<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- ---------------------------------------------
PROSPECTUS July 25, 1994
Managed High Income Portfolio Inc. (the "Portfolio") is a diversified,
closed-end management investment company whose primary investment objective is
high current income. Capital appreciation is a secondary objective. The
Portfolio will seek to achieve its investment objectives by investing, under
normal circumstances, at least 65% of its assets in high-yielding corporate
bonds, debentures and notes. For a description of the risks involved in
investing in high-yield securities, see "Investment Objectives and Management
Policies -- Risk Factors and Special Considerations." The Portfolio's address
is
Two World Trade Center, New York, New York 10048 and the Portfolio's telephone
number is (212) 720-9218.
The Portfolio seeks to invest substantially all of its assets in high-
yielding
corporate bonds, debentures and notes. Up to 35% of its assets may be invested
in common stock or other equity or equity-related securities, including
convertible securities, preferred stock, warrants and rights. Securities
purchased by the Portfolio generally will be rated in the lower rating
categories of recognized rating agencies, as low as C by Moody's Investors
Service, Inc. ("Moody's") or D by Standard & Poor's Corporation ("S&P"), or in
unrated securities that the Portfolio's investment adviser deems of comparable
quality. See "Investment Objectives and Policies."
This Prospectus is to be used by Smith Barney Inc. ("Smith Barney") in
connection with offers and sales of the Portfolio's Common Stock (the "Common
Stock") in market-making activities in the over-the-counter market at
negotiated
prices related to prevailing market at the time of the sale. The Common Stock
is
listed on the New York Stock Exchange Inc. (the "NYSE") under the symbol
"MHY."
Smith Barney intends to make a market in the Common Stock. Management is not
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice, at the sole
(CONTINUED ON PAGE
2)
SMITH BARNEY INC.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A
CRIMINAL OFFENSE.
1
<PAGE>
(CONTINUED FROM PAGE 1)
discretion of Smith Barney. The shares of Common Stock that may be offered
from
time to time pursuant to the Prospectus were issued and sold by the Portfolio
in
a public offering which commenced March 18, 1993, at a price of $12.00 per
share. No issuance can be given as to liquidity of, or the trading market for,
the Common Stock as a result of any market-making activities undertaken by
Smith
Barney. The Portfolio will not receive any proceeds from the sale of any
Common
Stock offered pursuant to this Prospectus.
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS, WHICH SETS FORTH CONCISELY
THE
INFORMATION ABOUT THE PORTFOLIO THAT A PROSPECTIVE INVESTOR OUGHT TO KNOW
BEFORE
INVESTING, AND TO RETAIN IT FOR FUTURE REFERENCE. A STATEMENT OF ADDITIONAL
INFORMATION ("SAI") DATED JULY 25, 1994 HAS BEEN FILED WITH THE SECURITIES AND
EXCHANGE COMMISSION ("SEC") AND IS INCORPORATED BY REFERENCE IN ITS ENTIRETY
INTO THIS PROSPECTUS. A TABLE OF CONTENTS FOR THE SAI IS SET FORTH ON PAGE 39
OF
THIS PROSPECTUS. A COPY OF THE SAI CAN BE OBTAINED WITHOUT CHARGE BY CALLING
OR
WRITING TO THE PORTFOLIO AT THE TELEPHONE NUMBER OR ADDRESS SET FORTH ABOVE OR
BY CONTACTING ANY SMITH BARNEY FINANCIAL CONSULTANT.
ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
2
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY 4
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PORTFOLIO EXPENSES 8
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FINANCIAL HIGHLIGHTS 9
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THE PORTFOLIO 10
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THE OFFERING 10
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USE OF PROCEEDS 10
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INVESTMENT OBJECTIVE AND POLICIES 11
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INVESTMENT TECHNIQUES 12
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SHARE PRICE DATA 26
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MANAGEMENT OF THE PORTFOLIO 27
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DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN 30
-----------------------------------------------------------------
NET ASSET VALUE 32
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TAXATION 33
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DESCRIPTION OF COMMON STOCK 36
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STOCK PURCHASES AND TENDERS 37
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CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION 38
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CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT AND
REGISTRAR 39
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FURTHER INFORMATION 39
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APPENDIX A A-1
-----------------------------------------------------------------
</TABLE>
3
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE SAI.
THE PORTFOLIO The Portfolio is a diversified, closed-end management investment
company. See "The Portfolio."
INVESTMENT OBJECTIVE The Portfolio seeks high current income. Capital
appreciation is a secondary objective. See "Investment Objective and
Policies."
INVESTMENTS The Portfolio will seek to achieve its investment objectives by
investing, under normal circumstances, at least 65% of its assets in high-
yielding corporate bonds, debentures and notes. Up to 35% of its assets may be
invested in common stock or other equity or equity-related securities,
including
convertible securities, preferred stock, warrants and rights. Although the
Portfolio may invest in securities of any maturity, under current market
conditions, the Portfolio intends that its portfolio of fixed-income
securities
will have an average remaining maturity of between 5 and 10 years. Securities
purchased by the Portfolio generally will be rated in the lower rating
categories of recognized rating agencies, as low as C by Moody's or D by S&P,
or
in unrated securities that the Portfolio's investment adviser deems of
comparable quality. However, the Portfolio will not purchase securities rated
lower than B by both Moody's and S&P if, immediately after such purchase, more
than 10% of its total assets are invested in such securities. The Portfolio
may
invest up to 20% of its assets in the securities of foreign issuers that are
denominated in currencies other than the U.S. dollar and may invest without
limitation in securities of foreign issuers that are denominated in U.S.
dollars. There is no guarantee that the Portfolio's investment objectives will
be achieved. See "Investment Objectives and Policies" and Appendix A.
THE OFFERING Smith Barney intends to make a market in the Common Stock in
addition to trading of the Common Stock on the NYSE. Smith Barney, however, is
not obligated to conduct market-making activities and any such activities may
be
discontinued at any time without notice, at the sole discretion of Smith
Barney.
LISTING NYSE
SYMBOL MHY
4
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
INVESTMENT ADVISER Greenwich Street Advisors, a division of Mutual Management
Corp. ("Greenwich Street Advisors") serves as the Portfolio's investment
adviser. Mutual Management Corp. provides investment advisory and management
services to investment companies affiliated with Smith Barney. Smith Barney is
a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which is
in
turn a wholly owned subsidiary of The Travelers Inc. ("Travelers"), a
diversified financial services holding company principally engaged in the
business of providing investment, consumer finance and insurance services.
Greenwich Street Advisors renders investment advice to a wide variety of
individual and institutional clients that had aggregate assets under
management,
as of May 31, 1994, in excess of $39.1 billion. The Portfolio pays Greenwich
Street Advisors a fee for services provided to the Portfolio that is computed
daily and paid monthly at the annual rate of .90% of the value of the
Portfolio's average daily net assets. See "Management of the Portfolio --
Investment Adviser."
ADMINISTRATOR Smith, Barney Advisers, Inc. ("SBA"), a subsidiary of Holdings,
serves as the Portfolio's administrator. The Portfolio pays SBA a fee for
services provided to the Portfolio that is computed daily and paid monthly at
the annual rate of .20% of the value of the Portfolio's average daily net
assets. See "Management of the Portfolio -- Administrator."
SUB-ADMINISTRATOR The Boston Company Advisors, Inc. ("Boston Advisors"), a
wholly owned subsidiary of The Boston Company, Inc. ("TBC"), which is in turn
wholly owned by Mellon Bank Corporation ("Mellon"), serves as the Portfolio's
Sub-Administrator. Boston Advisors is paid a fee by SBA for its services. See
"Management of the Portfolio -- Sub-Administrator."
CUSTODIAN, TRANSFER AGENT AND DIVIDEND-PAYING AGENT AND REGISTRAR Boston Safe
Deposit and Trust Company ("Boston Safe") serves as the Portfolio's custodian.
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation, serves as the Portfolio's transfer agent, dividend-paying agent
and
registrar. See "Custodian, Transfer Agent and Dividend-Paying Agent and
Registrar."
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN The Portfolio expects
to
pay monthly dividends of net investment income (that is, income other than net
realized capital gains) and to distribute net realized capital gains, if any,
annually. All dividends or distributions will be
5
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
reinvested automatically in additional shares through participation in the
Portfolio's Dividend Reinvestment Plan, unless a shareholder elects to receive
cash. See "Dividends and Distributions; Dividend Reinvestment Plan."
DISCOUNT FROM NET ASSET VALUE The shares of closed-end investment companies
often, although not always, trade at a discount from their net asset value.
Whether investors will realize gains or losses upon the sale of Common Stock
will not depend upon the Portfolio's net asset value, but will depend entirely
on whether the market price of the Common Stock at the time of sale is above
or
below the original purchase price of the shares. Since the market price of the
Common Stock will be determined by factors such as relative demand for and
supply of such shares in the market, general market and economic conditions
and
other factors beyond the control of the Portfolio, the Portfolio cannot
predict
whether the Common Stock will continue to trade at, below or above net asset
value. For that reason, shares of the Portfolio's Common Stock are designed
primarily for long-term investors, and investors in the Portfolio's Common
Stock
should not view the Portfolio as a vehicle for trading purposes. See
"Investment
Objective and Policies -- Risk Factors and Special Considerations" and "Share
Price Data."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Portfolio is a closed-end
investment
company that is designed primarily for long-term investors and not as a
trading
vehicle. The net asset value of the Common Stock will change with changes in
the
value of the securities held by the Portfolio. Because the Portfolio will
invest
primarily in fixed-income securities, the net asset value of the Common Stock
can be expected to change as levels of interest rates fluctuate; generally,
when
prevailing interest rates increase, the value of fixed-income securities held
by
the Portfolio can be expected to decrease and when prevailing interest rates
decrease, the value of the fixed-income securities held by the Portfolio can
be
expected to increase. The value of the fixed-income securities held by the
Portfolio, and thus the Portfolio's net asset value, may also be affected by
other economic, market and credit factors. See "Investment Objectives and
Policies -- Risk Factors and Special Considerations."
The Portfolio will invest in medium- or low-rated securities and unrated
securities of comparable quality. Generally, these securities offer a higher
return potential than higher-rated securities but involve greater volatility
of
price and risk of loss of income and principal including the possibility of
6
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
default or bankruptcy of the issuers of such securities. Medium-and low-rated
and comparable unrated securities will likely have large uncertainties or
major
risk exposures to adverse conditions and are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligations. Up to 10% of the Portfolio's
assets may be invested in securities rated lower than B by both Moody's and
S&P,
including bonds rated as low as C by Moody's or D by S&P. These bonds can be
regarded as having extremely poor prospects of ever attaining any real
investment standing and may be in default with payment of interest and/or
repayment of principal in arrears. Accordingly, it is possible that these
types
of factors could, in certain instances, reduce the value of securities held by
the Portfolio, with a commensurate effect on the value of the Portfolio's
shares. See "Investment Objectives and Management Policies -- Risk Factors and
Special Considerations" and Appendix A.
Certain of the instruments held by the Portfolio, and certain of the
investment techniques that the Portfolio may employ, might expose the
Portfolio
to special risks. The instruments presenting the Portfolio with risks are
medium-, low-and unrated securities, convertible and synthetic convertible
securities, foreign securities, non-publicly traded and illiquid securities
and
securities of developing countries and unseasoned issuers. Engaging in
financial
futures and options transactions, engaging in currency exchange and foreign
currency option transactions, entering into securities transactions on a
when-issued or delayed delivery basis, entering into repurchase agreements and
lending portfolio securities are investment techniques involving risks to the
Portfolio. See "Investment Objectives and Management Policies -- Risk Factors
and Special Considerations."
The Portfolio's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to acquire
control of the Portfolio and of depriving shareholders of an opportunity to
sell
their shares of Common Stock at a premium over prevailing market prices. See
"Certain Provisions of the Articles of Incorporation."
STOCK PURCHASES AND TENDERS The Portfolio's Board of Directors currently
contemplates that the Portfolio may from time to time consider the repurchase
of
its Common Stock on the open market or make tender offers of the Common Stock.
See "Stock Purchases and Tenders."
7
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- ---------------------------------------------------------------------------
PORTFOLIO EXPENSES
THE FOLLOWING TABLES ARE INTENDED TO ASSIST INVESTORS IN UNDERSTANDING
THE
VARIOUS COSTS AND EXPENSES ASSOCIATED WITH INVESTING IN THE PORTFOLIO.
<TABLE>
<CAPTION>
------------------------------------------------------------------
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Sales Load (as a percentage of offering price) None
Dividend Reinvestment Plan Fees and Cash Purchase
Plan Fees None
------------------------------------------------------------------
ANNUAL PORTFOLIO OPERATING EXPENSES
(as a percentage of net assets)(1)
Investment Advisory and Administration Fees 1.10%
------------------------------------------------------------------
Other Expenses 0.09%
------------------------------------------------------------------
TOTAL ANNUAL EXPENSES 1.19%
------------------------------------------------------------------
<FN>
(1) See "Management of the Portfolio" for additional information.
"Other Expenses" are based on data from the Fund's fiscal
period ended February 28, 1994.
</TABLE>
HYPOTHETICAL EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Portfolio, assuming a 5% annual return:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10
YEARS
<S> <C> <C> <C> <C>
-----------------------------------------------------------------------------
- ---
$ 12 $ 38 $ 65 $
144
-----------------------------------------------------------------------------
- ---
</TABLE>
This Hypothetical Example assumes that all dividends and other distributions
are reinvested at net asset value and that the percentage amounts listed under
Annual Portfolio Operating Expenses remain the same in the years shown. The
above tables and assumptions in the Hypothetical Example of a 5% annual return
and reinvestment at net asset value are required by regulations of the SEC
applicable to all investment companies; the assumed 5% return is not a
prediction of, and does not represent, the projected or actual performance of
the Common Stock.
THIS HYPOTHETICAL EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST
OR
FUTURE EXPENSES, AND THE PORTFOLIO'S ACTUAL EXPENSES MAY BE MORE OR LESS THAN
THOSE SHOWN.
8
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
The tables below set forth selected financial data for an outstanding share
of
Common Stock throughout the period presented. The per share operating
performance and ratios for the period shown have been audited by Coopers &
Lybrand, the Portfolio's independent accountants, as stated in their report
dated April 8, 1994, that is contained in the SAI and can be obtained by
shareholders. The following information should be read in conjunction with the
Portfolio's Financial Statements dated February 28, 1994, and Notes to those
Financial Statements, which are incorporated by reference into this
Prospectus.
