As filed with the Securities and Exchange Commission on June 18, 1998
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. 4
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5 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) 816-6474
(Registrants Telephone Number, including Area Code)
Christina T. Sydor
Secretary
Managed High Income Portfolio
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M. Leibert,Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Approximate Date of Proposed Public Offering: As soon as practicable
After the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance on Rule 415 under the Securities Act
of 1933,as amended ( the 1933 Act), 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 filing will become effective:
[ x ]when declared effective pursuant to section 8(c).
Registrant amends this Registration Statement under the Securities Act
of 1933, as amended, on such date as may be necessary to delay its effective
date until Registrant files a further amendment that specifically states that
this Registration Statement will thereafter become effective in accordance
with the provisions of Section 8(a) of the Securities Act of 1933, as
amended,
or until the Registration Statement becomes effective on such date as the
Securities and Exchange Commission, acting pursuant to Section 8(a), may
determine.
MANAGED 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 Page of Prospectus
3. Fee Table and Synopsis Prospectus Summary; Fund
Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Prospectus Summary; The
Offering;
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 LOGO]
Managed
High
Income
Portfolio
Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD01148 6/98
<PAGE>
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Prospectus June 26, 1998
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Managed High Income Portfolio Inc.
388 Greenwich Street
New York, New York 10013
(800) 331-1710
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 Portfolios address is 388
Greenwich Street, New York, New York 10013 and the Portfolios telephone number
is (800) 331-1710.
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 nationally recognized statistical rating organizations
(NRSROs), (i.e. as low as C by Moodys Investors Service, Inc. (Moodys) or
D by Standard & Poors Ratings Group (S&P)),or the equivalent rating by another
NRSRO, or in unrated securities that the
Portfolios 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 Portfolios 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
(Continued on page 2)
Smith Barney Inc.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Prospectus (continued) June 26, 1998
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Prospectus were issued and sold by the Portfolio in a public offering which
commenced March 18, 1993, at a price of $12.00 per share. No 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 26, 1998 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
<PAGE>
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Table of Contents
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Prospectus Summary 4
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Financial Highlights 8
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The Portfolio 9
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The Offering 9
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Use of Proceeds 9
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Investment Objectives and Policies 9
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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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Taxes 29
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Description of Common Stock 30
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Stock Purchases and Tenders 31
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Certain Provisions of the Articles of Incorporation 32
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Custodian, Transfer Agent and
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Dividend-Paying Agent and Registrar 32
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Further Information 33
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Appendix A A-1
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3
<PAGE>
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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 an NRSRO, as low as C by Moodys or D by S&P or the equivalent
rating by another NRSRO, or in unrated securities that the Portfolios
investment adviser deems to be of comparable quality. However, the Portfolio
will not purchase securities that have not been assigned a rating of B or higher
by any NRSRO 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 Portfolios 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 Mutual Management Corp. (MMC) (formerly known as Smith Barney Mutual
Funds Management Inc.). MMC is a wholly-owned subsidiary of Salomon Smith Barney
Holdings Inc. (Holdings) which in turn is a wholly owned subsidiary of
Travelers Group Inc. (Travelers), a diversified financial services holding
company engaged through its subsidiaries principally in four business
4
<PAGE>
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Prospectus Summary (continued)
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segments: Investment Services, including Asset Management, Consumer Finance
Services, Life Insurance Services and Property & Casualty Insurance Services.
MMC currently manages investment companies with total assets in excess of $98
billion. The Portfolio pays MMC 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 Portfolios average daily net assets. See Management of the Portfolio --
Investment Adviser and Administrator.
Administrator MMC also serves as the Portfolios administrator. The Portfolio
pays MMC 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
Portfolios 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 Portfolios custodian. First Data
Investor Services Group, Inc. (the Transfer Agent), serves as the Portfolios
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 Portfolios 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 Portfolios 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 Portfolios Common Stock are designed
primarily for long-term investors, and investors in the Portfolios 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.
5
<PAGE>
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 Portfolios 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 issuers capacity to pay interest and repay principal in
accordance with the terms of the obligations. Up to 10% of the Portfolios
assets may be invested in securities that have not been assigned a rating of B
or higher by any NRSRO, including bonds rated as low as C by Moodys or D by S&P
or the equivalent rating by another NRSRO. 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 Portfolios 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, 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 agreements and lending portfolio securities are investment
techniques involving risks to the Portfolio. See Investment Objectives and
Management Policies -- Risk Factors and Special Considerations.
6
<PAGE>
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Prospectus Summary (continued)
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The Portfolios 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 Portfolios 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.
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................................................ 0.08%
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Total Annual Operating Expenses*.................................. 1.18%
================================================================================
* See Management of the Portfolio for additional information. Other Expenses
are based on data from the Portfolios fiscal year ended February 28, 1998.
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 $37 $65 $143
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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 Portfolios actual expenses may be more or less than
those shown.
