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Prospectus June 25, 1999
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Managed High Income Portfolio Inc.
Common Stock
Listed on the New York Stock Exchange
Trading Symbol -- MHY
Managed High Income Portfolio Inc. is a diversified, closed-end management
investment company. The portfolio's primary investment objective is high current
income. Capital appreciation is a secondary objective. The portfolio invests
primarily in high-yielding corporate bonds, debentures and notes. The portfolio
may invest up to 35% of its assets in common stock or other equity or
equity-related securities, including convertible securities, preferred stock,
warrants and rights.
Credit quality Primarily below investment grade. This means that the
fixed-income securities in which the portfolio invests are rated in the lower
rating categories by a rating agency or are of comparable quality. These lower
rated securities are also called junk bonds or high yield securities. The
portfolio may not purchase additional fixed-income securities rated by a rating
agency (or considered to be) lower than B if more than 10% of assets are
invested in such securities.
Maturity Under normal market conditions, the portfolio's average remaining
portfolio maturity is between 5 and 10 years. The portfolio may, however, invest
in individual fixed-income securities of any maturity.
The market price of shares of closed-end funds frequently are less than
the net asset value per share. For more information about this or other risks of
investing in the portfolio, see "Risk Factors and Special Considerations" on
page 18.
The prospectus contains important information about the portfolio. For
your benefit and protection, please read it before you invest, and keep it on
hand for future reference.
The statement of additional information dated June 25, 1999 (SAI) provides
more detailed information about the portfolio and is incorporated into this
prospectus by reference. The SAI and shareholder reports can be obtained without
charge from your Salomon Smith Barney Financial Consultants or from the
portfolio by calling 1-800-451-2010 or writing to the protfolio at 388 Greenwich
Street, New York, New York 10013. You can review the portfolio's shareholder
reports at the
(Continued on page 2)
SALOMON SMITH BARNEY INC.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
STATEMENT TO THE CONTRARY IS A CRIME.
1
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Prospectus (continued) June 25, 1999
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Securities and Exchange Commission's Public Reference Room in Washington, D.C.
The Commission charges a duplicating fee for this service. Information about the
Public Reference Room may be obtained by calling 1-800-SEC-0330. You can get the
same information free from the Commission's Internet web site at www.sec.gov
2
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Table of Contents
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Prospectus Summary 4
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Fund Expenses 7
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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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Risk Factors and Special Considerations 19
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Investment Restrictions 22
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Share Price Data 23
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Management of the Portfolio 23
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Dividends and Distributions; Dividend Reinvestment Plan 25
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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 30
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Certain Provisions of the Articles of Incorporation 31
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Custodian, Transfer Agent,
Dividend-Paying Agent and Registrar 32
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Independent Auditors 32
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Further Information 32
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Appendix A A-1
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3
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Prospectus Summary
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The following is a summary of more complete information appearing later in
the prospectus. You should read the entire prospectus because it contains
details that are not in the summary. Cross references in the summary to headings
in the prospectus will help you locate information.
Investment Objectives and Primary Investments The portfolio's primary investment
objective is high current income. Capital appreciation is a secondary objective.
The portfolio invests primarily in high-yielding corporate bonds, debentures and
notes. The portfolio may invest up to 35% of its assets 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 to invest
in fixed-income securities will have an average remaining maturity of between 5
and 10 years.
The fixed-income securities purchased by the portfolio are generally below
investment grade. This means that they are rated lower than the four highest
rating categories (BB or below) by a nationally recognized statistical ratings
organization ("NRSRO"), or in unrated securities that the portfolio's investment
manager deems to be of comparable quality. These lower rated securities are also
called junk bonds or high yield 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.
The Offering The portfolio's shares of common stock trade on the New York Stock
Exchange. Salomon Smith Barney intends to buy and sell the portfolio's shares
and make a market in the common stock. Salomon Smith Barney is not obligated to
conduct market-making activities and may stop doing so at any time without
notice. See "The Offering" and "Use of Proceeds."
Listing NYSE.
Symbol MHY.
Investment Manager SSBC Fund Management Inc. (SSBC or the manager) (formerly
Mutual Management Corp.). The manager selects and manages the portfolio's
investments in accordance with the portfolio's investment objectives and
policies. SSBC is also the portfolio's administrator and oversees the
portfolio's non-investment operations and its relations with its service
providers. For its services, SSBC receives a fee equal on an annual basis to
1.10% of the portfolio's average daily net assets.
Risk Factors and Special Considerations The value of the securities in the
portfolio fluctuate in price and the value of your investment in the portfolio
will go up and down in value. This means that you could lose money on your
4
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Prospectus Summary (continued)
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investment in the portfolio or the portfolio could perform less well than other
possible investments. In addition, the price of the shares is determined by
market prices on the NYSE and elsewhere, so you may receive a price that is less
than net asset value when you sell your shares. The principal risks associated
with an investment in the portfolio are described below.
Below investment grade securities. The portfolio invests primarily in
securities rated below investment grade by a rating agency or considered to be
of comparable quality. Investment in below investment grade securities involves
a substantial risk of loss. These securities are speculative with respect to the
issuer's ability to pay interest and principal.
Compared to investment grade securities, lower-rated securities are more
susceptible to default or decline in market value due to adverse economic and
business developments and their market value tends to be more volatile. Further,
the market for lower-rated securities tends to be less liquid than the market
for investment grade securities.
The portfolio may invest in securities issued by companies that are in
default on their obligations to pay interest and/or principal. The portfolio may
lose its complete investment in these securities.
Fixed-income securities. In addition to the special risks associated with
investments in lower-rated securities, the portfolio's investments in
fixed-income securities may be affected by any of the following:
o Interest rates rise, causing the value of the portfolio's
investments generally to decline.
o When interest rates are declining, the issuer of a security
exercises its right to prepay principal earlier than scheduled,
forcing the portfolio to reinvest in lower yielding securities. This
is known as call or prepayment risk.
o The issuer of a security owned by the portfolio has its credit
rating downgraded or defaults on its obligation to pay principal
and/or interest.
o The manager's judgment about the attractiveness, value or income
potential of a particular security proves to be incorrect.
o Lower-rated securities fall out of favor with investors, which will
adversely affect their market value and liquidity.
Equity securities. Equity securities have historically had higher returns
but have had significantly more volatile returns than fixed-income securities.
The portfolio's equity securities may decline in value if there is a general
decline in the market of equity securities or an adverse event, such as an
unfavorable earnings report, depresses the market price of a portfolio
investment.
Foreign securities. The market value of the portfolio's foreign securities
may go down because of unfavorable foreign government actions, political,
economic or
5
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Prospectus Summary (continued)
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market instability or the absence of accurate information about foreign
companies. Foreign securities are sometimes less liquid and harder to value than
securities of U.S. issuers. A decline in the value of foreign currencies
relative to the U.S. dollar will reduce the value of securities held by the
portfolio which are denominated or quoted in those currencies. These risks are
greater to the extent that the portfolio invests in securities of issues located
in emerging market countries.
Derivatives. The portfolio may hold securities or use investment
techniques that provide for payments based on or "derived" from the performance
of an underlying asset, index or other economic benchmark.
Even a small investment in derivative contracts can have a big impact on
the portfolio's interest rate or stock market exposure. Therefore, using
derivatives can disproportionately increase losses and reduce opportunities for
gains when interest rates are changing. The portfolio may not fully benefit from
or may lose money on derivatives if changes in their value do not correspond
accurately to changes in the value of the portfolio's holdings. The other
parties to certain derivative contracts present the same types of default risk
as issuers of fixed-income securities. Derivatives can also make the portfolio
less liquid and harder to value, especially in declining markets. Derivatives
include futures and options transactions.
Closed end investment company. The portfolio is a closed-end investment
company and its shares may trade on the NYSE at a price that is less than its
net asset value.
See "Investment Objective and Policies -- Risk Factors and Special
Considerations" and "Certain Provisions of the Articles of Incorporation."
Dividends and Distributions Any dividends from net investment income (income
other than net realized capital gains) are paid monthly and any distributions of
net realized capital gains are paid annually. The portfolio may pay additional
distribution and dividends at other times if necessary for the portfolio to
avoid a federal tax. Your dividends or distributions are reinvested in
additional portfolio shares through participation in the Dividend Reinvestment
Plan, unless you elect to receive cash. The number of shares issued to you by
the plan depends on the price of the shares. The price of the shares is
determined by the market price at the time the shares are purchased.
Market Price of Portfolio Shares Price of Portfolio Shares Issued by Plan
Greater than or equal net asset Shares issued at net asset value or
value 95% of market price, whichever is greater
Less than net asset value Market price
See "Dividends and Distributions; Dividend Reinvestment Plan."
Custodian PNC Bank, National Association (PNC Bank) is the portfolio's
custodian. See "Custodian, Transfer Agent, Dividend-Paying Agent and Registrar."
6
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Prospectus Summary (continued)
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Transfer Agent, Dividend-Paying Agent and Registrar First Data Investor Services
Group, Inc. (First Data) is the portfolio's transfer agent, dividend-paying
agent and registrar. See "Custodian, Transfer Agent, Dividend-Paying Agent and
Registrar."
Stock Purchases and Tenders The portfolio's Board of Directors currently
contemplates that the portfolio may from time to time consider the repurchase of
its common stock on the open market or make tender offers for the common stock.
See "Stock Purchases and Tenders."
The following table shows the expenses the portfolio pays. As a shareholder, you
indirectly pay these expenses.
Fund Expenses
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Annual Expenses
(as a percentage of net assets)*
Management fees .................................................... 1.10%
Other expenses ..................................................... 0.07%
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Total Annual Operating Expenses* ....................................... 1.17%
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* See "Management of the Portfolio" for additional information. "Other
expenses" are based on data from the portfolio's fiscal year ended February
28, 1999.
Example
An investor would pay the following expenses on a $10,000 investment,
assuming a 5.00% annual return:
One Year Three Years Five Years Ten Years
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$119 $372 $644 $1,420
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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 expenses remain the same in the years shown.
This example should not be considered a representation of future expenses.
Actual expenses may be more or less than those shown.
7
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Financial Highlights
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The following information for the four years ended February 28, 1999 has
been audited by KPMG LLP, independent auditors, whose report thereon appears in
the Fund's annual report dated February 28, 1999. The information for 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 Fund's Annual Report, which is
incorporated by reference into this prospectus and Statement of Additional
Information.
<TABLE>
<CAPTION>
For a Share of Capital Stock Outstanding Throughout Each Year:
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1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $11.87 $11.59 $11.36 $10.88 $12.39
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Income (Loss) From Operations:
Net investment income 1.01 1.09 1.12 1.13 1.12
Net realized and unrealized gain (loss) (1.12) 0.28 0.21 0.65 (1.48)
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Total Income (Loss) From
Operations (0.11) 1.37 1.33 1.78 (0.36)
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Offering Costs Credited (Charged)
to Paid-In Capital -- -- -- -- 0.00*
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Less Distributions From:
Net investment income (1.03) (1.09) (1.08) (1.27) (1.00)
Net realized gains -- -- -- -- (0.15)
Capital -- -- (0.02) (0.03) --
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Total Distributions (1.03) (1.09) (1.10) (1.30) (1.15)
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Net Asset Value, End of Year $10.73 $11.87 $11.59 $11.36 $10.88
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Total Return,
Based on Market Value** (2.44)% 10.96% 15.37% 18.83% 0.14%
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Total Return,
Based on Net Asset Value** (0.72)% 12.43% 12.65% 17.80% (2.18)%
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Net Assets, End of Year (millions) $475 $523 $494 $477 $457
===============================================================================================
Ratios to Average Net Assets:
Expenses 1.17% 1.18% 1.20% 1.24% 1.24%
Net investment income 9.03 9.19 9.89 9.74 9.96
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Portfolio Turnover Rate 84% 94% 61% 73% 62%
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Market Value, End of Year $10.438 $11.750 $11.625 $11.125 $10.500
===============================================================================================
</TABLE>
* Amount represents less than $0.01.
