on futures contracts
in dollar amounts greater or lesser than the dollar amounts of the securities
being hedged. If
16
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
market movements are not as anticipated, the fund could lose money from these
positions.
o If the fund hedges against an increase in interest rates, and rates
decline instead, the fund will lose all or part of the benefit of the increase
in value of the securities it hedged because it will have offsetting losses in
its futures or options positions. Also, in order to meet margin requirements,
the fund may have to sell securities at a time it would not normally choose.
Non-diversification
The fund is non-diversified. This means that the fund may invest more of
its assets in a smaller number of issuers. The fund may be more adversely
affected by events affecting a single issuer than if it were diversified and
investing in a greater number of issuers.
INVESTMENT RESTRICTIONS
The fund has adopted certain fundamental investment restrictions that may
be changed only with the prior approval of the holders of a majority of the
fund's outstanding voting securities. A "majority of the fund's outstanding
voting securities" for this purpose means the lesser of (1) 67% or more of the
shares of the fund'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. The following are
several of the restrictions applicable to the fund. Any percentage limits apply
only at the time of purchase or initial investment. The fund is not required to
sell securities if the limits are exceeded after the purchase or investment is
completed. The fund may not:
o Borrow money, except for temporary or emergency purposes, and then
not in amounts that are greater than 15% of total assets (including
the amount borrowed).
o Buy more securities if the fund has borrowed money in amounts
greater than 5% of net assets.
o Invest more than 25% of total assets in securities of issuers in a
single industry. This restriction does not apply to the fund's
investments in U.S. Government securities.
o Buy any securities other than municipal obligations and taxable
investments.
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Net Asset Value
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The fund'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 fund'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 fund's assets is made by the manager after
consultation with an independent pricing 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 fund'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 fund 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 fund
to do so.
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Share Price Data
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The fund's common stock is listed on the NYSE under the symbol "MTU."
Salomon Smith Barney also intends to make a market in the fund's common stock.
The following table sets forth the high and low sales prices for the
fund'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.
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Share Price Data (continued)
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Quarterly High Price Quarterly Low Price
-------------------- -------------------
Premium Premium
Net Asset NYSE (Discount) Net Asset NYSE (Discount)
Value Price to NAV Value Price to NAV
================================================================================
8/31/96 $12.37 $11.875 (4.00)% $11.98 $11.250 (6.09)%
11/30/96 12.49 11.186 (10.42) 11.99 11.313 (5.65)
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)
2/28/98 12.61 13.00 3.09 12.37 12.00 (2.99)
5/31/98 12.45 12.00 (3.61) 12.26 11.00 (10.28)
8/31/98 12.47 12.00 (3.77) 12.33 11.00 (10.79)
================================================================================
As of October 30, 1998, the price of common stock as quoted on the NYSE was
$11.69, representing a 6.28% discount from the common stock's net asset value
calculated on that day.
Since the commencement of the fund's operations, the fund's common stock
has traded in the market at prices that were at times above, but generally
below, net asset value.
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Taxation
- --------------------------------------------------------------------------------
The following is a summary of the material federal tax considerations
affecting the fund and fund 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 implications to
consider. Because taxes are a complex matter, you are urged to consult your tax
advisor for more detailed information about the tax consequences of any
investment.
The fund 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 (Code) for tax treatment as a regulated
investment company. In each taxable year that the fund qualifies, the fund will
pay no federal income tax on its net investment income and short-term and
long-term capital gains that are distributed to shareholders. The fund also
intends to satisfy conditions that will enable it to pay "exempt-interest
dividends" to shareholders. Exempt-interest dividends are generally not subject
to regular federal income taxes but may be considered taxable for state and
local income tax purposes, and shares of the fund may also be subject to state
and local intangible property taxes.
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Taxation (continued)
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Exempt-interest dividends attributable to interest received by the fund 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 fund 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 fund from interest income on taxable investments,
net realized short-term capital 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 capital gains are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned fund shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional fund shares. None
of the dividends paid by the fund will qualify for the corporate dividends
received deduction. The fund will inform shareholders of the source and tax
status of all distributions, including their eligibility for the maximum 20%
capital gains tax rate, promptly after the close of each calendar year.
The fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any repurchase,
regardless of whether gain or loss is realized upon the repurchase, for
shareholders who do not provide the fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from the
proceeds of open-market sales and 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.
20
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Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the fund rests
with the fund's board of directors. The board of directors reviews all
significant agreements with the fund's investment manager, administrator,
custodian and transfer agent. The day-to-day operations of the fund are
delegated to MMC, the Portfolio's investment manager and administrator. The SAI
contains background information regarding each Director and executive officer of
the Portfolio.
INVESTMENT MANAGER AND ADMINISTRATOR
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the fund's investment manager. MMC (through its predecessor entities) has been
in the investment counseling business since 1968 and is a registered investment
adviser. MMC renders investment advice to a wide variety of individuals and
institutional clients, and had aggregate assets under management as of October
31, 1998 in excess of $105 billion.
Subject to the supervision and direction of the fund's board of directors,
the manager manages the securities held by the fund in accordance with the
fund's stated investment objective and policies, makes investment decisions for
the fund, places orders to purchase and sell securities on behalf of the fund
and employs managers and securities analysts who provide research services to
the fund. The fund pays the manager a management fee for investment advisory
services provided to the fund that is computed daily and paid monthly at the
annual rate of 0.70% of the value of the fund's average daily net assets. In
addition, MMC serves as the fund's administrator and is paid a fee by the fund
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 fund are allocated to various dealers by the
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 manager to supplement its own research and analysis with
the views and information of other securities firms. The fund may use Salomon
Smith Barney in connection with the purchase or sale of securities when the
manager believes that the broker's charge for the transaction does not exceed
usual and customary levels. The same standard applies to the use of Salomon
Smith Barney as a broker in connection with entering into options and futures
contracts. The fund paid no brokerage commissions in the last fiscal year.
Citigroup is a bank holding company subject to regulation under the Bank
Holding Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations.
Salomon Smith Barney and the manager believe that the manager's investment
management and administration services and the market-making activities
performed by
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Management of the Fund (continued)
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Salomon Smith Barney are not underwriting and are consistent with the BHCA, the
Glass-Steagall Act and other federal and state laws applicable to Citigroup.
