As filed with the Securities and Exchange Commission on June 24, 1997
Securities Act Registration No. 33-56408
Investment Company Act Registration No. 811-7396
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 3 x
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4 x
__________________
Managed High Income Portfolio Inc.
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 723-9218
(Registrant's Telephone Number, including Area Code)
Heath B. McLendon, Chairman of the Board
Managed High Income Portfolio
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Approximate Date of Proposed Public Offering: As soon as practicable
after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933, other than securities offered in connection with a dividend
reinvestment plan, check the following box. x_______________
This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions.
Pursuant to Rule 429, this Registration Statement relates to shares previously
registered on Form N-2. (Registration No. 33-56408).
It is proposed that this fiing will become effective: x when declared
effective pursuant to section 8(c).
Registrant amends this Registration Statement under the Securities Act
of 1933, as amended, on such date as may be necessary to delay its effective
date until Registrant files a further amendment that specifically states that
this Registration Statement will thereafter become effective in accordance
with the provisions of Section 8(a) of the Securities Act of 1933, as amended,
or until the Registration Statement becomes effective on such date as the
Securities and Exchange Commission, acting pursuant to Section 8(a), may
determine.
MANAGED HIGH INCOME PORTFOLIO INC.
Form N-2
Cross Reference Sheet
Part A
Item No. Caption Prospectus Caption
1. Outside Front Cover Outside Front Cover of
Prospectus
2. Inside Front and Outside Back Inside Front and Outside Back
Cover Page
Cover Pageof Prospectus
3. Fee Table and Synopsis Prospectus Summary; Fund
Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Prospectus Summary; The
Offering;
Repurchase of Shares
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds; Investment
Objective and
Policies
8. General Description of the Registrant The Fund; Investment
Objective
and Policies; Risk Factors
and Special Consider-
ations; Investment Practices
9. Management Management of the Fund;
Description of
Shares; Custodian and Transfer
Agent
10. Capital Stock, Long-Term Debt, and Other
Securities Taxation; Dividend
Reinvestment Plan;
Description of Shares
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Further Information
Part B Statement of Additional
Item No. Information Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and History The Fund; Description of
Shares (see Prospectus)
17. Investment Objective & Policies Investment Objective and
Policies; Investment Restrictions
18. Management Management of the Portfolio;
Officers and
Directors
19. Control Persons and Principal
Holders of Securities Not Applicable
20. Investment Advisory and Other Services Management of the Fund
21. Brokerage Allocation and Other Practices Portfolio Transactions
22. Tax Status Taxation
23. Financial Statements Financial Statements
PART A PROSPECTUS
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SMITH BARNEY
A Member of TravelersGroup[LOGO]
Managed
High
Income
Portfolio
Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FDO 1148 6/97
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Prospectus June 27, 1997
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388 Greenwich Street
New York, New York 10013
(800) 451-2010
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 Policies --
Risk Factors and Special Considerations." The Portfolio's address is 388
Greenwich Street, New York, New York 10013 and the Portfolio's telephone number
is (800) 451-2010.
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 Ratings Group
("S&P"), or in unrated securities that the Portfolio's investment adviser deems
to be 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 prices 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 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
(Continued on page 2)
SMITH BARNEY INC.
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Prospectus (continued) June 27, 1997
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commenced March 18, 1993, at a price of $12.00 per share. No assurance 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 June 27, 1997 has been filed with the
Securities and Exchange Commission ("SEC") and is incorporated by reference in
its entirety into 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.
2
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Table of Contents
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Prospectus Summary 4
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Portfolio Expenses 8
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Financial Highlights 9
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The Portfolio 10
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The Offering 10
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Use of Proceeds 10
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Investment Objectives and Policies 10
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Investment Restrictions 23
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Share Price Data 24
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Management of the Portfolio 24
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Dividends and Distributions; Dividend Reinvestment Plan 26
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Net Asset Value 28
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Taxation 29
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Description of Common Stock 31
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Stock Purchases and Tenders 32
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Certain Provisions of the Articles of Incorporation 33
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Custodian, Transfer Agent and
Dividend-Paying Agent and Registrar 33
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Further Information 34
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Appendix A A-1
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3
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Prospectus Summary
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The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the SAI.
THE PORTFOLIO The Portfolio is a diversified, closed-end management investment
company. See "The Portfolio."
Investment Objectives The Portfolio seeks high current income. Capital
appreciation is a secondary objective. See "Investment Objectives 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 to be 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 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.
Investment Adviser The Fund has entered into an investment advisory agreement
with Smith Barney Mutual Funds Management Inc. ("SBMFM"). SBMFM is a
wholly-owned subsidiary of Smith Barney Holdings Inc. ("Holdings") which in turn
is a wholly owned subsidiary of Travelers Group Inc. ("Travelers"), a
4
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Prospectus Summary (continued)
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diversified financial services holding company engaged through its subsidiaries
principally in four business segments: Investment Services, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
SBMFM currently manages investment companies with total assets in excess of $83
billion. The Portfolio pays SBMFM a fee for services provided to the Portfolio
that is computed daily and paid monthly at the annual rate of 0.90% of the value
of the Portfolio's average daily net assets. See "Management of the Portfolio --
Investment Adviser and Administrator."
Administrator SBMFM also serves as the Portfolio's administrator. The Portfolio
pays SBMFM a fee for administration services provided to the Portfolio that is
computed daily and paid monthly at the annual rate of 0.20% of the value of the
Portfolio's average daily net assets. See "Management of the Portfolio --
Investment Adviser and Administrator."
Custodian, Transfer Agent and Dividend-Paying Agent and Registrar PNC Bank,
National Association ("PNC"), serves as the Portfolio's custodian. First Data
Investor Services Group, Inc. (the "Transfer Agent"), serves as the Portfolio's
transfer agent, dividend-paying agent and registrar. See "Custodian, Transfer
Agent and Dividend-Paying Agent and Registrar."