<TABLE>
<CAPTION>
PER SHARE OPERATING PERFORMANCE FOR A SHARE OF THE
PORTFOLIO'S 3/26/93 TO
COMMON STOCK OUTSTANDING THROUGHOUT THE PERIOD 2/28/94 (1)
<S> <C> <C>
- ------------------------------------------------------------------------------
- ---
NET ASSET VALUE, Beginning of Period $ 12.00
Net Investment Income .98
Net Realized and Unrealized Gains on Investments .51
- ------------------------------------------------------------------------------
- ---
Total from Investment Operations 1.49
Offering Cost
Charged to Paid in Capital (.02)
- ------------------------------------------------------------------------------
- ---
Less Distributions
Dividends from net investment income (.96)
Distributions from capital gains (.12)
- ------------------------------------------------------------------------------
- ---
Total Distributions (1.08)
- ------------------------------------------------------------------------------
- ---
Net Asset Value, End of Period $ 12.39
Per Share Market Value, End of Period $ 11.75
- ------------------------------------------------------------------------------
- ---
TOTAL INVESTMENT RETURN (2) 6.85 %
- ------------------------------------------------------------------------------
- ---
RATIOS/SUPPLEMENTAL DATA (3)
Net Assets, End of Period (in 000's) $ 520,091
Ratios to Average Net Assets:
Operating Expenses (4) 1.19 %
Net Investment Income (4) 8.74 %
Portfolio Turnover Rate 108 %
- ------------------------------------------------------------------------------
- ---
<FN>
(1) The Portfolio commenced operations on March 26, 1993.
(2) Total return represents aggregate return based on market value for the
period
indicated, and assumes reinvestment of dividends and distributions at
prices
obtained under the Portfolio's Dividend Reinvestment Plan.
</TABLE>
9
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
<TABLE>
<S> <C> <C>
(3) Upon commencement of its investment operations and until July 30, 1993,
the
Portfolio employed Shearson Lehman Advisors, a member of the Asset
Management
Group of Shearson Lehman Brothers Inc., as investment adviser. On July 30,
1993, Shearson Lehman Advisors' business was combined with that of Mutual
Management Corp. and renamed Greenwich Street Advisors. See "Management of
the Portfolio -- Investment Adviser" below.
(4) Annualized.
</TABLE>
- --------------------------------------------------------------------
THE PORTFOLIO
The Portfolio is a diversified, closed-end management investment company
that
seeks a high level of current income with capital appreciation as a secondary
objective. The Portfolio, which was incorporated under the laws of the State
of
Maryland on December 24, 1992, is registered under the Investment Company Act
of
1940 ("1940 Act"), and has its principal office at Two World Trade Center, New
York, New York 10048. The Portfolio's telephone number is (212) 720-9218.
- --------------------------------------------------------------------
THE OFFERING
Smith Barney intends to make a market in the Common Stock, although it is
not
obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice at the sole discretion of Smith
Barney.
No assurance can be given as to the liquidity of, or the trading market for,
the
Common Stock as a result of any market-making activities undertaken by Smith
Barney. This Prospectus is to be used by Smith Barney in connection with
offers
and sales of the Common Stock in market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market
prices
at the time of sale.
- --------------------------------------------------------------------
USE OF PROCEEDS
The Portfolio will not receive any proceeds from the sale of any Common
Stock
offered pursuant to this Prospectus. Proceeds received by Smith Barney
10
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
USE OF PROCEEDS (CONTINUED)
as a result of its market-making in the Common Stock will be utilized by Smith
Barney in connection with its secondary market operations and for general
corporate purposes.
- --------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
The Portfolio's investment objective is high current income with capital
appreciation as a secondary objective. Set out below is a description of the
investment objectives and principal investment policies of the Portfolio. No
assurances can be given that the Portfolio will be able to achieve its
investment objective. The Portfolio's investment objective may not be changed
without the affirmative vote of the holders of a majority (as defined in the
1940 Act) of the Portfolio's outstanding shares.
In seeking its objective, the Portfolio will invest, under normal
circumstances at least 65% of its assets in high-yielding corporate bonds,
debentures and notes. Although the Portfolio may invest in securities of any
maturity, under current market conditions the Portfolio intends that its
portfolio of fixed-income securities will have an average remaining maturity
of
between 5 and 10 years. Greenwich Street Advisors may adjust the Portfolio's
average maturity when, based on interest rate trends and other market
conditions, it deems it appropriate to do so. Up to 35% of the Portfolio's
assets may be invested in common stock or other equity or equity-related
securities, including convertible securities, preferred stock, warrants and
rights. Equity investments may be made in securities of companies of any size
depending on the relative attractiveness of the company and the economic
sector
in which it operates. Securities purchased by the Portfolio generally will be
rated in the lower categories of recognized rating agencies, as low as C by
Moody's or D by S&P, or, if unrated, will be securities that Greenwich Street
Advisors deems of comparable quality. However, the Portfolio will not purchase
securities rated lower than B by both Moody's and S&P if, immediately after
such
purchase, more than 10% of its total assets are invested in such securities.
The
Portfolio may hold securities with higher ratings when the yield differential
between low-rated and higher-rated securities narrows and the risk of loss may
be reduced substantially with only a relatively small reduction in yield. The
Portfolio may also invest in higher-rated securities when Greenwich Street
Advisors
11
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
believes that a more defensive investment strategy is appropriate in light of
market or economic conditions. The Portfolio also may lend its portfolio
securities and purchase or sell securities on a when-issued or delayed-
delivery
basis.
The Portfolio may invest up to 20% of its assets in the securities of
foreign
issuers that are denominated in currencies other than the U.S. dollar and may
invest without limitation in securities of foreign issuers that are
denominated
in U.S. dollars. In order to mitigate the effects of uncertainty in future
exchange rates affecting the Portfolio's non-dollar investments, the Portfolio
may engage in currency exchange transactions and currency futures contracts
and
related options and purchase options on foreign currencies. The Portfolio also
may hedge against the effects of changes in the value of its investments by
entering into interest rate futures contracts and related options. Special
considerations associated with the Portfolio's investments are described
below.
INVESTMENT TECHNIQUES
The Portfolio may employ, among others, the investment techniques described
below:
CORPORATE SECURITIES. Corporate securities in which the Portfolio may invest
include corporate fixed-income securities of both domestic and foreign
issuers,
such as bonds, debentures, notes, equipment lease certificates, equipment
trust
certificates and preferred stock. Certain of the corporate fixed-income
securities in which the Portfolio may invest may involve equity
characteristics.
In addition, the Portfolio may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
MONEY-MARKET INSTRUMENTS. When Greenwich Street Advisors believes that
economic circumstances warrant a temporary defensive posture, the Portfolio
may
invest without limitation in short-term money market instruments rated Aaa or
Aa
by Moody's or AAA or AA by S&P, or, if unrated, of comparable quality in the
opinion of Greenwich Street Advisors. The Portfolio may also invest in money
market instruments to help defray operating expenses, to serve as collateral
in
connection with certain investment techniques and to hold as a reserve pending
the payment of dividends to investors. Money market instruments in which the
Portfolio
12
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
typically expects to invest include: U.S. government securities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks); commercial paper; and repurchase
agreements. To the extent the Portfolio invests in short-term money market
instruments, it may not be pursuing its investment objectives.
REPURCHASE AGREEMENTS. The Portfolio may enter into repurchase agreement
transactions with certain member banks of the Federal Reserve System or with
certain dealers listed on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase agreement, the
Portfolio would acquire an underlying obligation for a relatively short period
(usually not more than seven days) subject to an obligation of the seller to
repurchase, and the Portfolio to resell, the obligation at an agreed-upon
price
and time, thereby determining the yield during the Portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to
market
fluctuations during the Portfolio's holding period. Repurchase agreements
could
involve certain risks in the event of default or insolvency of the seller,
including possible delays or restrictions on the Portfolio's ability to
dispose
of the underlying securities, the risk of a possible decline in the value of
the
underlying securities during the period in which the Portfolio seeks to assert
its rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or part of the income from the
agreement. Greenwich Street Advisors, acting under the supervision of the
Portfolio's Board of Directors, reviews on an ongoing basis the value of the
collateral and the creditworthiness of the banks and dealers with which the
Portfolio enters into repurchase agreements to evaluate potential risk.
GOVERNMENT SECURITIES. U.S. government securities in which the Portfolio may
invest include direct obligations of the United States and obligations issued
by
U.S. government agencies and instrumentalities. Included among the 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);
13
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
and securities that are supported by the credit of the instrumentality (such
as
Federal National Mortgage Association and Federal Home Loan Mortgage
Corporation
bonds).
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES. The Portfolio may
invest in zero coupon, pay-in-kind and delayed interest securities as well as
custodial receipts or certificates underwritten by securities dealers or banks
that evidence ownership of future interest payments, principal payments or
both
on certain U.S. government securities. Zero coupon securities pay no cash
income
to their holders until they mature and are issued at substantial discounts
from
their value at maturity. When held to maturity, their entire return comes from
the difference between their purchase price and their maturity value.
Pay-in-kind securities pay interest through the issuance to the holders of
additional securities, and delayed interest securities are securities which do
not pay interest for a specified period. Custodial receipts evidencing
specific
coupon or principal payments have the same general attributes as zero coupon
U.S. government securities but are not considered to be U.S. government
securities. The Portfolio's investments in zero coupon, pay-in-kind and
delayed
interest securities will result in special tax consequences. Although zero
coupon securities do not make interest payments, for tax purposes a portion of
the difference between a zero coupon security's maturity value and its
purchase
price is taxable income of the Portfolio each year.
CONVERTIBLE SECURITIES AND SYNTHETIC CONVERTIBLE SECURITIES. Convertible
securities are fixed-income securities that may be converted at either a
stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and
equity
securities. Although to a lesser extent than with fixed-income securities
generally, the market value of convertible securities tends to decline as
interest rates increase and, conversely, tends to increase as interest rates
decline. In addition, because of the conversion feature, the market value of
convertible securities tends to vary with fluctuations in the market value of
the underlying common stocks and, therefore, also will react to variations in
the general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock
declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying
common
stock. When the market price of the underlying
14
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
common stock increases, the prices of the convertible securities tend to rise
as
a reflection of the value of the underlying common stock. While no securities
investments are without risk, investments in convertible securities generally
entail less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may
default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to
benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but non-
convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible
securities.
Unlike a convertible security, which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the Portfolio at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to
15
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
market fluctuations. Investing in synthetic convertible securities involves
the
risk normally involved in holding the securities comprising the synthetic
convertible security.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. When deemed advisable by
Greenwich Street Advisors, the Portfolio may enter into interest rate and
currency futures contracts and may purchase and sell put and call options on
such futures contracts. The Portfolio will enter into such transactions for
hedging purposes or for other appropriate risk-management purposes permitted
under the rules and regulations of the Commodity Futures Trading Commission
(the
"CFTC") and the SEC and may enter into closing purchase transactions with
respect to options written by the Portfolio in order to terminate existing
positions. There is no guarantee that such closing transactions can be
effected
at any particular time or at all. An interest rate futures contract is a
standardized contract for the future delivery of a specified security (such as
a
U.S. Treasury Bond or U.S. Treasury Note) or its equivalent at a future date
at
a price set at the time of the contract. A currency futures contract is a
standardized contract for the future delivery of a specified amount of
currency
at a future date at a price set at the time of the contract. The Portfolio may
only enter into futures contracts traded on regulated commodity exchanges.
An option on a futures contract, as contrasted with the direct investment in
such a contract, gives the purchaser of the option the right, in return for
the
premium paid, to assume a position in a futures contract at a specified
exercise
price at any time on or before 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 accomplished 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 a
futures contract is limited to the premium paid for the option (plus
transaction
costs). With respect to options purchased by the Portfolio, there are no daily
cash payments made by the Portfolio to reflect changes in the value of the
underlying contract; however, the value of the option does change daily and
that
change would be reflected in the net asset value of the Portfolio.
16
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
The Portfolio may not enter into futures and options contracts for which
aggregate initial margin deposits and premiums paid for unexpired options to
establish positions that are not bona fide hedging positions (as defined by
the
CFTC), exceed 5% of the fair market value of the Portfolio's total assets,
after
taking into account unrealized profits and unrealized losses on such
contracts.
In the event that the Portfolio enters into short positions in futures
contracts
as a hedge against a decline in the value of the Portfolio's portfolio
securities, the value of such futures contracts may not exceed the total
market
value of the Portfolio's investments. With respect to each long position in a
futures contract or option thereon, the underlying commodity value of such
contract always will be covered by cash or cash equivalents set aside plus
accrued profits held in a segregated account. In addition, certain provisions
of
the Internal Revenue Code of 1986, as amended (the "Code"), may limit the
extent
to which the Portfolio may enter into futures contracts or engage in options
transactions. See "Taxation."
CURRENCY EXCHANGE TRANSACTIONS AND OPTIONS ON FOREIGN CURRENCIES. In order
to
protect against uncertainty in the level of future exchange rates, the
Portfolio
may engage in currency exchange transactions and purchase exchange-traded put
and call options on foreign currencies. The Portfolio will conduct its
currency
exchange transactions either on a spot (i.e., cash) basis at the rate
prevailing
in the currency exchange market or through entering into forward contracts to
purchase or sell currencies. The Portfolio's dealings in forward currency
exchange and options on Foreign currencies are limited to hedging involving
either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date, which may
be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend
to limit any potential gain that might result should the value of the currency
increase.
The Portfolio may purchase put options on a foreign currency in which
securities held by the Portfolio are denominated to protect against a decline
17
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
in the value of the currency in relation to the currency in which the exercise
price is denominated. The Portfolio may purchase a call option on a foreign
currency to hedge against an adverse exchange rate of the currency in which a
security that it anticipates purchasing is denominated in relation to the
currency in which the exercise price is denominated. An option on a foreign
currency gives the purchaser, in return for a premium, the right to sell, in
the
case of a put, and buy, in the case of a call, the underlying currency at a
specified price during the term of the option. Although the purchaser of an
option on a foreign currency may constitute an effective hedge by the
Portfolio
against fluctuations in the exchange rates, in the event of rate movements
adverse to the Portfolio's position, the Portfolio may forfeit the entire
amount
of the premium plus related transaction costs. Options on foreign currencies
purchased by the Portfolio may be traded on domestic and foreign exchanges or
traded over-the-counter.
Although the foreign currency market may not necessarily be more volatile
than
the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearing-house, default
on
the contract would deprive the Portfolio of unrealized profits or force the
Portfolio to cover its commitments for the purchase or resale, if any, at the
current market price.