However, there is a little controlling precedent regarding the performance of
the combination of investment advisory and administrative activities by
subsidiaries of bank holding companies. If Salomon Smith Barney and MMC, or
their affiliates, were to be prevented from acting as the manager or
administrator, the fund would seek alternative means for obtaining these
services. The fund does not expect that shareholders would suffer any adverse
financial consequences as a result of any such occurrence.
PORTFOLIO MANAGEMENT
Joseph P. Deane, vice president and investment officer of the fund, is
primarily responsible for the day-to-day management of the fund's assets. Mr.
Deane has served the fund in this capacity since it commenced operations in 1992
and manages the day-to-day investment activities of the Portfolio, including
making all investment decisions. Mr. Deane is an investment officer of MMC and
is the senior asset manager for a number of investment companies and other
accounts.
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Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The fund generally expects to pay monthly dividends of net investment
income (income other than net realized capital gains) and to distribute net
realized capital gains, if any, annually. From time to time, when the fund makes
a capital gains distribution, it may do so in lieu of paying its regular monthly
dividend. All dividends or distributions with respect to shares of common stock
are reinvested automatically in additional shares through participation in the
fund's Dividend Reinvestment Plan (plan), unless a shareholder elects to
receive cash.
Under the plan, a shareholder whose shares of common stock are registered
in his or her own name will have all distributions from the fund reinvested
automatically by First Data as purchasing agent under the plan, unless the
shareholder elects to receive cash. Distributions with respect to shares
registered in the name of a broker-dealer or other nominee (that is, in "street
name") will be reinvested by the broker or nominee in additional shares under
the plan, unless the service is not provided by the broker or nominee or the
shareholder elects to receive distributions in cash. Investors who own common
stock registered in street name should consult their broker-dealers for details
regarding reinvestment. All distributions to fund 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.
22
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
The number of shares of common stock distributed to participants in the
plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the common stock is equal to or exceeds the net asset value
per share on the determination date (generally, the record date for the
distribution), plan participants will be issued shares of common stock by the
fund at a price equal to the greater of (1) the net asset value per share most
recently determined as described under "Net Asset Value" or (2) 95% of the
market price.
If the net asset value per share of common stock at the time of valuation
exceeds the market price of the common stock (which is the close of business on
the determination date), or if the fund 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 as
of the valuation time, First Data will attempt to terminate purchases in the
open market and cause the fund to issue the remaining portion of the dividend or
distribution by issuing shares at a price equal to the greater of (a) net asset
value as of the valuation time 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 fund issues the remaining shares. To the
extent First Data is unable to stop open market purchases and cause the fund 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 as of the valuation
time, resulting in the acquisition of fewer shares than if the dividend or
capital gains distribution had been paid in common stock issued by the fund at
such net asset value. First Data will begin to purchase common stock on the open
market as soon as practicable after the determination date for the dividend or
capital gains distribution, but in no event shall such purchases continue later
than 30 days after the payment date for such dividend or distribution, or the
record date for a succeeding dividend or distribution, except when necessary to
comply with applicable provisions of the federal securities laws.
First Data maintains all shareholder accounts in the plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common stock in the account of each plan participant will be held
by First Data in uncertificated form in the name of each plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
fund. No brokerage charges apply with respect to shares of common stock issued
directly by the fund under the plan. Each plan participant will, however, bear a
proportionate share of any
23
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
brokerage commissions actually incurred with respect to any open market
purchases made under the plan.
Experience under the plan may indicate that changes to it are desirable.
The fund 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 fund's prior written consent, on at least 30
days' written notice to plan participants. All correspondence concerning the
plan should be directed by mail to First Data Investor Services Group, P.O. Box
8030 Boston, Massachusetts 02266-8030 or by telephone at 1-800-331-1710.
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
- --------------------------------------------------------------------------------
The fund presently has provisions in its Articles of Incorporation and
By-laws (commonly referred to as "anti-takeover" provisions) that could have the
effect of limiting the ability of other entities or persons to acquire control
of the fund, 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 fund's directors, a majority of the shares
entitled to vote may approve the conversion of the fund from a closed-end to an
open-end investment company. If fewer than two-thirds of the directors 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 fund's directors, a majority of the shares
entitled to vote may approve: (i) the dissolution or liquidation of the fund;
(ii) the merger, consolidation or share exchange of the fund with or into any
other entity; or (iii) any sale, lease, exchange or other disposition by the
fund of any assets of the fund 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 directors 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
24
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation (continued)
- --------------------------------------------------------------------------------
difficult a change in the fund's business or management and may have the effect
of depriving shareholders of an opportunity to sell shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the fund in a tender offer or similar transaction. The fund's board
of directors, however, has considered these anti-takeover provisions and
believes they are in the best interests of shareholders.
Market Discount
Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium. Shares
of closed-end investment companies investing primarily in fixed-income
securities tend to trade on the basis of income yield on the market price of the
shares and the market price may also be affected by trading volume, general
market conditions and economic conditions and other factors beyond the control
of the fund. As a result, the market price of the fund's shares may be greater
or less than the net asset value. Since the commencement of the fund's
operations, the fund's shares have traded in the market at prices that were at
times equal to, but generally were below, net asset value.
Some closed-end investment companies have taken certain actions, including
the repurchase of common stock in the market at market prices and the making of
one or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value.
The fund's board of directors has seen no reason to adopt any of the steps
specified above, which some other closed-end funds have used to address the
discount. The experience of any closed-end funds suggests that the effect of
many of these steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, there can be no assurance than any of these actions
will be taken or, if undertaken, will cause the fund's shares to trade at a
price equal to their net asset value. The fund's investment manager may
voluntarily waive its fees from time to time in order to increase the fund's
dividend yield in an effort to reduce the discount. Any such waiver may be
terminated at any time, and there can be no assurance that such actions would
be successful at reducing the discount.
