As filed with the Securities and Exchange Commission on June 9,
2000
Securities Act Registration No. 33-56408
Investment Company Act Registration No. 811-7396
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 6
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7 x
__________________
Managed High Income Portfolio Inc.
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 816-6474
(Registrants Telephone Number, including Area Code)
Christina T. Sydor
Secretary
Managed High Income Portfolio
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M. Leibert,Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, New York 10019
Approximate Date of Proposed Public Offering: As soon as
practicable After the effective date of this Registration
Statement.
If any securities being registered on this form will be
offered on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933,as amended ( the "1933 Act"),
other than securities offered in connection with a dividend
reinvestment plan, check the following box.[ x ]
This Registration Statement relates to the registration of
an indeterminate number of shares solely for market-making
transactions. Pursuant to Rule 429, this Registration Statement
relates to shares previously registered on Form N-2.
(Registration No. 33-56408).
It is proposed that this filing will become effective:
[ x ]when declared effective pursuant to section 8(c).
Registrant amends this Registration Statement under the
Securities Act of 1933, as amended, on such date as may be
necessary to delay its effective date until Registrant files a
further amendment that specifically states that this Registration
Statement will thereafter become effective in accordance with the
provisions of Section 8(a) of the 1933 Act, as amended, or until
the Registration Statement becomes effective on such date as the
Securities and Exchange Commission, acting pursuant to Section
8(a), may determine.
MANAGED HIGH INCOME PORTFOLIO INC.
Form N-2
Cross Reference Sheet
Part A
Item No. Caption Prospectus
Caption
1. Outside Front Cover Outside Front
Cover of
Prospectus
2. Inside Front and Outside Back Inside Front and
Outside Back
Cover Page
Cover Page of
Prospectus
3. Fee Table and Synopsis Prospectus
Summary;
Fund Expenses
4. Financial Highlights Financial
Highlights
5. Plan of Distribution Prospectus
Summary; The
Offering;
Repurchase of
Shares
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds;
Investment
Objective and
Policies
8. General Description of the Registrant The Fund;
Investment
Objective
and Policies;
Risk
Factors
and Special
Consider-
ations;
Investment
Practices
9. Management Management of the
Fund;
Description of
Shares; Custodian
and
Transfer Agent
10. Capital Stock, Long-Term Debt,
and Other Securities Taxation;
Dividend
Reinvestment
Plan;
Description of
Shares
11. Defaults and Arrears
on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
12. Table of Contents of
the Statement of Additional Information Further
Information
Part B Statement of
Additional
Item No. Information
Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and History The Fund;
Description
of Shares (see
Prospectus)
17. Investment Objective & Policies Investment
Objective
and Policies;
Investment
Restrictions
18. Management Management of the
Portfolio;
Officers and
Directors
19. Control Persons and Principal
Holders of Securities Not Applicable
20. Investment Advisory and Other Services Management of the
Fund
21. Brokerage Allocation
and Other Practices Portfolio
Transactions
22. Tax Status Taxation
23. Financial Statements Financial
Statements
PART A PROSPECTUS
<PAGE>
Prospectus
June 26, 2000
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 the portfolio's 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 20.