** The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
8
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The Portfolio
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The portfolio was incorporated under the laws of the State of Maryland on
December 24, 1992 and is registered under the Investment Company Act of 1940, as
amended ("1940 Act"). Its principal office is located at 388 Greenwich Street,
New York, New York 10013. The portfolio's telephone number is 1-800-331-1710.
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The Offering
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Salomon Smith Barney currently makes a market in the common stock. This
prospectus is to be used by Salomon Smith Barney in connection with offers and
sales of the Common Stock in market-making transactions in the over-the-counter
market at negotiated prices related to prevailing market prices at the time of
sale. Salomon Smith Barney is not required to make a market in the common stock
and may stop doing so at any time. You should not rely on Salomon Smith Barney's
market making activities to provide an active or liquid trading market for the
common stock.
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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 Salomon Smith
Barney as a result of its market-making in the common stock will be used by
Salomon Smith Barney in connection with its secondary market operations and for
general corporate purposes.
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Investment Objectives and Policies
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Set out below is a general description of the portfolio investment
objectives and investment policies.
GENERAL
The portfolio's primary investment objective is high current income.
Capital appreciation is a secondary objective. Set out below is a description of
the investment objectives and principal investment policies of the portfolio. No
assurances can be given that the portfolio will be able to achieve its
investment objectives. The portfolio's investment objectives may only be changed
by the affirmative vote of the holders of a majority (as defined in the 1940
Act) of the portfolio's outstanding shares.
9
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Investment Objectives and Policies (continued)
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In seeking its objectives, the portfolio will invest, under normal
circumstances, at least 65% of its assets in high-yielding corporate bonds,
debentures and notes. Although the portfolio may invest in securities of any
maturity, under current market conditions the portfolio intends that its
portfolio of fixed-income securities will have an average remaining maturity of
between 5 and 10 years. SSBC may adjust the portfolio's average maturity when,
based on interest rate trends and other market conditions, it deems it
appropriate to do so. Up to 35% of the portfolio's assets may be invested in
common stock or other equity or equity-related securities, including convertible
securities, preferred stock, warrants and rights. Equity investments may be made
in securities of companies of any size depending on the relative attractiveness
of the company and the economic sector in which it operates.
The fixed income securities purchased by the portfolio generally will be
rated in the lower categories of NRSROs, as low as C by Moody's Investors
Service, Inc. (Moody's) or D by Standard Poor's Rating Group (S&P) or the
equivalent rating by another NRSRO, or, if unrated, will be securities that SSBC
deems to be of comparable quality. However, the portfolio will not invest in
securities that have been assigned a rating lower than B by any NRSRO if,
immediately after such purchase, more than 10% of its total assets are invested
in such securities. See Appendix A for more information on NRSRO ratings. 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 SSBC believes that a
more defensive investment strategy is appropriate in light of market or economic
conditions. The portfolio also may lend its portfolio securities and purchase or
sell securities on a when-issued or delayed-delivery basis.
The portfolio may invest up to 20% of its assets in the securities of
foreign issuers that are denominated in currencies other than the U.S. dollar
and may invest without limitation in securities of foreign issuers that are
denominated in U.S. dollars. In order to mitigate the effects of uncertainty in
future exchange rates affecting the portfolio's non-dollar investments, the
portfolio may engage in currency exchange transactions and currency futures
contracts and related options and purchase options on foreign currencies. The
portfolio also may hedge against the effects of changes in the value of its
investments by entering into interest rate futures contracts and related
options. Special considerations associated with the portfolio's investments are
described below.
INVESTMENT TECHNIQUES
The portfolio may employ, among others, the investment techniques
described below:
Corporate Securities. Corporate securities in which the portfolio may
invest
10
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Investment Objectives and Policies (continued)
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include corporate fixed-income securities of both domestic and foreign issuers,
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates and preferred stock. Certain of the corporate fixed-income
securities in which the portfolio may invest may involve equity characteristics.
In addition, the portfolio may invest in participations that are based on
revenues, sales or profits of an issuer or in common stock offered as a unit
with corporate fixed-income securities.
Money-Market Instruments. When SSBC 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 SSBC. The portfolio may also invest in money market instruments to
help defray operating expenses, to serve as collateral in connection with
certain investment techniques and to hold as a reserve pending the payment of
dividends to investors. Money market instruments in which the portfolio
typically expects to invest include: U.S. government securities; bank
obligations (including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks); commercial paper; and repurchase
agreements. To the extent the portfolio invests in short-term money market
instruments, it may not be pursuing its investment objectives.
Repurchase Agreements. The portfolio may enter into repurchase agreement
transactions with certain member banks of the Federal Reserve System or with
certain dealers listed on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase agreement, the
portfolio would acquire an underlying obligation for a relatively short period
(usually not more than seven days) subject to an obligation of the seller to
repurchase, and the portfolio to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the portfolio's holding period.
This arrangement results in a fixed rate of return that is not subject to market
fluctuations during the portfolio's holding period. Repurchase agreements could
involve certain risks in the event of default or insolvency of the seller,
including possible delays or restrictions on the portfolio's ability to dispose
of the underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which the portfolio seeks to assert
its rights to them, the risk of incurring expenses associated with asserting
those rights and the risk of losing all or part of the income from the
agreement. SSBC, acting under the supervision of the portfolio's Board of
Directors, reviews on an ongoing basis the value of the col lateral 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
11
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Investment Objectives and Policies (continued)
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differ principally in terms of their maturities. Included among the securities
issued by U.S. government agencies and instrumentalities are: securities that
are supported by the full faith and credit of the United States (such as
Government National Mortgage Association certificates); securities that are
supported by the right of the issuer to borrow from the U.S. Treasury (such as
securities of Federal Home Loan Banks); and securities that are supported by the
credit of the instrumentality (such as Federal National Mortgage Association and
Federal Home Loan Mortgage Corporation bonds).
Zero Coupon, Pay-In-Kind and Delayed Interest Securities. The portfolio
may invest in zero coupon, pay-in-kind and delayed interest securities as well
as custodial receipts or certificates underwritten by securities dealers or
banks that evidence ownership of future interest payments, principal payments or
both on certain U.S. government securities. Zero coupon securities pay no cash
income to their holders until they mature and are issued at substantial
discounts from their value at maturity. When held to maturity, their entire
return comes from the difference between their purchase price and their maturity
value. Pay-in-kind securities pay interest through the issuance to the holders
of additional securities, and delayed interest securities are securities which
do not pay interest for a specified period. Custodial receipts evidencing
specific coupon or principal payments have the same general attributes as zero
coupon U.S. government securities but are not considered to be U.S. government
securities. The portfolio's investments in zero coupon, pay-in-kind and delayed
interest securities will result in special tax consequences. Although zero
coupon securities do not make interest payments, for tax purposes, a portion of
the difference between a zero coupon security's maturity value and its purchase
price is taxable income of the portfolio each year.
Convertible Securities and Synthetic Convertible Securities. The portfolio
may invest in 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
12
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Investment Objectives and Policies (continued)
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rise as a reflection of the value of the underlying common stock. While no
securities investments are without risk, investments in convertible securities
generally entail less risk than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no assurance
of current income because the issuers of the convertible securities may default
on their obligations. Convertible securities, however, generally offer lower
interest or dividend yields than non-convertible securities of similar quality
because of the potential for capital appreciation. A convertible security, in
addition to providing fixed income, offers the potential for capital
appreciation through the conversion feature, which enables the holder to benefit
from increases in the market price of the underlying common stock. However,
there can be no assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible securities.
Unlike a convertible security, which is a single security, a synthetic
convertible security is comprised of two distinct securities that together
resemble convertible securities in certain respects. Synthetic convertible
securities are created by combining non-convertible bonds or preferred stocks
with warrants or stock call options. The options that will form elements of
synthetic convertible securities will be listed on a securities exchange or on
the National Association of Securities Dealers Automated Quotation System. The
two components of a synthetic convertible security, which will be issued with
respect to the same entity, generally are not offered as a unit, and may be
purchased and sold by the portfolio at different times. Synthetic convertible
securities differ from convertible securities in certain respects, including
that each component of a synthetic convertible security has a separate market
value and responds differently to 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 SSBC, 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
13
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Investment Objectives and Policies (continued)
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into closing purchase transactions with respect to options written by the
portfolio in order to terminate existing positions. There is no guarantee that
such closing transactions can be effected at any particular time or at all. An
interest rate futures contract is a standardized contract for the future
delivery of a specified security (such as a U.S. Treasury Bond or U.S. Treasury
Note) or its equivalent at a future date at a price set at the time of the
contract. A currency futures contract is a standardized contract for the future
delivery of a specified amount of currency at a future date at a price set at
the time of the contract. The portfolio may only enter into futures contracts
traded on regulated commodity exchanges.
An option on a futures contract, as contrasted with the direct investment
in such a contract, gives the purchaser of the option the right, in return for
the premium paid, to assume a position in a futures contract at a specified
exercise price at any time on or before the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of the
option to the holder of the option will be accomplished by delivery of the
accumulated balance in the writer's futures margin account, which represents the
amount by which the market price of the futures contract exceeds, in the case of
a call, or is less than, in the case of a put, the exercise price of the option
on the futures contract. The potential loss related to the purchase of an option
on a futures contract is limited to the premium paid for the option (plus
transaction costs). With respect to options purchased by the portfolio, there
are no daily cash payments made by the portfolio to reflect changes in the value
of the underlying contract; however, the value of the option does change daily
and that change would be reflected in the net asset value of the portfolio.
The portfolio may not enter into futures and options contracts for which
aggregate initial margin deposits and premiums paid for unexpired options to
establish positions that are not bona fide hedging positions (as defined by the
CFTC) exceed 5% of the fair market value of the portfolio's total assets, after
taking into account unrealized profits and unrealized losses on such contracts.
In the event that the portfolio enters into short positions in futures contracts
as a hedge against a decline in the value of its portfolio securities, the value
of such futures contracts may not exceed the total market value of the
portfolio's investments. With respect to each long position in a futures
contract or option thereon, the underlying commodity value of such contract
always will be covered by cash or cash equivalents set aside plus accrued
profits held in a segregated account. In addition, certain provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), may limit the extent to
which the portfolio may enter into futures contracts or engage in options
transactions. See "Taxation."
Currency Exchange Transactions and Options on Foreign Currencies. In order
to protect against uncertainty in the level of future exchange rates, the
portfolio may engage in currency exchange transactions and purchase
exchange-traded put
14
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
and call options on foreign currencies. The portfolio will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the rate prevailing
in the currency exchange market or through entering into forward contracts to
purchase or sell currencies. The portfolio's dealings in forward currency
exchange and options on foreign currencies are limited to hedging involving
either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they tend
to limit any potential gain that might result should the value of the currency
increase.