Dividends and Distributions; Dividend Reinvestment Plan The Portfolio expects to
pay monthly dividends of net investment income (that is, income other than net
realized capital gains) and to distribute net realized capital gains, if any,
annually. All dividends or distributions will be reinvested automatically in
additional shares through participation in the Portfolio's Dividend Reinvestment
Plan, unless a shareholder elects to receive cash. See "Dividends and
Distributions; Dividend Reinvestment Plan."
Discount from Net Asset Value The shares of closed-end investment companies
often, although not always, trade at a discount from their net asset value.
Whether investors will realize gains or losses upon the sale of Common Stock
will not depend upon the Portfolio's net asset value, but will depend entirely
on whether the market price of the Common Stock at the time of sale is above or
below the original purchase price of the shares. Since the market price of the
Common Stock will be determined by factors such as relative demand for and
supply of such shares in the market, general market and economic conditions and
other factors beyond the control of the Portfolio, the Portfolio cannot predict
whether the Common Stock will continue to trade at, below or above net asset
value. For that reason, shares of the Portfolio's Common Stock are designed
primarily for long-term investors, and
5
<PAGE>
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Prospectus Summary (continued)
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investors in the Portfolio's Common Stock should not view the Portfolio as a
vehicle for trading purposes. See "Investment Objectives 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
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. 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 options transactions, entering into
securities transactions on a when-issued or delayed delivery basis, entering
into repurchase
6
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Prospectus Summary (continued)
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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 for the Common Stock.
See "Stock Purchases and Tenders."
7
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Portfolio Expenses
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The following tables are intended to assist investors in understanding the
various costs and expenses associated with investing in the Portfolio.
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Shareholder Transaction Expenses
Sales Load (as a percentage of offering price)................... None
Dividend Reinvestment and Cash Purchase Plan Fees................ None
Annual Portfolio Operating Expenses
(as a percentage of net assets)*
Investment Advisory and Administration Fees...................... 1.10%
Other Expenses................................................... 0.10%
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Total Annual Operating Expenses*....................................... 1.20%
================================================================================
* See "Management of the Portfolio" for additional information. "Other
Expenses" are based on data from the Portfolio's fiscal ended February 28,
1997.
Example
An investor would pay the following expenses on a $1,000 investment,
assuming a 5.00% annual return:
One Year Three Years Five Years Ten Years
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$12 $38 $66 $145
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This hypothetical example assumes that all dividends and other
distributions are reinvested at net asset value and that the percentage amounts
listed under Annual Portfolio Operating Expenses remain the same in the years
shown. The above tables and assumptions in the hypothetical example of a 5%
annual return and reinvestment at net asset value are required by regulations of
the SEC applicable to all investment companies; the assumed 5% return is not a
prediction of, and does not represent, the projected or actual performance of
the Common Stock.
This hypothetical example should not be considered a representation of
past or future expenses, and the Portfolio's actual expenses may be more or less
than those shown.
8
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Financial Highlights
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The following information for the two years ended February 28, 1997 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's annual report dated February 28, 1997. The
information for the fiscal years ended February 28, 1988 through February 28,
1995 has been audited by other auditors. The information set forth below should
be read in conjunction with the financial statements and related notes that also
appear in the Fund's Annual Report to Shareholders, which is incorporated by
reference into the Statement of Additional Information.
For a Share of Capital Stock Outstanding Throughout Each Year:
<TABLE>
<CAPTION>
===========================================================================================
1997 1996 1995 1994(1)
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<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 11.36 $ 10.88 $ 12.39 $ 12.00
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Income (Loss) From Operations:
Net investment income 1.12 1.13 1.12 0.98
Net realized and unrealized gain (loss) 0.21 0.65 (1.48) 0.51
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Total Income (Loss) From Operations 1.33 1.78 (0.36) 1.49
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Offering Costs Credited (Charged)
to Paid-In Capital -- -- 0.00* (0.02)
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Less Distributions From:
Net investment income (1.08) (1.27) (1.00) (0.96)
Net realized gains -- -- (0.15) (0.12)
Capital (0.02) (0.03) -- --
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Total Distributions (1.10) (1.30) (1.15) (1.08)
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Net Asset Value, End of Year $ 11.59 $ 11.36 $ 10.88 $ 12.39
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Total Return, Based on Market Value** 15.37% 18.82% (0.43)% 6.85%++
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Total Return, Based on Net Asset Value** 12.65% 17.80% (2.18)% 12.67%++
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Net Assets, End of Year (000s) $493,906 $476,824 $456,789 $520,091
===========================================================================================
Ratios to Average Net Assets:
Expenses 1.20% 1.24% 1.24% 1.19%+
Net investment income 9.89 9.74 9.96 8.74+
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Portfolio Turnover Rate 61% 73% 62% 108%
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Market Value, End of Period $ 11.625 $ 11.125 $ 10.500 $ 11.750
===========================================================================================
</TABLE>
(1) For the period from March 26, 1993 (commencement of operations) to
February 28, 1994.
* Amount represents less than $0.01.
** The Total return assumes the purchase and redemption of shares using the
Fund's net asset value rather than the market value. Dividends are
reinvested in accordance with the Fund's dividend reinvestment plan.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
9
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The Portfolio
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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, as amended ("1940 Act"), and has its principal office at
388 Greenwich Street, New York, New York 10013. The Portfolio's telephone number
is 1-800-451-2010.
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The Offering
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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.
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Use Of Proceeds
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The Portfolio will not receive any proceeds from the sale of any Common
Stock offered pursuant to this Prospectus. Proceeds received by Smith Barney 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.
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Investment Objectives and Policies
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The Portfolio's primary investment objective is high current income.
Capital appreciation is 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 objectives. The Portfolio's investment objectives 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 objectives, the Portfolio will invest, under normal
circumstances, at least 65% of its assets in high-yielding corporate bonds,
debentures and
10
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Investment Objectives and Policies (continued)
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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. SBMFM 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 SBMFM deems to be of comparable quality. However, the Portfolio will not
invest in 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 SBMFM
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
11
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Investment Objectives and Policies (continued)
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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 SBMFM 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 SBMFM.