- --------------------------------------------------------------------------------
Description of Common Stock
- --------------------------------------------------------------------------------
Amount Held Amount Outstanding
by Fund for as of
Title of Class Amount Authorized its Own Account November 6, 1998
- --------------------------------------------------------------------------------
Common Stock 500,000,000 Shares -- 11,234,705.431
- --------------------------------------------------------------------------------
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 are 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 fund'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 fund is
required to hold an annual meeting of shareholders in each year. If the fund'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 fund
may decide not to hold annual meetings of shareholders.
The fund has no current intention of offering additional shares, except
that additional shares may be issued under the Plan. See "Dividends and
Distributions; Dividend Reinvestment Plan." Other offerings of shares, if made,
will require approval of the fund'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 fund's outstanding shares.
25
<PAGE>
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Custodian and Transfer Agent
- --------------------------------------------------------------------------------
PNC Bank, 17th and Chestnut Streets, Philadelphia, Pennsylvania 19103 acts
as custodian of the fund's investments. First Data, One Exchange Place, Boston,
Massachusetts 02109 serves as agent in connection with the Plan and serves as
the fund'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.
26
<PAGE>
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Appendix A
- --------------------------------------------------------------------------------
TYPES OF MUNICIPAL OBLIGATIONS
The fund 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 the lessee's
A-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
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 fund will be considered illiquid securities unless the fund'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
fund'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 fund will not
invest more than 5% of its assets in such "non-appropriation" municipal lease
obligations.
ZERO COUPON OBLIGATIONS
The fund 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 fund, MMC believes that limited investments in such
securities may facilitate the fund'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 fund may purchase floating and variable rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obligations under the demand feature of such notes and bonds generally
are secured by bank letters of
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
credit or other credit support arrangements. There frequently will be no
secondary market for variable and floating rate obligations held by the fund,
although the fund may be able to obtain payment of principal at face value by
exercising the demand feature of the obligation.
PARTICIPATION INTERESTS
The fund 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 fund an undivided interest
in a municipal bond owned by a bank. The fund 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
fund'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 fund 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 fund's participation interest,
plus accrued interest. Generally, the fund 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 fund's assets in accordance with its
investment objective and policies. The ability of a bank to fulfill its
obligations under a letter of credit or guarantee might be affected by possible
financial difficulties of its borrowers, adverse interest rate or economic
conditions, regulatory limitations or other factors. MMC will monitor the
pricing, quality and liquidity of the participation interests held by the fund
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 fund 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 fund would be typically authorized to assert its rights directly against the
issuer of the underlying obligation, the fund could be required to assert
through the custodian bank those rights that may exist against the
A-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
underlying issuer. Thus, in the event the underlying issuer fails to pay
principal or interest when due, the fund may be subject to delays, expenses and
risks that are greater than those that would have been involved if the fund 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, and the income earned by the fund could be
taxable.
MUNICIPAL OBLIGATION COMPONENTS
The fund 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 (auction component) pays an interest rate that is reset periodically
through an auction process, whereas the second of the components (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 fund 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>
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Part B
Statement of Additional Information
Managed Municipals Portfolio II Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
STATEMENT OF ADDITIONAL INFORMATION
December 31, 1998
Managed Municipals Portfolio II Inc. (fund) 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 fund 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 fund 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
fund, dated December 31, 1998, as amended or supplemented from time to
time (Prospectus), and should be read in conjunction with the
Prospectus. The Prospectus may be obtained from any Salomon Smith
Barney Financial Consultant or by writing or calling the fund 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 fund or the fund'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 fund's common stock
(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 fund
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 Fund (see in the
Prospectus "Management of the Fund")
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
IBCA, Inc. (Fitch) Ratings
A-1
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the fund's investment objective and the
policies it employs to achieve that objective. The following discussion
supplements the description of the fund's investment policies in the
Prospectus. The fund'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 fund'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 (1940 Act)) of the fund's outstanding voting shares. No
assurance can be given that the fund's investment objective will be
achieved.
Use of Ratings as Investment Criteria
In general, the ratings of Moody's, S&P and Fitch and other
nationally recognized statistical rating organizations (NRSROs)
represent the opinions of the NRSROs as to the quality of the municipal
obligations and 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 fund also will rely upon the
independent advice of its investment adviser, Mutual Management Corp.
(formerly known as Smith Barney Mutual Funds Management Inc.) (MMC or
the Investment Manager). Among the factors that will also be considered
by the investment manager in evaluating potential municipal obligations
to be held by the fund 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 fund invests in lower-rated and comparable unrated securities, the
fund'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 fund 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 fund, 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 fund.
Neither event will require the sale of such municipal obligations by the
fund, but the investment manager will consider such event in its
determination of whether the fund 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 fund will attempt to use comparable ratings
as standards for its investments in accordance with its investment
objectives and policies.
The fund will seek to invest substantially all of its assets in
municipal obligations, and under normal conditions at least 80% of the
fund's total assets will be invested in investment grade municipal
obligations.
The fund 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 fund'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 fund 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 fund 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 fund's investments in bank obligations, including time
deposits, exceed 25% of the value of its assets.
U.S. government securities in which the fund 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 fund 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 fund will adhere to the
following conditions whenever it lends its securities: (1) the fund 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 fund
must be able to terminate the loan at any time; (4) the fund 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 fund 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
fund's Board of Directors must terminate the loan and regain the fund's
right to vote the securities. From time to time, the fund 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 fund and that is acting as a "finder."
Repurchase Agreements
The fund 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 fund 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 fund
to resell the obligation at an agreed-upon price and time, thereby
determining the yield during the fund'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 fund'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 fund enters into such
transactions. The fund will bear a risk of loss in the event that the
other party to the transaction defaults on its obligations and the fund
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 fund
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 fund 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 fund solely for the purpose of hedging
against changes in the value of its fund 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 fund's entering into a municipal obligation
index or interest rate futures contract, as the holder of long-term
municipal obligations, is to protect the fund from fluctuation in
interest rates on tax-exempt securities without actually buying or
selling municipal obligations. The Fund 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 fund upon the purchase or sale
of a futures contract. Initially, the fund 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 fund 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 fund may elect
to close the position by taking an opposite position, which will operate
to terminate the fund'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 fund 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 fund. 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
Fund'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 fund 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 fund 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 fund 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 fund 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 fund 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 fund may have
to sell securities at a time when it may be disadvantageous to do so.