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 26, 2000 (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 Consultant or from 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
<PAGE>
Prospectus (continued)
June 26, 2000
portfolio by calling 1-800-451-2010 or writing to the portfolio at 388
Greenwich Street, New York, New York 10013. Information about the portfolio can
be reviewed and copied at the Securities and Exchange Commission's (the
"Commission") Public Reference Room in Washington, D.C. In addition,
information on the operation of the Public Reference Room may be obtained by
calling the Commission at 1-202-942-8090. Reports and other information about
the portfolio are available on the Edgar Database on the Commission's Internet
site at http://www.sec.gov. Copies of this information may be obtained for a
duplicating fee by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
2
<PAGE>
Table of Contents
<TABLE>
<S> <C>
Prospectus Summary 4
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Fund Expenses 8
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Financial Highlights 9
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The Portfolio 10
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The Offering 10
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Use of Proceeds 10
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Investment Objectives and Policies 10
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Risk Factors and Special Considerations 20
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Investment Restrictions 24
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Share Price Data 25
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Management of the Portfolio 25
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Dividends and Distributions; Dividend Reinvestment Plan 27
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Net Asset Value 29
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Taxes 30
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Description of Common Stock 31
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Stock Purchases and Tenders 32
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Certain Provisions of the Articles of Incorporation 33
-------------------------------------------------------------------
Custodian, Transfer Agent, Dividend-Paying Agent and Registrar 34
-------------------------------------------------------------------
Independent Accountants 34
-------------------------------------------------------------------
Further Information 34
-------------------------------------------------------------------
Appendix A A-1
-------------------------------------------------------------------
</TABLE>
3
<PAGE>
Prospectus Summary
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 which
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 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 Inc ("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 The New York Stock Exchange ("NYSE").
Symbol MHY.
Investment Manager SSB Citi Fund Management LLC, successor to SSBC Fund
Management Inc. ("SSB Citi" or "the manager"). The manager selects and manages
the portfolio's investments in accordance with the portfolio's investment
objectives and policies. SSB Citi is also the portfolio's administrator and
oversees the portfolio's non-investment operations and its relations with its
service providers. For its services, SSB Citi receives a fee equal on an annual
basis to 1.10% of the portfolio's average daily net assets.
4
<PAGE>
Prospectus Summary (continued)
Risk Factors and Special Considerations The value of the securities in the
portfolio fluctuates 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
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:
. Interest rates rise, causing the value of the portfolio's investments
generally to decline.
. 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.
. 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.
. The manager's judgment about the attractiveness, value or income
potential of a particular security proves to be incorrect.
. 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
5
<PAGE>
Prospectus Summary (continued)
the equity securities markets or if 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 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 Objectives 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 distributions 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.
6
<PAGE>
Prospectus Summary (continued)
<TABLE>
<CAPTION>
Price of Portfolio Shares
Market Price of Portfolio Shares Issued by Plan
-------------------------------- ---------------------------
<S> <C>
Greater than or equal net asset value Shares issued at net asset
value or 95% of market
price, whichever is greater
Less than net asset value Market price
</TABLE>
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."
Transfer Agent, Dividend-Paying Agent and Registrar PFPC Global Fund
Services (PFPC) (formerly First Data Investor Services Group, Inc.) 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."
7
<PAGE>
Fund Expenses
The following table shows the expenses the portfolio pays. As a shareholder,
you indirectly pay these expenses.
<TABLE>
--------------------------------------------------------------------------------
<S> <C>
Annual Expenses
(as a percentage of net assets)*
Management fees....................................................... 1.10%
Other expenses........................................................ 0.08%
--------------------------------------------------------------------------------
Total Annual Operating Expenses*........................................ 1.18%
--------------------------------------------------------------------------------
Management fee waiver and expense reimbursement**..................... (.03)%
Net annual operating expenses......................................... 1.15%
--------------------------------------------------------------------------------
</TABLE>
* See "Management of the Portfolio" for additional information. "Other
expenses" are based on data from the portfolio's fiscal year ended February
29, 2000.
** Management has agreed to waive a portion of its investment advisory fees.
Management may discontinue or modify this investment advisory fee waiver at
any time.
Example
An investor would pay the following expenses on a $10,000 investment,
assuming a 5.00% annual return:
<TABLE>
<CAPTION>
One Year Three Years Five Years Ten Years
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
$120 $375 $649 $1,432
----------------------------------------------------------------------------------------------
</TABLE>
This hypothetical example assumes that all dividends and other distributions
are reinvested at net asset value and that the percentage amounts listed under
Annual 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.
8
<PAGE>
Financial Highlights
The following information for the five years ended February 29, 2000 has been
audited by KPMG LLP, independent accountants, whose report thereon appears in
the portfolio's annual report dated February 29, 2000. The information for the
two years 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 portfolio's Annual Report,
which is incorporated by reference into this prospectus and Statement of
Additional Information.