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 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. SBMFM, 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
12
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
by the full faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported by the right
of the issuer to borrow from the U.S. Treasury (such as securities of Federal
Home Loan Banks); and securities that are supported by the credit of the
instrumentality (such as Federal National Mortgage Association and Federal Home
Loan Mortgage Corporation bonds).
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 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.
13
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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 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 SBMFM, 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
14
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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.
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 its 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
15
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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 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
16
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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
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 SBMFM 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.
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
17
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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.
Loan Participations and Assignments. The Portoflio may invest a portion of
its assets in loan participations ("Participations"). By purchasing a
Participation, the Portfolio acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate or government borrower. The
Participations typically will result in the Portfolio having a contractual
relationship only with the lender not the borrower. The Portfolio will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the lender selling the Participation and only upon receipt by
the lender of the payments from the borrower. In connection with purchasing
Participations, the Portfolio generally will have no right to enforce compliance
by the borrower with the terms of the loan agreement relating to the loan, nor
any rights of set-off against the borrower, and the Portfolio may not directly
benefit from any collateral supporting the loan in which it has purchased the
Participation. As a result, the Portfolio will assume the credit risk of both
the borrower and the lender that is selling the Participation. In the event of
the insolvency of the lender selling a Participation, the Portfolio may be
treated as a general creditor of the lender and may not benefit from any set-off
between the lender and the borrower. The Portfolio will acquire Participations
only if the lender interpositioned between the Portfolio and the borrower is
determined by management to be creditworthy.
The Portfolio may also invest in assignments of portions of loans from
third parties ("Assignments"). When it purchases Assignments from lenders, the
Portfolio will acquire direct rights against the borrower on the loan. However,
since Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the Portfolio as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigned lender.
The Portfolio may have difficulty disposing of Assignments and
Participations. The liquidity of such securities is limited and the Portfolio
anticipates that such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such securities and on the Portfolio's ability to
dispose of particular Assignments or
18
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Investment Objectives and Policies (continued)
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Participations when necessary to meet the Portfolio's liquidity needs or in
response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the fund to
assign a value to those securities for purposes of valuing the Portfolio's
investments and calculating its net asset value.
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 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 Portfolio
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 Portfolio would
be required to make daily cash payments of variation margin. In those
circumstances, an increase in the value of the portion of the portfolio 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 the Portfolio's securities 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's securities
may be
19
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Investment Objectives and Policies (continued)
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in excess of gains on the futures contract or losses on the futures contract may
be in excess of gains on the Portfolio's 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 Portfolio 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 Portfolio's net investment results if market
movements are not as anticipated when the hedge is established.
If the Portfolio 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 Portfolio will lose part or all of the benefit
of the increased value of securities that it has hedged because it will have
offsetting losses in its futures or options positions. In addition, in those
situations, if the Portfolio 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 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 SBMFM. Successful use by the Portfolio of options
will depend on SBMFM's 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 governmen-
20
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Investment Objectives and Policies (continued)
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tal 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
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.
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Investment Objectives and Policies (continued)
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While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than 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 a 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, SBMFM, in evaluating the creditworthiness of an
issue, whether rated or unrated, will take various 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
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Investment Objectives and Policies (continued)
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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 SBMFM 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 SBMFM
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.
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Investment Restrictions
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The Portfolio has adopted certain fundamental investment restrictions that
may not be changed without the prior approval of the holders of a majority of
the Portfolio's outstanding voting securities. A "majority of the Portfolio's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the shares of the Portfolio's Common Stock present at a meeting of
shareholders, if the holders of 50% of the outstanding shares are present or
represented by proxy at the meeting or (2) more than 50% of the outstanding
shares. Among the investment restrictions applicable to the Portfolio is that
the Portfolio is prohibited from borrowing money, except for temporary or
emergency purposes, 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's Statement of Additional Information dated June
27, 1997. 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.
23
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Share Price Data
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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 within the
two most recent fiscal years.
<TABLE>
<CAPTION>
=========================================================================================
Quarterly Net Net Asset NYSE Premium
Period Asset Value NYSE Value at Price at (Discount)
Ended Price Range Price Range Quarter End Quarter End to NAV
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/31/95 10.89 - 11.21 10.1250 - 11.0000 $11.21 $10.750 (4.10%)
8/31/95 11.11 - 11.36 10.3750 - 11.0000 $11.25 $10.625 (5.56%)
11/30/95 11.22 - 11.37 10.3750 - 10.8250 $11.29 $10.750 (4.78%)
2/29/96 11.15 - 11.51 10.3750 - 11.3750 $11.36 $11.125 (2.07%)
5/31/96 11.11 - 11.39 10.5000 - 11.2500 $11.18 $10.625 (4.96%)
8/31/96 10.98 - 11.18 10.3750 - 11.3750 $11.01 $11.000 (0.09%)
11/30/96 11.00 - 11.40 10.8750 - 11.4375 $11.38 $11.250 (1.14%)
2/28/97 11.38 - 11.67 11.1250 - 11.7500 $11.59 $11.625 0.30%
=========================================================================================
</TABLE>
As of May 30, 1997, the price of Common Stock as quoted on the NYSE was
$11.625, representing a premium from the Common Stock's net asset value of
$11.47 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,
custodian and transfer agent. The day-to-day operations of the Portfolio are
delegated to the Portfolio's investment adviser and administrator. The SAI
contains background information regarding each Director and executive officer of
the Portfolio.
Investment Adviser and Administrator
SBMFM, located at 388 Greenwich Street, New York, New York 10013, serves
as the Portfolio's investment adviser. SBMFM, through its predecessors, has been
in the investment counseling business since 1934 and currently manages
investment companies with
24
<PAGE>
- --------------------------------------------------------------------------------
Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
total assets of May 31, 1997 in excess of
$83 billion.