7
<PAGE>
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Financial Highlights
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The following information for the three years ended February 28, 1998 has
been audited by KPMGPeat Marwick LLP, independent auditors, whose report thereon
appears in the Funds annual report dated February 28, 1998. The information for
the period March 26, 1993 through February 28, 1994 and the fiscal year ended
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 Funds 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>
1998 1997 1996 1995 1994(1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 11.59 $ 11.36 $ 10.88 $ 12.39 $ 12.00
- -------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.09 1.12 1.13 1.12 0.98
Net realized and unrealized gain (loss) 0.28 0.21 0.65 (1.48) 0.51
- -------------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 1.37 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 (1.09) (1.08) (1.27) (1.00) (0.96)
Net realized gains -- -- -- (0.15) (0.12)
Capital -- (0.02) (0.03) -- --
- -------------------------------------------------------------------------------------------------------
Total Distributions (1.09) (1.10) (1.30) (1.15) (1.08)
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Net Asset Value, End of Year $ 11.87 $ 11.59 $ 11.36 $ 10.88 $ 12.39
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Total Return,
Based on Market Value 10.96% 15.37% 18.83% 0.14% 6.85%++
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Total Return,
Based on Net Asset Value** 12.43% 12.65% 17.80% (2.18)% 12.67%++
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Net Assets, End of Year (000s) $522,560 $493,906 $476,824 $456,789 $520,091
=======================================================================================================
Ratios to Average Net Assets:
Expenses 1.18% 1.20% 1.24% 1.24% 1.19%+
Net investment income 9.19 9.89 9.74 9.96 8.74+
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Portfolio Turnover Rate 94% 61% 73% 62% 108%
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Market Value, End of Year $ 11.750 $ 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 calculation assumes that dividends are reinvested in
accordance with the Funds dividend reinvestment plan.
++ Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
8
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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 Portfolios telephone number
is 1-800-331-1710.
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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 Portfolios 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 Portfolios investment objectives may not be changed
without the affirmative vote of the holders of a majority (as defined in the
1940 Act) of the Portfolios 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
9
<PAGE>
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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. MMC may adjust the Portfolios average maturity when, based on
interest rate trends and other market conditions, it deems it appropriate to do
so. Up to 35% of the Portfolios 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 NRSROs, as low as C
by Moodys or D by S&P or the equivalent rating by another NRSRO, or, if
unrated, will be securities that MMC deems to be of comparable quality. However,
the Portfolio will not invest in securities that have not been assigned a rating
of B or higher by any NRSRO 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 MMC 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 Portfolios 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 Portfolios 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
10
<PAGE>
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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 MMC believes that economic circumstances
warrant a temporary defensive posture, the Portfolio may invest without
limitation in short-term money market instruments rated in the two highest
ratings categories by an NRSRO, or, if unrated, of comparable quality in the
opinion of MMC. 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 Yorks 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 Portfolios holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Portfolios 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 Portfolios 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. MMC, acting under the supervision of the Portfolios Board of
Directors, reviews on an ongoing basis the value of the collateral and the
creditworthiness of the banks and dealers with which the Portfolio enters into
repurchase agreements to evaluate potential risk.
Government Securities. U.S. government securities in which the Portfolio
may invest include direct obligations of the United States and obligations
issued by U.S. government agencies and instrumentalities. Included among the
direct obligations of the United States are Treasury Bills, Treasury Notes and
Treasury Bonds, which differ principally in terms of their maturities. Included
among the securities issued by U.S. government agencies and instrumentalities
are: securities that are supported by the full faith and credit of the United
States (such as Government National
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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 Portfolios 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 securitys 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.
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Investment Objectives and Policies (continued)
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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 MMC, 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
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Investment Objectives and Policies (continued)
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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 writers 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 Portfolios 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 its portfolio securities, the value
of such futures contracts may not exceed the total market value of the
Portfolios 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 Portfolios dealings in
forward currency exchange and options
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Investment Objectives and Policies (continued)
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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 Portfolios 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
15
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Investment Objectives and Policies (continued)
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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 Portfolios 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. Consistent with applicable regulatory
requirements, the Portfolio has the ability to lend portfolio securities to
brokers, dealers and other financial organizations. 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.
Illiquid Securities. The Portfolio may invest up to 15% of its net assets
in illiquid securities, including repurchase agreements maturing in more than
seven days, securities that are not readily marketable and restricted securities
not eligible for resale pursuant to Rule 144A under the Securities Act of 1933,
as amended (the 1933 Act). An illiquid security is any security that cannot be
disposed of within seven days in the normal course of business at approximately
the amount at which it is valued by the Portfolio. The price the Portfolio pays
for illiquid securities or receives upon resale may be lower than the price paid
or received for similar securities with a more liquid market. Accordingly, the
valuation of these securities will reflect any limitations on their liquidity.
Rule 144A Securities. The Portfolio may purchase Rule 144A Securities,
which are unregistered securities restricted to purchase by qualified
institutional buyers pursuant to Rule 144A under the 1933 Act. Because Rule
144A Securities are freely transferable among qualified institutional buyers, a
liquid market may exist among such buyers. The Board of Directors has adopted
guidelines and delegated to management the daily function of determining and
monitoring liquidity of Rule 144A securities. However, the Board of Directors
maintains sufficient oversight and is ultimately responsible for the liquidity
determinations. Investments in restricted securities such as Rule 144A
securities could have the effect of increasing the level of illiquidity in the
Portfolio to the extent that there is temporarily no market for these securities
among qualified institutional buyers.
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
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Investment Objectives and Policies (continued)
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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 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 Portfolios net assets (taken at current value) may be held as collateral
for such sales at any one time.
Asset Backed Securities. An Asset Backed Security (ABS) represents an
interest in a pool of assets such as receivables from credit card loans,
automobile loans and other trade receivables. Changes in the markets perception
of the asset backing the security, the creditworthiness of the servicing agent
for the loan pool, the originator of the loans, or the financial institution
providing any credit enhancement will all affect the value of ABSs, as will the
exhaustion of any credit enhancement. The risks in investing in an ABS
ultimately depend upon the payment of the consumer loans by the individual
borrowers. In its capacity as purchaser of ABSs, the Fund would generally have
no recourse to the entity that originated the loans in the event of default by
the borrower. Additionally, the loans underlying ABSs are subject to
prepayments, which may shorten the weighted average life of such securities and
may lower their return.