WHEN-ISSUED SECURITIES AND DELAYED-DELIVERY TRANSACTIONS. In order to secure
yields or prices deemed advantageous at the time, the Portfolio may purchase
or
sell any portfolio securities on a when-issued or delayed-delivery basis. The
Portfolio will enter into a when-issued transaction for the purpose of
acquiring
portfolio securities and not for the purpose of leverage. In such transactions
delivery of the securities occurs beyond the normal settlement periods, but no
payment or delivery is made by the Portfolio prior to the actual delivery or
payment by the other party to the transaction. Due to fluctuations in the
value
of securities purchased or sold on a when-issued or delayed-delivery basis,
the
yields obtained on such securities may be higher or lower than the yields
available in the market on the dates when the investments are actually
delivered
to the buyers. The Portfolio will establish a segregated account consisting of
cash, U.S. government securities or other high grade debt obligations in an
amount equal to the amount of its when-issued and delayed-delivery
commitments.
Placing securities rather than cash in the
18
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
segregated account may have a leveraging effect on the Portfolio's net assets.
The Portfolio will not accrue income with respect to a when-issued security
prior to its stated delivery date.
LENDING OF PORTFOLIO SECURITIES. The Portfolio has the ability to lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made, may not exceed 20% of the Portfolio's assets
taken at value. Loans of portfolio securities will be collateralized by cash,
letters of credit or U.S. government securities that are maintained at all
times
in an amount at least equal to the current market value of the loaned
securities.
NON-PUBLICLY TRADED AND ILLIQUID SECURITIES. The Portfolio may invest up to
20% of its assets in illiquid securities. The sale of securities that are not
publicly traded is typically restricted under the Federal securities laws. As
a
result, the Portfolio may be forced to sell these securities at less than fair
market value or may not be able to sell them when Greenwich Street Advisors
believes it desirable to do so. The Portfolio's investments in illiquid
securities are subject to the risk that should the Portfolio desire to sell
any
of these securities when a ready buyer is not available at a price that the
Portfolio deems representative of its value, the value of the Portfolio's net
assets could be adversely affected.
SECURITIES OF DEVELOPING COUNTRIES. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are
generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile
than
the markets of more mature economies of developed countries; however, such
markets often have provided higher rates of return to investors.
SECURITIES OF UNSEASONED ISSUERS. Securities in which the Portfolio may
invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, the issuers of certain securities
may
lack a significant operating history and be dependent on products or services
without an established market share.
19
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
SHORT SALES AGAINST THE BOX. The Portfolio may make short sales of
securities
in order to reduce market exposure and/or to increase its income if, at all
times when a short position is open, the Portfolio owns an equal or greater
amount of such securities or owns preferred stock, debt or warrants
convertible
or exchangeable into an equal or greater number of the shares of the
securities
sold short. Short sales of this kind are referred to as short sales "against
the
box." The broker-dealer that executes a short sale generally invests the cash
proceeds of the sale until they are paid to the Portfolio. Arrangements may be
made with the broker-dealer to obtain a portion of the interest earned by the
broker on the investment of short sale proceeds. The Portfolio will segregate
the securities against which short sales against the box have been made in a
special account with its custodian. Not more than 10% of the Portfolio's net
assets (taken at current value) may be held as collateral for such sales at
any
one time.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Portfolio involves risk factors and special
considerations,
such as those described below:
ZERO COUPON, PAY-IN-KIND AND DELAYED INTEREST SECURITIES. As discussed
above,
the Portfolio may invest in zero coupon, pay-in-kind and delayed interest
securities as well as custodial receipts. Because interest on zero coupon,
pay-in-kind and delayed interest securities is not paid on a current basis,
the
values of securities of this type are subject to greater fluctuations than are
the values of securities that distribute income regularly and may be more
speculative than such securities. Accordingly, the values of these securities
may be highly volatile as interest rates rise or fall. Additionally, although
typically under the terms of a custodial receipt the Portfolio is authorized
to
assert its rights directly against the issuer of the underlying obligation,
the
Portfolio may be required to assert through the custodian bank such rights as
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the Portfolio may be
subject to delays, expenses and risks that are greater than those that would
have been involved if the Portfolio had purchased a direct obligation of the
issuer. In addition, in the event that the trust or custodial account in which
the underlying security has been deposited is
20
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
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
respect
of any taxes paid.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. Although the Fund
intends
to enter into futures or options contracts only if an active market exists for
the contracts, no assurance can be given that an active market will exist for
the contracts at any particular time. If it is not possible to close a futures
position in anticipation of adverse price movements, the Fund would be
required
to make daily cash payments of variation margin. In those circumstances, an
increase in the value of the portion of the portfolio being hedged, if any,
may
offset partially or completely losses on the futures contract. No assurance
can
be given, however, that the price of the securities being hedged will
correlate
with the price movements in a futures contract and, thus, provide an offset to
losses on the futures contract or option on the futures contract. In addition,
in light of the risk of an imperfect correlation between securities in the
Fund's portfolio that are the subject of a hedging transaction and the futures
or options contract used as a hedging device, the hedge may not be fully
effective because, for example, losses on the portfolio securities may be in
excess of gains on the futures contract or losses on the futures contract may
be
in excess of gains on the portfolio securities that were the subject of the
hedge. In an effort to compensate for the imperfect correlation of movements
in
the price of the securities being hedged and movements in the price of futures
contracts, the Fund may enter into futures contracts or options on futures
contracts in a greater or lesser dollar amount than the dollar amount of the
securities being hedged if the historical volatility of the futures contract
has
been less or greater than that of the securities. This "over-hedging" or
"under
hedging" may adversely affect the Fund's net investment results if market
movements are not as anticipated when the hedge is established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities held in its portfolio and
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have
offsetting
losses in its futures or options positions. In addition, in those situations,
if
the Fund has insufficient cash, it may have to sell securities to meet daily
variation margin requirements on the futures contracts at a time when it may
be
disadvantageous to do so. These sales of securities may, but will not
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
necessarily, be at increased prices that reflect the decline in interest
rates.
The Portfolio may enter into options transactions primarily as hedges to
reduce
investment risk, generally by making an investment expected to move in the
opposite direction of a portfolio position. A hedge is designed to offset a
loss
on a portfolio position with a gain on the hedge position; at the same time,
however, a properly correlated hedge will result in a gain on the portfolio
position being offset by a loss on the hedge position. The Portfolio bears the
risk that the prices of the securities being hedged will not move in the same
amount as the hedge. The Portfolio will engage in hedging transactions only
when
deemed advisable by Greenwich Street Advisors. Successful use by the Portfolio
of options will depend on Greenwich Street Advisors' ability to correctly
predict movements in the direction of the stock underlying the option used as
a
hedge. Losses incurred in hedging transactions and the costs of these
transactions will affect the Portfolio's performance.
The ability of the Portfolio to engage in closing transactions with respect
to
options depends on the existence of a liquid secondary market. While the
Portfolio generally will purchase options only if there appears to be a liquid
secondary market for the options purchased or sold, for some options no such
secondary market may exist or the market may cease to exist.
FOREIGN SECURITIES. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in
addition
to the usual risks inherent in domestic investments. These risks include those
resulting from devaluation of currencies, future adverse political and
economic
developments and the possible imposition of currency exchange blockages or
other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing
and
financial reporting standards or of other regulatory practices and
requirements
comparable to those applicable to domestic companies. The net asset value of
the
Portfolio may be adversely affected by fluctuations in value of one or more
foreign currencies relative to the U.S. dollar. Moreover, securities of many
foreign issuers and their markets may be less liquid and their prices more
volatile than those of securities of comparable domestic issuers. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation and limitations on the
use
or removal of funds or other assets of the Portfolio, including the
withholding
of dividends. Foreign
22
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
securities may be subject to foreign government taxes that could reduce the
yield on such securities. Because the Portfolio will invest in securities
denominated or quoted in currencies other than the U.S. dollar, changes in
foreign currency exchange rates may adversely affect the value of portfolio
securities and the appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the cost of
converting foreign currency to U.S. dollars, the payment of fixed brokerage
commissions on foreign exchanges, the expense of maintaining securities with
foreign custodians and the imposition of transfer taxes or transaction charges
associated with foreign exchanges.
MEDIUM-, LOW- AND UNRATED SECURITIES. The Portfolio may invest in medium- or
low-rated securities and unrated securities of comparable quality. Generally,
these securities offer a higher return potential than higher-rated securities
but involve greater volatility of price and risk of loss of income and
principal, including the possibility of default or bankruptcy of the issuers
of
such securities. Medium- and low-rated and comparable unrated securities will
likely have large uncertainties or major risk exposures to adverse conditions
and are predominantly speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms of the obligation.
Accordingly, it is possible that these types of factors could, in certain
instances, reduce the value of securities held by the Portfolio, with a
commensurate effect on the value of the Portfolio's shares.
The markets in which medium- and low-rated or comparable unrated securities
are traded generally are more limited than those in which higher-rated
securities are traded. The existence of limited markets for these securities
may
restrict the availability of securities for the Portfolio to purchase and also
may have the effect of limiting the ability of the Portfolio to (a) obtain
accurate market quotations for purposes of valuing securities and calculating
net asset value and (b) sell securities at their fair value to respond to
changes in the economy or the financial markets. The market for medium- and
low-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.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than
23
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MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES (CONTINUED)
do those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
medium- and low-rated and comparable unrated securities generally present a
higher degree of credit risk. Issuers of medium- and low-rated and comparable
unrated securities are often highly leveraged and may not have more
traditional
methods of financing available to them so that their ability to service their
debt obligations during an economic downturn or during sustained periods of
rising interest rates may be impaired. The risk of loss due to default by such
issuers is significantly greater because medium- and low-rated and comparable
unrated securities generally are unsecured and frequently are subordinated to
the prior payment of senior indebtedness. The Portfolio may incur additional
expenses to the extent that it is required to seek recovery upon a default in
the payment of principal or interest on its portfolio holdings.
Fixed-income securities, including medium- and low-rated and comparable
unrated securities, frequently have call or buy-back features that permit
their
issuers to call or repurchase the securities from their holders, such as the
Portfolio. If an issuer exercises these rights during periods of declining
interest rates, the Portfolio may have to replace the security with a lower
yielding security, resulting in a decreased return to the Portfolio.
Up to 10% of the Portfolio's assets may be invested in securities rated
lower
than B by both Moody's and S&P. Securities which are rated Ba by Moody's or BB
by S&P have speculative characteristics with respect to capacity to pay
interest
and repay principal. Securities which are rated B generally lack
characteristics
of the desirable investment and assurance of interest and principal payments
over any long period of time may be small. Securities which are rated Caa or
CCC
or below are of poor standing. Those issues may be in default or present
elements of danger with respect to principal or interest. Securities rated C
by
Moody's and D by S&P are the lowest rating class and indicate that payments
are
in default or that a bankruptcy petition has been filed with respect to the
issuer or that the issuer is regarded as having extremely poor prospects. See
Appendix A for a description of corporate bond ratings by Moody's and S&P.
In light of these risks, Greenwich Street Advisors, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
24
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MANAGED HIGH INCOME PORTFOLIO INC.
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
factors into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of and the community support for the facility financed by
the
issue, the ability of the issuer's management and regulatory matters.
RATINGS AS INVESTMENT CRITERIA. In general, the ratings of nationally
recognized statistical rating organizations ("NRSROs") represent the opinions
of
these agencies as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of
quality
and do not evaluate the market value risk of the securities. These ratings
will
be used by the Portfolio as initial criteria for the selection of portfolio
securities, but the Portfolio also will rely upon the independent advice of
Greenwich Street Advisors to evaluate potential investments. Among the factors
that will be considered are the long-term ability of the issuer to pay
principal
and interest and general economic trends.
Subsequent to its purchase by the Portfolio, an issue of securities may
cease
to be rated or its rating may be reduced below the minimum required for
purchase
by the Portfolio. In addition, it is possible that an NRSRO might not change
its
rating of a particular issue to reflect subsequent events. None of these
events
will require sale of such securities by the Portfolio, but Greenwich Street
Advisors will consider such events in its determination whether the Portfolio
should continue to hold the securities. In addition, to the extent that the
ratings change as a result of changes in such organizations or their rating
systems, or due to a corporate reorganization, the Portfolio will attempt to
use
comparable ratings as standards for its investments in accordance with its
investment objectives and policies.
INVESTMENT RESTRICTIONS
The Portfolio has adopted certain fundamental investment restrictions that
may
not be changed without the prior approval of the holders of a majority of the
Portfolio's outstanding voting securities. A "majority of the Portfolio's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the shares of the Portfolio's Common Stock present at a meeting of
shareholders, if the holders of 50% of the outstanding shares are present or
represented by proxy at the meeting or (2) more than 50% of the outstanding
shares. Among the investment restrictions applicable to the Portfolio is that
the Portfolio is prohibited from borrowing money, except
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MANAGED HIGH INCOME PORTFOLIO INC.
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INVESTMENT OBJECTIVES AND POLICIES (CONTINUED)
for temporary or emergency purposes, in amounts not exceeding 10% of its total
assets (not including the amount borrowed) and as otherwise described in this
Prospectus; when the Portfolio's borrowings exceed 5% of the value of its
total
assets, the Portfolio will not make any additional investments. In addition,
the
Portfolio will not invest more than 25% of its total assets in the securities
of
issuers in any single industry, except that this limitation will not be
applicable to the purchase of U.S. government securities. For a complete
listing
of the investment restrictions applicable to the Portfolio, see "Investment
Restrictions" in the Portfolio Statement of Additional Information dated July
15, 1994. All percentage limitations included in the investment restrictions
apply immediately after a purchase or initial investment, and any subsequent
change in any applicable percentage resulting from market fluctuations will
not
require the Portfolio to dispose of any security that it holds.
- --------------------------------------------------------------------
SHARE PRICE DATA
The Common Stock is traded on the NYSE under the symbol "MHY." Smith Barney
also intends to make a market in the Portfolio's Common Stock.
The following table sets forth the high and low sales prices for the Common
Stock, the net asset value per share and the discount or premium to net asset
value represented by the quotation for each quarterly period since the
Portfolio's commencement of operations.
<TABLE>
<CAPTION>
QUARTERLY HIGH PRICE QUARTERLY LOW PRICE
- ---------------------------------------------------------------------------
Premium Premium
Net Asset NYSE (Discount) Net Asset NYSE
(Discount)
Value Price to NAV Value Price to NAV
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
5/31/93* $ 12.10 $ 12.50 .40 $ 11.96 $ 11.875 (.085)
8/31/93 12.44 12.375 (.065) 12.11 12.00 (.11)
11/30/93 12.44 12.375 (.065) 12.20 12.00 (.20)
2/28/94 12.53 12.50 (.03) 12.26 11.625 .635
- ---------------------------------------------------------------------------
<FN>
*The Portfolio commenced operations on March 26, 1993.
</TABLE>
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MANAGED HIGH INCOME PORTFOLIO INC.