Subject to the supervision and direction of the Portfolio's Board of
Directors, SBMFM manages the securities held by the Portfolio in accordance with
the Portfolio's stated investment objectives 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 SBMFM a fee for
investment advisory services provided to the Portfolio that is computed daily
and paid monthly at the annual rate of 0.90% of the value of the Portfolio's
average daily net assets.
Transactions on behalf of the Portfolio are allocated to various dealers
by SBMFM 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 SBMFM 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 SBMFM 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.
As the Portfolio's administrator, SBMFM generally manages all aspects of
the Portfolio's administration and operation. The Portfolio pays SBMFM a fee for
administration services that is computed daily and paid monthly at the annual
rate of 0.20% 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.
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
25
<PAGE>
- --------------------------------------------------------------------------------
Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
investment decisions. Mr. Bianchi is a Managing Director of SBMFM and, as such,
is the senior asset manager for investment companies and other accounts
investing in high yield securities.
- --------------------------------------------------------------------------------
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 substantially all the
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 the
Transfer Agent 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 the Transfer Agent as dividend-paying agent.
If the Portfolio declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, shareholders who are not Plan
participants will receive cash, and Plan participants will receive the
equivalent amount in shres of Common Stock. When the market price of the Common
Stock is equal to or exceeds the net asset value per share of the Common Stock
on the Valuation Date (as defined below), Plan participants will be issued
shares of Common Stock valued at the net asset value most recently determined as
described below under "Net Asset Value" or, if net asset value is less than 95%
of the current market price of the Common Stock, then at 95% of the market
value. The Valuation Date is the dividend or capital gains distribution record
date or, if that date is not a NYSE trading day, the immediately preceding
trading day.
If the market price of the Common Stock is less than the net asset value
of the Common Stock, or if the Portfolio declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with Smith
Barney, as purchas-
26
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
ing agent for Plan participants (the "Purchasing Agent"), 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 the Purchasing Agent
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, the average per share purchase price paid by the Purchasing Agent
may exceed the net asset value of the Common Stock, resulting in the acquisition
of fewer shares than if the divdend or capital gains distribution had been paid
in Common Stock issued by the Portfolio at net asset value. Additionally, if the
market price exceeds the net asset value of shares before the Purchasing Agent
has completed its purchases, the Purchasing Agent is permitted to cease
purchasing shares and the Portfolio may issue the remaining shares at a price
equal to the greater of (a) net asset value or (b) 95% of the then current
market price. In a case where the Purchasing Agent has terminated open market
purchases and the Portfolio has issued the remaining shares, the number of
shares received by the participant in respect to the cash dividend or capital
gains distribution will be based on the weighted average prices paid for shares
purchased in the open market and the price at which the Portfolio issues the
remaining shares. All cash received as a dividend or capital gains distribution
will be applied 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.
The Transfer Agent 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 the
Transfer Agent 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. The Transfer Agent's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Portfolio. No brokerage charges apply with respect to shares of Common Stock
issued directly by the Portfolio as a result of dividends or capital gains
distributions payable either in Common Stock or in cash. Each Plan participant
will, however, bear a proportionate share of brokerage commissions incurred with
respect to open market purchases made in connection with the reinvestment of
dividends or capital gains distributions.
Experience under the Plan may indicate that changes to it are desirable.
The Portfolio reserves the right to amend or terminate the Plan as applied to
any divi-
27
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
dend 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 the Transfer Agent, with the Portfolio's prior written consent, on
at least 30 days' written notice to Plan participants. All correspondence
concerning the Plan should be directed by mail to First Data Investor Services
Group, Inc., P.O. Box 1376, Boston, Massachusetts 02104 or by telephone at
1-800-331-1710.
- --------------------------------------------------------------------------------
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. A security that is traded primarily on an exchange is 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 SBMFM 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
28
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value (continued)
- --------------------------------------------------------------------------------
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
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 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
29
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
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 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 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 such shareholder's 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 fed-
30
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
eral 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 the shareholder has provided a correct taxpayer identification number and
that the shreholder 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 such
individual's 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
- --------------------------------------------------------------------------------
No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock have equal
non-cumulative voting rights and equal rights with respect to dividends, assets
and liquidation. Shares of Common Stock will be fully paid and non-assessable
when issued and have no preemptive, conversion or exchange rights. A majority of
the votes cast at any meeting of shareholders is sufficient to take or authorize
action, except for election of Directors or as otherwise provided in the
Portfolio's Articles of Incorporation as described under "Certain Provisions of
the Articles of Incorporation."
Under the rules of the NYSE applicable to listed companies, the Portfolio
will be required to hold an annual meeting of shareholders in each year. If the
Portfolio's shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of shareholders),
the Portfolio may decide not to hold annual meetings of shareholders. See "Stock
Purchases and Tenders."
The Portfolio has no current intention of offering additional shares,
except that additional shares may be issued under the Plan. See "Dividends and
Distributions; Dividend Reinvestment Plan." Other offerings of shares, if made,
will require approval of the Portfolio's Board of Directors and will be subject
to the requirement of the 1940 Act that shares may not be sold at a price below
the then current net
31
<PAGE>
- --------------------------------------------------------------------------------
Description of Common Stock (continued)
- --------------------------------------------------------------------------------
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.
Common Stock
Shares Issued
and Outstanding
Shares Authorized as of
Title of Class Shares Authorized and Not Issued May 31, 1997
-------------- ----------------- ----------------- ---------------
Common Stock 500,000,000 457,143,894.082 42,856,105.918
- --------------------------------------------------------------------------------
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 traded primarily 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 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 the review of the Board of Directors, a tender
offer is not expected to be made if the anticipated benefit to shareholders and
the Portfolio would not be
32
<PAGE>
- --------------------------------------------------------------------------------
Stock Purchases and Tenders (continued)
- --------------------------------------------------------------------------------
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) cause it to engage in certain
transactions or (iii) 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.