The portfolio may purchase put options on a foreign currency in which
securities held by the portfolio are denominated to protect against a decline in
the value of the currency in relation to the currency in which the exercise
price is denominated. The portfolio may purchase a call option on a foreign
currency to hedge against an adverse exchange rate of the currency in which a
security that it anticipates purchasing is denominated in relation to the
currency in which the exercise price is denominated. An option on a foreign
currency gives the purchaser, in return for a premium, the right to sell, in the
case of a put, and buy, in the case of a call, the underlying currency at a
specified price during the term of the option. Although the purchaser of an
option on a foreign currency may constitute an effective hedge by the portfolio
against fluctuations in the exchange rates, in the event of rate movements
adverse to the portfolio's position, the portfolio may forfeit the entire amount
of the premium plus related transaction costs. Options on foreign currencies
purchased by the portfolio may be traded on domestic and foreign exchanges or
traded over-the-counter.
Although the foreign currency market may not necessarily be more volatile
than the market in other commodities, the foreign currency market offers less
protection against defaults in the forward trading of currencies than is
available when trading in currencies occurs on an exchange. Because a forward
currency contract is not guaranteed by an exchange or clearing-house, default on
the contract would deprive the portfolio of unrealized profits or force the
portfolio to cover its commitments for the purchase or resale, if any, at the
current market price.
When-Issued Securities and Delayed-Delivery Transactions. In order to
secure yields or prices deemed advantageous at the time, the portfolio may
purchase or sell any portfolio securities on a when-issued or delayed-delivery
basis. The portfolio will enter into a when-issued transaction for the purpose
of acquiring portfolio securities and not for the purpose of leverage. In such
transactions delivery of the
15
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Investment Objectives and Policies (continued)
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securities occurs beyond the normal settlement periods, but no payment or
delivery is made by the portfolio prior to the actual delivery or payment by the
other party to the transaction. Due to fluctuations in the value of securities
purchased or sold on a when-issued or delayed-delivery basis, the yields
obtained on such securities may be higher or lower than the yields available in
the market on the dates when the investments are actually delivered to the
buyers. The portfolio will establish a segregated account consisting of cash,
U.S. government securities or other high grade debt obligations in an amount
equal to the amount of its when-issued and delayed-delivery commitments. Placing
securities rather than cash in the segregated account may have a leveraging
effect on the portfolio's net assets. The portfolio will not accrue income with
respect to a when-issued security prior to its stated delivery date.
Lending of portfolio Securities. 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
consid-
16
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
ered to be a country that is in the initial stages of its industrialization
cycle. Investing in the equity and fixed-income markets of developing countries
involves exposure to economic structures that are generally less diverse and
mature, and to political systems that can be expected to have less stability,
than those of developed countries. Historical experience indicates that the
markets of developing countries have been more volatile than the markets of more
mature economies of developed countries; however, such markets often have
provided higher rates of return to investors.
Securities of Unseasoned Issuers. Securities in which the portfolio may
invest may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, the issuers of certain securities may
lack a significant operating history and be dependent on products or services
without an established market share.
Short Sales Against the Box. The portfolio may make short sales of
securities in order to reduce market exposure and/or to increase its income if,
at all times when a short position is open, the portfolio owns an equal or
greater amount of such securities or owns preferred stock, debt or warrants
convertible or exchangeable into an equal or greater number of the shares of the
securities sold short. Short sales of this kind are referred to as short sales
"against the box." The broker-dealer that executes a short sale generally
invests the cash proceeds of the sale until they are paid to the portfolio.
Arrangements may be made with the broker-dealer to obtain a portion of the
interest earned by the broker on the investment of short sale proceeds. The
portfolio will segregate the securities against which short sales against the
box have been made in a special account with its custodian. Not more than 10% of
the portfolio's net assets (taken at current value) may be held as collateral
for such sales at any one time.
Asset Backed Securities. The portfolio may invest in 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 market's 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. The portfolio may invest in Real Estate
Investment Trusts. Real Estate Investment Trusts ("REITs") are pooled investment
17
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
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.
Corporate Loans, Loan Participations and Assignments. The portfolio may
invest a portion of its assets in loan participations ("Participations") and up
to 15% of the portfolio's assets in corporate loans. Corporate loans are
negotiated and underwritten by a bank or syndicate of banks and other
institutional investors. These loans may be collateralized or uncollateralized.
The loans tend to have a senior position in the borrower's capital structure,
and tend to have variable or adjustable interest rates. By purchasing a
Participation, the portfolio acquires some or all of the interest of a bank or
other lending institution in a loan to a corporate or government borrower. The
Participations typically will result in the portfolio having a contractual
relationship only with the lender not the borrower. The portfolio will have the
right to receive payments of principal, interest and any fees to which it is
entitled only from the lender selling the Participation and only upon receipt by
the lender of the payments from the borrower. In connection with purchasing
Participations, the portfolio generally will have no right to enforce compliance
by the borrower with the terms of the loan agreement relating to the loan, nor
any rights of set-off against the borrower, and the portfolio may not directly
benefit from any collateral supporting the loan in which it has purchased the
Participation. As a result, the portfolio will assume the credit risk of both
the borrower and the lender that is selling the Participation. In the event of
the insolvency of the lender selling a Participation, the portfolio may be
treated as a general creditor of the lender and may not benefit from any set-off
between the lender and the borrower. The portfolio will acquire Participations
only if the lender interpositioned between the portfolio and the borrower is
determined by management to be creditworthy.
The portfolio may also invest in assignments of portions of loans from
third parties ("Assignments"). When it purchases Assignments from lenders, the
portfolio will acquire direct rights against the borrower on the loan. However,
since Assignments are arranged through private negotiations between potential
assignees and assignors, the rights and obligations acquired by the portfolio as
the purchaser of an Assignment may differ from, and be more limited than, those
held by the assigned lender.
The portfolio may have difficulty disposing of Assignments and
Participations. The liquidity of such securities is limited and the portfolio
anticipates that such securities could be sold only to a limited number of
institutional investors. The lack of a liquid secondary market could have an
adverse impact on the value of such
18
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Investment Objectives and Policies (continued)
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securities and on the portfolio's ability to dispose of particular Assignments
or Participations when necessary to meet the portfolio's liquidity needs or in
response to a specific economic event, such as a deterioration in the
creditworthiness of the borrower. The lack of a liquid secondary market for
Assignments and Participations also may make it more difficult for the fund to
assign a value to those securities for purposes of valuing the portfolio's
investments and calculating its net asset value. The portfolio's policy limiting
its illiquid securities will be applicable to corporate loans, Participations
are Assignments.
RISK FACTORS AND SPECIAL CONSIDERATIONS.
There are risks associated with an investment in the portfolio. You should
consider whether the portfolio is an appropriate investment for you. The
portfolio invests primarily lower-rated securities. An investment
in these securities is speculative and involves a substantial risk of loss.
Circumstances or events that affect the value of fixed-income securities in
general and lower-rated securities in particular will affect the portfolio's net
asset value. In addition to the risks discussed elsewhere in this prospectus, an
investment in the portfolio involves the following risks:
The issuer of a lower-rated security may default on its obligation to pay
o At the time of the portfolio's investment, the issuer of a lower-rated
security may be in default on its obligations to pay interest and principal or
it may subsequently default on its payment obligations. If an issuer did not
make timely payments, the portfolio would not receive the anticipated income
from the investment and the portfolio's investment would decline in value or may
be worth less. This would decrease the portfolio's net asset value.
o The risk of default is greater for lower-rated securities than for
investment grade securities. Issuers of lower-rated securities are often highly
leveraged and may not have more traditional methods of financing available.
These issuers may be unable to make principal and interest payment obligations
during an economic downturn or during sustained periods of rising interest
rates. Payment on these lower-rated securities may also rank lower than payment
on other obligations of the issuer.
o Even if the issuer does not actually default, adverse changes in the
issuer's financial condition may negatively affect its credit rating or presumed
creditworthiness. These developments would adversely affect the market value of
the issuer's obligations. The market value of lower-rated securities is more
sensitive to changes in the issuer's financial condition and changes in economic
conditions than is the market value of investment grade securities.
19
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Investment Objectives and Policies (continued)
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o The portfolio may invest up to 10% of assets in securities rated lower
than B by a rating agency. These securities generally lack characteristics of
desirable investments, and the chance that the portfolio would collect principal
and interest payments on these securities is small.
The issuer of a lower-rated security declares bankruptcy
o The issuer of a lower-rated security might declare or be in bankruptcy
and the portfolio could experience loss or delays collecting interest and
principal. To enforce its rights to collect principal and interest payments, the
portfolio might be required to incur additional expenses which would reduce its
net asset value. The portfolio may lose some or all of its investment in
lower-rated securities upon default or bankruptcy because these securities are
generally unsecured and frequently rank below payment obligations on more senior
indebtedness.
Less liquid markets for lower-rated securities
o The market for lower-rated securities may be less liquid than for
investment grade securities. There may be no established trading markets for
certain lower-rated securities, and trading in these securities may be
relatively inactive. If markets are less liquid, the portfolio may not be able
to purchase these securities when the manager desires to do so or to sell the
portfolio's securities when the manager determines it appropriate or at a fair
price. Further, the ability of the manager to value lower-rated securities may
be more difficult and the manager's judgment may play a greater role in their
valuation.
o Less liquid markets tend to be more volatile and react more negatively
to adverse publicity and investor perception than more liquid markets.
Interest rate sensitivity
o Fixed-income securities, including lower-rated securities, are sensitive
to changes in interest rates. Generally, when interest rates are rising, the
value of the portfolio's fixed-income securities can be expected to decrease.
When interest rates are declining, the value of the portfolio's fixed-income
securities can be expected to increase. The portfolio's net asset value may
fluctuate in response to the increasing or decreasing value of the portfolio's
fixed-income securities.
Call or prepayment risk
o Fixed-income securities, including lower-rated securities, frequently
permit their issuers to prepay, call or repurchase the securities from their
holders, such as the portfolio. As a result of declining interest rates, the
issuer of a fixed-income security may exercise its prepayment, call or
repurchase right on the security, forcing the portfolio to replace the security
with a lower yielding security. This would decrease the return to the portfolio.
o If the portfolio purchased a fixed-income security at a premium, it
would experience a loss of that premium in the event that the issuer of that
security
20
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Investment Objectives and Policies (continued)
- --------------------------------------------------------------------------------
exercises its prepayment, call or repurchase right.
Extension risk
o When interest rates are rising, the average life of certain types of
fixed-income securities is generally extended because of slower than expected
principal payments. This will lock in a below-market interest rate, increase the
fixed-income security's duration and reduce the value of the security. This is
known as extension risk.
Equity securities
o The portfolio's equity securities may decline in value if:
o The stock market goes down.
o Companies in which the portfolio invests suffer unexpected
losses or lower than expected earnings.
o The manager's judgments about the attractiveness, value or
potential appreciation of a particular company's stock
selected for the portfolio prove to be wrong.
Foreign securities
o There are additional risks associated with investing in securities of
foreign companies and governments compared to investing in U.S. issuers. These
risks include:
o Less information may be available about foreign companies and
markets due to relaxed disclosure or accounting standards or
regulatory practices.
o Many foreign markets are smaller, less liquid and more
volatile than U.S. markets. As a result, the manager may not
be able to sell the portfolio's securities in amounts and at
prices it considers reasonable.
o The U.S. dollar appreciates against foreign currencies causing
the value of the portfolio's foreign securities to be worth
less.
o Economic, political or social instability in foreign countries
disrupts the markets where the portfolio's foreign securities
are traded.
o These risks are greater to the extent that the portfolio invests in
securities of issuers located in emerging market countries.