Options on Interest Rate Futures Contracts. The fund 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 fund 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 fund.
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 fund'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
fund'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 fund's securities. Because the fund 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 fund can be expected to decrease and when
prevailing interest rates decrease, the value of the fixed-income
securities held by the fund can be expected to increase. The value of
the fixed-income securities held by the fund and thus the fund's net
asset value, may also be affected by other economic, market and credit
factors.
From time to time, the fund's investments may include securities
as to which the fund, 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 fund 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 fund 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 fund will purchase
municipal obligations on a when-issued basis only with the intention of
actually acquiring the securities, the fund 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 fund consisting of
cash or liquid debt securities equal to the amount of the when-issued
commitments will be established at the fund'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
fund. Placing securities rather than cash in the segregated account may
have a leveraging effect on the fund's net assets. That is, to the
extent the fund 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 fund 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
fund'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 fund 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 fund'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 fund 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 fund may acquire will be both rated and
unrated. Rated leases that may be held by the fund 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 fund may acquire
unrated issues that the investment manager deems to be comparable in
quality to rated issues in which the fund 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
fund's board of directors.
Municipal leases held by the fund will be considered illiquid
securities unless the fund'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 fund has adopted certain fundamental investment restrictions
that may not be changed without the prior approval of the holders of a
majority of the fund's outstanding voting securities. A "majority of
the fund's outstanding voting securities" for this purpose means the
lesser of (1) 67% or more of the shares of the fund'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 fund. Under its
fundamental restrictions, the fund 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
fund's borrowings exceed 5% of the value of its total assets, the
fund 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 fund 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 fund may invest in municipal obligations secured by
real estate or interests in real estate.
6. Invest in commodities, except that the fund 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 fund'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.
Fund 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 fund 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 fund 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 fund transactions by the fund.
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 fund 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 fund.
The fund will not purchase municipal obligations during the
existence of any underwriting or selling group relating thereto of which
Salomon Smith Barney Inc. (Salomon Smith Barney) or its affiliates are
members except to the extent permitted by the Securities and Exchange
Commission (SEC), including Rule 10f-3 under the 1940 Act. Under
certain circumstances, the fund 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 affiliated with Salomon Smith Barney.
While investment decisions for the fund are made independently
from those of the other accounts managed by the investment manager,
investments of the type the fund may make also may be made by those
other accounts. When the fund 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 fund or the size of the position
obtained or disposed of by the fund.
The fund's board of directors will review periodically the
commissions paid by the fund to determine if the commissions paid over
representative periods of time were reasonable in relation to the
benefits inuring to the fund.
Fund Turnover
The fund's turnover rate (the lesser of purchases or sales of fund
securities during the last fiscal year, excluding purchases or sales of
short-term securities, divided by the monthly average value of fund
securities) generally is not expected to exceed 100%, but the fund
turnover rate will not be a limiting factor whenever the fund 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 fund 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, 1996, 1997 and 1998 the fund's turnover rate was 63%, 97% and
66%, respectively.
MANAGEMENT OF THE FUND
The executive officers of the fund are employees of certain of the
organizations that provide services to the fund. These organizations are
as follows:
Name Service
MMC Investment Manager and
Administrator
Salomon Smith Barney Market Maker
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 fund
are discussed in the Prospectus and this SAI.
Directors and Executive Officers of the Fund
The overall management of the business and affairs of the fund is
vested with its board of directors. The board of directors approves all
significant agreements between the fund and persons or companies
furnishing services to it, including the fund'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 fund are delegated to its officers and MMC, subject
always to the investment objective and policies of the fund and to
general supervision by the fund's board of directors.
The directors and executive officers of the fund, 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
(65)
388 Greenwich Street
New York NY 10013
Chairman of the
Board,
Chief Executive
Officer
and President
Managing Director of Salomon
Smith Barney Inc.; President
of MMC and Travelers
Investment Advisers, Inc.
("TIA"); Chairman of Smith
Barney Strategy Advisers Inc.
+Martin Brody (77)
c/o HMK Associates
30 Columbia Turnpike
Florham Park, NJ
07932
Director
Consultant, HMK Associates;
Retired Vice Chairman of the
Board of Restaurant
Associates Corp.; Director of
Jaclyn, Inc.
+Allan J. Bloostein
(68)
717 Fifth Avenue
21st Floor
New York, NY 10022
Director
President, Allan J. Bloostein
Associates, Consultant and
retired Vice Chairman and
Director of the Board of May
Department Stores Company;
Director of Taubman Centers,
Inc. and CVS Corporation.
+Dwight B. Crane (60)
Harvard Business
School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business
School.
+Robert A. Frankel
(71)
102 Grand Street
Croton-on-Hudson,
New York, NY 10520
Director
Managing Partner of Robert A.
Frankel Management
Consultants; formerly
Corporate Vice President of
The Reader's Digest
Association, Inc.
* Director who is an "interested person" of the fund (as defined in the
1940 Act).
+Director and/or trustee of other registered investment companies with
which Salomon Smith Barney is affiliated.
Name (Age)and Address
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
+William R.
Hutchinson (55)
Amoco Corp.
200 East Randolph
Drive
Chicago, IL 60601
Director
Vice President, Financial
Operations of Amoco Corp.;
Director of Associated Banks
and Associated Bank Corp.
Joseph P. Deane (50)
388 Greenwich Street
New York. NY 10013
Vice President and
Investment Officer
Managing Director of Salomon
Smith Barney;. Investment
Officer of MMC. Prior to
July 1993, Senior Vice
President and Managing
Director of Shearson Lehman
Advisors.
Lewis E. Daidone
(41)
388 Greenwich Street
New York, NY 10105
Senior Vice
President
and Treasurer
Managing Director of Salomon
Smith Barney; Chief Financial
Officer, Director and Senior
Vice President of MMC and
TIA.
Christina T. Sydor
(47)
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Salomon
Smith Barney; General Counsel
and Secretary of MMC and TIA.
________________________________
+ Director and/or trustee of other registered investment companies with
which Salomon Smith Barney is affiliated.