- --------------------------------------------------------------------------------
Custodian, Transfer Agent and Dividend-Paying Agent and Registrar
- --------------------------------------------------------------------------------
PNC Bank, National Association ("PNC"), located at 17th and Chestnut
Street, Philadelphia, Pennsylvania 19103, acts as custodian of the Portfolio's
investments.
First Data Investor Services Group, Inc., located at One Exchange Place,
Boston, Massachusetts 02109, serves as the Portfolio's transfer agent,
dividend-paying agent and registrar. The Transfer Agent also serves as agent in
connection with the Plan. Neither PNC nor the Transfer Agent assists in or is
responsible for investment decisions involving assets of the Portfolio.
Under the Custody Agreement, PNC holds the Portfolio's assets in
accordance with the provisions of the 1940 Act. Under the Transfer Agency and
Registrar Agreement, the Transfer Agent 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 the Transfer
Agent as agent under the Plan are described under "Dividends and Distributions;
Dividend Reinvestment Plan."
33
<PAGE>
- --------------------------------------------------------------------------------
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.
No person has been authorized to give any information or make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Portfolio or the Portfolio's investment adviser. This Prospectus does not
constitute an offer to sell or a solicitation of any offer to buy any security
other than the shares of common stock, nor does it constitute an offer to sell
or a solicitation of any offer to buy the shares of Common Stock by anyone in
any jurisdiction in which the offer or solicitation would be unlawful. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Portfolio since the date hereof. If any material change occurs
while this Prospectus is required by law to be delivered, however, this
Prospectus will be supplemented or amended accordingly.
34
<PAGE>
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
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 therefore not
well safeguarded during both good and bad times over the future.
Uncertainty of position characterizes bonds in this class.
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.
A-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
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
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, Bonds rated BB and B are regarded, on balance, as predominantly
and speculative with respect to capacity to pay interest and repay principal
CCC 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-2
PART B - STATEMENT OF ADDITIONAL INFORMATION
MANAGED HIGH INCOME PORTFOLIO INC.
388 Greenwich Street
New York, New York 10013
1-800-451-2010
STATEMENT OF ADDITIONAL INFORMATION
June 27, 1997
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 Ratings Group ("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 June 27, 1997, as amended or supplemented from time to time
(the "Prospectus"), and should be read in conjunction with the Prospectus.
The Prospectus may be obtained from any Smith Barney Financial Consultant or
by writing or calling the Portfolio at the address or telephone number set
forth above. This SAI, although not itself a prospectus, is incorporated by
reference into the Prospectus in its entirety.
No person has been authorized to give any information or to make any
representations not contained in the Prospectus or this SAI and, if given or
made, such information or representations 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, nor
does it 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 the 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 Objectives and Policies (see in the
Prospectus "Investment Objectives and Policies"
and Appendix A) 2
Portfolio Transactions and Turnover 9
Management of the Portfolio 10
Taxes (see in the Prospectus "Taxation") 14
Stock Purchases and Tenders (see in the Prospectus
"Stock Purchases and Tenders" and
"Description of Common Stock") 17
Additional Information (see in the Prospectus
"Custodian, Transfer Agent and Dividend-Paying
Agent and Registrar") 18
Financial Statements 18
INVESTMENT OBJECTIVES AND POLICIES
The Prospectus discusses the Portfolio's investment objectives and the
policies it employs to achieve those objectives. The following discussion
supplements the description of the Portfolio's investment policies in the
Prospectus.
General
The Portfolio's primary investment objective is high current income,
with capital appreciation as a secondary objective. The Portfolio seeks to
achieve its objectives 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, Smith Barney Mutual Funds Management Inc. ("SBMFM"), 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 objectives 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 by Moody's or D by S&P, or, if unrated, will be securities that
SBMFM 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 SBMFM 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
SBMFM. Among the factors that will also be considered by SBMFM 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 objectives may be more dependent on SBMFM's 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 SBMFM 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 objectives 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 contracts and options on futures contracts to
reduce risk involves costs and will be subject to SBMFM's ability to predict
correctly changes in interest rate relationships or other factors. No
assurance can be given that SBMFM's 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 SBMFM
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 marking-to-market; (2) the borrower must increase the
collateral whenever the market value of the securities loaned rises above the
level of the collateral; (3) the Portfolio must be able to terminate the loan
at any time; (4) the Portfolio must receive reasonable interest on the loan,
as well as any dividends, interest or other distributions on the loaned
securities, and any increase in market value; (5) the Portfolio may pay only
reasonable custodian fees in connection with the loan; and (6) voting rights
on the loaned securities may pass to the borrower, except that, if a material
event adversely affecting the investment in the loaned securities occurs, the
Portfolio's Board of Directors must terminate the loan and regain the
Portfolio's right to vote the securities. From time to time, the Portfolio
may pay a part of the interest earned from the investment of collateral
received for securities loaned to the borrower and/or a third party that is
unaffiliated with the Portfolio and that is acting as a "finder."
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 has 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 exceeds 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 it 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 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 15% 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
$165,364 in brokerage commissions for the fiscal year ended February 28, 1997.
Allocation of transactions, including their frequency, to various
dealers is determined by SBMFM in its best judgment and in a manner deemed
fair and reasonable to shareholders. The primary considerations are
availability of the desired security and the prompt execution of orders in an
effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment research and
statistical or other services to SBMFM 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 SBMFM, and the fees of
SBMFM are not reduced as a consequence of their receipt of such supplemental
information. Such information may be useful to SBMFM 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 SBMFM 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 SBMFM, 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 SBMFM 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 SBMFM 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
received by the Portfolio.
Portfolio Turnover. The 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 year ended February 28, 1997, the
portfolio turnover rate was 61%.