When-Issued and Delayed Delivery Transactions
The portfolio may use when-issued and delayed delivery transactions to
purchase securities. The value of securities purchased in these transactions may
decrease before they are delivered to the portfolio. Also, the yield on
securities purchased in these transactions may be higher in the market when the
delivery takes place.
21
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Investment Objectives and Policies (continued)
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Lending Securities
If the party borrowing the portfolio's securities fails financially, the
portfolio may be unable to recover the loaned securities.
Financial Futures and Options
The portfolio may use financial futures contracts and options on these
contracts to protect the portfolio from a decline in the price of fixed-income
obligations it owns or an increase in the price of a fixed-income obligation it
plans to buy. There are risks associated with futures and options transactions.
o Because it is not possible to correlate perfectly the price of the
securities being hedged with the price movement in a futures or option contract,
it is not possible to provide a perfect offset to losses on the securities.
Losses on the portfolio's securities may be greater than gains on the futures or
options contract, or losses on the futures or options contract may be greater
than gains on the securities subject to the hedge.
o To compensate for imperfect correlation, the portfolio may over-hedge or
under-hedge by entering into futures contracts or options on futures contracts
in dollar amounts greater or lesser than the dollar amounts of the securities
being hedged. If market movements are not as anticipated, the portfolio could
lose money from these positions.
o If the portfolio hedges against an increase in interest rates, and rates
decline instead, the portfolio will lose all or part of the benefit of the
increase in value of the securities it hedged because it will have offsetting
losses in its futures or options positions. Also, in order to meet margin
requirements, the portfolio may have to sell securities at a time it would not
normally choose.
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Investment Restrictions
- --------------------------------------------------------------------------------
The portfolio has adopted certain fundamental investment restrictions that
may be changed only with the prior approval of the holders of a majority of the
portfolio's outstanding voting securities. A "majority of the portfolio's
outstanding voting securities" for this purpose means the lesser of (1) 67% or
more of the shares of the portfolio's common stock present at a meeting of
shareholders, if the holders of 50% of the outstanding shares are present or
represented by proxy at the meeting or (2) more than 50% of the outstanding
shares. For a complete listing of the investment restrictions applicable to the
portfolio, see "Investment Restrictions" in the portfolio's Statement of
Additional Information dated June 25,1999. 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.
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Share Price Data
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The common stock is traded on the NYSE under the symbol "MHY." Salomon
Smith Barney intends to buy and sell the fund's shares in order to make a market
in the portfolio's common stock.
The following table sets forth the high and low sales prices for the
common stock, the net asset value per share and the discount or premium to net
asset value represented by the quotation for each quarterly period within the
two most recent fiscal years.
<TABLE>
<CAPTION>
===========================================================================================
Quarterly Net Net Asset NYSE Premium
Period Asset Value NYSE Value at Price at (Discount)
Ended Price Range Price Range Quarter End Quarter End to NAV
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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%)
5/31/98 11.80 - 11.94 11.25 - 11.75 $11.81 $11.438 (3.15%)
8/31/98 10.99 - 11.84 9.75 - 11.625 $10.99 $ 9.750 (11.28%)
11/30/98 10.33 - 10.97 9.5625 - 11.125 $10.97 $10.750 (2.01%)
2/28/99 10.73 - 10.98 10.125 - 10.98 $10.73 $10.438 (2.72%)
5/31/99 10.57 - 10.96 9.9375 - 10.5625 $10.57 $10.1875 (3.62%)
</TABLE>
As of May 29, 1999, the price of common stock as quoted on the NYSE was
$10.1875, representing a discount from the common stock's net asset value of
$10.57 calculated on that day. Since the commencement of the portfolio's
operations, the portfolio's shares have traded in the market at prices that were
at times above, but generally were below, net asset value.
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Management of the Portfolio
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BOARD OF DIRECTORS
Overall responsibility for management and supervision of the portfolio
rests with the portfolio's Board of Directors. The Directors approve all
significant agreements with the portfolio's investment adviser, administrator,
custodian and transfer agent. The day-to-day operations of the portfolio are
delegated to the portfolio's investment adviser and administrator. The SAI
contains background information regarding each Director and executive officer of
the portfolio.
INVESTMENT ADVISER AND ADMINISTRATOR
SSBC, located at 388 Greenwich Street, New York, New York 10013, serves as
the portfolio's investment adviser. SSBC, through its predecessors, has been in
the investment counseling business since 1934 and currently manages investment
companies with total assets as of May 31, 1999 in excess of $167 billion.
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Management of the Portfolio (continued)
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The manager and Salomon Smith Barney are subsidiaries of Citigroup Inc.
Citigroup businesses produce a broad range of financial services -- asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading -- and use diverse channels to make
them available to consumer and corporate customers around the world.
Subject to the supervision and direction of the portfolio's Board of
Directors, SSBC manages the securities held by the portfolio in accordance with
the portfolio's stated investment objectives and policies, makes investment
decisions for the portfolio, places orders to purchase and sell securities on
behalf of the portfolio and employs managers and securities analysts who provide
research services to the portfolio. The portfolio pays SSBC a fee for investment
advisory services provided to the portfolio that is computed daily and paid
monthly at the annual rate of 0.90% of the value of the portfolio's average
daily net assets.
Transactions on behalf of the portfolio are allocated to various dealers
by SSBC 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 SSBC to supplement its own research and analysis with the
views and information of other securities firms. The portfolio may use Salomon
Smith Barney or a Salomon Smith Barney affiliated broker in connection with the
purchase or sale of securities when SSBC believes that the broker's charge for
the transaction does not exceed usual and customary levels. The same standard
applies to the use of Salomon Smith Barney as a broker in connection with
entering into options and futures contracts. The portfolio paid no brokerage
commissions in the last fiscal year.
As the portfolio's administrator, SSBC generally manages all aspects of
the portfolio's administration and operation. The portfolio pays SSBC a fee for
administration services that is computed daily and paid monthly at the annual
rate of 0.20% of the portfolio's average daily net assets. The combined annual
rate of fees paid by the portfolio for advisory and administrative services is
higher than the rates for similar services paid by other publicly offered,
closed-end management investment companies that have investment objectives and
policies similar to those of the portfolio.
Year 2000 issue Information technology experts are concerned about
computer systems' ability to process date-related information on and after
January 1, 2000. This situation, commonly known as the "Year 2000" issue, could
have an adverse impact on the fund. The cost of addressing the Year 2000 issue,
if substantial, could adversely affect companies and governments that issue
securities held by the fund.
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Management of the Portfolio (continued)
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The manager and Salomon Smith Barney are addressing the Year 2000 issue for
their systems. The fund has been informed by other service providers that they
are taking similar measures. Although the fund does not expect the Year 2000
issue to adversely affect it, the fund cannot guarantee the efforts of the fund,
which are limited to requesting and receiving reports from its service
providers, or the efforts of its service providers to correct the problem will
be successful.
PORTFOLIO MANAGEMENT
John C. Bianchi, Vice President and Investment Officer of the portfolio,
is primarily responsible for the management of the portfolio's assets. Mr.
Bianchi has served the portfolio in this capacity since the portfolio commenced
operations in 1993 and manages the day-to-day operations of the portfolio,
including making all investment decisions. Mr. Bianchi is a Managing Director of
SSBC and, as such, is the senior asset manager for investment companies and
other accounts investing in high yield securities.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The portfolio expects to pay monthly dividends of net investment income
(that is, income other than net realized capital gains) to the holders of the
common stock. Under the portfolio's current policy, which may be changed at any
time by its Board of Directors, the portfolio's monthly dividends will be made
at a level that reflects the past and projected performance of the portfolio,
which policy over time will result in the distribution of substantially all the
net investment income of the portfolio. Expenses of the portfolio are accrued
each day. Net realized capital gains, if any, will be distributed to the
shareholders at least once a year. The portfolio may pay additional
distributions and dividends at other times if necessary to avoid a federal tax.
Under the portfolio's Dividend Reinvestment Plan (the "Plan"), a
shareholder whose shares of common stock are registered in his own name will
have all distributions from the portfolio reinvested automatically by the
transfer agent as agent under the Plan, unless the shareholder elects to receive
cash. Distributions with respect to shares registered in the name of a
broker-dealer or other nominee (that is, in "Street Name") will be reinvested by
the broker or nominee in additional shares under the Plan, unless the service is
not provided by the broker or nominee or the shareholder elects to receive
distributions in cash. Investors who own common stock registered in Street Name
should consult their broker-dealers for details regarding reinvestment. All
distributions to portfolio shareholders who do not participate in the Plan will
be paid by check mailed directly to the record holder by or under the direction
of the transfer agent as dividend-paying agent.
25
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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 dividend or capital gains distribution record
date or, if that date is not a NYSE trading day, the immediately preceding
trading day.
If the market price of the common stock is less than the net asset value
of the common stock, or if the portfolio declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with Salomon
Smith Barney, as purchasing agent for Plan participants, 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 dividend or capital gains distribution had been paid
in common stock issued by the portfolio at net asset value. Additionally, if the
market price exceeds the net asset value of shares before the purchasing agent
has completed its purchases, the purchasing agent is permitted to cease
purchasing shares and the portfolio may issue the remaining shares at a price
equal to the greater of (a) net asset value or (b) 95% of the then current
market price. In a case where the purchasing agent has terminated open market
purchases and the portfolio has issued the remaining shares, the number of
shares received by the participant in respect to the cash dividend or capital
gains distribution will be based on the weighted average prices paid for shares
purchased in the open market and the price at which the portfolio issues the
remaining shares. All cash received as a dividend or capital gains distribution
will be applied to purchase common stock on the open market as soon as
practicable after the payment date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.
The transfer agent maintains all shareholder accounts in the Plan and
furnishes written confirmations of all transactions in each account, including
information needed by a shareholder for personal and tax records. The automatic
reinvestment of dividends and capital gains distributions will not relieve Plan
participants of any income tax that may be payable on the dividends or capital
gains distributions.
26
<PAGE>
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
Common stock in the account of each Plan participant will be held by the
transfer agent in uncertificated form in the name of the Plan participant, and
each shareholder's proxy will include those shares purchased pursuant to the
Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. The transfer agent's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
portfolio. No brokerage charges apply with respect to shares of common stock
issued directly by the portfolio as a result of dividends or capital gains
distributions payable either in common stock or in cash. Each Plan participant
will, however, bear a proportionate share of brokerage commissions incurred with
respect to open market purchases made in connection with the reinvestment of
dividends or capital gains distributions.
Experience under the Plan may indicate that changes to it are desirable.
The portfolio reserves the right to amend or terminate the Plan as applied to
any 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 portfolio's prior written consent, on
at least 30 days' written notice to Plan participants. All correspondence
concerning the Plan should be directed by mail to First Data Investor Services
Group, Inc., P.O. Box 1376, Boston, Massachusetts 02104 or by telephone at
1-800-331-1710.
27
<PAGE>
- --------------------------------------------------------------------------------
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 portfolio's Board of Directors. For purposes of determining
net asset value, futures contracts and options on futures contracts will be
valued 15 minutes after the close of regular trading on the NYSE.