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SHARE PRICE DATA (CONTINUED)
As of May 31, 1994, the price of Common Stock as quoted on the NYSE was
$11.00, representing a discount from the Common Stock's net asset value of
$11.49 calculated on that day. Since the commencement of the Portfolio's
operations, the Portfolio's shares have traded in the market at prices that
were
at times above, but generally were below, net asset value.
- --------------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIO
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Portfolio rests
with the Portfolio's Board of Directors. The Directors approve all significant
agreements with the Portfolio's investment adviser, administrator,
sub-administrator, custodian and transfer agent. The day-to-day operations of
the Portfolio are delegated to the Portfolio's investment adviser,
administrator
and sub-administrator. The SAI contains background information regarding each
Director and executive officer of the Portfolio.
INVESTMENT ADVISER
Greenwich Street Advisors, a division of Mutual Management Corp., located at
Two World Trade Center, New York, New York 10048, serves as the Portfolio's
investment adviser. Greenwich Street Advisors, through its predecessors, has
been in the investment counseling business since 1934 and renders investment
advice to a wide variety of individual, institutional and investment company
clients with aggregate assets under management as of May 31, 1994 in excess of
$39 billion. Mutual Management Corp. is located at 1345 Avenue of the
Americas,
New York, New York 10105 and is controlled by Holdings.
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney, is also a wholly owned subsidiary of Holdings, which in turn is
a
wholly owned subsidiary of Travelers, a financial services holding company
which
provides through its subsidiaries investment, consumer finance and insurance
services.
Subject to the supervision and direction of the Portfolio's Board of
Directors, Greenwich Street Advisors manages the securities held by the
27
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIO (CONTINUED)
Portfolio in accordance with the Portfolio's stated investment objective and
policies, makes investment decisions for the Portfolio, places orders to
purchase and sell securities on behalf of the Portfolio and employs managers
and
securities analysts who provide research services to the Portfolio. The
Portfolio pays Greenwich Street Advisors a fee for services provided to the
Portfolio that is computed daily and paid monthly at the annual rate of .90%
of
the value of the Portfolio's average daily net assets.
Transactions on behalf of the Portfolio are allocated to various dealers by
Greenwich Street Advisors in its best 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 Greenwich Street Advisors to
supplement
its own research and analysis with the views and information of other
securities
firms. The Portfolio may use Smith Barney or a Smith Barney affiliated broker
in
connection with the purchase or sale of securities when Greenwich Street
Advisors believes that the broker's charge for the transaction does not exceed
usual and customary levels. The same standard applies to the use of Smith
Barney
as a broker in connection with entering into options and futures contracts.
The
Portfolio paid no brokerage commissions in the last fiscal year.
PORTFOLIO MANAGEMENT
John C. Bianchi, Vice President and Investment Officer of the Portfolio, is
primarily responsible for the management of the Portfolio's assets. Mr.
Bianchi
has served the Portfolio in this capacity since the Portfolio commenced
operations in 1993 and manages the day to day operations of the Portfolio,
including making all investment decisions. Mr. Bianchi is a Managing Director
of
Greenwich Street Advisors and, as such, is the senior asset manager for
investment companies and other accounts investing in high yield securities.
ADMINISTRATOR
SBA, a wholly owned subsidiary of Holdings located at 1345 Avenue of the
Americas, New York, New York 10105, serves as the Portfolio's
28
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
MANAGEMENT OF THE PORTFOLIO (CONTINUED)
administrator. SBA provides investment management, investment advisory and/or
administrative services to investment companies with total assets as of May
31,
1994 in excess of $9 billion.
As the Portfolio's administrator, SBA generally manages all aspects of the
Portfolio's administration and operation. The Portfolio pays SBA a fee for
services that is computed daily and paid monthly at the annual rate of .20% of
the Portfolio's average daily net assets. The combined annual rate of fees
paid
by the Portfolio for advisory and administrative services is higher than the
rates for similar services paid by other publicly offered, closed-end
management
investment companies that have investment objectives and policies similar to
those of the Portfolio.
SUB-ADMINISTRATOR
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Portfolio's sub-administrator pursuant to a sub-administration
agreement between the Portfolio, SBA and Boston Advisers. Boston Advisors is a
wholly owned subsidiary of TBC, a financial services holding company, which is
in turn an indirect, wholly owned subsidiary of Mellon. Boston Advisors
provides
investment management, investment advisory and/or administrative services to
investment companies with total assets, as of May 31, 1994, in excess of $89
billion. For its services, Boston Advisors receives a fee from SBA.
Greenwich Street Advisors and SBA each bears all expenses in connection with
the performance of the services it provides to the Portfolio. The Portfolio
will
bear all other expenses to be incurred in its operation, including, but not
limited to: the costs incurred in connection with the Portfolio's
organization;
investment advisory and administration fees; fees for necessary professional
and
brokerage services; fees for any pricing service; the costs of regulatory
compliance; the costs associated with maintaining the Portfolio's corporate
existence; and costs of corresponding with the Portfolio's shareholders.
29
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- --------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
The Portfolio expects to pay monthly dividends of net investment income
(that
is, income other than net realized capital gains) to the holders of the Common
Stock. Under the Portfolio's current policy, which may be changed at any time
by
its Board of Directors, the Portfolio's monthly dividends will be made at a
level that reflects the past and projected performance of the Portfolio, which
policy over time will result in the distribution of all net investment income
of
the Portfolio. Expenses of the Portfolio are accrued each day. Net realized
capital gains, if any, will be distributed to the shareholders at least once a
year.
Under the Portfolio's Dividend Reinvestment Plan (the "Plan"), a shareholder
whose shares of Common Stock are registered in his own name will have all
distributions from the Portfolio reinvested automatically by TSSG as agent
under
the Plan, unless the shareholder elects to receive cash. Distributions with
respect to shares registered in the name of a broker-dealer or other nominee
(that is, in "Street Name") will be reinvested by the broker or nominee in
additional shares under the Plan, unless the service is not provided by the
broker or nominee or the shareholder elects to receive distributions in cash.
Investors who own Common Stock registered in Street Name should consult their
broker-dealers for details regarding reinvestment. All distributions to
Portfolio shareholders who do not participate in the Plan will be paid by
check
mailed directly to the record holder by or under the direction of TSSG as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the Plan
in lieu of a cash dividend is determined in the following manner. Whenever the
market price of the Common Stock is equal to or exceeds the net asset value
per
share at the time shares are valued for purposes of determining the number of
shares equivalent to the cash dividend or capital gains distribution, Plan
participants will be issued shares of Common Stock valued at the greater of
(1)
the net asset value per share most recently determined as described below
under
"Net Asset Value" or (2) 95% of the then current market value. To the extent
the
Portfolio issues shares to participants in the Plan at a discount to net asset
value, the remaining shareholders' interests in the Portfolio's net assets
will
be proportionately diluted.
If the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock or if the Portfolio declares a
30
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
(CONTINUED)
dividend or capital gains distribution payable only in cash, TSSG will buy
Common Stock in the open market, on the NYSE or elsewhere, for the
participants'
accounts. If, following the commencement of the purchases and before TSSG has
completed its purchases, the market price exceeds the net asset value of the
Common Stock, TSSG will attempt to terminate purchases in the open market and
cause the Portfolio to issue the remaining dividend or distribution in shares
at
net asset value per share. In this case, the number of shares of Common Stock
received by a Plan participant will be based on the weighted average of prices
paid for shares purchased in the open market and the price at which the
Portfolio issues the remaining shares. To the extent TSSG is unable to stop
open
market purchases and cause the Portfolio to issue the remaining shares, the
average per share purchase price paid by TSSG may exceed the net asset value
of
the Common Stock, resulting in the acquisition of fewer shares than if the
dividend or capital gains distribution had been paid in Common Stock issued by
the Portfolio at net asset value. TSSG will apply all cash received as a
dividend or capital gains distribution to purchase Common Stock on the open
market as soon as practicable after the payment date of the dividend or
capital
gains distribution, but in no event later than 30 days after that date, except
when necessary to comply with applicable provisions of the federal securities
laws.
TSSG maintains all shareholder accounts in the Plan and furnishes written
confirmations of all transactions in each account, including information
needed
by a shareholder for personal and tax records. The automatic reinvestment of
dividends and capital gains distributions will not relieve Plan participants
of
any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be
held
by TSSG in uncertificated form in the name of the Plan participant, and each
shareholder's proxy will include those shares purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. TSSG's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Portfolio. No
brokerage charges apply with respect to shares of Common Stock issued directly
by the Portfolio as a result of dividends or capital gains distributions
payable
either in Common Stock or in cash. Each Plan participant will,
31
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
(CONTINUED)
however, bear a proportionate share of brokerage commissions incurred with
respect to open market purchases made in connection with the reinvestment of
dividends or capital gains distributions.
Experience under the Plan may indicate that changes to it are desirable. The
Portfolio reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of
the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by TSSG, with the Portfolio's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to The Shareholders Services Group, Inc., One
Exchange Place, Boston, Massachusetts 02109 or by telephone at (617) 573-9300.
- --------------------------------------------------------------------
NET ASSET VALUE
The net asset value of shares of the Common Stock is calculated as of the
close of regular trading on the NYSE, currently 4:00 p.m., New York time, on
each day on which the NYSE is open for trading. The Portfolio reserves the
right
to cause its net asset value to be calculated on a less frequent basis as
determined by the Portfolio's Board of Directors. For purposes of determining
net asset value, futures contracts and options on futures contracts will be
valued 15 minutes after the close of regular trading on the NYSE.
Net asset value per share of Common Stock is calculated by dividing the
value
of the Portfolio's total assets less liabilities. In general, the Portfolio's
investments will be valued at market value, or in the absence of market value,
at fair value as determined by or under the direction of the Portfolio's Board
of Directors. Portfolio securities which are traded primarily on foreign
exchanges are generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed
such
value, then the fair market value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors or delegates. A security that is traded primarily on an exchange is
32
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
NET ASSET VALUE (CONTINUED)
valued at the last sale price on that exchange or, if there were no sales
during
the day, at the current quoted bid price. Over-the-counter securities are
valued
on the basis of the bid price at the close of business on each day.
Investments
in U.S. government securities (other than short-term securities) are valued at
the average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued on the basis
of
amortized cost (which involves valuing an investment at its cost and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating interest rates on the market
value of the investment) when the Board of Directors has determined that
amortized cost is fair value.
The valuation of the Portfolio's assets is made by SBA or Boston Advisors
after consultation with an independent pricing service (the "Service")
approved
by the Portfolio's Board of Directors. When, in the judgment of the Service,
quoted bid prices for investments are readily available and are representative
of the bid side of the market, these investments are valued at the mean
between
the quoted bid prices and asked prices. Investments for which, in the judgment
of the Service, no readily obtainable market quotation is available, are
carried
at fair value as determined by the Service, based on methods that include
consideration of: yields or prices of securities of comparable quality,
coupon,
maturity and type; indications as to values from dealers; and general market
conditions. The Service may use electronic data processing techniques and/or a
matrix system to determine valuations. The procedures of the Service are
reviewed periodically by the officers of the Portfolio under the general
supervision and responsibility of the Board of Directors, which may replace
the
Service at any time if it determines it to be in the best interests of the
Portfolio to do so.
- --------------------------------------------------------------------
TAXATION
The following is a summary of the material federal tax considerations
affecting the Portfolio and its shareholders; see the SAI for further
discussion. In addition to the considerations described below and in the SAI,
which are applicable to any investment in the Portfolio, there may be other
federal, state, local or foreign tax considerations applicable to particular
33
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
TAXATION (CONTINUED)
investors. Prospective shareholders are therefore urged to consult their tax
advisors with respect to the consequences to them of an investment in the
Portfolio.
The Portfolio has qualified, and intends to qualify each year, as a
"regulated
investment company" under Subchapter M of the Code. In each taxable year that
the Portfolio so qualifies, the Portfolio will be relieved of federal income
tax
on that part of its investment company taxable income (consisting generally of
taxable net investment income, net short-term capital gain and net realized
gains from certain hedging transactions) and long-term capital gain that is
distributed to its shareholders.
To qualify under Subchapter M of the Code, the Portfolio must meet certain
requirements of the Code. In meeting these requirements, the Portfolio may be
restricted in the selling of securities held by the Portfolio for less than
three months and in the utilization of certain of the investment techniques
described above under "Investment Objectives and Management Policies --
Investment Techniques." As a regulated investment company, the Portfolio will
be
subject to a 4% non-deductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gain. The Portfolio
expects
to pay the dividends and make the distributions necessary to avoid the
application of this excise tax.
The Portfolio's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Portfolio (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the Portfolio, defer
Portfolio losses and cause the Portfolio to be subject to hyperinflationary
currency rules. These rules could therefore affect the character, amount and
timing of distributions to shareholders. These provisions also (1) will
require
the Portfolio to mark-to-market certain types of its positions (i.e., treat
them
as if they were closed out) and (2) may cause the Portfolio to recognize
income
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
and excise taxes. The Portfolio will monitor its transactions, will make the
appropriate tax elections and will make the appropriate entries in its book
and
records when it acquires any foreign
34
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
TAXATION (CONTINUED)
currency, forward contract, option, futures contract or hedged investment so
that (1) neither the Portfolio nor its shareholders will be treated as
receiving
a materially greater amount of capital gains or distributions than actually
realized or received, (2) these special provisions will not prevent the
Portfolio from using substantially all of its losses for the fiscal years in
which the losses actually occur and (3) the Portfolio will continue to qualify
as a regulated investment company.
Dividends paid from the Portfolio's net investment income and distributions
of
the Portfolio's net realized short-term capital gains are taxable to
shareholders of the Portfolio as ordinary income, regardless of the length of
time shareholders have held shares of Common Stock and whether the dividends
or
distributions are received in cash or reinvested in additional shares.
Distributions of net long-term capital gains, if any, will be taxable as
long-term capital gains, whether received in cash or reinvested in shares and
regardless of how long the shareholder has held the Portfolio shares.
A shareholder of the Portfolio receiving dividends or distributions in
additional shares pursuant to the Plan should be treated for federal income
tax
purposes as receiving a distribution in an amount equal to the amount of money
that a shareholder receiving cash dividends or distributions receives, and
should have a cost basis in the shares received equal to that amount.
Investors considering buying shares just prior to a dividend or capital gain
distribution should be aware that, although the price of shares purchased at
that time may reflect the amount of the forthcoming distribution, those who
purchase just prior to a distribution will receive a distribution that will
nevertheless be taxable to them.
Each shareholder will receive an annual statement as to the federal income
tax
status of his dividends and distributions from the Portfolio for the prior
calendar year. Furthermore, shareholders will also receive, if appropriate,
various written notices after the close of the Portfolio's taxable year
regarding the federal income tax status of certain dividends and distributions
that were paid (or that are treated as having been paid) by the Portfolio to
its
shareholders during the preceding year.