The fund pays each of its directors who is not a director, officer
or employee of MMC, or any of its affiliates, an annual fee of $5,000
plus $500 for each board of directors meeting attended, and $100 for
each board meeting held via telephone. In addition, the fund 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, 1998 out of pocket expenses totaled approximately $3,677.
Director
Aggregate
Compensation
from Fund
Pension or
Retirement
Benefits
Accrued as
part of
Fund
Expenses
Total
Compensati
on from
Fund and
Fund
Complex
Total
Number of
Funds for
which
Director
Serves
Within Fund
Complex
Martin Brody
6,400
0
119,814
19
Dwight Crane
7,200
0
133,850
22
Allan Bloostein
7,800
0
85,850
8
Robert Frankel
7,800
0
65,900
8
William R.
Hutchinson
7,800
0
35,750
6
Heath B. McLendon*
- ------
0
- -----
59
* Designates a director that is an "interested person" of the fund as
defined under the 1940 Act.
Upon attainment of age 80, fund directors are required to change to
emeritus status. Directors emeritus are entitled to serve in emeritus
status for a maximum of 10 years, during which time they are paid 50%
of the annual retainer fee and meeting fees otherwise applicable to
fund directors, together with reasonable out-of-pocket expenses for
each meeting attended. During the fund's last fiscal year, aggregate
compensation paid by the fund to directors emeritus totaled $3,300.
Investment Manager and Administrator-- MMC
The Investment Manager serves as investment adviser to the fund
pursuant to a written agreement dated July 30, 1993 (the "Advisory
Agreement"), which was most recently approved by the board of directors,
including a majority of those directors who are not "interested persons"
of the fund or the investment manager ("Non-Interested Directors") on
August 19, 1998. Unless terminated sooner, the Advisory Agreement will
continue for successive annual periods provided that such continuance is
specifically approved at least annually: (1) by a majority vote of the
Non-Interested Directors cast in person at a meeting called for the
purpose of voting on such approval; and (2) by the board of directors or
by a vote of a majority of the outstanding shares of common stock. The
investment manager is a wholly owned subsidiary of Salomon Smith Barney
Holdings Inc. ("Holdings"), which is in turn a wholly owned subsidiary
of Citigroup Inc. ("Citigroup"). The investment manager pays the salary
of any officer or employee who is employed by both it and the fund. The
investment manager bears all expenses in connection with the performance
of its services as investment adviser.
For services rendered to the fund, the investment manager receives
from the fund a fee, computed and paid monthly at the annual rate of
0.70% of the value of the fund's average daily net assets. For the
fiscal years ended August 31, 1996, 1997 and 1998, such fees amounted to
$979,107, $946,120 and $972,743, 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 fund 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 fund. The Advisory
Agreement terminates automatically upon its assignment.
MMC also serves as administrator to the fund pursuant to a written
agreement dated June 1, 1994 (the "Administration Agreement"). The
services provided by MMC under the Administration Agreement are
described in the Prospectus under "Management of the Fund."
For services rendered to the fund, MMC receives from the fund an
administration fee computed and paid monthly at the annual rate of 0.20%
of the value of the fund's average daily assets. For the fiscal years
ended August 31, 1996, 1997 and 1998, MMC received $279,745, $270,320
and $277,927, respectively, in administration fees.
Pursuant to the Administration Agreement, MMC will exercise its
best judgment in rendering its services to the fund. MMC will not be
liable for any error of judgment or mistake of law or for any loss
suffered by the fund in connection with the matters to which the
Administration Agreement relates, except by reason of MMC's reckless
disregard of its obligations and duties under the Administration
Agreement.
The Administration Agreement will continue automatically for
successive annual periods provided that such continuance is approved at
least annually by the board of directors of the fund 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 fund or by vote of holders of a majority of the
fund's shares of common stock, or upon 90 days' written notice, by MMC.
The fund bears expenses incurred in its operation including: fees
of the investment adviser and administrator; taxes, interest brokerage
fees and commissions, if any; fees of directors who are not officers,
directors, shareholders or employees of Salomon Smith Barney; SEC fees
and state blue sky qualification fees; charges of the custodian;
transfer and dividend disbursing agent's fees; certain insurance
premiums; outside auditing and legal expenses; costs of any independent
pricing service; costs of maintaining corporate existence; costs
attributable to investor services (including allocated telephone and
personnel expenses); costs of preparation and printing of prospectuses
and statements of additional information for regulatory purposes and for
distribution to shareholders; shareholders' reports and corporate
meetings of the officers, board of directors and shareholders of the
fund.
Principal Stockholders
There are no persons known to the fund to be "control persons" of
the fund, as such term is defined in Section 2(a)(9) of the 1940 Act.
There is no person known to the fund to hold beneficially more than 5%
of the outstanding shares of common stock. The following person is the
only person holding of record more than 5% of the fund's outstanding
shares of common stock as of November 6, 1998:
Percent
of
Amount of Common
Name and Address Record Stock
of Record Owner Ownership
Outstanding
Cede & Co., as Nominee for 10,992,651
97.85%
The Depository Trust Company
P.O. Box 20
Bowling Green Station
New York, New York 10004
As of November 6, 1998, the directors and officers of the fund, as
a group, beneficially owned less than 1% of the fund's outstanding
shares of common stock.
TAXES
As described above and in the Prospectus, the fund is designed to
provide investors with current income which is excluded from gross
income for federal income tax purposes. The fund 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 fund 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 fund 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 fund.
Taxation of the Fund and its Investments
The fund has qualified and intends to continue to qualify as a
"regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (Code). In addition, the fund 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 fund, to retain that tax-exempt
status when distributed to the shareholders of the fund (that is, to be
classified as "exempt-interest" dividends of the fund).
If it qualifies as a regulated investment company, the fund 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 fund 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 any net realized short-term capital gain in excess of net
realized long-term capital loss 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
fund's business of investing in securities; and (3) diversify its
holdings so that at the end of each fiscal quarter of the fund (a) at
least 50% of the market value of the fund's assets is represented by
cash, U.S. government securities and securities of other regulated
investment companies and other securities, with those other securities
limited with respect to any one issuer, to an amount no greater than 5%
of the fund's assets and (b) not more than 25% of the market value of
the fund'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 fund 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 fund will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary
income and capital gain. The fund 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 fund 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 fund
anticipates that these investment activities will not prevent the fund
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 fund
and, thus, will affect the amount of capital gains distributed to the
fund 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 fund 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 fund and the amount of distributions taxable to a
shareholder. Moreover, if the fund invests in both Section 1256
Contracts and offsetting positions to those contracts, then the fund
might not be able to receive the benefit of certain realized losses for
an indeterminate period of time. The fund expects that its activities
with respect to Section 1256 Contracts and offsetting positions to 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 (to the extent it realizes corresponding gains in such
years).