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
2000(1) 1999 1998 1997 1996(2) 1995 1994(1)
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $10.73 $11.87 $11.59 $11.36 $10.88 $12.39 $12.00
--------------------------------------------------------------------------------------------
Income (Loss) From
Operations:
Net investment income 1.00 1.01 1.09 1.12 1.13 1.12 0.98
Net realized and
unrealized gain (loss) (0.76) (1.12) 0.28 0.21 0.65 (1.48) 0.51
--------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.24 (0.11) 1.37 1.33 1.78 (0.36) 1.49
--------------------------------------------------------------------------------------------
Gain from Repurchase of
Treasury Stock 0.03 -- -- -- -- 0.00* (0.02)
--------------------------------------------------------------------------------------------
Offering Costs Credited
(Charged) to Paid-In
Capital -- -- -- -- -- -- --
--------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.98) (1.03) (1.09) (1.08) (1.27) (1.00) (0.96)
Net realized gains -- -- -- -- -- (0.15) (0.12)
Capital -- -- -- (0.02) (0.03) -- --
--------------------------------------------------------------------------------------------
Total Distributions (0.98) (1.03) (1.09) (1.10) (1.30) (1.15) (1.08)
--------------------------------------------------------------------------------------------
Net Asset Value, End of
Year $10.02 $10.73 $11.87 $11.59 $11.36 $10.88 $12.39
--------------------------------------------------------------------------------------------
Total Return, Based on
Market
Value(4) (13.40)% (2.44)% 10.96% 15.37% 18.83% (0.43)% 6.85%++
--------------------------------------------------------------------------------------------
Total Return, Based on
Net Asset Value(4) 3.89% (0.72)% 12.43% 12.65% 17.80% (2.18)% 12.67%++
--------------------------------------------------------------------------------------------
Net Assets, End of Year
(millions) $435 $475 $523 $494 $477 $456 $520
--------------------------------------------------------------------------------------------
Ratios to Average Net
Assets:
Expenses(3) 1.15% 1.17% 1.18% 1.20% 1.24% 1.24% 1.19%
Net investment income 9.62 9.03 9.19 9.89 9.74 9.96 8.74+
--------------------------------------------------------------------------------------------
Portfolio Turnover Rate 80% 84% 94% 61% 73% 62% 108%
--------------------------------------------------------------------------------------------
Market Value, End of
Year $8.125 $10.438 $11.750 $11.625 $11.125 $10.500 $11.750
--------------------------------------------------------------------------------------------
</TABLE>
(1) For the year ended February 29, 2000.
(2) For the year ended February 29, 1996
(3) The manager has waived a portion of its fees for the year ended February
29, 2000. If such fees had not been waived, the per share decrease in net
investment income and actual expense ratio would have been $0.00* and
1.18%, respectively.
(4) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
(5) For the period from March 26, 1993 (commencement of operations) to February
28, 1994.
* Amount represents less than $0.01
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
9
<PAGE>
The Portfolio
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.
The Offering
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 the 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.
Use of Proceeds
The portfolio will not receive any proceeds from the sale of any common
stock offered pursuant to this prospectus. Proceeds received by 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.
Investment Objectives and Policies
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.
10
<PAGE>
Investment Objectives and Policies (continued)
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. SSB Citi 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 SSB
Citi 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 SSB Citi 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.
11
<PAGE>
Investment Objectives and Policies (continued)
Investment Techniques
The portfolio may employ, among others, the investment techniques described
below:
Corporate Securities. Corporate securities in which the portfolio may invest
include corporate fixed-income securities of both domestic and foreign issuers,
such as bonds, debentures, notes, equipment lease certificates, equipment trust
certificates and preferred stock. Certain of the corporate fixed-income
securities in which the portfolio may invest may involve equity
characteristics. In addition, the portfolio may invest in participations that
are based on revenues, sales or profit of an issuer or in common stock offered
as a unit with corporate fixed-income securities.