Net asset value per share of common stock is calculated by dividing the
value of the portfolio's total assets less liabilities. In general, the
portfolio's investments will be valued at market value, or in the absence of
market value, at fair value as determined by or under the direction of the
portfolio's Board of Directors. Portfolio securities which are traded primarily
on foreign exchanges are generally valued at the preceding closing values of
such securities on their respective exchanges, except that when an occurrence
subsequent to the time a value was so established is likely to have changed such
value, then the fair market value of those securities will be determined by
consideration of other factors by or under the direction of the Board of
Directors. A security that is traded primarily on an exchange is valued at the
last sale price on that exchange or, if there were no sales during the day, at
the current quoted bid price. Over-the-counter securities are valued on the
basis of the bid price at the close of business on each day. Investments in U.S.
government securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter market.
Short-term investments that mature in 60 days or less are valued on the basis of
amortized cost (which involves valuing an investment at its cost and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating interest rates on the market
value of the investment) when the Board of Directors has determined that
amortized cost is fair value.
The valuation of the portfolio's assets is made by SSBC after consultation
with an independent pricing service (the "Service") approved by the portfolio's
Board of Directors. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid prices
and asked prices. Investments for which, in the judgment of the Service, no
readily obtainable market quotation is available, are carried at fair value as
determined by the Service, based on methods that include consideration of:
yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions. The
Service may use electronic data processing techniques and/or a matrix system to
determine valuations. The procedures of the Service are reviewed periodically by
the officers of the portfolio under the general supervision and responsibility
of the Board of Directors, which may replace the Service at any time if it
determines it to be in the best interests of the portfolio to do so.
28
<PAGE>
- --------------------------------------------------------------------------------
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 discussion. 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, you are urged to consult your
tax advisor 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 so long as such qualification is in the best
interests of its shareholders. In each taxable year that the portfolio
qualifies, the portfolio will pay no federal income tax on its investment
company taxable income and net long-term capital gain that is distributed to its
shareholders.
Dividends paid from net investment income and net realized short-term
capital gain are subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term capital gain, derived from
the sale of securities held by the portfolio for more than one year or certain
other sources, are taxable as long-term capital gains, regardless of the length
of time a shareholder has owned portfolio shares.
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 shareholder's gain or loss on the sale of portfolio shares, 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. In some circumstances, sales to the
portfolio (e.g., in connection with a tender offer) may be subject to different
tax rules. A loss 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
dividends, capital gain distributions, and the proceeds of any repurchase,
regardless of whether gain or loss is realized upon the repurchase, for
shareholders who do not provide the portfolio with a correct taxpayer
identification number (social security or employer identification number) and
any required certifications. Withholding from the proceeds of open-market sales
and from taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute
29
<PAGE>
- --------------------------------------------------------------------------------
Taxes (continued)
- --------------------------------------------------------------------------------
an additional tax, and may be claimed as a credit on the shareholders' federal
income tax return.
- --------------------------------------------------------------------------------
Description of Common Stock
- --------------------------------------------------------------------------------
No shares of common stock, other than those currently outstanding, are
offered for sale pursuant to this prospectus. All shares of common stock have
equal non-cumulative voting rights and equal rights with respect to dividends,
assets and liquidation. Shares of common stock will be fully paid and
non-assessable when issued and have no preemptive, conversion or exchange
rights. A majority of the votes cast at any meeting of shareholders is
sufficient to take or authorize action, except for election of Directors or as
otherwise provided in the portfolio's Articles of Incorporation as described
under "Certain Provisions of the Articles of Incorporation."
Under the rules of the NYSE applicable to listed companies, the portfolio
will be required to hold an annual meeting of shareholders in each year. If the
portfolio's shares are no longer listed on the NYSE (or any other national
securities exchange the rules of which require annual meetings of shareholders),
the portfolio may decide not to hold annual meetings of shareholders. See "Stock
Purchases and Tenders."
The portfolio has no current intention of offering additional shares,
except that additional shares may be issued under the Plan. See "Dividends and
Distributions; Dividend Reinvestment Plan." Other offerings of shares, if made,
will require approval of the portfolio's Board of Directors and will be subject
to the requirement of the 1940 Act that shares may not be sold at a price below
the then current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of a majority of the portfolio's outstanding shares.
Common Stock
Shares Issued
and Outstanding
Shares Authorized as of
Title of Class Shares Authorized and Not Issued May 31, 1999
-------------- ----------------- --------------- --------------
common stock 500,000,000 455,763,897.073 44,236,102.927
- --------------------------------------------------------------------------------
Stock Purchases and Tenders
- --------------------------------------------------------------------------------
Although shares of closed-end investment companies sometimes trade at
premiums over net asset value, they frequently trade at discounts. Since the
portfolio's
30
<PAGE>
- --------------------------------------------------------------------------------
Stock Purchases and Tenders (continued)
- --------------------------------------------------------------------------------
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 portfolio's Board of Directors currently intends to consider from
time to time repurchases of common stock on the open market or in private
transactions or the making of tender offers for common stock.
The portfolio may repurchase shares of its common stock in the open market
or in privately negotiated transactions when the portfolio can do so at prices
below their then current net asset value per share on terms that the Board of
Directors believes represent a favorable investment opportunity.
In addition, the Board of Directors currently intends to consider, at
least once a year, making an offer to each common stock shareholder of record to
purchase at net asset value shares of common stock owned by the shareholder.
Before authorizing any repurchase of common stock or tender offer to the
common stock shareholders, the portfolio's Board of Directors would consider all
relevant factors, including the market price of the common stock, its net asset
value per share, the liquidity of the portfolio's securities positions, the
effect an offer or repurchase might have on the portfolio or its shareholders
and relevant market conditions. Any offer would be made in accordance with the
requirements of the 1940 Act and the Securities Exchange Act of 1934. Although
the matter will be subject to the review of the Board of Directors, a tender
offer is not expected to be made if the anticipated benefit to shareholders and
the portfolio would not be commensurate with the anticipated cost to the
portfolio, or if the number of shares expected to be tendered would not be
material.
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
- --------------------------------------------------------------------------------
The portfolio's Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons to (i)
acquire control of the portfolio, (ii) cause it to engage in certain
transactions or (iii) modify its structure. These provisions could have the
effect of depriving shareholders of an opportunity to sell their shares of
common stock at a premium over prevailing market prices by discouraging a third
party from seeking to obtain control of the portfolio. The provisions include
the classification of the Board of Directors and requirements for the approval
of substantial majorities of the portfolio's shareholders for certain matters.
These provisions are set forth in detail in the SAI.
31
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation (continued)
- --------------------------------------------------------------------------------
The Board of Directors has determined that the increased voting
requirements required by the Articles of Incorporation, which are generally
greater than the minimum requirements under Maryland law and the 1940 Act, are
in the best interests of shareholders generally. Reference should be made to the
Articles of Incorporation on file with the SEC for the full text of their
provisions.
- --------------------------------------------------------------------------------
Custodian, Transfer Agent and Dividend-Paying Agent and Registrar
- --------------------------------------------------------------------------------
PNC Bank, National Association ("PNC"), located at 17th and Chestnut
Street, Philadelphia, Pennsylvania 19103, acts as custodian of the portfolio's
investments.
First Data Investor Services Group, Inc., located at One Exchange Place,
Boston, Massachusetts 02109, serves as the portfolio's transfer agent,
dividend-paying agent and registrar. The transfer agent also serves as agent in
connection with the Plan. Neither PNC nor the transfer agent assists in or is
responsible for investment decisions involving assets of the portfolio.
Under the Custody Agreement, PNC holds the portfolio's assets in
accordance with the provisions of the 1940 Act. Under the transfer agency and
Registrar Agreement, the transfer agent maintains the shareholder account
records for the portfolio, distributes dividends and distributions payable by
the portfolio and produces statements with respect to account activity for the
portfolio and its shareholders. The services to be provided by the transfer
agent as agent under the Plan are described under "Dividends and Distributions;
Dividend Reinvestment Plan."
- --------------------------------------------------------------------------------
Independent Auditors
- --------------------------------------------------------------------------------
The audited financial statements have been incorporated by reference in
the SAI in reliance upon the report of KPMG LLP, independent auditors.
- --------------------------------------------------------------------------------
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.
32
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S 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>
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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
CCC, predominantly speculative with respect to the issuer's capacity to
CC, C pay interest and 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>
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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&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories.
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&P's receipt of closing
documentation confirming investments and cash flow.
* - Continuance of the rating is contingent upon S&P's receipt of an
executed copy of the escrow agreement.
NR - Indicates no rating has been requested, that there is insufficient
information on which to 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
MOODY'S 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 & POOR'S
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.
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet financial commitment in a timely
manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the strongest
capacity for timely payments of financial commitments. The "+" denotes an
exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for timely
payment of financial commitments, but the margin of safety is not as great as in
the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction to
non-investment grade.
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
<PAGE>
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- --------------------------------------------------------------------------------
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
All dealers effecting transactions in the portfolio's securities, whether or not
participating in this distribution, may be required to give investors a
prospectus.
If someone makes a statement about the portfolio that is not in this
prospectus, you should not rely upon that information. This prospectus does not
offer any security other than the portfolio's shares of common stock. Neither
the portfolio nor Salomon Smith Barney is offering to sell shares of the
portfolio to any person to whom the portfolio may not lawfully sell its shares.
There may be changes in the portfolio's affairs that occur after the date
of the prospectus. The portfolio will publish a supplement to the prospectus if
there are any material changes in its business.
Managed
High
Income
Portfolio
Inc.
388 Greenwich Street
New York, New York 10013
Common Stock
FD01148 6/99
MANAGED HIGH INCOME PORTFOLIO INC.
388 Greenwich Street
New York, New York 10013
1-800-451-2010
STATEMENT OF ADDITIONAL INFORMATION
June 25, 1999
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 Moody's Investors Service,
Inc. ("Moody's") or D by Standard & Poor's Ratings Group ("S&P") or
the equivalent rating by another NRSRO, or in unrated securities
that the portfolio's investment adviser deems of comparable
quality. No assurance can be given that the portfolio will be able
to achieve its investment objective.
This Statement of Additional Information ("SAI") expands upon and
supplements the information contained in the current prospectus of
the portfolio, dated June 25, 1999, 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
Salomon Smith Barney Financial Consultant or by writing or calling
the portfolio at the address or telephone number set forth above.
This SAI, although not itself a prospectus, is incorporated by
reference into the prospectus in its entirety.
No person has been authorized to give any information or to make
any representations not contained in the prospectus or this SAI
and, if given or made, such information or representations must not
be relied upon as having been authorized by the portfolio or the
portfolio's investment adviser. The prospectus and this SAI do not
constitute an offer to sell or a solicitation of any offer to buy
any security other than the shares of common stock, nor does it
constitute an offer to sell or a solicitation of an offer to buy
the shares of common stock by anyone in any jurisdiction in which
the offer or solicitation would be unlawful. Neither the delivery
of the prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change
in the affairs of the portfolio since the date hereof. If any
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 portfolio's investment objectives and
the policies it employs to achieve those objectives. The following
discussion supplements the description of the portfolio's
investment policies in the prospectus.