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
35
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- ---------------------------------------------------------------------------
TAXATION (CONTINUED)
provided a correct taxpayer identification number and that he is not subject
to
"backup withholding," the shareholder may be subject to a 31% "backup
withholding" tax with respect to (1) taxable dividends and distributions and
(2)
the proceeds of any sales or repurchases of shares of Common Stock. An
individual's taxpayer identification number is his social security number.
Corporate shareholders and other shareholders specified in the Code are or may
be exempt from backup withholding. The backup withholding tax is not an
additional tax and may be credited against a taxpayer's federal income tax
liability.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSEQUENCES AFFECTING THE
PORTFOLIO AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR OWN
TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE PORTFOLIO.
- --------------------------------------------------------------------
DESCRIPTION OF COMMON STOCK
<TABLE>
<CAPTION>
AMOUNT HELD AMOUNT OUTSTANDING
BY PORTFOLIO FOR EXCLUSIVE OF SHARES
ITS OWN ACCOUNT HELD BY PORTFOLIO
FOR
AMOUNT AS OF JULY 13, ITS OWN ACCOUNT AS
OF
TITLE OF CLASS AUTHORIZED 1994 JULY 13, 1994
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
- ---
Common Stock 500,000,000 Shares 0
41,981,589.04
</TABLE>
No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock have equal non-
cumulative voting rights and equal rights with respect to dividends, assets
and
liquidation. Shares of Common Stock will be fully paid and non-assessable when
issued and have no preemptive, conversion or exchange rights. A majority of
the
votes cast at any meeting of shareholders is sufficient to take or authorize
action, except for election of Directors or as otherwise provided in the
Portfolio's Articles of Incorporation as described under "Certain Provisions
of
the Articles of Incorporation."
Under the rules of the NYSE applicable to listed companies, the Portfolio
will
be required to hold an annual meeting of shareholders in each year. If
36
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
DESCRIPTION OF COMMON STOCK (CONTINUED)
the Portfolio's shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of
shareholders),
the Portfolio may decide not to hold annual meetings of shareholders. See
"Stock
Purchases and Tenders."
The Portfolio has no current intention of offering additional shares, except
that additional shares may be issued under the Plan. See "Dividends and
Distributions; Dividend Reinvestment Plan." Other offerings of shares, if
made,
will require approval of the Portfolio's Board of Directors and will be
subject
to the requirement of the 1940 Act that shares may not be sold at a price
below
the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the Portfolio's outstanding shares.
- --------------------------------------------------------------------
STOCK PURCHASES AND TENDERS
Although shares of closed-end investment companies sometimes trade at
premiums
over net asset value, they frequently trade at discounts. Since the
Portfolio's
commencement of operations, the Common Stock has primarily traded at a slight
discount from its net asset value per share. The Portfolio cannot predict
whether the Common Stock will continue to trade above, at or below net asset
value. The Portfolio believes that, if the Common Stock trades at a discount
to
net asset value, the share price will not adequately reflect the value of the
Portfolio to investors and that investors' financial interests will be
furthered
if the price of the Common Stock more closely reflects its net asset value.
For
these reasons, the Portfolio's Board of Directors currently intends to
consider
from time to time repurchases of Common Stock on the open market or in private
transactions or the making of tender offers for Common Stock.
The Portfolio may repurchase shares of its Common Stock in the open market
or
in privately negotiated transactions when the Portfolio can do so at prices
below their then current net asset value per share on terms that the Board of
Directors believes represent a favorable investment opportunity. In addition,
the Board of Directors currently intends to consider, at least once a
37
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
STOCK PURCHASES AND TENDERS (CONTINUED)
year, making an offer to each Common Stock shareholder of record to purchase
at
net asset value shares of Common Stock owned by the shareholder.
Before authorizing any repurchase of Common Stock or tender offer to the
Common Stock shareholders, the Portfolio's Board of Directors would consider
all
relevant factors, including the market price of the Common Stock, its net
asset
value per share, the liquidity of the Portfolio's securities positions, the
effect an offer or repurchase might have on the Portfolio or its shareholders
and relevant market conditions. Any offer would be made in accordance with the
requirements of the 1940 Act and the Securities Exchange Act of 1934. Although
the matter will be subject to Board of Directors review at the time, a tender
offer is not expected to be made if the anticipated benefit to shareholders
and
the Portfolio would not be commensurate with the anticipated cost to the
Portfolio, or if the number of shares expected to be tendered would not be
material.
- --------------------------------------------------------------------
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Portfolio's Articles of Incorporation include provisions that could have
the effect of limiting the ability of other entities or persons to (i) acquire
control of the Portfolio, (ii) to cause it to engage in certain transactions
or
(iii) to modify its structure. These provisions could have the effect of
depriving shareholders of an opportunity to sell their shares of Common Stock
at
a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Portfolio. The provisions include the
classification of the Board of Directors and requirements for the approval of
substantial majorities of the Portfolio's shareholders for certain matters.
These provisions are set forth in detail in the SAI.
The Board of Directors has determined that the increased voting requirements
required by the Articles of Incorporation, which are generally greater than
the
minimum requirements under Maryland law and the 1940 Act, are in the best
interests of shareholders generally. Reference should be made to the Articles
of
Incorporation on file with the SEC for the full text of their provisions.
38
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- --------------------------------------------------------------------
CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT AND
REGISTRAR
Boston Safe, an indirect, wholly owned subsidiary of TBC, which is in turn
an
indirect, wholly owned subsidiary of Mellon, located at One Boston Place,
Boston, Massachusetts 02108, acts as custodian of the Portfolio's investments.
Boston Safe is also an affiliate of Boston Advisors, the Portfolio's
sub-administrator.
TSSG, located at One Exchange Place, Boston, Massachusetts 02109, serves as
the Portfolio's transfer agent, dividend-paying agent and registrar. TSSG, a
subsidiary of First Data Corporation, also serves as agent in connection with
the Plan. Neither Boston Safe nor TSSG assists in or is responsible for
investment decisions involving assets of the Portfolio.
Under the Custody Agreement, Boston Safe holds the Portfolio's assets in
accordance with the provisions of the 1940 Act. Under the Transfer Agency and
Registrar Agreement, TSSG maintains the shareholder account records for the
Portfolio, distributes dividends and distributions payable by the Portfolio
and
produces statements with respect to account activity for the Portfolio and its
shareholders. The services to be provided by TSSG as agent under the Plan are
described under "Dividends and Distributions; Dividend Reinvestment Plan."
- --------------------------------------------------------------------
FURTHER INFORMATION
Further information concerning the Common Stock and the Portfolio may be
found
in the Registration Statement, of which this Prospectus and the SAI constitute
a
part, on file with the SEC.
The Table of Contents for the SAI is as follows:
<TABLE>
<CAPTION>
Page
--
- --
<S>
<C>
Investment Objective and Policies.....................................
2
Management of the Portfolio...........................................
10
Taxes.................................................................
15
Stock Purchases and Tenders...........................................
18
Additional Information................................................
19
Financial Statements..................................................
19
</TABLE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
39
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
FURTHER INFORMATION (CONTINUED)
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED
BY THE PORTFOLIO OR THE PORTFOLIO'S INVESTMENT ADVISER. THIS PROSPECTUS DOES
NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF ANY OFFER TO BUY ANY SECURITY
OTHER THAN THE SHARES OF COMMON STOCK, NOR DOES IT CONSTITUTE AN OFFER TO SELL
OR A SOLICITATION OF ANY OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN
ANY JURISDICTION IN WHICH THE OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER
THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE PORTFOLIO SINCE THE DATE HEREOF. IF ANY MATERIAL CHANGE OCCURS
WHILE THIS PROSPECTUS IS REQUIRED BY LAW TO BE DELIVERED, HOWEVER, THIS
PROSPECTUS WILL BE SUPPLEMENTED OR AMENDED ACCORDINGLY.
40
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- ---------------------------------------------------------------------------
APPENDIX A
DESCRIPTION OF RATINGS
DESCRIPTION OF MOODY'S CORPORATE 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 future.
BAA Bonds rated Baa are considered to be medium grade obligations, that is,
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements 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.
BA Bonds that are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
A-1
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
APPENDIX A (CONTINUED)
B Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA Bonds that are rated Caa are of poor standing. These issues may be in
default or present elements of danger may exist with respect to principal or
interest.
CA Bonds that are rated Ca represent obligations which are speculative in a
high degree. Such issues are often in default or have other marked
shortcomings.
C Bonds that are rated C are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever attaining any
real investment standing.
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 S&P CORPORATE BOND RATINGS:
AAA Bonds rated AAA have the highest rating assigned by S&P to a debt
obligation. Capacity to pay interest and repay principal is extremely strong.
AA Bonds rated AA have a very strong capacity to pay interest and repay
principal and differ from the highest rated issues only in small degree.
A Bonds rated A have a strong capacity to pay interest and repay principal
although they are somewhat more susceptible to the adverse effects of changes
in
circumstances and economic conditions than bonds in higher rated categories.
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
A-2
<PAGE>
MANAGED HIGH INCOME PORTFOLIO INC.
- -------------------------------------------------------------
APPENDIX A (CONTINUED)
protection parameters, adverse economic conditions or changing circumstances
are
more likely to lead to a weakened capacity to pay interest and repay principal
for bonds in this category than for bonds in higher rated categories.
BB, B AND CCC Bonds rated BB and B are regarded, on balance, as
predominantly
speculative with respect to capacity to pay interest and repay principal in
accordance with the terms of the obligation. BB represents a lower degree of
speculation than B and CCC the highest degree of speculation. While such bonds
will likely have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to adverse
conditions.
C The rating C is reserved for income bonds on which no interest is being
paid.
D Bonds rated D are in default, and payment of interest and/or repayment of
principal is in arrears.
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-Prime Grade category.
A-3
<PAGE>
MANAGED HIGH
INCOME PORTFOLIO INC.
COMMON STOCK
Two World Trade Center
New York, New York 10048
FD0341 H4
MANAGED HIGH INCOME PORTFOLIO INC.
Two World Trade Center
New York, New York 10048
(212) 720-9218
STATEMENT OF ADDITIONAL INFORMATION
July 25, 1994
Managed High Income Portfolio Inc. (the "Portfolio") is a diversified
closed-end management investment company that seeks a high level of current
income with capital appreciation as a secondary objective. Under normal
conditions, in seeking its investment objective, the Portfolio will invest at
least 65% of its assets in high-yielding corporate bonds, debentures and
notes. Up to 35% of its assets may be invested in common stock or other
equity or equity-related securities, including convertible securities,
preferred stock, warrants and rights. Securities purchased by the Portfolio
generally will be rated in the lower categories of recognized ratings
agencies, as low as C by Moody's Investors Service, Inc. ("Moody's") or D by
Standard & Poor's Corporation ("S&P"), or in unrated securities that the
Portfolio's investment adviser deems of comparable quality. No assurance can
be given that the Portfolio will be able to achieve its investment objective.
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current prospectus of the
Portfolio, dated July 25, 1994, as amended or supplemented from time to time
(the "Prospectus"), and should be read in conjunction with the Prospectus.
The Prospectus may be obtained from any Smith Barney Financial Consultant or
by writing or calling the Portfolio at the address or telephone number set
forth above. This SAI, although not itself a prospectus, is incorporated by
reference into the Prospectus in its entirety.
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or this SAI and, if given or
made, such information must not be relied upon as having been authorized by
the Portfolio or the Portfolio's investment adviser. The Prospectus and this
SAI do not constitute an offer to sell or a solicitation of any offer to buy
any security other than the shares of Common Stock. The Prospectus and this
SAI do not constitute an offer to sell or a solicitation of an offer to buy
the shares of Common Stock by anyone in any jurisdiction in which such offer
or solicitation would be unlawful. Neither the delivery of the Prospectus nor
any sale made hereunder shall, under any circumstances, create any implication
that there has been no change in the affairs of the Portfolio since the date
hereof. If any materials 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
Portfolio Transactions and Turnover 9
Management of the Portfolio (see in the Prospectus
"Management of the Portfolio") 10
Taxes (see in the Prospectus "Taxation") 15
Stock Purchases and Tenders (see in the Prospectus
"Stock Purchases and Tenders" and
"Description of Common Stock") 18
Additional Information (see in the Prospectus
"Custodian, Transfer Agent and Dividend-Paying
Agent and Registrar") 19
Financial Statements 19
Report of Independent Accountants 20
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the Portfolio's investment objective and the
policies it employs to achieve that objective. The following discussion
supplements the description of the Portfolio's investment policies in the
Prospectus.
General
The Portfolio's investment objective is high current income, with
capital appreciation a secondary objective. The Portfolio seeks to achieve
its objective by investing at least 65% of its assets in high yielding
corporate bonds, debentures and notes. Although the Portfolio may invest in
securities of any maturity, under current market conditions the Portfolio
intends that its portfolio of fixed-income securities will have an average
remaining maturity of between 5 and 10 years The Portfolio's investment
adviser, Greenwich Street Advisors ("Greenwich Street Advisors"), a division
of Mutual Management Corp., may adjust the Portfolio's average maturity when,
based on interest rate trends and other market conditions, it deems it
appropriate to do so. Up to 35% of the Portfolio's assets may be invested in
common stock or other equity or equity-related securities, including
convertible securities, preferred stock, warrants and rights. The Portfolio's
investment objective may not be changed without the affirmative vote of the
holders of a majority (as defined in the Investment company Act of 1940, as
amended (the "1940 Act")) of the Portfolio's outstanding voting shares. No
assurance can be given that the Portfolio's investment objective will be
achieved.
The Portfolio may make equity investments in securities of companies of
any size depending on the relative attractiveness of the company and the
economic sector in which it operates. Securities purchased by the Portfolio
generally will be rated in the lower categories of recognized rating agencies,
as low as C or D by S&P, or, if unrated, will be securities that Greenwich
Street Advisors deems of comparable quality. However, the Portfolio will not
purchase securities rated lower than B by both Moody's and S&P if, immediately
after such purchase, more than 10% of its total assets are invested in such
securities. The Portfolio may hold securities with higher ratings when the
yield differential between low-rated and higher-rated securities narrows and
the risk of loss may be reduced substantially with only a relatively small
reduction in yield. The Portfolio may also invest in higher-rated securities
when Greenwich Street Advisors believes that a more defensive investment
strategy is appropriate in light of market or economic conditions. The
Portfolio also may lend its portfolio securities and purchase or sell
securities on a when-issued or delayed-delivery basis.