Real Estate Investment Trusts. Real Estate Investment Trusts (REITs) are
pooled investment vehicles that invest primarily in either real estate or real
estate loans. The value of a REIT is affected by changes in the value of the
properties owned by the REIT or securing mortgage loans held by the REIT. REITs
are dependent upon cash flow from their investments to repay financing costs and
the ability of the REITs manager. REITs are always subject to risks generally
associated with investments in real estate. The Portfolio will invest primarily
in REIT issued debt.
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Investment Objectives and Policies (continued)
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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 inter-positioned 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 Portfolios ability to
dispose of particular Assignments or Participations when necessary to meet the
Portfolios 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 Portfolios 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:
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Investment Objectives and Policies (continued)
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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 Portfolios 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 Portfolios securities
may be in excess of gains on the futures contract or losses on the futures
contract may be in excess of gains on the Portfolios 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
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Investment Objectives and Policies (continued)
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Portfolios 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 MMC. Successful use by the Portfolio of options
will depend on MMCs ability to correctly predict movements in the direction of
the stock under lying the option used as a hedge. Losses incurred in hedging
transactions and the costs of these transactions will affect the Portfolios
performance.
The ability of the Portfolio to engage in closing transactions with
respect to options depends on the existence of a liquid secondary market. While
the Portfolio generally will purchase options only if there appears to be a
liquid secondary market for the options purchased or sold, for some options no
such secondary market may exist or the market may cease to exist.
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risks inherent in domestic investments. These risks include those
resulting from devaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The net asset value of the
Portfolio may be adversely affected by fluctuations in value of one or more
foreign currencies relative to the U.S. dollar. Moreover, securities of many
foreign issuers and their markets may be less liquid and their prices more
volatile than those of securities of comparable domestic issuers. In addition,
with respect to certain foreign countries, there is the possibility
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Investment Objectives and Policies (continued)
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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 issuers 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 Portfolios shares.
The markets in which medium- and low-rated or comparable unrated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Portfolio to
purchase and also may have the effect of limiting the ability of the Portfolio
to (a) obtain accurate market quotations for purposes of valuing securities and
calculating net asset value and (b) sell securities at their fair value to
respond to changes in the economy or the financial markets. The market for
medium- and low-rated and comparable unrated securities is relatively new and
has not fully weathered a major economic recession. Any such economic downturn
could adversely affect the ability of the issuers of such securities to repay
principal and pay interest thereon.
While the market values of medium- and low-rated and comparable unrated
securities tend to react less to fluctuations in interest rate levels than 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
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Investment Objectives and Policies (continued)
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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 Portfolios assets may be invested in securities that
have not been assigned a rating of B or better by an NRSRO. Securities which are
rated below investment grade by an NRSRO (such as Ba by Moodys 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 in the lowest
NRSRO rating class (such as C by Moodys and D by S&P) 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.
In light of these risks, MMC, in evaluating the creditworthiness of an
issue, whether rated or unrated, will take various factors into consideration,
which may include, as applicable, the issuers 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
issuers management and regulatory matters.
Ratings as Investment Criteria. In general, the ratings of NRSROs
represent the opinions of these agencies as to the quality of securities that
they rate. Such ratings, however, are relative and subjective, and are not
absolute standards of quality and do not evaluate the market value risk of the
securities. These ratings will be used by the Portfolio as initial criteria for
the selection of portfolio securities, but the Portfolio also will rely upon the
independent advice of MMC 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.
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Investment Objectives and Policies (continued)
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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 MMC 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.
Year 2000. The investment management services provided to the Fund by MMC,
and the services provided to shareholders by Smith Barney, depend on the smooth
functioning of their computer systems. Many computer software systems in use
today cannot recognize the year 2000, but revert to 1900 or some other date, due
to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Funds operations, including the handling of
securities trades, pricing and account services. MMC and Smith Barney have
advised the Fund that they have been reviewing all of their computer systems and
actively working on necessary changes to their systems to prepare for the year
2000 and expect that their systems will be compliant before that date. In
addition, MMC has been advised by the Funds custodian, transfer agent and
accounting service agent that they are also in the process of modifying their
systems with the same goal. There can, however, be no assurance that, MMC, Smith
Barney or any other service provider will be successful, or that interaction
with other noncomplying computer systems will not impair Fund services at that
time.
- --------------------------------------------------------------------------------
Investment Restrictions
- --------------------------------------------------------------------------------
The Portfolio has adopted certain fundamental investment restrictions that
may not be changed without the prior approval of the holders of a majority of
the Portfolios outstanding voting securities. A majority of the Portfolios
outstanding voting securities for this purpose means the lesser of (1) 67% or
more of the shares of the Portfolios Common Stock present at a meeting of
shareholders, if the holders of 50% of the outstanding shares are present or
represented by proxy at the meeting or (2) more than 50% of the outstanding
shares. For a complete listing of the investment restrictions applicable to the
Portfolio, see Investment Restrictions in the Portfolios Statement of
Additional Information dated June 26, 1998. 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
<PAGE>
- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------
The Common Stock is traded on the NYSE under the symbol MHY. Smith
Barney intends to make a market in the Portfolios 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>
5/31/96 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%
5/31/97 11.16 - 11.58 11.1250 - 11.7500 $11.47 $11.625 1.35%
8/31/97 11.48 - 11.86 11.6250 - 11.9380 $11.77 $11.875 0.89%
11/30/97 11.76 - 12.08 11.7500 - 12.1250 $11.78 $12.125 2.93%
2/28/98 11.75 - 11.98 11.7500 - 12.5000 $11.87 $11.750 (1.01%)
</TABLE>
As of May 29, 1998, the price of Common Stock as quoted on the NYSE was
$11.4375, representing a discount from the Common Stocks net asset value of
$11.81 calculated on that day. Since the commencement of the Portfolios
operations, the Portfolios 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 Portfolios Board of Directors. The Directors approve all
significant agreements with the Portfolios investment adviser, administrator,
custodian and transfer agent. The day-to-day operations of the Portfolio are
delegated to the Portfolios investment adviser and administrator. The SAI
contains background information regarding each Director and executive officer of
the Portfolio.