General
The portfolio's primary investment objective is high current
income, with capital appreciation as a secondary objective. The
portfolio seeks to achieve its objectives by investing at least 65%
of its assets in high-yielding corporate bonds, debentures and
notes. Although the portfolio may invest in securities of any
maturity, under current market conditions the portfolio intends
that its portfolio of fixed-income securities will have an average
remaining maturity of between 5 and 10 years The portfolio's
investment adviser, SSBC Funds Management Inc. ("SSBC"), (formerly
known as Mutual Management Corp.) may adjust the portfolio's
average maturity when, based on interest rate trends and other
market conditions, it deems it appropriate to do so. Up to 35% of
the portfolio's assets may be invested in common stock or other
equity or equity-related securities, including convertible
securities, preferred stock, warrants and rights. The portfolio's
investment 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 portfolio's
outstanding voting shares. No assurance can be given that the
portfolio's investment objectives will be achieved.
The portfolio may make equity investments in securities of
companies of any size depending on the relative attractiveness of
the company and the economic sector in which it operates.
Securities purchased by the portfolio generally will be rated in
the lower categories of NRSROs, as low as C by Moody's or D by S&P
or the equivalent rating by another NRSRO, or, if unrated, will be
securities that SSBC deems of comparable quality. However, the
portfolio will not purchase securities that have been assigned a
rating lower than B or lower 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 SSBC
believes that a more defensive investment strategy is appropriate
in light of market or economic conditions. The portfolio also may
lend its portfolio securities and purchase or sell securities on a
when-issued or delayed-delivery basis.
The portfolio may invest up to 20% of its assets in the securities
of foreign issuers that are denominated in currencies other than
the U.S. dollar and may invest without limitation in securities of
foreign issuers that are denominated in U.S. dollars. In order to
mitigate the effects of uncertainty in future exchange rates
affecting the portfolio's non-dollar investments, the portfolio may
engage in currency exchange transactions and currency futures
contracts and related options and purchase options on foreign
currencies. The portfolio also may hedge against the effects of
changes in the value of its investments by entering into interest
rate futures contracts and related options.
Use of Ratings as Investment Criteria. In general, the ratings of
NRSROs such as Moody's and S&P represent the opinions of those
agencies as to the quality of the securities and long-term
investments which they rate. It should be emphasized, however,
that such ratings are relative and subjective; they are not
absolute standards of quality and do not evaluate the market risk
of securities. These ratings will be used as initial criteria for
the selection of securities, but the portfolio also will rely upon
the independent advice of SSBC. Among the factors that will also
be considered by SSBC in evaluating potential investments are the
long-term ability of the issuer to pay principal and interest and
general economic trends. To the extent the portfolio invests in
lower-rated and comparable unrated securities, the portfolio's
achievement of its investment objectives may be more dependent on
SSBC's credit analysis of such securities than would be the case
for a portfolio consisting entirely of higher-rated securities.
The Appendix to the prospectus contains information concerning the
ratings of 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 SSBC
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
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 Moody's or S&P, the equivalent from another
major rating service or comparable unrated securities. Money
market securities in which the portfolio typically expects to
invest include: U.S. government securities; bank obligations
(including certificates of deposit, time deposits and bankers'
acceptances of U.S. or foreign banks); commercial paper; and
repurchase agreements.
Futures Contracts and Options on Futures Contracts. As set forth
in the prospectus, the portfolio may enter into interest rate and
currency futures contracts and may purchase and sell put and call
options on such futures contracts. The portfolio will enter into
such transactions for hedging purposes or for other appropriate
risk management purposes permitted under the rules and regulations
of the Commodity Futures Trading Commission (the "CFTC") and the
Securities and Exchange Commission (the "SEC").
Parties to a futures contract must make initial "margin" deposits
to secure performance of the contract. There are also requirements
to make "variation" margin deposits from time to time as the value
of the futures contract fluctuates. The portfolio is not a
commodity pool and, in accordance with CFTC regulations currently
in effect, may enter into futures contracts or options on futures
contacts (as described below) only for "bona fide hedging" purposes
(as defined in CFTC regulations) and, in addition, for other
purposes, provided that aggregate initial margin and premiums
required to establish such positions other than those considered by
the CFTC to be for "bona fide hedging" purposes will not exceed 5%
of the fair market value of the portfolio's total assets, after
taking into account unrealized profits and unrealized losses on
such contracts. In the event that the portfolio enters into short
positions in futures contracts as a hedge against a decline in the
value of the portfolio's securities, the value of such futures
contracts may not exceed the total market value of the portfolio's
investments. In addition, certain provisions of the Internal
Revenue Code of 1986, as amended (the "Code"), may limit the extent
to which the portfolio may enter into futures contracts or engage
in options transactions. See "Taxes."
Under regulations of the CFTC currently in effect, which may change
from time to time, with respect to futures contracts to purchase
securities, call options on futures purchased by the portfolio and
put options on futures written by the portfolio, the portfolio will
set aside in a segregated account cash, U.S. government securities
or other U.S. dollar-denominated, high quality, short-term or other
money market instruments at least equal to the value of instruments
underlying such futures contracts less the amount of initial margin
on deposit for such contracts. The current view of the staff of
the SEC is that the portfolio's positions in futures contracts as
well as options on futures written by it must be collateralized
with cash or certain liquid assets held in a segregated account or
covered in order to eliminate any potential leveraging. Under
interpretations of the SEC currently in effect, which may change
from time to time, a "covered" call option means that so long as
the portfolio is obligated to the writer of the option, it will own
(1) the underlying instruments subject to the option, (2)
instruments convertible or exchangeable into the instruments
subject to the option or (3) a call option on the relevant
instruments with an exercise price no higher than the exercise
price on the call option written.
The portfolio may either accept or make delivery of cash or the
underlying instrument specified at the expiration of a futures
contact or, prior to expiration, enter into a closing transaction
involving the purchase or sale of an offsetting contract. Closing
transactions with respect to futures contracts are effected on the
exchange on which the contract was entered into (or a linked
exchange).
The portfolio may purchase and write put and call options on
futures contracts in order to hedge all or a portion of its
investments and may enter into closing purchase transactions with
respect to options written by the portfolio in order to terminate
existing positions. There is no guarantee that such closing
transactions can be effected at any particular time or at all. In
addition, daily limits on price fluctuations on exchanges on which
the portfolio conducts its futures and options transactions may
prevent the prompt liquidation of positions at the optimal time,
thus subjecting the portfolio to the potential of greater losses.
An option on a futures contract, as contrasted with the direct
investment in such a contract, gives the purchaser of the option
the right, in return for the premium paid, to assume a position in
a futures contract at a specified exercise price at any time on or
before the expiration date of the option. Upon exercise of an
option, the delivery of the futures position by the writer of the
option to the holder of the option will be accomplished by delivery
of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than,
in the case of a put, the exercise price of the option on the
futures contract. The potential loss related to the purchase of an
option on a futures contract is limited to the premium paid for the
option (plus transaction costs). With respect to options purchased
by the portfolio, there are no daily cash payments made by the
portfolio to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and
that change would be reflected in the net asset value of the
portfolio.
While the portfolio may enter into futures contracts and options on
futures contracts for bona fide hedging and other appropriate risk
management purposes, the use of futures contracts and options on
futures contracts might result in a poorer overall performance for
the portfolio than if it had not engaged in any such transactions.
If, for example, the portfolio had insufficient cash, it may have
to sell a portion of its underlying portfolio of securities in
order to meet daily variation margin requirements on its futures
contracts or options on futures contracts at a time when it may be
disadvantageous to do so. There may be an imperfect correlation
between the portfolio's investments and futures contracts or
options on futures contracts entered into by the portfolio, which
may prevent the portfolio from achieving the intended hedge or
expose the portfolio to risk of loss. Further, the portfolio's use
of futures contracts and options on futures contracts to reduce
risk involves costs and will be subject to SSBC's ability to
predict correctly changes in interest rate relationships or other
factors. No assurance can be given that SSBC's 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 SSBC 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
portfolio's Board of Directors must terminate the loan and regain
the portfolio's right to vote the securities. From time to time,
the portfolio may pay a part of the interest earned from the
investment of collateral received for securities loaned to the
borrower and/or a third party that is unaffiliated with the
portfolio and that is acting as a "finder."
Currency Exchange Transactions and Options on Foreign Currencies.
In order to protect against uncertainty in the level of future
exchange rates, the Portfolio may engage in currency exchange
transactions and purchase exchange-traded put and call options on
foreign currencies. The Portfolio will conduct its currency
exchange transactions either on a spot (i.e., cash) basis at the
rate prevailing in the currency exchange market or through entering
into forward contracts to purchase or sell currencies.
The portfolio's dealings in forward currency exchange transactions
will be limited to hedging involving either specific transactions
or portfolio positions. Transaction hedging is the purchase or
sale of forward currency contracts with respect to specific
receivables or payables of the portfolio generally arising in
connection with the purchase or sale of its securities. position
hedging, generally, is the sale of forward currency contracts with
respect to portfolio security positions denominated or quoted in
the currency. The portfolio may not position hedge with respect to
a particular currency to an extent greater than the aggregate
market value at any time of the security or securities held in its
portfolio denominated or quoted in or currently convertible (such
as through exercise of an option or consummation of a forward
currency contract) into that particular currency. If the portfolio
enters into a transaction hedging or position hedging transaction,
it will cover the transaction through one or more of the following
methods: (a) ownership of the underlying currency or an option to
purchase such currency; (b) ownership of an option to enter into an
offsetting forward currency contract; (c) entering into a forward
contract to purchase currency being sold or to sell currency being
purchased, provided that such covering contract is itself covered
by any one of these methods unless the covering contract closes out
the first contract; or (d) depositing into a segregated account
with the custodian or a sub-custodian of the portfolio cash or
readily marketable securities in an amount equal to the value of
the portfolio's total assets committed to the consummation of the
forward currency contract and not otherwise covered. In the case
of transaction hedging, securities placed in the account must be
liquid debt securities. In any case, if the value of the
securities placed in the segregated account declines, additional
cash or securities will be placed in the account so that the value
of the account will equal the above amount. Hedging transactions
may be made from any foreign currency into dollars or into other
appropriate currencies.
At or before the maturity of a forward contract, the portfolio may
sell a portfolio security and make delivery of the currency, or
retain the security and offset its contractual obligation to
deliver the currency by purchasing a second contract pursuant to
which the portfolio will obtain, on the same maturity date, the
same amount of the currency which it is obligated to deliver. If
the portfolio retains the portfolio security and engages in an
offsetting transaction, the portfolio, at the time of execution of
the offsetting transaction, will incur a gain or loss to the extent
movement has occurred in forward contract prices. Should forward
prices decline during the period between the portfolio's entering
into a forward contract for the sale of a currency and the date it
enters into an offsetting contract for the purchase of the
currency, the portfolio will realize a gain to the extent that the
price of the currency it has agreed to sell exceeds the price of
the currency it has agreed to purchase. Should forward prices
increase, the portfolio will suffer a loss to the extent the price
of the currency that it has agreed to purchase exceeds the price of
the currency it has agreed to sell.
The cost to the portfolio of engaging in currency transactions
varies with factors such as the currency involved, the length of
the contract period and the market conditions then prevailing.
Because transactions in currency exchange are usually conducted on
a principal basis, no fees or commissions are involved. The use of
forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate
of exchange that can be achieved in the future. In addition,
although forward currency contacts limit the risk of loss due to a
decline in the value of the hedged currency, at the same time, they
limit any potential gain that might result should the value of the
currency increase.