The Portfolio may invest up to 20% of its assets in the securities of
foreign issuers that are denominated in currencies other than the U.S. dollar
and may invest without limitation in securities of foreign issuers that are
denominated in U.S. dollars. In order to mitigate the effects of uncertainty
in future exchange rates affecting the Portfolio's non-dollar investments, the
Portfolio may engage in currency exchange transactions and currency futures
contracts and related options and purchase options on foreign currencies. The
Portfolio also may hedge against the effects of changes in the value of its
investments by entering into interest rate futures contracts and related
options.
Use of Ratings as Investment Criteria. In general, the ratings of
Moody's and S&P represent the opinions of those agencies as to the quality of
the securities and long-term investments which they rate. It should be
emphasized, however, that such ratings are relative and subjective; they are
not absolute standards of quality and do not evaluate the market risk of
securities. These ratings will be used as initial criteria for the selection
of securities, but the Portfolio also will rely upon the independent advice of
Greenwich Street Advisors. Among the factors that will also be considered by
Greenwich Street Advisors in evaluating potential investments are the long-
term ability of the issuer to pay principal and interest and general economic
trends. To the extent the Portfolio invests in lower-rated and comparable
unrated securities, the Portfolio's achievement of its investment objective
may be more dependent on Greenwich Street Advisors' credit analysis of such
securities than would be the case for a portfolio consisting entirely of
higher-rated securities. The Appendix to the Prospectus contains information
concerning the ratings of Moody's and S&P and their significance.
Subsequent to its purchase by the Portfolio, a security may cease to be
rated or its rating may be reduced below the rating given at the time the
security was acquired by the Portfolio. Neither event will require the sale
of such securities by the Portfolio, but Greenwich Street Advisors will
consider such event in its determination of whether the Portfolio should
continue to hold the security. 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 or S&P, the Portfolio will attempt to use comparable
ratings as standards for its investments in accordance with its investment
objective and policies.
As more fully described in the Prospectus, the markets in which medium-
and low-rated securities or comparable unrated securities are traded generally
are more limited than those in which higher-rated securities are traded.
Accordingly, the Portfolio may be limited as to securities eligible for
purchase and may have difficulty obtaining accurate market quotations for
portfolio securities, or disposing of portfolio securities at fair value. The
market for certain lower-rated and comparable unrated securities is relatively
new and has not fully weathered a major economic recession. Any economic
downturn could adversely affect the ability of the issuers of such securities
to repay principal and pay interest thereon.
Investment Techniques
The Prospectus discusses the investment objectives of the Portfolio and
the polices to be employed to achieve those objectives. This section contains
supplemental information concerning the types of securities and other
instruments in which the Portfolio may invest, the investment policies that
the Portfolio may utilize, and certain risks attendant to such investments and
policies.
Money Market Instruments. For defensive purposes, the Portfolio may
invest, without limitation, in short-term money market instruments rated in
the two highest short-term ratings categories by Moody's or S&P, the
equivalent from another major rating service or comparable unrated securities.
Money market securities in which the Portfolio typically expects to invest
include: U.S. government securities; bank obligations (including certificates
of deposit, time deposits and bankers' acceptances of U.S. or foreign banks);
commercial paper; and repurchase agreements.
Futures Contracts and Options on Futures Contracts. As set forth in the
Prospectus, the Portfolio may enter into interest rate and currency futures
contracts and may purchase and sell put and call options on such futures
contracts. The Portfolio will enter into such transactions for hedging
purposes or for other appropriate risk management purposes permitted under the
rules and regulations of the Commodity Futures Trading Commission (the "CFTC")
and the Securities and Exchange Commission (the "SEC").
Parties to a futures contract must make initial "margin" deposits to
secure performance of the contract. There are also requirements to make
"variation" margin deposits from time to time as the value of the futures
contract fluctuates. The Portfolio is not a commodity pool and, in accordance
with CFTC regulations currently in effect, may enter into futures contracts or
options on futures contacts (as described below) only for "bona fide hedging"
purposes (as defined in CFTC regulations) and, in addition, for other
purposes, provided that aggregate initial margin and premiums required to
establish such positions other than those considered by the CFTC to be for
"bona fide hedging" purposes will not exceed 5% of the fair market value of
the Portfolio's total assets, after taking into account unrealized profits and
unrealized losses on such contracts. In the event that the Portfolio enters
into short positions in futures contracts as a hedge against a decline in the
value of the Portfolio's securities, the value of such futures contracts may
not exceed the total market value of the Portfolio's investments. In
addition, certain provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), may limit the extent to which the Portfolio may enter into
futures contracts or engage in options transactions. See "Taxes."
Under regulations of the CFTC currently in effect, which may change from
time to time, with respect to futures contracts to purchase securities, call
options on futures purchased by the Portfolio and put options on futures
written by the Portfolio, the Portfolio will set aside in a segregated account
cash, U.S. government securities or other U.S. dollar-denominated, high
quality, short-term or other money market instruments at least equal to the
value of instruments underlying such futures contracts less the amount of
initial margin on deposit for such contracts. The current view of the staff
of the SEC is that the Portfolio's positions in futures contracts as well as
options on futures written by it must be collateralized with cash or certain
liquid assets held in a segregated account or covered in order to eliminate
any potential leveraging. Under interpretations of the SEC currently in
effect, which may change from time to time, a "covered" call option means that
so long as the Portfolio is obligated to the writer of the option, it will own
(1) the underlying instruments subject to the option, (2) instruments
convertible or exchangeable into the instruments subject to the option or (3)
a call option on the relevant instruments with an exercise price no higher
than the exercise price on the call option written.
The Portfolio may either accept or make delivery of cash or the
underlying instrument specified at the expiration of a futures contact or,
prior to expiration, enter into a closing transaction involving the purchase
or sale of an offsetting contract. Closing transactions with respect to
futures contracts are effected on the exchange on which the contract was
entered into (or a linked exchange).
The Portfolio may purchase and write put and call options on futures
contracts in order to hedge all or a portion of its investments and may enter
into closing purchase transactions with respect to options written by the
Portfolio in order to terminate existing positions. There is no guarantee
that such closing transactions can be effected at any particular time or at
all. In addition, daily limits on price fluctuations on exchanges on which
the Portfolio conducts its futures and options transactions may prevent the
prompt liquidation of positions at the optimal time, thus subjecting the
Portfolio to the potential of greater losses.
An option on a futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser of the option the right, in
return for the premium paid, to assume a position in a futures contract at a
specified exercise price at any time on or before 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 accomplished 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 a futures contract is limited to the
premium paid for the option (plus transaction costs). With respect to options
purchased by the Portfolio, there are no daily cash payments made by the
Portfolio to reflect changes in the value of the underlying contract; however,
the value of the option does change daily and that change would be reflected
in the net asset value of the Portfolio.
While the Portfolio may enter into futures contracts and options on
futures contracts for bona fide hedging and other appropriate risk management
purposes, the use of futures contracts and options on futures contracts might
result in a poorer overall performance for the Portfolio than if it had not
engaged in any such transactions. If, for example, the Portfolio had
insufficient cash, it may have to sell a portion of its underlying portfolio
of securities in order to meet daily variation margin requirements on its
futures contracts or options on futures contracts at a time when it may be
disadvantageous to do so. There may be an imperfect correlation between the
Portfolio's investments and futures contracts or options on futures contracts
entered into by the Portfolio, which may prevent the Portfolio from achieving
the intended hedge or expose the Portfolio to risk of loss. Further, the
Portfolio's use of futures contacts and options on futures contracts to reduce
risk involves cost and will be subject to Greenwich Street Advisors' ability
to predict correctly changes in interest rate relationships or other factors.
No assurance can be given that Greenwich Street Advisors' judgment in this
respect will be correct.
Lending Securities. The Portfolio is authorized to lend securities it
holds to brokers, dealers and other financial institutions, other than
Greenwich Street Advisors and its affiliates. Such loans may not exceed 20%
of the Portfolio's assets taken at value. By lending its securities, the
Portfolio can increase its income by continuing to receive interest on the
loaned securities, by investing the cash collateral in short-term instruments
or by obtaining yield in the form of interest paid by the borrower when U.S.
government securities are used as collateral. The Portfolio will adhere to
the following conditions whenever it lends its securities: (1) the Portfolio
must receive at least 100% cash collateral or equivalent securities from the
borrower, which will be maintained by daily market-to-market; (2) the borrower
must increase the collateral whenever the market value of the securities
loaned raises above the level of the collateral; (3) the Portfolio must be
able to terminate the loan at any time; (4) the Portfolio must receive
reasonable interest on the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in market value; (5)
the Portfolio may pay only reasonable custodian fees in connection with the
loan; and (6) voting rights on the loaned securities may pass to the borrower,
except that, if a material event adversely affecting the investment in the
loaned securities occurs, the Portfolio's Board of Directors must terminate
the loan and retain the Portfolio's right to vote the securities. From time
to time, the Portfolio may pay a part of the interest earned from the
investment of collateral received for securities loaned to the borrower and/or
a third party that is unaffiliated with the Portfolio and that is acting as a
"finder."
Currency Exchange Transactions and Options on Foreign Currencies. In
order to protect against uncertainty in the level of future exchange rates,
the Portfolio may engage in currency exchange transactions and purchase
exchange-traded put and call options on foreign currencies. The Portfolio
will conduct its currency exchange transactions either on a spot (i.e., cash)
basis at the rate prevailing in the currency exchange market or through
entering into forward contacts to purchase or sell currencies.
The Portfolio's dealings in forward currency exchange transactions will
be limited to hedging involving either specific transactions or portfolio
positions. Transaction hedging is the purchase or sale of forward currency
contracts with respect to specific receivables or payables of the Portfolio
generally arising in connection with the purchase or sale of its securities.
Position hedging, generally, is the sale of forward currency contracts with
respect to portfolio security positions denominated or quoted in the currency.
The Portfolio may not position hedge with respect to a particular currency to
an extent greater than the aggregate market value at any time of the security
or securities held in its portfolio denominated or quoted in or currently
convertible (such as through exercise of an option or consummation of a
forward currency contract) into that particular currency. If the Portfolio
enters into a transaction hedging or position hedging transaction, it will
cover the transaction through one or more of the following methods: (a)
ownership of the underlying currency or an option to purchase such currency;
(b) ownership of an option to enter into an offsetting forward currency
contract; (c) entering into a forward contract to purchase currency being sold
or to sell currency being purchased, provided that such covering contract is
itself covered by any one of these methods unless the covering contract closes
out the first contract; or (d) depositing into a segregated account with the
custodian or a sub-custodian of the Portfolio cash or readily marketable
securities in an amount equal to the value of the Portfolio's total assets
committed to the consummation of the forward currency contract and not
otherwise covered. In the case of transaction hedging, securities placed in
the account must be liquid debt securities. In any case, if the value of the
securities placed in the segregated account declines, additional cash or
securities will be placed in the account so that the value of the account will
equal the above amount. Hedging transactions may be made from any foreign
currency into dollars or into other appropriate currencies.
At or before the maturity of a forward contract, the Portfolio may sell
a portfolio security and make delivery of the currency, or retain the security
and offset its contractual obligation to deliver the currency by purchasing a
second contract pursuant to which the Portfolio will obtain, on the same
maturity date, the same amount of the currency which it is obligated to
deliver. If the Portfolio retains the portfolio security and engages in an
offsetting transaction, the Portfolio, at the time of execution of the
offsetting transaction, will incur a gain or loss to the extent movement has
occurred in forward contract prices. Should forward prices decline during the
period between the Portfolio's entering into a forward contract for the sale
of a currency and the date it enters into an offsetting contract for the
purchase of the currency, the Portfolio will realize a gain to the extent that
the price of the currency it has agreed to sell exceeds the price of the
currency it as agreed to purchase. Should forward prices increase, the
Portfolio will suffer a loss to the extent the price of the currency that it
has agreed to purchase excess the price of the currency it has agreed to sell.
The cost to the Portfolio of engaging in currency transactions varies
with factors such as the currency involved, the length of the contract period
and the market conditions then prevailing. Because transactions in currency
exchange are usually conducted on a principal basis, no fees or commissions
are involved. The use of forward currency contracts does not eliminate
fluctuations in the underlying prices of the securities, but it does establish
a rate of exchange that can be achieved in the future. In addition, although
forward currency contacts limit the risk of loss due to a decline in the value
of the hedged currency, at the same time, they limit any potential gain that
might result should the value of the currency increase.
The Portfolio may purchase put options on a foreign currency in which
securities held by the Portfolio are denominated to protect against a decline
in the value of the currency in relation to the currency in which the exercise
price is denominated. The Portfolio may purchase a call option on a foreign
currency to hedge against an adverse exchange rate of the currency in which a
security that it anticipates purchasing is denominated in relation to the
currency in which the exercise price is denominated. Put options convey the
right to sell the underlying currency at a price which is anticipated to be
higher than the spot price of the currency at the time the option expires.
Call options convey the right to buy the underlying currency at a price which
is expected to be lower than the spot price of the currency at the time the
option expires.
The Portfolio may use foreign currency options under the same
circumstances that it could use forward currency exchange transactions. A
decline in the dollar value of a foreign currency in which the Portfolio's
securities are denominated, for example, will reduce the dollar value of the
securities, even if their value in the foreign currency remains constant. In
order to protect against such diminution in the value of securities it holds,
the Portfolio may purchase put options on the foreign currency. If the value
of the currency does decline, the Portfolio will have the right to sell the
currency for a fixed amount in dollars and will thereby offset, in whole or in
part, the adverse effect on its securities that otherwise would have resulted.
Conversely, if a rise in the dollar value of a currency in which securities to
be acquired are denominated is projected, thereby potentially increasing the
cost of the securities, the Portfolio may purchase call options on the
particular currency. The purchase of these options could offset, at least
partially, the effects of the adverse movements in exchange rates. The
benefit to the Portfolio derived from purchases of foreign currency options,
like the benefit derived from other types of options, will be reduced by the
amount of the premium and related transaction costs. In addition, if currency
rates do not move in the direction or to the extent anticipated, the Portfolio
could sustain losses on transactions in foreign currency options that would
require it to forego a portion or all of the benefits of advantageous changes
in the rates. Options on foreign currencies purchased by the Portfolio may be
traded on domestic and foreign exchanges or traded over-the-counter.
Investment Restrictions
The investment restrictions numbered 1 through 12 below have been
adopted by the Portfolio as fundamental investment restrictions that may not
be changed without the prior approval of the holders of a majority of the
Portfolio's outstanding voting securities. A "majority of the Portfolio's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the shares of the Portfolio's Common Stock present at a meeting of
shareholders, if the holders of 50% of the outstanding shares are present or
represented by proxy at the meetings, or (2) more than 50% of the outstanding
shares. Investment restrictions numbered 13 and 14 may be changed by vote of
a majority of the Board of Directors at any time. For purposes of the
restrictions listed below, all percentage limitations apply immediately after
a purchase or initial investment, and any subsequent change in applicable
percentage resulting from market fluctuations will not require elimination of
any security from the portfolio.