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 and 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 SBMFM, subject always to the
investment objectives 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 and Age
*+Heath B. McLendon
388 Greenwich Street
New York, NY 10013
Chairman of the Board
of Directors, Chief
Executive Officer
Managing Director of Smith
Barney Inc. ("Smith
Barney"); Chairman of Smith
Barney Strategy Advisers
Inc.; and Director and
President of SBMFM and of
Travelers Investment
Advisers, Inc. ("TIA").
Director of forty-two
investment companies
associated with Smith
Barney; 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.
age 63.
+Paolo M. Cucchi
Dean of College of
Liberal Arts
Drew University
Madison, NJ 07940
Director
Dean of the College of
Liberal Arts at Drew
University; Director of two
investment companies
associated with Smith
Barney. age 55.
A+lessandro di
Montezemolo
200 Murray Place
P.O. Box 5057
Southampton, NY 11969
Director
Retired; Director of two
investment companies
associated with Smith
Barney and a Director of
Offit Bank; formerly
Chairman of the Board and
Chief Executive Officer of
Marsh & McLennan, Inc. age
78.
Andrea Farace
Trace International
Holdings, Inc.
375 Park Avenue 11th
Floor
New York, NY 10152
Director
Effective May 30, 1997,
Chairman & Chief Executive
Officer of Foamex
International Inc. and Vice
Chairman and Chairman of
the Executive Committee of
Trace International
Holdings, Inc. and prior to
May 30, 1997, President and
Director of Trace
International Holdings,
Inc.; Prior to December
1994, Executive Vice
President and Managing
Director of Trace
International Holdings,
Inc. and prior to March
1993, Senior Vice President
of Trace International
Holdings, Inc. age 41.
+Paul M. Hardin
12083 Morehead
Chapel Hill, NC 27514-
8426
Director
Chancellor Emeritus and
Professor of Law at the
University of North
Carolina at Chapel Hill;
Prior to July 1995,
Chancellor and Professor of
Law. age 65.
+George M. Pavia
Pavia & Harcourt
600 Madison Avenue
New York, NY 10022
Director
Senior Partner, Pavia &
Harcourt, Attorneys.
Director of two investment
companies associated with
Smith Barney. age 69.
+James Crisona
118 East 60th Street
New York, New York 10022
Director emeritus
Retired; formerly a Justice
of the Supreme Court of the
State of New York. age 89.
John C. Bianchi
388 Greenwich Street
New York, NY 10013
Vice President and
Investment Officer
Managing Director of SBMFM;
prior to July 1993,
Managing Director of
Shearson Lehman Advisors.
age 40.
Lewis E. Daidone
388 Greenwich Street
New York, NY 10013
Senior Vice President
and Treasurer
Managing Director of Smith
Barney Inc.; Director and
Senior Vice President SBMFM
and TIA. age 39.
Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Smith
Barney Inc., General
Counsel and Secretary of
SBMFM and TIA. age 46.
* "Interested person" of the Portfolio (as defined in the 1940 Act).
+ Director and/or trustee of other registered investment companies with which
Smith Barney is affiliated.
The Portfolio pays each of its Directors who is not a director, officer
or employee of SBMFM, or any of its affiliates, an annual fee of $5,000 plus
$500 for each in-person meeting and $100 for each telephonic meeting. Each
Director emeritus is paid an annual fee of $2,500 plus $250 for each in-person
meeting and $50 for each telephonic meeting. In addition, the Portfolio will
reimburse its Directors for travel and out-of-pocket expenses incurred in
connection with Board of Directors meetings.
For the fiscal year ended February 28, 1997, the Directors of the
Portfolio were paid the following compensation.
Director(*)
Aggregate Compensation
from the Portfolio
Aggregate Compensation
from the Smith Barney
Mutual Funds
Paolo Cucchi (2)
$7,000
$17,600
Alessandro di
Montezemolo (2)
7,000
17,600
Andrea Farace (2)
7,000
20,750
Paul Hardin (12)
6,500
76,850
Heath McLendon (42)
-----
-----
George Pavia (2)
7,000
17,600
James Crisona (10)+
3,500
20,575
* Number of Funds for which Director serves within Smith Barney Mutual Funds.
+ Director emeritus may attend meetings but has no voting rights.
Upon attainment of age 80 Directors are required to change to emeritus
status. Directors Emeritus are entitled to serve in emeritus status for a
maximum of 10 years during which time they are paid 50% of the annual retainer
fee and meeting fees otherwise applicable to the Fund Directors together with
reasonable out-of-pocket expenses for each meeting attended.
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 May 31, 1997.
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
42,006,722
98.15%
As of May 31, 1997, the Directors and Officers of the Portfolio, as a
group, beneficially owned less than 1% of the Portfolio's outstanding shares
of Common Stock.
Investment Adviser and Administrator -- SBMFM
SBMFM 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 SBMFM ("Non-Interested Directors"), on November 13, 1996. Unless terminated
sooner, the Advisory Agreement 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. SBMFM 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 Travelers Group Inc. ("Travelers"), a
diversified financial services holding company engaged through its
subsidiaries principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property & Casualty
Insurance Services. SBMFM pays the salary of any officer or employee who is
employed by both it and the Portfolio. SBMFM bears all expenses in connection
with the performance of its services as investment adviser. For services
rendered to the Portfolio, SBMFM receives from the Portfolio a fee, computed
and paid monthly at the annual rate of 0.90% of the value of the Portfolio's
average daily net assets. For the fiscal years ended February 29, 1996 and
February 28, 1997, total investment advisory fees paid by the Portfolio
amounted to $4,253,885 and $4,255,116, respectively.
Under the Advisory Agreement, SBMFM will not be liable for any error of
judgment or mistake of law or for any loss suffered by the Portfolio in
connection with the Advisory Agreement, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of SBMFM 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 SBMFM. The Advisory agreement may also be terminated by SBMFM on 90 days'
written notice to the Portfolio. The Advisory Agreement terminates
automatically upon its assignment.