INVESTMENT ADVISER AND ADMINISTRATOR
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Portfolios investment adviser. MMC, through its predecessors, has been in
the investment counseling business since 1934 and currently manages investment
companies with total assets as of May 31, 1998 in excess of $98 billion.
24
<PAGE>
- --------------------------------------------------------------------------------
Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
Subject to the supervision and direction of the Portfolios Board of
Directors, MMC manages the securities held by the Portfolio in accordance with
the Portfolios 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 MMC 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 Portfolios average
daily net assets.
Transactions on behalf of the Portfolio are allocated to various dealers
by MMC 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 MMC 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 MMC believes that the brokers 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 Portfolios administrator, MMC generally manages all aspects of the
Portfolios administration and operation. The Portfolio pays MMC a fee for
administration services that is computed daily and paid monthly at the annual
rate of 0.20% of the Portfolios 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.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also subject
to approval by the stockholders of each of Travelers and Citicorp. Upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
BHCA), the requirements of the Glass-Steagall Act and certain other laws and
regulations. Although the effects of the merger of Travelers and Citicorp and
compliance with the requirements of the BHCA and the Glass-Steagall Act are
still under review, the Manager does not believe that its compliance with
applicable law following the merger of Travelers and Citicorp will have a
material adverse effect on its ability to continue to provide the Fund with the
same level of investment advisory services that it currently receives.
25
<PAGE>
- --------------------------------------------------------------------------------
Management of the Portfolio (continued)
- --------------------------------------------------------------------------------
PORTFOLIO MANAGEMENT
John C. Bianchi, Vice President and Investment Officer of the Portfolio,
is primarily responsible for the management of the Portfolios assets. Mr.
Bianchi has served the Portfolio in this capacity since the Portfolio commenced
operations in 1993 and manages the day-to-day operations of the Portfolio,
including making all investment decisions. Mr. Bianchi is a Managing Director of
MMC 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 Portfolios current policy, which may be changed at any
time by its Board of Directors, the Portfolios 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 Portfolios 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 shares 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 divi-
26
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
dend 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 purchasing 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
informa tion 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 shareholders 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 Agents 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
27
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
Common Stock or in cash. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to open
market purchases made in connection with the reinvestment of dividends or
capital gains distributions.
Experience under the Plan may indicate that changes to it are desirable.
The Portfolio reserves the right to amend or terminate the Plan as applied to
any dividend or capital gains distribution paid subsequent to written notice of
the change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by the Transfer Agent, with the Portfolios 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., Eastern 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 Portfolios 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 Portfolios total assets less liabilities. In general, the
Portfolios 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
Portfolios 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
28
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value (continued)
- --------------------------------------------------------------------------------
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 Portfolios assets is made by MMC after consultation
with an independent pricing service (the Service) approved by the Portfolios
Board of Directors. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid prices
and asked prices. Investments for which, in the judgment of the Service, no
readily obtainable market quotation is available, are carried at fair value as
determined by the Service, based on methods that include consideration of:
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. The
Service may use electronic data processing techniques and/or a matrix system to
determine valuations. The procedures of the Service are reviewed periodically by
the officers of the Portfolio under the general supervision and responsibility
of the Board of Directors, which may replace the Service at any time if it
determines it to be in the best interests of the Portfolio to do so.
- --------------------------------------------------------------------------------
Taxes
- --------------------------------------------------------------------------------
The following is a summary of the material federal tax considerations
affecting the Portfolio and Portfolio shareholders. Please refer to the SAI for
further dis cussion. In addition to the considerations described below and in
the SAI, there may be other federal, state, local, and/or foreign tax
applications to consider. Because taxes are a complex matter, prospective
shareholders are urged to consult their tax advisors for more detailed
information with respect to the tax consequences of any investment.
The Portfolio intends to qualify, as it has in prior years, under
Subchapter M of the Internal Revenue Code (the Code) for tax treatment as a
regulated investment company. In each taxable year that the Portfolio qualifies,
so long as such qualifi cation is in the best interests of its shareholders, the
Portfolio will pay no federal income tax on its net investment company taxable
income and long-term capital gain that is distributed to its shareholders.
Dividends paid from net investment income and net realized short-term
securities gain, are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains, derived
from the sale of securities held by the Portfolio for more than one year, are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Portfolio shares.
29
<PAGE>
- --------------------------------------------------------------------------------
Taxes (continued)
- --------------------------------------------------------------------------------
Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional shares. A portion
of the dividends paid by the Portfolio may qualify for the corporate dividends
received deduction. Dividends consisting of interest from U.S. government
securities may be exempt from state and local income taxes. The Portfolio will
inform shareholders of the source and tax status of all distributions promptly
after the close of each calendar year.
A shareholders gain or loss on the disposition of Portfolio shares
(whether by redemption, sale or exchange), generally will be a long-term or
short-term gain or loss depending on the length of time the shares had been
owned at disposition. Losses realized by a shareholder on the disposition of
Portfolio shares owned for six months or less will be treated as a long-term
capital loss to the extent that a capital gain dividend had been distributed on
such shares.