The investment policies adopted by the Portfolio prohibit the Portfolio
from:
1. Purchasing the securities of any issuer (other than U.S.
government securities) if, as a result, more than 5% of the value of the
Portfolio's total assets would be invested in the securities of the issuer,
except that up to 25% of the value of the Portfolio's total assets may be
invested without regard to this 5% limitation.
2. Purchasing more than 10% of the voting securities of any one
issuer (other than U.S. government securities), except that up to 25% of the
value of the Portfolio's total assets may be invested without regard to the
10% limitation.
3. Purchasing securities on margin, except that the Portfolio may
obtain any short-term credits necessary for the clearance of purchases and
sales of securities. For purposes of this restriction, the deposit or payment
of initial or variation margin in connection with futures contracts or related
options will not be deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short position,
except that the Portfolio may engage in short sales "against the box."
5. Borrowing money, except that (a) the Portfolio may borrow from
banks for temporary or emergency (not leveraging) purposes in an amount not
exceeding 10% of the value of the Portfolio's total assets (including the
amount borrowed) valued at the time the borrowing is made and (b) the
Portfolio may enter into futures contacts. Whenever borrowings described in
(a) exceed a 5% of the value of the Portfolio's total assets, the Portfolio
will not make any additional investments.
6. Pledging, hypothecating, mortgaging or otherwise encumbering more
than 10% of the value of the Portfolio's total assets. For purposes of this
restriction, (a) the deposit of assets in escrow in connection with the
writing of options, the purchase of securities on a when-issued or delayed-
delivery basis and the entry into forward currency contracts and securities
lending transactions and (b) collateral arrangements with respect to options
transactions and margin for futures contracts and options on futures
contracts, will not be deemed to be pledges of the Portfolio's assets.
7. Underwriting the securities of other issuers, except insofar as
the Portfolio may be deemed an underwriter under the Securities Act of 1933,
as amended (the "1933 Act"), by virtue of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real estate,
except that the Portfolio may purchase and sell securities that are secured by
real estate or interests in real estate and may purchase securities issued by
companies that invest or deal in real estate.
9. Investing in commodities, except that the Portfolio may invest in
futures contracts and options on futures contracts and options on currencies
as described under "Investment Objectives and Management Policies."
10. Making loans to others, except through the purchase of qualified
debt obligations, the entry into repurchase agreements and loans of portfolio
securities consistent with the Portfolio's investment objectives and policies.
11. Investing in securities of other investment companies registered
or required to be registered under the 1940 Act, except as they may be
acquired as part of a merger, consolidation, reorganization, acquisition of
assets or an offer of exchange or to the extent permitted by the 1940 Act.
12. Purchasing any securities which would cause more than 25% of the
value of the Portfolio's total assets at the time of purchase to be invested
in the securities of issuers conducting their principal business activities in
the same industry, provided that there shall be no limit on the purchase of
U.S. government securities.
13. Purchasing illiquid securities (such as repurchase agreements with
maturities in excess of seven days) or other securities that are not readily
marketable if more than 20% of the total assets of the Portfolio would be
invested in such securities.
14. Making investments for the purpose of exercising control or
management. This restriction shall not limit the Portfolio's ability to
participate on committees seeking to include the reorganization of portfolio
companies.
PORTFOLIO TRANSACTIONS AND TURNOVER
Portfolio Transactions. The Portfolio's securities ordinarily are
purchased from and sold to parties acting as either principal or agent. 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 principal. Usually
no brokerage commissions, as such, are paid by the Portfolio for purchases and
sales undertaken through principal transactions, although the price paid
usually includes an undisclosed compensation to the dealer acting as agent.
The purchase price paid by the Portfolio to underwriters of newly issued
securities usually includes a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers normally
are executed at a price between the bid and asked prices. The Portfolio paid
$40,287 in brokerage commissions for its fiscal period ended February 28,
1994.
Allocation of transactions, including their frequency, to various
dealers is determined by Greenwich Street Advisors in its best judgment and in
a manner deemed fair and reasonable to shareholders. The primary
considerations are availability of the desired security and the prompt
execution of orders in a effective manner at the most favorable prices.
Subject to these considerations, dealers that provide supplemental investment
research and statistical or other services to Greenwich Street Advisors may
receive orders for portfolio transactions by the Portfolio. Information so
received is in addition to, and not in lieu of, services required to be
performed by Greenwich Street Advisors, and the fees of Greenwich Street
Advisors are not reduced as a consequence of their receipt of such
supplemental information. Such information may be useful to Greenwich Street
Advisors in serving both the Portfolio and other clients and, conversely,
supplemental information obtained by the placement of business of other
clients may be useful to Greenwich Street Advisors in carrying out its
obligations to the Portfolio.
The Portfolio will not purchase securities during the existence of any
underwriting or selling group relating thereto of which Smith Barney or its
affiliates are members, except to the extent permitted by the SEC. Under
certain circumstances, the Portfolio may be at a disadvantage because of this
limitation in comparison with other investment companies which have a similar
investment objective but which are not subject to such limitation.
While investment decisions for the Portfolio are made independently from
those of the other accounts managed by Greenwich Street Advisors, investments
of the type the Portfolio may make also may be made by those other accounts.
When the Portfolio and one or more other accounts managed by Greenwich Street
Advisors are prepared to invest in, or desire to dispose of, the same
security, available investments or opportunities for sales will be allocated
in a manner believed by Greenwich Street Advisors to be equitable to each. In
some cases, this procedure may adversely affect the price paid or received by
the Portfolio or the size of the position obtained or disposed of by the
Portfolio.
The Portfolio's Board of Directors will review periodically the
commissions paid by the Portfolio to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inurring to the Portfolio.
Portfolio Turnover. The Portfolio's portfolio turnover rate (the lesser
of the Portfolio's purchases or sales of portfolio securities during the last
fiscal year, excluding any security the maturity of which at the time of
acquisition is one year or less, divided by the average monthly value of
portfolio securities) generally is not expected to exceed 150%, but the
turnover rate will not be a limiting factor whenever the Portfolio deems it
desirable to sell or purchase securities. For the fiscal period ended
February 28, 1994, the Portfolio's portfolio turnover rate was 108%.
MANAGEMENT OF THE PORTFOLIO
Directors and Executive Officers of the Portfolio
The overall management of the business and affairs of the Portfolio is
vested with its Board of Directors. The Board of Directors approves all
significant agreements between the Portfolio and persons or companies
furnishing services to it, including the Portfolio's agreements with its
investment adviser, administrator, sub-administrator, custodian, transfer
agent, dividend paying agent, registrar and plan agent. The day-to-day
operations of the Portfolio are delegated to its officers and to Greenwich
Street Advisors, subject always to the investment objective and polices of the
Portfolio and to general supervision by the Portfolio's Board of Directors.
The Directors and Executive Officers of the Portfolio, their addresses
and information as to their principal business occupations during the past
five years, are shown in the table below:
Name and Address
Positions Held
With the Portfolio
Principal Occupations
During Past 5 Years
* Heath B. McLendon
Two World Trade Center
New York, NY 10048
Chairman of the Board of
Directors, Chief
Executive Officer and
Director
Executive Vice President
of Smith Barney Inc.
("Smith Barney);
Chairman of Smith Barney
Strategy Advisers Inc.
("Strategy Advisors").
Prior to July 1993,
Senior Executive Vice
President of Shearson
Lehman Brothers Inc.
("Shearson Lehman
Brothers"); Vice
Chairman of Shearson
Asset Management, a
member of the Asset
Management Group of
Shearson Lehman
Brothers.
James J. Crisona
118 E. 60th Street
New York, NY 10022
Director
Retired; prior to
December 1992, attorney
in private practice.
Formerly a Justice of
the Supreme Court of the
State of New York.
Paolo M. Cucchi
Drew University
College of Liberal Arts
Madison, NJ 07940
Director
Dean of the College of
Drew University.
Alessandro di
Montezemolo
200 E. 65th Street
New York, NY 10021
Director
Retired; Former Chairman
of the Board and Chief
Executive Officer of
Marsh & McLennan, Inc.
Andrea Farace
153 E. 53rd Street
New York, NY 10022
Director
Executive Vice President
and Senior Managing
Director, '21'
International Holdings,
Inc.; from April 1991 to
March 1993, President of
'21' International
Holdings, Inc.; From May
1990 to April 1991,
Executive of C.I.R.
S.p.A.; from October
1989 to May 1990,
Managing Director of
Shearson Lehman Hutton
Holdings, Inc.; prior to
October 1989, Senior
Vice President of
Shearson Lehman Hutton
Holdings, Inc.
Paul M. Hardin
UNC - Chapel Hill
103 South Building
Charlotte, NC 27599
Director
Chancellor of the
University of North
Carolina at Chapel Hill.
George M. Pavia
600 Madison Avenue
New York, NY 10022
Director
Senior Partner, Pavia &
Harcourt, Attorneys
Stephen J. Treadway
1345 Avenue of the
Americas
New York, NY 10105
President
Executive Vice President
and Director of Smith
Barney; Director and
President of Mutual
Management Corp. and
Smith, Barney Advisers,
Inc.
Richard P. Roelofs
Two World Trade Center
New York, NY 10048
Executive Vice President
Managing Director of
Smith Barney and
President of Strategy
Advisers; prior to July
1993, Senior Vice
President of Shearson
Lehman Bothers; Vice
President of Shearson
Lehman Strategy Advisors
Inc., an investment
advisory affiliate of
Shearson Lehman
Brothers.
John C. Bianchi
Two World Trade Center
New York, NY 10048
Vice President and
Investment Officer
Managing Director of
Greenwich Street
Advisors; prior to July
1993, Managing Director
of Shearson Lehman
Advisors, an investment
advisory affiliate of
Shearson Lehman
Brothers.
Lewis E. Daidone
1345 Avenue of the
Americas
New York, NY 10105
Treasurer
Managing Director of
Smith Barney; Director
and Senior Vice
President of Mutual
Management Corp. Prior
to 1990, Senior Vice
President and Chief
Financial Officer of
Cortland Financial
Group, Inc.
Christina T. Sydor
1345 Avenue of the
Americas
New York, NY 10105
Secretary
Managing Director of
Smith Barney.
* "Interested person" of the Portfolio (as defined in the 1940 Act).
Director and/or trustee of other registered investment companies with
which Smith Barney is affiliated.
The Portfolio pays each of its directors who is not a director, officer
or employee of Greenwich Street Advisors, or any of its affiliates, an annual
fee of $5,000 plus $500 for each Board of Directors meeting attended. In
addition, the Portfolio will reimburse these directors for travel and out-of-
pocket expenses incurred in connection with Board of Directors meetings. For
the fiscal period ended February 28, 1994, such fees and expenses totaled
$47,155.
Principal Stockholders. There are no persons known to the Portfolio to
be control persons of the Portfolio, as such term is defined in Section
2(a)(9) of the 1940 Act. There is no person known to the Portfolio to hold
beneficially more than 5% of the outstanding shares of the Common Stock except
as set forth below. The following person is the only person holding more than
5% of the outstanding shares of Common Stock as of June 30, 1994.
Name and Address
of Record Owner
Amount of
Record
Ownership
Percent of
Common Stock
Outstanding
Cede & Co.
as Nominee for The Depository Trust
Company
P.O. Box 20
Bowling Green Station
New York, New York 10004
41,064,545
97.82%
Of the shares held of record by Cede & Co., approximately 38,000,000
representing 92.54% of the outstanding shares of Common Stock, were held by
The Depository Trust Company as nominee for Smith Barney, representing
accounts for which Smith Barney has discretionary and non-discretionary
authority.
As of June 30, 1994, the Directors and Officers of the Portfolio, as a
group, beneficially owned less than 1% of the Portfolio's outstanding shares
of Common Stock.
Investment Adviser -- Greenwich Street Advisors
Administrator -- Smith, Barney Advisers, Inc.
Sub-Administrator -- Boston Advisors
Greenwich Street Advisors serves as investment adviser to the Portfolio
pursuant to a written agreement dated July 30, 1993 (the "Advisory
Agreement"), a form of which was most recently approved by the Board of
Directors, including a majority of those Directors who are not "interested
persons" of the Portfolio or Greenwich Street Advisors ("Non-Interested
Directors") on February 17, 1993. Unless terminated sooner, the Advisory
Agreement will continue for an initial two-year period and will continue for
successive annual periods thereafter, provided that such continuance is
specifically approved at least annually: (1) by a majority vote of the Non-
Interested Directors cast in person at a meeting called for the purpose of
voting on such approval; and (2) by the Board of Directors or by a vote of a
majority of the outstanding shares of Common Stock. Greenwich Street Advisors
is a division of Mutual Management Corp., which provides investment advisory
and management services to investment companies affiliated with Smith Barney.
Smith Barney is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings") which is in turn a wholly owned subsidiary of The Travelers Inc.
("Travelers"), a diversified financial services holding company principally
engaged in the business of providing investment, consumer finance and
insurance services. Greenwich Street Advisors pays the salary of any officer
or employee who is employed by both it and the Portfolio. Greenwich Street
Advisors bears all expenses in connection with the performance of its services
as investment adviser. For services rendered to the Portfolio, Greenwich
Street Advisors receives from the Portfolio a fee, computed and paid monthly
at the annual rate of .90% of the value of the Portfolio's average daily net
assets.
Prior to July 31, 1993, the Portfolio was party to an investment
advisory agreement with Shearson Lehman Brothers on behalf of Shearson Lehman
Advisors, a member of the Asset Management group of Shearson Lehman Brothers.
For services rendered in accordance with such agreement, the Portfolio paid a
monthly fee at the annual rate of .90% of the value of its average daily net
assets.
At the close of business on July 30, 1993, Travelers (formerly known as
Primerica Corporation) and Smith Barney, Harris Upham & Co. Incorporated
completed the acquisition of substantially all of the domestic retail
brokerage and asset management business of Shearson Lehman Brothers and Smith
Barney, Harris Upham & Co. Incorporated was renamed Smith Barney Inc. Also as
of that date, Greenwich Street Advisors succeeded Shearson Lehman Advisors as
the Portfolio's investment adviser under the terms discussed above.
For the fiscal period ended February 28, 1994, total investment advisory
fees paid by the Portfolio amounted to $4,217,562.
Under the Advisory Agreement, Greenwich Street Advisors will not be
liable for any error of judgment or mistake of law or for any loss suffered by
the Portfolio in connection with the Advisory Agreement, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part
of Greenwich Street Advisors in the performance of its duties or from reckless
disregard of its duties and obligations under the Advisory Agreement. The
Advisory Agreement is terminable by vote of the Board of Directors or by the
holders of a majority of the Common Stock, at any time without penalty, on 60
days' written notice to Greenwich Street Advisors. The Advisory agreement may
also be terminated by Greenwich Street Advisors on 90 days' written notice to
the Portfolio. The Advisory Agreement terminates automatically upon its
assignment.