SBMFM also serves as administrator to the Portfolio pursuant to a
written agreement dated May 18, 1994 (the "Administration Agreement"), which
was last approved by the Board of Directors of the Portfolio, including a
majority of the Non-Interested Directors, on March 7, 1997. Pursuant to the
Administration Agreement, SBMFM 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 SBMFM's services, the Portfolio
pays a fee, computed daily and paid monthly, at the annual rate of 0.20% of
the Portfolio's average daily net assets. For the fiscal years ended February
29, 1996 and February 28, 1997, total administration fees paid by the
Portfolio amounted to $945,308 and $945,581 respectively.
Pursuant to the Administration Agreement, SBMFM will exercise its best
judgment in rendering services to the Portfolio. SBMFM will not be liable for
any error of judgment or mistake of law or for any loss suffered by the
Portfolio in connection with the matters to which the Administration Agreement
relates, except by reason of SBMFM's reckless disregard of obligations and
duties under the Administration Agreement.
The Administration Agreement will continue automatically for successive
annual periods provided that such continuance is approved at least annually by
the Board of Directors of the Portfolio, including a majority of the Non-
Interested Directors, by vote cast in person at a meeting called for the
purpose of voting such approval. The Agreement is terminable, without
penalty, upon 60 days' written notice, by the Board of Directors of the
Portfolio or by vote of holders of a majority of the Portfolio's shares of
Common Stock, or upon 90 days' written notice by SBMFM.
The Portfolio bears expenses incurred in its operation, including: fees
of the investment adviser and administrator; taxes, interest, brokerage fees
and commissions, if any; fees of Directors who are not officers, directors,
shareholders or employees of Smith Barney; SEC fees and state blue sky
qualification fees; charges of the custodian; transfer and dividend disbursing
agent's fees; certain insurance premiums; outside auditing and legal expenses;
costs of any independent pricing service; costs of maintaining corporate
existence; costs attributable to investor services (including allocated
telephone and personnel expenses); costs of preparation and printing of
prospectuses and statements of additional information for regulatory purposes
and for distribution to shareholders; shareholders' reports and corporate
meetings of the officers, Board of Directors and shareholders of the
Portfolio.
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 qualify 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 least 90% of its
taxable net investment income (which, for this purpose, consists 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
qualify 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
nevertheless 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 the 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 the shareholder has provided a correct taxpayer identification number and
that the shareholder 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 repurchase of
shares of Common Stock. An individual's taxpayer identification number is
that individual's 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 shareholder's 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 may 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 objectives, policies and securities holdings, SBMFM
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 than 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
and, therefore, 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 LLP as their
counsel.
Independent Public Accountants
KPMG Peat Marwick, LLP, 345 Park Avenue, New York, NY 10154, has been
selected as the Portfolio's independent auditor to examine and report on the
Portfolio's financial statements and highlights for the fiscal year ending
February 28, 1998.
Custodian and Transfer Agent
PNC Bank, National Association ("PNC"), located at 17th and Chestnut
Streets, Philadelphia, PA 19103, serves as the Portfolio's custodian pursuant
to a custody agreement. Under the custody agreement, PNC holds the
Portfolio's securities and keeps all necessary accounts and records. The
assets of the Portfolio are held under bank custodianship in compliance with
the 1940 Act.
First Data Investor Services Group, Inc. ("FDISG"), located at Exchange
Place, Boston, Massachusetts 02109, serves as the Portfolio's transfer agent
pursuant to a transfer agency agreement. Under the transfer agency agreement,
FDISG 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 year ended February 28, 1997
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.
u:\legal\funds\#mhy\1997\secdocs\sai1997.doc 19
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
- Included in Part A:
Financial Highlights Table
- Included in Part B:
Report of Independent Accountants is filed
herein.
- - Incorporated by Reference into Part B:
Annual Report (audited) for period ended February 28, 1997 as
filed
with the Securities and Exchange Commission on May 7, 1997 as
Accession # 91155-97-244.
(2) Exhibits:
(a) (i) Articles of Incorporation are incorporated by reference to
the Registrant's initial Registration Statement on Form N-2 (the
"Registration Statement"), Registration No. 33-56408, filed with the SEC on
December 28, 1992.
(ii) Articles of Amendment to Articles of Incorporation are
incorporated by reference to the Registrant's Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-2, filed with the SEC on February 11,
1993 ("PreEffective Amendment No. 1").
(b) (i) Bylaws of Registrant are incorporated by
reference to the Registration Statement.
(ii) Amended Bylaws of Registrant are incorporated by reference to
Pre-Effective Amendment No. 1.
(c) Not Applicable
(d) Specimen Certificate of Common Stock, par value $.01 per share
is incorporated by reference to Pre-Effective Amendment No. 1.
(e) Dividend Reinvestment Plan is incorporated by
reference to Pre-Effective Amendment No. 1.
(f) Not Applicable
(g) (i) Form of Investment Advisory Agreement between Registrant
and Shearson Lehman Advisors is incorporated by reference to Pre- Effective
Amendment No. 1.
(ii) Form of Investment Advisory Agreement between Registrant and Greenwich
Street Advisors is incorporated by reference to the Registrant's Post-
Effective Amendment No. 1 to its Registration Statement on Form N-2, filed
with the SEC on July 14, 1994 ("PostEffective Amendment No. 1").
(iii) Form of Transfer and Assumption of Investment Advisory
Agreement between the Registrant and Smith Barney Mutual Funds Management Inc.
is
incorporated by reference to the Registrant's Post-Effective Amendment No.2
to its
retistration Form N-2 filed with the SEC on June 13, 1996.
(h) Form of Underwriting Agreement between
Registrant and Shearson Lehman Brothers Inc. is incorporated by reference
to Pre-Effective Amendment No. 1.
(i) Not Applicable
(j) Form of Custody Agreement between Registrant
and PNC
Bank, National Association is incorporated by reference to
the Registrant's Post-Effective Amendment No.2 to its
registration Form N-2 filed with the SEC on June 13, 1996.