The portfolio may purchase put options on a foreign currency in
which securities held by the portfolio are denominated to protect
against a decline in the value of the currency in relation to the
currency in which the exercise price is denominated. The portfolio
may purchase a call option on a foreign currency to hedge against
an adverse exchange rate of the currency in which a security that
it anticipates purchasing is denominated in relation to the
currency in which the exercise price is denominated. Put options
convey the right to sell the underlying currency at a price which
is anticipated to be higher than the spot price of the currency at
the time the option expires. Call options convey the right to buy
the underlying currency at a price which is expected to be lower
than the spot price of the currency at the time the option expires.
The portfolio may use foreign currency options under the same
circumstances that it could use forward currency exchange
transactions. A decline in the dollar value of a foreign currency
in which the portfolio's securities are denominated, for example,
will reduce the dollar value of the securities, even if their value
in the foreign currency remains constant. In order to protect
against such diminution in the value of securities it holds, the
portfolio may purchase put options on the foreign currency. If the
value of the currency does decline, the portfolio will have the
right to sell the currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its
securities that otherwise would have resulted. Conversely, if a
rise in the dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially
increasing the cost of the securities, the portfolio may purchase
call options on the particular currency. The purchase of these
options could offset, at least partially, the effects of the
adverse movements in exchange rates. The benefit to the portfolio
derived from purchases of foreign currency options, like the
benefit derived from other types of options, will be reduced by the
amount of the premium and related transaction costs. In addition,
if currency rates do not move in the direction or to the extent
anticipated, the portfolio could sustain losses on transactions in
foreign currency options that would require it to forego a portion
or all of the benefits of advantageous changes in the rates.
Options on foreign currencies purchased by the portfolio may be
traded on domestic and foreign exchanges or traded over-the-
counter.
Investment Restrictions
The investment restrictions numbered 1 through 12 below have been
adopted by the portfolio as fundamental investment restrictions
that may not be changed without the prior approval of the holders
of a majority of the portfolio's outstanding voting securities. A
"majority of the portfolio's outstanding voting securities" for
this purpose means the lesser of (1) 67% or more of the shares of
the portfolio's Common Stock present at a meeting of shareholders,
if the holders of 50% of the outstanding shares are present or
represented by proxy at the meetings, or (2) more than 50% of the
outstanding shares. Investment restrictions numbered 13 and 14 may
be changed by vote of a majority of the Board of Directors at any
time. For purposes of the restrictions listed below, all
percentage limitations apply immediately after a purchase or
initial investment, and any subsequent change in applicable
percentage resulting from market fluctuations will not require
elimination of any security from the portfolio.
The investment policies adopted by the portfolio prohibit it from:
1. Purchasing the securities of any issuer (other than U.S.
government securities) if, as a result, more than 5% of the value
of the portfolio's total assets would be invested in the securities
of the issuer, except that up to 25% of the value of the
portfolio's total assets may be invested without regard to this 5%
limitation.
2. Purchasing more than 10% of the voting securities of any one
issuer (other than U.S. government securities), except that up to
25% of the value of the portfolio's total assets may be invested
without regard to the 10% limitation.
3. Purchasing securities on margin, except that the portfolio
may obtain any short-term credits necessary for the clearance of
purchases and sales of securities. For purposes of this
restriction, the deposit or payment of initial or variation margin
in connection with futures contracts or related options will not be
deemed to be a purchase of securities on margin.
4. Making short sales of securities or maintaining a short
position, except that the portfolio may engage in short sales
"against the box."
5. Borrowing money, except that (a) the portfolio may borrow
from banks for temporary or emergency (not leveraging) purposes in
an amount not exceeding 10% of the value of the portfolio's total
assets (including the amount borrowed) valued at the time the
borrowing is made and (b) the portfolio may enter into futures
contacts. Whenever borrowings described in (a) exceed 5% of the
value of the portfolio's total assets, the portfolio will not make
any additional investments.
6. Pledging, hypothecating, mortgaging or otherwise encumbering
more than 10% of the value of the portfolio's total assets. For
purposes of this restriction, (a) the deposit of assets in escrow
in connection with the writing of options, the purchase of
securities on a when-issued or delayed-delivery basis and the entry
into forward currency contracts and securities lending transactions
and (b) collateral arrangements with respect to options
transactions and margin for futures contracts and options on
futures contracts, will not be deemed to be pledges of the
portfolio's assets.
7. Underwriting the securities of other issuers, except insofar
as the portfolio may be deemed an underwriter under the Securities
Act of 1933, as amended (the "1933 Act"), by virtue of disposing of
portfolio securities.
8. Purchasing or selling real estate or interests in real
estate, except that the portfolio may purchase and sell securities
that are secured by real estate or interests in real estate and may
purchase securities issued by companies that invest or deal in real
estate.
9. Investing in commodities, except that the portfolio may
invest in futures contracts and options on futures contracts and
options on currencies as described under "Investment Objectives and
Management Policies."
10. Making loans to others, except through the purchase of
qualified debt obligations, the entry into repurchase agreements
and loans of portfolio securities consistent with the portfolio's
investment objectives and policies.
11. Investing in securities of other investment companies
registered or required to be registered under the 1940 Act, except
as they may be acquired as part of a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange or to
the extent permitted by the 1940 Act.
12. Purchasing any securities which would cause more than 25% of
the value of the portfolio's total assets at the time of purchase
to be invested in the securities of issuers conducting their
principal business activities in the same industry, provided that
there shall be no limit on the purchase of U.S. government
securities.
13. 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 portfolio's
ability to participate on committees seeking to include the
reorganization of portfolio companies.
PORTFOLIO TRANSACTIONS AND TURNOVER
Portfolio Transactions. The portfolio's securities ordinarily are
purchased from and sold to parties acting as either principal or
agent. Newly issued securities normally are purchased directly
from the issuer or from an underwriter acting as principal. Other
purchases and sales usually are placed with those dealers from
which it appears the best price or execution will be obtained;
those dealers may be acting as either agents or principal. Usually
no brokerage commissions, as such, are paid by the portfolio for
purchases and sales undertaken through principal transactions,
although the price paid usually includes an undisclosed
compensation to the dealer acting as agent. The purchase price
paid by the portfolio to underwriters of newly issued securities
usually includes a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers
normally are executed at a price between the bid and asked prices.
The portfolio did not pay any in brokerage commissions for the
fiscal year ended February 28, 1999.
Allocation of transactions, including their frequency, to various
dealers is determined by SSBC 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 SSBC 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 SSBC, and the fees
of SSBC are not reduced as a consequence of their receipt of such
supplemental information. Such information may be useful to SSBC
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 SSBC 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 Salomon
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 SSBC, 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 SSBC 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 SSBC to be equitable to
each. In some cases, this procedure may adversely affect the price
paid or received by the portfolio or the size of the position
obtained or disposed of by the portfolio.
The portfolio's Board of Directors will review periodically the
commissions paid by the portfolio to determine if the commissions
paid over representative periods of time were reasonable in
relation to the benefits received by the portfolio.
Portfolio Turnover. The portfolio turnover rate (the lesser of the
portfolio's purchases or sales of portfolio securities during the
last fiscal year, excluding any security the maturity of which at
the time of acquisition is one year or less, divided by the average
monthly value of portfolio securities) generally is not expected to
exceed 150%, but the turnover rate will not be a limiting factor
whenever the portfolio deems it desirable to sell or purchase
securities. For the fiscal year ended February 28, 1999, the
portfolio turnover rate was 84%.
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
portfolio's agreements with its investment adviser and
administrator, custodian, transfer agent, dividend paying agent,
registrar and plan agent. The day-to-day operations of the
portfolio are delegated to its officers and to SSBC, subject always
to the investment objectives and polices of the portfolio and to
general supervision by the portfolio's Board of Directors.
The Directors and Executive Officers of the portfolio, their
addresses and information as to their principal business
occupations during the past five years are shown in the table
below:
Name and Address
Positions Held
With the Portfolio
Principal Occupations
During Past 5 Years and Age
Heath B. McLendon
388 Greenwich Street
New York, NY 10013
Chairman of the Board of
Directors, Chief Executive
Officer
Managing Director of Salomon Smith
Barney Inc. ("Salomon Smith
Barney"); Chairman or Co-Chairman
of sixty-four Investment companies
managed by affiliates of Citigroup
Inc. ("Citigroup"); Formerly
Chairman of Smith Barney Strategy
Advisers Inc.; Director and
President of SSBC and of Travelers
Investment Adviser, Inc. ("TIA");
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
managed by affiliates of Salomon
Smith Barney; age 57.
Alessandro di Montezemolo
200 Murray Place
P.O. Box 5057
Southampton, NY 11969
Director
Retired; Director of two
investment companies managed by
affiliates of Salomon Smith Barney
and a Director of Offit Bank;
formerly Chairman of the Board and
Chief Executive Officer of Marsh &
McLennan, Inc.; age 80.
Director and/or trustee of
other registered investment
companies with which
Salomon Smith Barney is
affiliated.
Andrea Farace
Trace International
Holdings, Inc.
375 Park Avenue 11th Floor
New York, NY 10152
Director
Formerly 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
43.
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; Director of fourteen
Investment companies managed by
affiliates of Salomon Smith
Barney.; Prior to July 1995,
Chancellor at the University of
North Carolina at Chapel Hill; age
67.
George M. Pavia
Pavia & Harcourt
600 Madison Avenue
New York, NY 10022
Director
Senior Partner, Pavia & Harcourt,
Attorneys. Director of two
investment companies managed by
affiliates of Salomon Smith
Barney; age 71.
John C. Bianchi
388 Greenwich Street
New York, NY 10013
Vice President and
Investment Officer
Managing Director of Salomon Smith
Barney; age 43.
Lewis E. Daidone
388 Greenwich Street
New York, NY 10013
Senior Vice President and
Treasurer
Managing Director of Salomon Smith
Barney Inc.; Chief Financial
Officer of each of the Smith
Barney Mutual Funds; Director and
Senior Vice President SSBC and
TIA; age 41.
Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Salomon Smith
Barney Inc., General Counsel and
Secretary of SSBC and TIA; age 48.
Director and/or trustee of other registered investment companies
with which Salomon Smith Barney is affiliated.
The portfolio pays each of its Directors who is not a director,
officer or employee of SSBC, 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, 1999, the Directors of the
portfolio were paid the following compensation.
Director(*)
Aggregate Compensation
from the Portfolio
Aggregate Compensation from the
Smith Barney Mutual Funds
Paolo Cucchi (2)
$7,100
$17,700
Alessandro di Montezemolo (2)
7,200
17,900
Andrea Farace (2)
6,600
7,350
Paul Hardin (14)
7,600
71,400
Heath McLendon (64)
- -----
- -----
George Pavia (2)
7,200
17,900
* 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 portfolio's
fiscal year ended February 28, 1999, aggregate compensation paid by
the Portfolio to Directors Emeritus totaled $3,550.
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 16, 1999.
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
43,373,070.4850
98.05%
As of May 31, 1999, the Directors and Officers of the portfolio, as
a group, beneficially owned less than 1% of the portfolio's
outstanding shares of Common Stock.