Taxation of the Fund's Shareholders
The fund anticipates that all dividends it pays, other than
dividends from taxable investments and market discount on municipal
obligations 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 fund satisfies certain asset percentage
requirements. Distributions of the fund's net realized short-term
capital gains are taxable to shareholders of the fund 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. Dividends and distributions paid by the fund 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 to the extent it is deemed related to exempt-interest
dividends. 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 fund that represents income derived from private
activity bonds held by the fund 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 fund's exempt-interest dividends may be excluded by
shareholders from their gross income for federal income tax purposes,
some or all of the fund'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 fund may affect a
foreign corporate shareholder's federal "branch profits" tax liability
and the federal "excess net passive income" tax liability of a
shareholder of an S corporation. 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 fund receiving dividends or distributions in
additional shares purchased in the open market 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.
With respect to distributions issued in shares of the fund, the amount
of the distribution for tax purposes is the fair market value of the
issued shares on the payment date, and the difference between such fair
market value and the amount of cash the shareholder would otherwise have
received may be treated as a return of capital. In the case of shares
issued by the fund, the shareholder's tax basis in each share received
is its fair market value on the payment date, adjusted by any amount
treated as a return of capital to the shareholder.
Statements and Notices
Statements as to the tax status of the dividends and distributions
received by shareholders of the fund 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 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. The fund will notify shareholders
annually as to the interest excluded from federal income taxes earned by
the fund with respect to those states and possessions in which the fund
has or had investments. The dollar amount of dividends paid by the fund
that is excluded from federal income taxation and the dollar amount of
dividends paid by the fund 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 fund. To the extent that
the fund 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 fund may repurchase shares of its common stock in the open
market or in privately negotiated transactions when the fund can do so
at prices below their then current net asset value per share on terms
that the fund'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 fund's turnover rate of the fund
may or may not be affected by the fund'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 fund's shares trading at a price that is equal to their
net asset value. The market prices of the fund shares will, among other
things, be determined by the relative demand for and supply of the
shares in the market, the fund's investment performance, the fund's
dividends and yield and investor perception of the fund's overall
attractiveness as an investment as compared with other investment
alternatives. The fund's acquisition of common stock will decrease the
total assets of the fund and therefore have the effect of increasing the
fund's expense ratio. The fund 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 fund's net
income. Because of the nature of the fund's investment objective,
policies and securities holdings, the investment manager does not
anticipate that repurchases and tenders will have an adverse effect on
the fund'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 fund'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 Sections 318(a) and 302(c) of the Code). Provided that
each tendering shareholder tenders all of the shares actually and
constructively owned by that shareholder, tendering shareholder will
realize a taxable gain or loss depending upon the amount of cash
received and his or her basis in his or her shares.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The fund'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 fund 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 fund. 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
fund'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 fund'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 fund 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 fund's Articles of Incorporation providing for the
conversion of the fund.
The affirmative votes of a least 75% of the directors and the
holders of at least 75% of the shares of the fund 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 fund with or into any other person (referred to individually as a
"Reorganization Transaction"): (2) the issuance or transfer by the fund
(in one or a series of transactions in any 12-month period) of any
securities of the fund 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 fund in connection with a public offering, issuance of
securities of the fund pursuant to a dividend reinvestment plan adopted
by the fund and issuances of securities of the fund upon the exercise of
any stock subscriptions rights distributed by the fund: (3) a sale,
lease, exchange, mortgage, pledge, transfer or other disposition by the
fund (in one or a series of transactions in any 12-month period) to or
with any person of any assets of the fund having aggregate fair market
value of $1,000,000 or more, except for transactions in securities
effected by the fund 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 fund or any amendment to the
fund'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 fund'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 Fund and
various other requirements are satisfied. In such case, a majority of
the votes entitled to be cast by shareholders of the fund will be
required to approve the transaction if it is a Reorganization
Transactions or a Transfer Transaction that involves substantially all
of the fund'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 fund will be required to approve the
transaction.
The voting provisions described above could have the effect of
depriving shareholders of the fund 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 fund in a tender
offer or similar transaction. In the view of the fund's board of
directors, however, these provisions offer several possible advantages
including: (1) requiring persons seeking control of the fund 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 fund'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 fund'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 fund (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 fund. The
directors who are not "interested persons" of the fund have selected
Stroock & Stroock & Lavan LLP as their counsel.
Independent Public Accountants
For the fiscal year ending August 31, 1999, KPMG Peat Marwick LLP,
345 Park Avenue, New York, New York 10154, have been selected as
independent auditors for the fund to examine and report on the fund's
financial statements.
Custodian and Transfer Agent
PNC Bank, N.A. is located at 17 Chestnut Street, Philadelphia,
Pennsylvania 19103 and serves as the fund's custodian pursuant to a
custody agreement. Under the custody agreement, PNC Bank holds the
fund's securities and keeps all necessary accounts and records. The
assets of the fund are held under bank custodianship in compliance with
the 1940 Act. First Data is located at Exchange Place Boston,
Massachusetts 02109, and pursuant to a transfer agency agreement serves
as the fund's transfer agent. Under the transfer agency agreement,
First Data maintains the shareholder account records for the fund,
handles certain communications between shareholders and the fund, and
distributes dividends and distributions payable by the fund.
FINANCIAL STATEMENTS
The fund sends unaudited semi-annual and audited annual financial
statements of the fund to shareholders, including a list of the
investments held by the fund.
The fund's Annual Report for the fiscal year ended August 31, 1998
is incorporated into this Statement of Additional Information by
reference in its entirety. A copy of these Reports may be obtained from
any Salomon Smith Barney Financial Consultant or by calling or writing
to the fund 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-1 by S&P indicates that the degree of
safety regarding timely payment is either overwhelming or very strong.