The Portfolio is required to withhold (backup withholding) 31% of all
taxable dividends, capital gain distributions, and the proceeds of any
redemption, regardless of whether gain or loss is realized upon the redemption,
for shareholders who do not provide the Portfolio with a correct taxpayer
identification number (social security or employer identification number).
Withholding from taxable dividends and capital gain distributions also is
required for shareholders who otherwise are subject to backup withholding. Any
tax withheld as a result of backup withholding does not constitute an
additional tax, and may be claimed as a credit on the shareholders federal
income tax return.
- --------------------------------------------------------------------------------
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
Portfolios 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
Portfolios 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.
30
<PAGE>
- --------------------------------------------------------------------------------
Description of Common Stock (continued)
- --------------------------------------------------------------------------------
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 Portfolios Board of Directors and will be subject
to the requirement of the 1940 Act that shares may not be sold at a price below
the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the Portfolios outstanding shares.
Common Stock
Shares Issued
and Outstanding
Shares Authorized as of
Title of Class Shares Authorized and Not Issued May 31, 1998
-------------- ----------------- -------------- ------------
Common Stock 500,000,000 455,985,011 44,014,989
- --------------------------------------------------------------------------------
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
Portfolios commencement of operations, the Common Stock has traded primarily at
a slight discount to 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 Portfolios 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 Portfolios 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 Portfolios securities positions, the
effect an
31
<PAGE>
- --------------------------------------------------------------------------------
Stock Purchases and Tenders (continued)
- --------------------------------------------------------------------------------
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 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 Portfolios 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 Portfolios 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 Portfolios
investments.
First Data Investor Services Group, Inc., located at One Exchange Place,
Boston, Massachusetts 02109, serves as the Portfolios 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 Portfolios 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 share-
32
<PAGE>
- --------------------------------------------------------------------------------
Custodian, Transfer Agent and Dividend-Paying Agent and Registrar
(continued)
- --------------------------------------------------------------------------------
holders. The services to be provided by the Transfer Agent as agent under the
Plan are described under Dividends and Distributions; Dividend Reinvestment
Plan.
- --------------------------------------------------------------------------------
Further Information
- --------------------------------------------------------------------------------
Further information concerning the Common Stock and the Portfolio may be
found in the Registration Statement, of which this Prospectus and the SAI
constitute a part, on file with the SEC.
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 Portfolios 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.
33
<PAGE>
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
DESCRIPTION OF MOODYS CORPORATE BOND RATINGS:
Aaa Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as gilt
edge. Interest payments are protected by a large or by an exceptionally
stable margin, and principal is secure. While the various protective
elements are likely to change, such changes as can be visualized are most
unlikely to impair the fundamentally strong position of these bonds.
Aa Bonds rated Aa are judged to be of high quality by all standards. Together
with the Aaa group they 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 there may be other
elements present that make the long-term risks appear somewhat
larger than in Aaa securities.
A Bonds rated A possess many favorable investment attributes and are to be
considered as upper medium grade obligations. Factors giving security to
principal and interest are considered adequate, but elements may be
present that suggest a susceptibility to impairment some time in the
future.
Baa Bonds rated Baa are considered to be medium grade obligations, i.e, 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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba Bonds rated Ba are judged to have speculative elements; their future
cannot be considered as well assured. Often the protection of interest and
principal payments may be very moderate, and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B Bonds rated B generally lack characteristics of the desirable investments.
Assurance of interest and principal payments or 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. Such issues may be in
default or there may be present elements of danger with respect to
principal or interest.
Ca Bonds that are rated Ca represent obligations that 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 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.
Con Bonds for which the security depends upon the completion of some actor
(...) the fulfillment of some condition are rated conditionally. These are bonds
secured by: (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operating experience (c) rentals that begin when
facilities are completed, or (d) payments to which some other limiting
condition attaches.
Parenthetical rating denotes probable credit stature upon completion of
construction or elimination of basis of condition.
P When applied to forward delivery bonds, indicates that the rating is
(..) provisional pending delivery of bonds. The rating may be revised prior to
delivery if changes occur in the legal documents or the underlying credit
quality of the bonds.
Note: The modifier 1 indicates that the issue 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 low 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 debt 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, B, CCC and C are regarded, on balance, as predominantly
CCC, speculative with respect to the issuers capacity to pay interest and
CC,C repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C 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.
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
CI Bonds rated CI are income bonds on which no interest is being paid.
D Bonds rated D are in default. The D category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such
payments will be made during such grace period. The D rating is also used
upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
S&Ps 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.
Provisional Ratings: The letter p indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project being financed by the debt being rated and indicates that payment of
debt service requirements is largely or entirely dependent upon the successful
and timely completion of the project. This rating, however, while addressing
credit quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L - The letter L indicates that the rating pertains to the principal
amount of those bonds where the underlying deposit collateral is fully insured
by the Federal Savings & Loan Insurance Corp. or the Federal Deposit Insurance
Corp.
+ - Continuance of the rating is contingent upon S&Ps receipt of closing
documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&Ps receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which th base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
DESCRIPTION OF FITCH IBCA, INC.S CORPORATE BOND RATINGS:
AAA - Bonds rated AAA by Fitch have the lowest expectation of credit risk.
The obligor has an exceptionally strong capacity for timely payment of financial
commitments which is highly unlikely to be adversely affected by foreseeable
events.
AA - Bonds rated AA by Fitch have a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial commitment.
This capacity is not significantly vulnerable to foreseeable events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but may be more vulnerable to changes in economic
conditions and circumstances than bonds with higher ratings.
A-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
BBB - Bonds rated BBB by Fitch currently have a low expectation of credit
risk. The capacity for timely payment of financial commitments is considered to
be adequate. Adverse changes in economic conditions and circumstances, however,
are more likely to impair this capacity. This is the lowest investment grade
category assigned by Fitch.