Investment Adviser and Administrator -- SSBC
SSBC 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 SSBC ("Non-Interested Directors"), on
August 12, 1998. 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. SSBC provides
investment advisory and management services to investment companies
affiliated with Salomon Smith Barney. Salomon Smith Barney is a
wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly-owned subsidiary of
Citigroup Inc., 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. SSBC pays the salary of any officer or
employee who is employed by both it and the portfolio. SSBC bears
all expenses in connection with the performance of its services as
investment adviser. For services rendered to the portfolio, SSBC
receives from the portfolio a fee, computed and paid monthly at the
annual rate of 0.90% of the value of the portfolio's average daily
net assets. For the fiscal years ended February 28, 1997, February
28, 1998 and February 28, 1999, total investment advisory fees paid
by the portfolio amounted to, $4,255,116, $4,548,319 and
$4,469,951, respectively.
Under the Advisory Agreement, SSBC 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 SSBC 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
SSBC. The Advisory agreement may also be terminated by SSBC on 90
days' written notice to the portfolio. The Advisory Agreement
terminates automatically upon its assignment.
SSBC 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 12, 1998. Pursuant to the Administration
Agreement, SSBC 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 SSBC's services, the portfolio pays a fee,
computed daily and paid monthly, at the annual rate of 0.20% of the
portfolio's average daily net assets. For the fiscal years ended
February 28, 1997, February 28, 1998 and February 28, 1999, total
administration fees paid by the portfolio amounted to $945,581,
$1,010,715, and $993,322, respectively.
Pursuant to the Administration Agreement, SSBC will exercise its
best judgment in rendering services to the portfolio. SSBC 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
SSBC's reckless disregard of obligations and duties under the
Administration Agreement.
The Administration Agreement will continue automatically for
successive annual periods provided that such continuance is
approved at least annually by the Board of Directors of the
portfolio, including a majority of the Non-Interested Directors, by
vote cast in person at a meeting called for the purpose of voting
such approval. The Agreement is terminable, without penalty, upon
60 days' written notice, by the Board of Directors of the portfolio
or by vote of holders of a majority of the portfolio's shares of
Common Stock, or upon 90 days' written notice by SSBC.
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 Salomon
Smith Barney; SEC fees and state blue sky qualification fees;
charges of the custodian; transfer and dividend disbursing agent's
fees; certain insurance premiums; outside auditing and legal
expenses; costs of any independent pricing service; costs of
maintaining corporate existence; costs attributable to investor
services (including allocated telephone and personnel expenses);
costs of preparation and printing of prospectuses and statements of
additional information for regulatory purposes and for distribution
to shareholders; shareholders' reports and corporate meetings of
the officers, Board of Directors and shareholders of the 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 portfolio's 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 portfolio's assets is represented by cash,
U.S. government securities and other securities, with these other
securities limited, with respect to any one issuer, to an amount
not greater than 5% of the value of the portfolio's assets and not
greater than 10% of the outstanding voting securities of the
issuer, and (b) not more than 25% of the market value of the
portfolio's assets is invested in the securities of any one issuer
(other than U.S. government securities or securities of other
regulated investment companies) or of two or more issuers that the
portfolio controls and that are determined to be in the same or
similar trades or businesses or related trades or businesses. As a
regulated investment company, the portfolio will be subject to a 4%
non-deductible excise tax measured with respect to certain
undistributed amounts of ordinary income and capital gains. The
portfolio expects to pay the dividends and make the distributions
necessary to avoid the application of this excise tax.
The portfolio's transactions, if any, in foreign currencies,
forward contracts, options and futures contracts (including options
and forward contracts on foreign currencies) will be subject to
special provisions of the Code that, among other things, may affect
the character of gains and losses recognized by the portfolio
(i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the portfolio, defer portfolio
losses and cause the portfolio to be subject to hyperinflationary
currency rules. These rules could therefore affect the character,
amount and timing of distributions to shareholders. The provisions
also (1) will require the portfolio to mark-to-market certain types
of its positions (i.e., treat them as if they were closed out) and
(2) may cause the portfolio to recognize income without receiving
cash with which to pay dividends or make distributions in amounts
necessary to satisfy the distribution requirements for avoiding
income and excise taxes. The portfolio will monitor its
transactions, will make the appropriate tax elections and will make
the appropriate entries in its books and records when it acquires
any foreign currency, forward contract, option, futures contract or
hedged investment.
Taxation of the Portfolio's Shareholders
Dividends paid from the portfolio's net investment income and
distributions of the portfolio's net realized short-term capital
gains are taxable to shareholders of the portfolio as ordinary
income, regardless of the length of time shareholders have held
shares of Common Stock and whether the dividends or distributions
are received in cash or reinvested in additional shares.
Distributions of net long-term capital gains, if any, will be
taxable as long-term capital gains, whether received in cash or
reinvested in shares and regardless of how long the shareholder has
held the portfolio shares. As a general rule, a shareholder's gain
or loss on a sale of his shares of Common Stock will be a long-term
gain or loss if he has held his shares for more than one year and
will be a short-term capital gain or loss if he has held his shares
for one year or less. If the portfolio invests in equity
securities, a portion of the dividends and distributions paid by
the portfolio may qualify for the federal dividends-received
deduction for corporations.
Dividend Reinvestment Plan
A shareholder of the portfolio receiving dividends or distributions
in additional shares pursuant to the portfolio's Dividend
Reinvestment Plan (the "Plan") should be treated for federal income
tax purposes as receiving a distribution in an amount equal to the
amount of money that a shareholder receiving cash dividends or
distributions receives, and should have a cost basis in the shares
received equal to that amount.
Sale of Shares
Upon the sale or exchange of his shares, a shareholder will realize
a taxable gain or loss depending upon the amount realized and his
basis in his shares. Such gain or loss will be treated as capital
gain or loss if the shares are capital assets in the shareholder's
hands, and will be long-term or short-term depending upon the
shareholder's holding period for the shares. Any loss realized on
a sale or exchange will be disallowed to the extent the shares
disposed of are replaced, including replacement through the
reinvesting of dividends and capital gains distributions in the
portfolio under the Plan, within a period of 61 days beginning 30
days before and ending 30 days after the disposition of the shares.
In such a case, the basis of the shares acquired will be increased
to reflect the disallowed loss. Any loss realized by a shareholder
on the sale of a portfolio share held by the shareholder for six
months or less will be treated for federal income tax purposes as a
long-term capital loss to the extent of any distributions or deemed
distributions of long-term capital gains received by the
shareholder with respect to such share.
Tender Offers to Purchase Shares
Under current law, a holder of Common Stock who tenders all shares
of Common Stock owned by such shareholder and any shares considered
owned by such shareholder under attribution rules contained in the
Code will realize a taxable gain or loss depending upon such
shareholder's basis in the shares. Such gain or loss will be
treated as capital gain or loss if the shares are held as capital
assets in the shareholder's hands and will be long-term or short-
term depending upon the shareholder's holding period of the shares.
If a holder of Common Stock tenders less than all shares owned by
and attributed to such shareholder (or if the portfolio purchases
only some of the shares tendered by a holder of Common Stock), and
if the distribution to such shareholder does not otherwise qualify
as an exchange, the proceeds received will be treated as a taxable
dividend, return of capital or capital gain depending on the
portfolio's earnings and profits and the shareholder's basis in the
tendered shares.
Statements and Notices
Each shareholder will receive an annual statement as to the federal
income tax status of the dividends and distributions from the
portfolio for the prior calendar year. Furthermore, shareholders
will also receive, if appropriate, various written notices after
the close of the portfolio's taxable year regarding the federal
income tax status of certain dividends and distributions that were
paid (or that are treated as having been paid) by the portfolio to
its shareholders during the preceding year.
Backup Withholding
If a shareholder fails to furnish a correct taxpayer identification
number, 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 individual's taxpayer
identification number is that individual's social security number.
The backup withholding tax is not an additional tax and may be
credited against a taxpayer's federal income tax liability.
Other Taxes
Dividends and distributions also may be subject to state, local,
and foreign taxes depending on each shareholder's particular
situation.
THE FOREGOING IS ONLY A SUMMARY OF CERTAIN TAX CONSEQUENCES
AFFECTING THE PORTFOLIO AND ITS SHAREHOLDERS. SHAREHOLDERS ARE
ADVISED TO CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
PARTICULAR TAX CONSEQUENCES TO THEM OF AN INVESTMENT IN THE
PORTFOLIO.
STOCK PURCHASES AND TENDERS
The portfolio may repurchase shares of its Common Stock in the open
market or in privately negotiated transactions when the Portfolio
can do so at prices below their then current net asset value per
share on terms that the portfolio's Board of Directors believes
represent a favorable investment opportunity. In addition, the
Board of Directors currently intends to consider, at least one a
year, making an offer to each shareholder of record to purchase at
net asset value shares of Common Stock owned by the shareholders.
No assurance can be given that repurchases and/or tenders will
result in the portfolio's shares trading at a price that is equal
to their net asset value. The market prices of the portfolio's
shares will, among other things, be determined by the relative
demand for and supply of the shares in the market, the portfolio's
investment performance, the portfolio's dividends and yields and
investor perception of the portfolio's overall attractiveness as an
investment as compared with other investment alternatives. The
portfolio's acquisition of Common Stock will decrease the total
assets of the portfolio and therefore may have the effect of
increasing the portfolio's expense ratio. The portfolio may borrow
money to finance the repurchase of shares subject to the
limitations described in the prospectus and this SAI. Any interest
on the borrowings will reduce the portfolio's net income. Because
of the nature of the portfolio's investment objectives, policies
and securities holdings, SSBC does not anticipate that repurchases
and tenders will have an adverse effect on the portfolio's
investment performance and does not anticipate any material
difficulty in disposing of securities to consummate Common Stock
repurchases and tenders.
When a tender offer is authorized to be made by the portfolio's
Board of Directors, it will be an offer to purchase at a price
equal to the net asset value of all (but not less than all) of the
shares owned by the shareholder (or attributed to him for federal
income tax purposes under Section 38 of the Code). A shareholder
who tenders all shares owned or considered owned by him, as
required, will realize a taxable gain or loss depending upon his
basis in those shares.
If the portfolio liquidates securities in order to repurchase
shares of Common Stock, the portfolio may realize gains and losses.
These gains, if any, may be realized on securities held for less
than three months.. The portfolio turnover rate of the portfolio
may or may not be affected by the portfolio's repurchases of shares
of Common Stock pursuant to a tender offer.
ADDITIONAL INFORMATION
Legal Matters
Willkie Farr & Gallagher serves as legal counsel to the portfolio.
The Non-Interested Directors have selected Stroock & Stroock &
Lavan LLP as their counsel.
Independent Public Accountants
KPMG LLP, 345 Park Avenue, New York, NY 10154, has been selected as
the portfolio's independent auditor to examine and report on the
portfolio's financial statements and highlights for the fiscal year
ending February 29, 2000.
Custodian and Transfer Agent
PNC Bank, National Association ("PNC"), located at 17th and
Chestnut Streets, Philadelphia, PA 19103, serves as the portfolio's
custodian pursuant to a custody agreement. Under the custody
agreement, PNC holds the portfolio's securities and keeps all
necessary accounts and records. The assets of the portfolio are
held under bank custodianship in compliance with the 1940 Act.
First Data Investor Services Group, Inc. ("First Data"), located at
Exchange Place, Boston, Massachusetts 02109, serves as the
portfolio's transfer agent pursuant to a transfer agency agreement.
Under the transfer agency agreement, 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 portfolio's Annual Report of the fiscal year ended February 28,
1999 is incorporated into its Statement of Additional Information
by reference in its entirety. A copy of the Annual Report may be
obtained from any Smith Barney Financial Consultant or by calling
or writing to the portfolio at the telephone number or address set
forth on the cover page of this SAI.
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