Those issues determined to possess overwhelming safety characteristics
are denoted A-1+. Capacity for timely payment on commercial paper rated
A-2 is strong, but the relative degree of safety is not as high as for
issues designated A-1.
Description of Fitch Municipal Bond Ratings:
AAA - Bonds rated AAA by Fitch have the lowest expectation of
credit risk. The obligor has an exceptionally strong capacity for
timely payment of financial commitments which is highly unlikely to be
adversely affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit
risk. They indicate very strong capacity for timely payment of
financial commitment. This capacity is not significantly vulnerable to
foreseeable events.
A - Bonds rated A by Fitch are considered to have a low
expectation of credit risk. The capacity for timely payment of
financial commitments is considered to be strong, but may be more
vulnerable to changes in economic conditions and circumstances than
bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial commitments
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to impair this capacity .
This is the lowest investment grade category assigned by Fitch.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus signs
however, are not used in the AAA category.
Description of Fitch Short -Term Ratings:
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three
years, including commercial paper, certificates of deposit, medium-term
notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term
rating on the existence of liquidity necessary to meet financial
commitment in a timely manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the
strongest capacity for timely payments of financial commitments. The
"+" denotes an exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the
strongest capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety is not
as great as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a
reduction to non investment grade.
A-4
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 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, 1998 and
Report of Independent Accountants
dated October 15, 1998 are incorporated by
reference to the Definitive 30(b)2-1 filed
on , November 4, 1998
Accession # 0000091155-98-000652.
(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 filed
herewith.
(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-Effective 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, 1998
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 $9,000.00
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 November 6, 1998
Shares of Common Stock, 148
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 Fund" in the Prospectus.
Mutual Management Corp. (formerly known as Smith Barney Mutual
Funds Management Inc., ("MMC") a New York corporation, is a registered
investment adviser
and is wholly owned by Salomon Smith Barney Holdings Inc.,
which in turn is wholly owned by Citigroup Inc.
MMC is primarily engaged in the investment advisory
business. Information as to executive officers and directors
of MMC 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
Mutual Management Corp.
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 Fund 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 Fund 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 18th day of November, 1998.
MANAGED MUNICIPALS PORTFOLIO II INC.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chief Executive Officer, President
and Chairman of the Board
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,
11/18/98
Chief Executive Officer
and President
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial
11/18/98
and Accounting Officer)
/s/ Charles F. Barber*
Charles F. Barber Director 11/18/98
/s/ Allan J. Bloostein*
Allan J. Bloostein Director
11/18/98
/s/ Martin Brody*
Martin Brody Director
11/18/98
/s/ Dwight B. Crane*
Dwight B. Crane Director 11/18/98
/s/ Robert A. Frankel*
Robert A. Frankel Director 11/18/98
/s/ William R. Hutchinson*
William Hutchinson Director
11/18/98
*Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power-of-attorney dated September 27, 1994.
MANAGED MUNICIPALS PORTFOLIO II INC.
EXHIBIT INDEX
Exhibit No. Description of Exhibit
(e) Dividend Reinvestment Plan.
(n) Consent of KPMG Peat Marwick LLP, independent
accountants
for the Fund.
(r) Financial Data Schedule.
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, 1998, with
respect to 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
November 16, 1998
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000890068
<NAME> MANAGED MUNICIPALS PORTFOLIO II INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1998
<PERIOD-END> AUG-31-1998
<INVESTMENTS-AT-COST> 135,954,712
<INVESTMENTS-AT-VALUE> 141,042,983
<RECEIVABLES> 1,822,673
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 142,865,656
<PAYABLE-FOR-SECURITIES> 2,043,563
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 592,538
<TOTAL-LIABILITIES> 2,636,101
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 134,246,087
<SHARES-COMMON-STOCK> 11,234,706
<SHARES-COMMON-PRIOR> 11,234,706
<ACCUMULATED-NII-CURRENT> (106,481)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,001,678
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 5,088,271
<NET-ASSETS> 140,229,555
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 7,728,562
<OTHER-INCOME> 0
<EXPENSES-NET> 1,532,848
<NET-INVESTMENT-INCOME> 6,195,714
<REALIZED-GAINS-CURRENT> 1,007,582
<APPREC-INCREASE-CURRENT> 4,890,299
<NET-CHANGE-FROM-OPS> 12,093,595
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 6,471,190
<DISTRIBUTIONS-OF-GAINS> 1,909,900
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 3,712,505
<NET-CHANGE-IN-ASSETS> 177,336
<ACCUMULATED-NII-PRIOR> 1,895,655
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,250,670
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 282,178
<AVERAGE-NET-ASSETS> 138,973,514
<PER-SHARE-NAV-BEGIN> 12.15
<PER-SHARE-NII> 00.55
<PER-SHARE-GAIN-APPREC> 00.53
<PER-SHARE-DIVIDEND> 00.58
<PER-SHARE-DISTRIBUTIONS> 00.17
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 12.48
<EXPENSE-RATIO> 01.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
MANAGED MUNICIPALS PORTFOLIO II INC.
TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1. You, First Data Investor Services Group, Inc., will
act as agent ("Agent") for the stockholders (the "Participants") of
Managed Municipals Portfolio II Inc. (the "Fund"), and will open an
account for each of the Participants under the Dividend Reinvestment
Plan (the "Plan") in the name of the record owner in which shares of
common stock, par value $.001 per share of the Fund ("Common Stock") are
registered, and put into effect for the Participants the distribution
reinvestment provisions of the Plan as of the first record date for a
dividend or capital gain distribution after you have implemented the
Plan.