BB - Bonds rated BB by Fitch carry the possibility of credit risk
developing, particularly as the result of adverse economic change over time.
Business or financial alternatives may, however, be available to allow financial
commitments to be met. Securities rated in this category are not considered by
Fitch to be investment grade.
B - Bonds rated B by Fitch carry significant credit risk, however, a
limited margin of safety remains. Although financial commitments are currently
being met, capacity for continued payment depends upon a sustained, favorable
business and economic environment.
CCC, CC, C - Default on bonds rated CCC,CC, and C by Fitch is a real
possibility. The capacity to meet financial commitments depends solely on a
sustained, favorable business and economic environment. Default of some kind on
bonds rated CC appears probable, a C rating indicates imminent default.
Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs however, are not used
in the AAA category.
COMMERCIAL PAPER RATINGS
MOODYS INVESTORS SERVICE, INC.
Issuers rated Prime-1 (or related supporting institutions) have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment will normally be evidenced by the following characteristics: leading
market positions in well-established industries; high rates of return on funds
employed; conservative capitalization structures with moderate reliance on debt
and ample asset protection; broad margins in earnings coverage of fixed
financial changes and high internal cash generation; well-established access to
a range of financial markets and assured sources of alternate liquidity.
Issuers rated Prime-2 (or related supporting institutions) have strong
capacity for repayment of short-term promissory obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, will be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
STANDARD & POORS
A-1 - This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issuers determined to
possess
A-4
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
overwhelming safety characteristics will be denoted with a plus (+) sign
designation.
A-2 - Capacity for timely payment on issues with this designation is
strong. However, the relative degree of safety is not as high as for issues
designated A-1.
FITCH IBCA, INC.
Fitchs short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet financial commitment in a timely
manner.
Fitchs short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payments of financial commitments. The + denotes an
exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for timely
payment of financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
DUFF & PHELPS INC.
Duff 1+ - Indicates the highest certainty of timely payment: short-term
liquidity is clearly outstanding, and safety is just below risk-free United
States Treasury short-term obligations.
Duff 1 - Indicates a high certainty of timely payment.
Duff 2 - Indicates a good certainty of timely payment: liquidity factors
and company fundamentals are sound.
THE THOMSON BANKWATCH (TBW)
TBW-1 - Indicates a very high degree of likelihood that principal and
interest will be paid on a timely basis.
TBW-2 - While the degree of safety regarding timely repayment of principal
and interest is strong, the relative degree of safety is not as high as for
issues rated TBW-1.
A-5
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 26, 1998
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 objectives, 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 nationally recognized
statistical rating organizations (NRSROs), as low as C by Moodys Investors
Service, Inc. (Moodys) or D by Standard & Poors Ratings Group (S&P) or the
equivalent rating by another NRSRO, or in unrated securities that the
Portfolios 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 26, 1998, 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 Portfolios 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 material change occurs while the Prospectus is
required by law to be delivered, however, the Prospectus or this SAI will be
supplemented or amended accordingly.
TABLE OF CONTENTS
Page
Investment 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 Taxes) 14
Stock Purchases and Tenders (see in the Prospectus
Stock Purchases and Tenders and
Description of Common Stock) 16
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 Portfolios investment objectives and the
policies it employs to achieve those objectives. The following discussion
supplements the description of the Portfolios investment policies in the
Prospectus.
General
The Portfolios 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 Portfolios
investment adviser, Mutual Management Corp. (MMC), (formerly known as
Smith Barney Mutual Funds Management Inc.) may adjust the Portfolios
average maturity when, based on interest rate trends and other market
conditions, it deems it appropriate to do so. Up to 35% of the Portfolios
assets may be invested in common stock or other equity or equity-related
securities, including convertible securities, preferred stock, warrants and
rights. The Portfolios investment objectives 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 Portfolios outstanding
voting shares. No assurance can be given that the Portfolios 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 NRSROs, as low as C by
Moodys or D by S&P or the equivalent rating by another NRSRO, or, if unrated,
will be securities that MMC deems of comparable quality. However, the
Portfolio will not purchase securities that have not been assigned a rating
of B or higher by any NRSRO 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 MMC 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 Portfolios 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
NRSROs such as Moodys 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 MMC. Among the factors that will also be considered by
MMC 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 Portfolios achievement of its investment objectives may be
more dependent on MMCs 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
NRSROs 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 MMC 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 an NRSRO, 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 an NRSRO such as Moodys 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
Portfolios 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 Portfolios securities, the value of such futures contracts may
not exceed the total market value of the Portfolios 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 Portfolios 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 writers 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
Portfolios 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
Portfolios use of futures contracts and options on futures contracts to
reduce risk involves costs and will be subject to MMCs ability to predict
correctly changes in interest rate relationships or other factors. No
assurance can be given that MMCs judgment in this respect will be correct.
Lending Securities. Consistent with applicable legal requirements, the
Portfolio is authorized to lend securities it holds to brokers, dealers and
other financial institutions, other than MMC and its affiliates. 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
Portfolios Board of Directors must terminate the loan and regain the
Portfolios 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 contracts to purchase or sell currencies.
The Portfolios 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
Portfolios 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 Portfolios 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 Portfolios
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
Portfolios outstanding voting securities. A majority of the Portfolios
outstanding voting securities for this purpose means the lesser of (1) 67% or
more of the shares of the Portfolios 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
Portfolios total assets would be invested in the securities of the issuer,
except that up to 25% of the value of the Portfolios 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 Portfolios 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 Portfolios 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 Portfolios 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 Portfolios 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 Portfolios 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 Portfolios 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 Portfolios 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. Investing in illiquid securities, including repurchase agreements
maturing in more than seven days, securities that are not readily marketable
and restricted securities not eligible for resale pursuant to Rule 144A under
the Securities Act of 1933, as amended, if more than 15% of the net 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 Portfolios ability to
participate on committees seeking to include the reorganization of portfolio
companies.