Smith, Barney Advisers, Inc. ("SBA"), a wholly owned subsidiary of
Holdings, serves as administrator to the Portfolio pursuant to a written
agreement dated May 18, 1994 (the "Administration Agreement"), which was
approved by the Board of Directors of the Portfolio, including a majority of
the Non-Interested Directors, on May 18, 1994. Pursuant to the Administration
Agreement, SBA pays the salaries of all officers and employees who are
employed both by it and the Portfolio, assists in providing accounting,
financial and tax support relating to portfolio management, prepares and
coordinates communications to shareholders and provides the Portfolio with
certain legal, accounting and financial reporting and corporate secretarial
services. As compensation for SBA's services, the Portfolio pays a fee,
computed daily and paid monthly, at the annual rate of .20% of the Portfolio's
average daily net assets.
Boston Advisors serves as sub-administrator to the Portfolio pursuant to
a written agreement dated May 18, 1994 (the "Sub-Administration Agreement").
Boston Advisors is an indirect wholly owned subsidiary of Mellon Bank
Corporation ("Mellon"). Pursuant to the Sub-Administration Agreement, Boston
Advisors pays the salaries of all officers and employees who are employed by
both it and the Portfolio, maintains office facilities for the Portfolio,
furnishes the Portfolio with statistical and research data, clerical help and
accounting, data processing, bookkeeping, internal auditing and legal services
and certain other services required by the Portfolio, prepares reports to the
Portfolio's shareholders, and prepares tax returns and reports to and filings
with the SEC and state blue sky authorities. Boston Advisors bears all
expenses in connection with the performance of its services. Under the terms
of the Sub-Administration Agreement, Boston Advisors is compensated in such
amounts as the Portfolio, SBA and Boston Advisors shall from time to time
agree. The compensation of SBA is reduced by amounts paid to Boston Advisors.
The Portfolio pays no fee directly to Boston Advisors.
Pursuant to the Administration Agreement and the Sub-Administration
Agreement (collectively, the "Agreements"), SBA and Boston Advisors,
respectively, will exercise their best judgment in rendering services to the
Portfolio. Neither SBA nor Boston Advisors will be liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolio in
connection with the matters to which the Agreements relate, except by reason
of SBA's or Boston Advisors' reckless disregard of obligations and duties
under the respective Agreements.
The Agreements will continue automatically for successive annual periods
provided that such continuance is approved at least annually by the Board of
Directors of the Portfolio, including a majority of the Non-Interested
Directors, by vote cast in person at a meeting called for the the purpose of
voting such approval. The Agreements are terminable, without penalty, upon 60
days' written notice, by the Board of Directors of the Portfolio or by vote of
holders of a majority of the Portfolio's shares of Common Stock, or upon 90
days' written notice by SBA or Boston Advisors.
The Portfolio bears expenses incurred in its operation including: fees
of the investment adviser and administrator; taxes, interest, brokerage fees
and commissions, if any; fees of Directors who are not officers, directors,
shareholders or employees of Smith Barney; 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; cost attributable to investor services (including allocated
telephone and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory purposes
and for distribution to shareholders; shareholders' reports and corporate
meetings of the officers, Board of Directors and shareholders of the
Portfolio.
TAXES
The discussion set out below of tax considerations generally affecting
the Portfolio and its shareholders is intended to be only a summary and is not
intended as a substitute for careful tax planning by prospective shareholders.
Taxation of the Portfolio and its Investments
The Portfolio intends to quality as a "regulated investment company"
under Subchapter M of the Code. If it qualifies as a regulated investment
company, the Portfolio will pay no federal income taxes on its taxable net
investment income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed to
shareholders. To qualify under Subchapter M of the Code, the Portfolio must,
among other things: (1) distribute to its shareholders at lest 90% of its
taxable net investment income (for this purpose consisting of taxable net
investment income and net realized short-term capital gains); (2) derive at
least 90% of its gross income from dividends, interest, payments with respect
to loans of securities, gains from the sale or other disposition of
securities, or other income (including, but not limited to, gains from
options, futures, and forward contracts) derived with respect to the
Portfolio's business of investing in securities; (3) derive less than 30% of
its annual gross income from the sale or other disposition of securities,
options, futures or forward contracts held for less than three months; and (4)
diversify its holdings so that, at the end of each fiscal quarter of the
Portfolio (a) at least 50% of the market value of the Portfolio's assets is
represented by cash, U.S. government securities and other securities, with
these other securities limited, with respect to any one issuer, to an amount
not greater than 5% of the value of the Portfolio's assets and not greater
than 10% of the outstanding voting securities of the issuer, and (b) not more
than 25% of the market value of the Portfolio's assets is invested in the
securities of any one issuer (other than U.S. government securities or
securities of other regulated investment companies) or of two or more issuers
that the Portfolio controls and that are determined to be in the same or
similar trades or businesses or related trades or businesses. In meeting
these requirements, the Portfolio may be restricted in the selling of
securities held by the Portfolio for less than three months and in the
utilization of certain of the investment techniques described above under
"Investment Objectives and Policies -- Investment Techniques." As a regulated
investment company, the Portfolio will be subject to a 4% non-deductible
excise tax measured with respect to certain undistributed amounts of ordinary
income and capital gains. The Portfolio expects to pay the dividends and make
the distributions necessary to avoid the application of this excise tax.
The Portfolio's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Portfolio (i.e., may affect whether gains or losses are
ordinary or capital), accelerate recognition of income to the Portfolio, defer
Portfolio losses and cause the Portfolio to be subject to hyperinflationary
currency rules. These rules could therefore affect the character, amount and
timing of distributions to shareholders. The provisions also (1) will require
the Portfolio to mark-to-market certain types of its positions (i.e., treat
them as if they were closed out) and (2) may cause the Portfolio to recognize
income without receiving cash with which to pay dividends or make
distributions in amounts necessary to satisfy the distribution requirements
for avoiding income and excise taxes. The Portfolio will monitor its
transactions, will make the appropriate tax elections and will make the
appropriate entries in its books and records when it acquires any foreign
currency, forward contract, option, futures contract or hedged investment so
that (1) neither the Portfolio nor its shareholders will be treated as
receiving a materially greater amount of capital gains or distributions than
actually realized or received, (2) these special provisions will not prevent
the Portfolio from using substantially all of its losses for the fiscal years
in which the losses actually occur and (3) the Portfolio will continue to
quality as a regulated investment company.
Taxation of the Portfolio's Shareholders
Dividends paid from the Portfolio's net investment income and
distributions of the Portfolio's net realized short-term capital gains are
taxable to shareholders of the Portfolio as ordinary income, regardless of the
length of time shareholders have held shares of Common Stock and whether the
dividends or distributions are received in cash or reinvested in additional
shares. Distributions of net long-term capital gains, if any, will be taxable
as long-term capital gains, whether received in cash or reinvested in shares
and regardless of how long the shareholder has held the Portfolio shares. As
a general rule, a shareholder's gain or loss on a sale of his shares of Common
Stock will be a long-term gain or loss if he has held his shares for more than
one year and will be a short-term capital gain or loss if he has held his
shares for one year or less. If the Portfolio invests in equity securities, a
portion of the dividends and distributions paid by the Portfolio may qualify
for the federal dividends-received deduction for corporations.
Dividend Reinvestment Plan
A shareholder of the Portfolio receiving dividends or distributions in
additional shares pursuant to the Portfolio's Dividend Reinvestment Plan (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.
Return of Invested Capital
Investors considering buying shares just prior to a dividend or capital
gain distribution should be aware that, although the price of shares purchased
at that time may reflect the amount of the forthcoming distribution, those who
purchase just prior to a distribution will receive a distribution that will
nevertheselss be taxable to them.
Sale of Shares
Upon the sale or exchange of his shares, a shareholder will realize a
taxable gain or loss depending upon the amount realized and his basis in his
shares. Such gain or loss will be treated as capital gain or loss if the
shares are capital assets in the shareholder's hands, and will be long-term or
short-term depending upon the shareholder's holding period for the shares.
Any loss realized on a sale or exchange will be disallowed to the extent the
shares disposed of are replaced, including replacement through the reinvesting
of dividends and capital gains distributions in the Portfolio under the Plan,
within a period of 61 days beginning 30 days before and ending 30 days after
the disposition of the shares. In such a case, the basis of the shares
acquired will be increased to reflect the disallowed loss. Any loss realized
by a shareholder on the sale of a Portfolio share held by the shareholder for
six months or less will be treated for federal income tax purposes as a long-
term capital loss to the extent of any distributions or deemed distributions
of long-term capital gains received by the shareholder with respect to such
share.
Tender Offers to Purchase Shares
Under current law, a holder of Common Stock who tenders all shares of
Common Stock owned by such shareholder and any shares considered owned by such
shareholder under attribution rules contained in the Code will realize a
taxable gain or loss depending upon such shareholder's basis in the shares.
Such gain or loss will be treated as capital gain or loss if the shares are
held as capital assets in the shareholder's hands and will be long-term or
short-term depending upon the shareholder's holding period of the shares. If
a holder of Common Stock tenders less than all shares owned by and attributed
to such shareholder (or if the Portfolio purchases only some of the shares
tendered by a holder of Common Stock), and if the distribution to such
shareholder does not otherwise qualify as an exchange, the proceeds received
will be treated as a taxable dividend, return of capital or capital gain
depending on the Portfolio's earnings and profits and the shareholder's basis
in the tendered shares.
Statements and Notices
Each shareholder will receive an annual statement as to the federal
income tax status of his dividends and distributions from the Portfolio for
the prior calendar year. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the Portfolio's
taxable year regarding the federal income tax status of certain dividends and
distributions that were paid (or that are treated as having been paid) by the
Portfolio to its shareholders during the preceding year.
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 sale or repurchases of shares of
Common Stock. An individual's taxpayer identification number is his social
security number. Corporate shareholders and other shareholders specified in
the Code are or may be exempt from backup withholding. The backup withholding
tax is not an additional tax and may be credited against a taxpayer's federal
income tax liability.
Other Taxes
Dividends and distributions also may be subject to state and local taxes
depending on each shareholders' particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSEQUENCES AFFECTING
THE PORTFOLIO AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO THEM OF AN
INVESTMENT IN THE PORTFOLIO.
STOCK PURCHASES AND TENDERS
The Portfolio may repurchase shares of its Common Stock in the open
market or in privately negotiated transactions when the Portfolio can do so at
prices below their then current net asset value per share on terms that the
Portfolio's Board of Directors believes represent a favorable investment
opportunity. In addition, the Board of Directors currently intends to
consider, at least one a year, making an offer to each shareholder of record
to purchase at net asset value shares of Common Stock owned by the
shareholders.
No assurance can be given that repurchases and/or tenders will result in
the Portfolio's shares trading at a price that is equal to their net asset
value. The market prices of the Portfolio's shares will, among other things,
be determined by the relative demand for and supply of the shares in the
market, the Portfolio's investment performance, the Portfolio's dividends and
yields and investor perception of the Portfolio's overall attractiveness as an
investment as compared with other investment alternatives. The Portfolio's
acquisition of Common Stock will decrease the total assets of the Portfolio
and therefore have the effect of increasing the Portfolio's expense ratio.
The Portfolio may borrow money to finance the repurchase of shares subject to
the limitations described in the Prospectus and this SAI. Any interest on the
borrowings will reduce the Portfolio's net income. Because of the nature of
the Portfolio's investment objective, policies and securities holdings,
Greenwich Street Advisors does not anticipate that repurchases and tenders
will have an adverse effect on the Portfolio's investment performance and does
not anticipate any material difficulty in disposing of securities to
consummate Common Stock repurchases and tenders.
When a tender offer is authorized to be made by the Portfolio's Board of
Directors, it will be an offer to purchase at a price equal to the net asset
value of all (but not less than all) of the shares owned by the shareholder
(or attributed to him for federal income tax purposes under Section 38 of the
Code). A shareholder who tenders all shares owned or considered owned by him,
as required, will realize a taxable gain or loss depending upon his basis in
those shares.
If the Portfolio liquidates securities in order to repurchase shares of
Common Stock, the Portfolio may realize gains and losses. These gains, if
any, may be realized on securities held for less than three months. Because
the Portfolio must derive less that 30% of its gross income for any taxable
year from the sale or disposition of stock and securities held for less than
three months (in order to retain the Portfolio's regulated investment company
status under the Code), gains realized by the Portfolio due to a liquidation
of securities held for less than three months would reduce the amount of gain
on sales of other securities held for less than three months that the
Portfolio could realize in the ordinary course of its portfolio management,
which may adversely affect the Portfolio's performance. The portfolio
turnover rate of the Portfolio may or may not be affected by the Portfolio's
repurchases of shares of Common Stock pursuant to a tender offer.
ADDITIONAL INFORMATION
Legal Matters
Willkie Farr & Gallagher serves as legal counsel to the Portfolio. The
Non-Interested Directors have selected Stroock & Stroock & Lavan as their
counsel.
Independent Public Accountants
Coopers & Lybrand, independent accountants, One Post Office Square,
Boston, Massachusetts 02109, serve as auditors of the Portfolio and render an
opinion on the Portfolio's financial statements annually.
Custodian and Transfer Agent
Boston Safe Deposit and Trust Company ("Boston Safe"), an indirect
wholly owned subsidiary of Mellon and an affiliate of Boston Advisors, is
located at One Boston Place, Boston, Massachusetts 02108, and serves as the
Portfolio's custodian pursuant to a custody agreement. Under the custody
agreement, Boston Safe holds the Portfolio's securities and keeps all
necessary accounts and records. The assets of the Portfolio are held under
bank custodianship in compliance with the 1940 Act.
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First
Data Corporation, is located at Exchange Place, Boston, Massachusetts 02109,
and pursuant to a transfer agency agreement serves as the Portfolio's transfer
agent. Under the transfer agency agreement, TSSG maintains the shareholder
account records for the Portfolio, handles certain communications between
shareholders and the Portfolio, and distributions payable by the Portfolio.
FINANCIAL STATEMENTS
The Portfolio sends unaudited semi-annual and audited annual financial
statements of the Portfolio to shareholders, including a list of the
investments held by the Portfolio.
The Portfolio's Annual Report of the fiscal period ended February 28,
1994 is incorporated into its Statement of Additional Information by reference
in its entirety. A copy of the Annual Report may be obtained from any Smith
Barney Financial Consultant or by calling or writing to the Portfolio at the
telephone number or address set forth on the cover page of this SAI.
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