(k) (i) Transfer Agency and Registrar Agreement
between Registrant and FDISG is incorporated by reference to Pre-Effective
Amendment No. 1.
(ii) Administration Agreement between Registrant and Smith,
Barney Advisors, Inc. is incorporated by reference to Post-Effective
Amendment No. 1.
(iii) Form of Market-Making Agreement between the Registrant and
Smith Barney Inc. is incorporated by reference to the Registrant's Post-
Effective Amendment No.2 to its registration Form N-2 filed with the SEC on
June 13, 1996.
(l) Opinion and Consent of Counsel is incorporated by reference to the
Registrant's Pre-Effective Amendment No. 2 to its Registration Statement on
Form N-2, filed with the SEC on March 18, 1993.
(m) Not Applicable
(n) Consent of Independent Auditors is filed herein.
(o) Financial Data Schedule is filed herein.
(p) Form of Purchase Agreement between Registrant and Shearson Lehman
Brothers Inc. is incorporated by reference to PreEffective Amendment No.
1.
(q) Not Applicable
Item 25. Marketing Arrangements
None
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in connection
with the offering described in this Registration Statement:
Securities and Exchange Commission Fees $
Printing and Engraving Expenses 5,000
Legal Fees 0
Accounting Expenses 3,000
Miscellaneous Expenses 0
Total 8000
Item 27. Persons Controlled by or Under Common Control
None
Item 28. Number of Holders of Securities
Number of
Record
Stockholders
as of
Title of Class May 13, 1997
Shares of Common Stock,
par value
$0.01 per share 926
Item 29. Indemnification
Under Article VII of Registrant's Articles of Incorporation, any
past or present director or officer of Registrant is indemnified to the
fullest extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any action, suit or proceeding to which he
may be a party or otherwise involved by reason or his being or having been
a director or officer of Registrant. This provision does not authorize
indemnification when it is determined that the director or officer would
otherwise be liable to Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of his duties.
Expenses may be paid by Registrant in advance of the final disposition of any
action, suit or proceeding upon receipt of an undertaking by a director or
officer to repay those expenses to Registrant in the event that it is
ultimately determined that indemnification of the expenses is not authorized
under Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that in the opinion of
the Securities and Exchange Commission, such indemnification is against
policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by Registrant of expenses incurred or paid by a director,
officer or controlling person of Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Mutual Funds Management Inc., formerly
known as Smith Barney Advisers, Inc. ("SBMFM"). SBMFM was incorporated in
December 1968 under the laws of the State of Delaware. SBMFM is a wholly
owned subsidiary of Smith Barney Holdings Inc. (formerly known as Smith
Barney Shearson Holdings Inc.) ("Holdings"), which in turn is a wholly
owned subsidiary of Travelers Group Inc. (formerly known as Primerica
Corporation) ("Travelers"). SBMFM is registered as an investment adviser
under the Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and directors of SBMFM
together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by
reference to Schedules A and D of FORM ADV filed by SBMFM pursuant to the
Advisers Act (SEC File No. 801-8314).
Item 31. Location of Accounts and Records
Managed High Income Portfolio Inc.
388 Greenwich Street
New York, New York 10013
Smith Barney Mutual Funds Management Inc. 388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc. One Exchange Place
Boston, Massachusetts 02109
PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
Item 32. Management Services
None
Item 33. Undertakings
1. Not Applicable.
2. Not Applicable.
3. Not Applicable.
4. The Portfolio hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the Securities
Act of 1933 (the "Act");
(2) to reflect in the Prospectus any facts or events arising after the
effective date of the
Registration Statement (or the most recent posteffective amendment thereof)
which, individually or in the aggregate, represent a fundamental change
in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the
Registration Statement.
(b) For the purpose of determining any liability under the Act, each post-
effective amendment shall be deemed to be a new Registration
Statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
(c) Not Applicable
5. Not Applicable.
6. The Portfolio undertakes to send by first class mail or
other means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any Statement of
Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, as amended, the Registrant has duly
caused this Amendment to its Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New
York and State of New York, on the 24th day of June, 1997.
MANAGED HIGH INCOME PORTOFLIO INC.
By:/s/Heath B. McLendon_____
Health B. McLendon
Chairman of the Board
We, the undersigned, hereby severally constitute and appoint Heath
B. McLendon, and Christina T. Sydor and each of them singly, our true and
lawful attorneys, with full
power to them and each of them to sign for us, and in our hands and in the
capacities indicated below, any and all Amendments to this Registration
Statement and to file the same, with all
exhibits thereto, and other documents therewith, with the Securities and
Exchange Commission, granting unto said attorneys and each of them, acting
alone, full authority and power to do and perform each and every act and
thing requisite or necessary to be done in the premises, as fully to all
intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys or any of them may lawfully
do or cause to be done by virtue thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement and the above Power of
Attorney has been signed below by the following persons in the capacities and
as of the dates indicated.
Signature Title Date
/s/ Heath B.McLendon Chairman of the Board, June 24, 1997
Heath B. McLendon Chief Executive Officer
and Director
/s/ Lewis E.Daidone Senior Vice President June 24, 1997
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
/s/ Paolo M.Cucchi Director June 24, 1997
Paolo M. Cucchi
/s/ Alessandro C. di Director June 24, 1997
Montezemolo
Alessandro C. di
Montezemolo
/s/ Andrea Farace Director June 24, 1997
Andrea Farace
/s/ Paul Hardin Director June 24, 1997
Paul Hardin
/s/ George M. Pavia Director June 24, 1997
George M. Pavia
u:\legal\funds\#mhy\1997\secdocs\pea3.txt
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Managed High Income Portfolio Inc.:
We consent to the use of our report dated April 17, 1997 for the Managed
High Income Portfolio Inc. incorporated herein by reference and to the
references to our Firm under the heading "Financial Highlights" in the
Prospectus and Independent Public Accountants" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
New York, New York
June 30, 1997
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<NAME> MANAGED HIGH INCOME PORTFOLIO INC.
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