PORTFOLIO TRANSACTIONS AND TURNOVER
Portfolio Transactions. The Portfolios 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 $19,592.80 in brokerage commissions for the fiscal year
ended February 28, 1998.
Allocation of transactions, including their frequency, to various
dealers is determined by MMC 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 MMC 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 MMC, and the fees of MMC are not reduced
as a consequence of their receipt of such supplemental information. Such
information may be useful to MMC 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 MMC 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 MMC, 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 MMC 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 MMC 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 Portfolios 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
Portfolios 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, 1998,
the portfolio turnover rate was 94%.
MANAGEMENT OF THE PORTFOLIO
Directors and Executive Officers of the Portfolio
The overall management of the business and affairs of the Portfolio is
vested in 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 Portfolios 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 MMC, subject always to the
investment objectives and polices of the Portfolio and to general supervision
by the Portfolios 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
MMC and of Travelers
Investment Adviser, Inc.
(TIA). Chairman or Co-
Chairman of 58 investment
companies associated with
Salomon Smith Barney
Holdings Inc.; 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 65.
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 56.
Director and/or trustee of other registered investment companies with which
Smith Barney is affiliated.
Alessandro 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
79.
Andrea Farace
Trace International
Holdings, Inc.
375 Park Avenue 11th
Floor
New York, NY 10152
Director
Chairman & Chief Executive
Officer of Foamex
International Inc. and Vice
Chairman and Chairman of
the Executive Committee of
Trace International
Holdings, Inc. 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. age 42.
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 and
a Director of the Summit
Banc Corporation; Prior to
July 1995, Chancellor at
the University of North
Carolina at Chapel Hill.
age 66.
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 70.
John C. Bianchi
388 Greenwich Street
New York, NY 10013
Vice President and
Investment Officer
Managing Director of MMC;
prior to July 1993,
Managing Director of
Shearson Lehman Advisors.
age 42.
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 MMC
and TIA. Age 40.
Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Smith
Barney Inc., General
Counsel and Secretary of
MMC and TIA. age 47.
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 MMC, or any of its affiliates, an annual fee of $5,000 plus
$500 for each in-person meeting and $100 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, 1998, 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)
$6,500
$17,600
Alessandro di
Montezemolo (2)
6,500
17,600
Andrea Farace (2)
6,500
16,000
Paul Hardin (12)
6,500
73,000
Heath McLendon (58)
-----
-----
George Pavia (2)
6,500
17,500
* Number of Funds for which Director serves within Salomon Smith Barney
Holdings Inc.
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.
During the Portfolios fiscal year ended February 28, 1998, aggregate
compensation paid by the Portfolio to Directors Emeritus totaled $3,250.
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 is the only holder of more than 5%
of the outstanding shares of Common Stock as of June 17, 1998.
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
43,127,018
97.98%
As of May 31, 1998, the Directors and Officers of the Portfolio, as a
group, beneficially owned less than 1% of the Portfolios outstanding shares
of Common Stock.
Investment Adviser and Administrator -- MMC
MMC 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 MMC (Non-
Interested Directors), on August 13, 1997. 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. MMC 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 including Asset
Management, Consumer Finance Services, Life Insurance Services and Property &
Casualty Insurance Services. MMC pays the salary of any officer or employee
who is employed by both it and the Portfolio. MMC bears all expenses in
connection with the performance of its services as investment adviser. For
services rendered to the Portfolio, MMC receives from the Portfolio a fee,
computed and paid monthly at the annual rate of 0.90% of the value of the
Portfolios average daily net assets. For the fiscal years ended February 28,
1996, February 28, 1997 and February 28, 1998, total investment advisory fees
paid by the Portfolio amounted to $4,253,885, $4,255,116 and $4,548,318
respectively.
Under the Advisory Agreement, MMC 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 MMC 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 MMC. The Advisory agreement may also be terminated by MMC on 90 days
written notice to the Portfolio. The Advisory Agreement terminates
automatically upon its assignment.
MMC 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 August 13, 1997. Pursuant to the
Administration Agreement, MMC 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 MMCs services, the
Portfolio pays a fee, computed daily and paid monthly, at the annual rate of
0.20% of the Portfolios average daily net assets. For the fiscal years ended
February 28, 1996, February 28, 1997 and February 28, 1998, total
administration fees paid by the Portfolio amounted to $945,308, $945,581 and
$1,010,715 respectively.
Pursuant to the Administration Agreement, MMC will exercise its best
judgment in rendering services to the Portfolio. MMC 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 MMCs 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 Portfolios shares of
Common Stock, or upon 90 days written notice by MMC.
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 agents 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
investment company taxable income (which, for this purpose, consists of
taxable net income other than net long-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
Portfolios business of investing in securities (3) diversify its holdings so
that, at the end of each fiscal quarter of the Portfolio (a) at least 50%
of the market value of the Portfolios 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 Portfolios 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 Portfolios assets is invested in the securities of any
one issuer (other than U.S. government securities or securities of other
regulated investment companies) or of two or more issuers that the Portfolio
controls and that are determined to be in the same or similar trades or
businesses or related trades or businesses. As a regulated investment
company, the Portfolio will be subject to a 4% non-deductible excise tax
measured with respect to certain undistributed amounts of ordinary income and
capital gains. The Portfolio expects to pay the dividends and make the
distributions necessary to avoid the application of this excise tax.