2. If the Fund declares a distribution payable either in
Common Stock or in cash, non-participants in the Plan will receive cash,
and Participants will receive the equivalent amount in Common Stock
valued in the following manner: if the market price of the Common Stock
on the determination date is equal to or exceeds the net asset value per
share of the Common Stock, you will acquire shares directly from the
Fund at a price equal to the greater of (1) net asset value per share at
the valuation time or (2) 95% of the market price per share of the
Common Stock on the determination date. If the net asset value of the
Common Stock exceeds the market price of the Common Stock on the
determination date, you will buy Common Stock in the open market, on the
New York Stock Exchange or elsewhere, for the Participants' accounts as
soon as practicable commencing on the trading day following the
determination date and terminating no later than the earlier of (a) 30
days after the dividend or distribution payment date, or (b) the record
date for the next succeeding dividend or distribution to be made to the
holders of the Common Stock; except when necessary to comply with
applicable provisions of the federal securities laws. If the market
price equals or exceeds the net asset value per share of the Common
Stock at the valuation time before you have completed the open market
purchases or if you are unable to invest the full amount eligible to be
reinvested hereunder in open market purchases during the time period
referred to in the previous sentence, you shall cease purchasing shares
in the open market and the Fund shall issue the remaining shares of
Common Stock at a price per share equal to the greater of (a) the net
asset value per share at the valuation time or (b) 95% of the then
current market price per share on the valuation date.
3. For all purposes of the Plan: (a) the valuation time
will be the close of trading on the New York Stock Exchange on the
determination date for the relevant dividend or distribution; (b) the
determination date will be the record date for determining shareholders
eligible to receive the relevant dividend or distribution, except that
if such day is not a New York Stock Exchange trading day, the
immediately preceding trading day; (c) the market price of the Fund's
Common Stock on a particular date shall be the mean between the highest
and lowest sales prices on the New York Stock Exchange on that date, or,
if there is no sale on such Exchange on that date, then the mean between
the closing bid and asked quotations for such stock on such Exchange on
such date; (d) the net asset value per share of the Fund's Common Stock
as of the valuation time on a particular date shall be as determined by
or on behalf of the Fund; and (e) all distributions and other payments
shall be made net of any applicable withholding tax.
4. The open market purchases provided for above may be
made on any securities exchange where the Fund's Common Stock is traded,
in the over-the-counter market or in negotiated transactions and may be
on such terms as to price, delivery and otherwise as you shall
determine. Participant funds held by you pending investment will not
bear interest, and it is understood that, in any event, you shall have
no liability in connection with any inability to purchase shares within
30 days after the initial date of such purchase is herein provided, or
with the timing of any purchases effected. You shall have no
responsibility as to the value of the Common Stock of the Fund acquired
for a Participant's account. In connection with open market purchases,
you may commingle a Participant's funds with those of other Participants
for whom you similarly act as Agent and the average price (including
brokerage commissions) of all shares purchased by you as Agent shall be
the price per share allocable to each Participant in connection
therewith.
5. You may hold shares acquired pursuant to the Plan,
together with the shares of other Participants acquired pursuant to the
Plan, in noncertificated form in your name or that of your nominee. You
will forward to Participants any proxy solicitation material and will
vote any shares so held for any Participant only in accordance with
instructions given through a proxy executed by the Participant. Upon a
Participant's written request, you will deliver to him, without charge,
a certificate or certificates for the full shares.
6. You will confirm to each Participant each acquisition
made for his account as soon as practicable but not later than 60 days
after the date thereof. Although Participants may from time to time
have an undivided fractional interest (computed to three decimal places)
in a share of the Fund, no certificates for a fractional share will need
to be issued. However, distributions on fractional shares will be
credited to Participant accounts. In the event of termination of a
Participant's account under the Plan, you will adjust for any such
undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale
required to make such an adjustment.
7. Any stock dividends or split shares distributed by the
Fund on shares held by you for a Participant will be credited to his
account. In the event that the Fund makes available to its stockholders
rights to purchase additional shares or other securities, the shares
held for a Participant under the Plan will be added to other shares held
by such Participant in calculating the number of rights to be issued to
him.
8. No service fee for handling the reinvestment of
capital gains distributions or income dividends will be charged to
Participants or their accounts. Participants will be charged a pro rata
share of any brokerage commissions actually incurred on open market
purchases.
9. A Participant may terminate his account under the Plan
by notifying you in writing or by calling you at 1-800-331-
1710. Such termination will be effective immediately if notice is
received by you not less than ten business days prior to any dividend or
distribution record date; otherwise such termination will be effective
as soon as practicable after your investment of the most recently
declared dividend or distribution on the Common Stock. The Plan may be
terminated by the Fund upon notice in writing mailed to all Participants
at least 30 days prior to the record date for the payment of any
dividend or distribution by the Fund for which the termination is to be
effective. Upon any termination you will cause a certificate or
certificates for the full shares held for each Participant under the
Plan and cash adjustment for any fractional shares to be delivered to
each Participant without charge. If a Participant elects by notice to
you in writing in advance of such termination to have you sell part or
all of his shares and remit the proceeds to him, you are authorized to
deduct a $5.00 fee plus brokerage commissions actually incurred for this
transaction from the proceeds.
10. These terms and conditions may be amended or
supplemented by you or the Fund at any time or times but, except when
necessary or appropriate to comply with applicable law or the rules or
policies of the Securities and Exchange Commission or any other
regulatory authority, only by mailing to Participants appropriate
written notice at least 30 days prior to the record date for the first
distribution or dividend to which such amendment or supplement is to be
effective, if by the Fund or, if to be amended or supplemented by you,
30 days prior to the effective date of such amendment or supplement and
only upon your receipt of the written consent of the Fund's Board of
Directors. The amendment or supplement shall be deemed to be accepted
by Participants unless, prior to the effective date thereof, you receive
written notice of the termination of a Participant's account under the
Plan. Any such amendment may include an appointment by you in your
place and stead of a successor agent under these terms and conditions,
with full power and authority to perform all or any of the acts to be
performed by the Agent under these terms and conditions. Upon any such
appointment of an Agent for the purpose of receiving distributions, the
Fund will be authorized to pay such successor Agent, for a Participant's
account, all distributions payable on common stock of the Fund held in
his name under the Plan for retention or application by such successor
Agent as provided in these terms and conditions.
11. You shall at all times act in good faith and agree to
use your best efforts within reasonable limits to insure the accuracy of
all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall not be liable for
loss or damage due to errors unless such error is caused by your
negligence, bad faith or willful misconduct or that of your employees.
12. These terms and conditions shall be governed by the
laws of the State of New York.
Effective as of November 12, 1998
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