The Portfolios 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.
Taxation of the Portfolios Shareholders
Dividends paid from the Portfolios net investment income and
distributions of the Portfolios 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 shareholders 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 Portfolios 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.
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 shareholders hands, and will be long-term or
short-term depending upon the shareholders 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 shareholders 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 shareholders hands and will be long-term or
short-term depending upon the shareholders 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 Portfolios earnings and profits and the shareholders 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 Portfolios
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, 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 redemption of shares of Common Stock. An
individuals taxpayer identification number is that individuals social
security number. The backup withholding tax is not an additional tax and may
be credited against a taxpayers federal income tax liability.
Other Taxes
Dividends and distributions also may be subject to state, local, and
foreign taxes depending on each shareholders particular situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSEQUENCES AFFECTING
THE PORTFOLIO AND ITS SHAREHOLDERS. SHAREHOLDERS ARE ADVISED TO CONSULT
THEIR OWN TAX ADVISORS WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO
THEM OF AN INVESTMENT IN THE PORTFOLIO.
STOCK PURCHASES AND TENDERS
The Portfolio may repurchase shares of its Common Stock in the open
market or in privately negotiated transactions when the Portfolio can do so
at prices below their then current net asset value per share on terms that
the Portfolios 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 Portfolios shares trading at a price that is equal to their net asset
value. The market prices of the Portfolios shares will, among other things,
be determined by the relative demand for and supply of the shares in the
market, the Portfolios investment performance, the Portfolios dividends and
yields and investor perception of the Portfolios overall attractiveness as an
investment as compared with other investment alternatives. The Portfolios
acquisition of Common Stock will decrease the total assets of the Portfolio
and therefore may have the effect of increasing the Portfolios 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 Portfolios net income. Because of the nature
of the Portfolios investment objectives, policies and securities holdings,
MMC does not anticipate that repurchases and tenders will have an adverse
effect on the Portfolios 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 Portfolios 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 Portfolios 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 Portfolios performance. The
portfolio turnover rate of the Portfolio may or may not be affected by the
Portfolios 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 Portfolios independent auditor to examine and report on the
Portfolios financial statements and highlights for the fiscal year ending
February 28, 1999.
Custodian and Transfer Agent
PNC Bank, National Association (PNC), located at 17th and Chestnut
Streets, Philadelphia, PA 19103, serves as the Portfolios custodian pursuant
to a custody agreement. Under the custody agreement, PNC holds the
Portfolios 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. (First Data), located at
Exchange Place, Boston, Massachusetts 02109, serves as the Portfolios
transfer agent pursuant to a transfer agency agreement. Under the transfer
agency agreement, First Data 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 Portfolios Annual Report of the fiscal year ended February 28, 1998
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\1998\secdocs\sai1998.doc 21
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, 1998 as
Filed with the Securities and Exchange Commission on May 6, 1998
as
Accession 91155-98-000322.
(2) Exhibits:
(a) (i) Articles of Incorporation are incorporated by reference
to
the Registrants 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 Registrants Pre-Effective Amendment No. 1 to
the Registration Statement on Form N-2, filed with the SEC on February 11,
1993 (Pre Effective Amendment No. 1).
(b) (i) Bylaws of Registrant are incorporated by
reference to the Registration Statement.
(ii) Amended Bylaws of Registrant are incorporated by reference
to
Pre-Effective Amendment No. 1.
(c) Not Applicable
(d) Specimen Certificate of Common Stock, par value $.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 Registrants Post-
Effective Amendment No. 1 to its Registration Statement on Form N-2, filed
with the SEC on July 14, 1994 (Post Effective 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 Registrants Post-Effective Amendment No.2
to its
registration 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 Registrants 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 First Data Investor Services Group 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 Registrants 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
Registrants 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 Pre Effective 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 $8,000
Item 27. Persons Controlled by or Under Common Control
None
Item 28. Number of Holders of Securities
Number of Record Stockholders
as of June 12, 1998
Title of Class
Shares of Common Stock,
par value
$0.01 per share 892
Item 29. Indemnification
Under Article VII of Registrants 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 Registrants 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 - - Mutual Management Corp, (MMC) formerly
known as Smith Barney Mutual Funds Management. MMC was incorporated in
December 1968 under the laws of the State of Delaware. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. (formerly known as Smith
Barney Holdings Inc.) (Holdings), which in turn is a wholly
owned subsidiary of Travelers Group Inc. (Travelers).
MMC 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 MMC
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 MMC 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
Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
PNC Bank, 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 post effective amendment
thereof)
which, individually or in the aggregate, represent a fundamental
change
in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or
any material change to such information in the
Registration Statement.
(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 18th day of June, 1998.
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 18, 1998
Heath B. McLendon Chief Executive Officer
and Director
/s/ Lewis E.Daidone Senior Vice President June 18, 1998
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
/s/ Paolo M.Cucchi Director June 18, 1998
Paolo M. Cucchi
/s/ Alessandro C. di Director June 18, 1998
Montezemolo
Alessandro C. di
Montezemolo
/s/ Andrea Farace Director June 18, 1998
Andrea Farace
/s/ Paul Hardin Director June 18, 1998
Paul Hardin
/s/ George M. Pavia Director
June 18, 1998
George M. Pavia
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 24, 1998 for the Managed
High Income Portfolio Inc., incorporated herein by reference and to the
references to our Firm under the headings Financial Highlights in the
Prospectus and Independent Public Accountants in the Statement of Additional
Information.
KPMG Peat Marwick LLP
New York, New York
June 16, 1998
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