Money-Market Instruments. When SSB Citi 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 SSB Citi. 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. SSB Citi, acting under the supervision of the
portfolio's Board of Directors, reviews on an ongoing basis the value of the
12
<PAGE>
Investment Objectives and Policies (continued)
collateral and the creditworthiness of the banks and dealers with which the
portfolio enters into repurchase agreements to evaluate potential risk.
Government Securities. U.S. government securities in which the portfolio may
invest include direct obligations of the United States and obligations issued
by U.S. government agencies and instrumentalities. Included among the direct
obligations of the United States are Treasury Bills, Treasury Notes and
Treasury Bonds, which differ principally in terms of their maturities. Included
among the securities issued by U.S. government agencies and instrumentalities
are: securities that are supported by the full faith and credit of the United
States (such as Government National Mortgage Association certificates);
securities that are supported by the right of the issuer to borrow from the
U.S. Treasury (such as securities of Federal Home Loan Banks); 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
13
<PAGE>
Investment Objectives and Policies (continued)
underlying common stocks and, therefore, also will react to variations in the
general market for equity securities. A unique feature of convertible
securities is that as the market price of the underlying common stock declines,
convertible securities tend to trade increasingly on a yield basis, and so may
not experience market value declines to the same extent as the underlying
common stock. When the market price of the underlying common stock increases,
the prices of the convertible securities tend to rise as a reflection of the
value of the underlying common stock. While no securities investments are
without risk, investments in convertible securities generally entail less risk
than investments in common stock of the same issuer.
As fixed-income securities, convertible securities are investments which
provide 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.
14
<PAGE>
Investment Objectives and Policies (continued)
Futures Contracts and Options on Futures Contracts. When deemed advisable by
SSB Citi 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
Commission and may enter into closing purchase transactions with respect to
options written by the portfolio in order to terminate existing positions.
There is no guarantee that such closing transactions can be effected at any
particular time or at all. An interest rate futures contract is a standardized
contract for the future delivery of a specified security (such as a U.S.
Treasury Bond or U.S. Treasury Note) or its equivalent at a future date at a
price set at the time of the contract. A currency futures contract is a
standardized contract for the future delivery of a specified amount of currency
at a future date at a price set at the time of the contract. The portfolio may
only enter into futures contracts traded on regulated commodity exchanges.
An option on a futures contract, as contrasted with the direct investment in
such a contract, gives the purchaser of the option the right, in return for the
premium paid, to assume a position in a futures contract at a specified
exercise price at any time on or before the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the writer of
the option to the holder of the option will be accomplished by delivery of the
accumulated balance in the writer's futures margin account, which represents
the amount by which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the exercise price of
the option on the futures contract. The potential loss related to the purchase
of an option on a futures contract is limited to the premium paid for the
option (plus transaction costs). With respect to options purchased by the
portfolio, there are no daily cash payments made by the portfolio to reflect
changes in the value of the underlying contract: however, the value of the
option does change daily and that change would be reflected in the net asset
value of the portfolio.
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
15
<PAGE>
Investment Objectives and Policies (continued)
amended (the "Code"), may limit the extent to which the portfolio may enter
into futures contracts or engage in options transactions. See "Taxes."
Currency Exchange Transactions and Options on Foreign Currencies. In order
to protect against uncertainty in the level of future exchange rates, the
portfolio may engage in currency exchange transactions and purchase exchange-
traded put and call options on foreign currencies. The portfolio will conduct
its currency exchange transactions either on a spot (i.e., cash) basis at the
rate prevailing in the currency exchange market or through entering into
forward contracts to purchase or sell currencies. The portfolio's dealings in
forward currency exchange and options on foreign currencies are limited to
hedging involving either specific transactions or portfolio positions.
A forward currency contract involves an obligation to purchase or sell a
specific currency for an agreed-upon price at an agreed-upon date, which may be
any fixed number of days from the date of the contract agreed upon by the
parties. These contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks) and their
customers. Although these contracts are intended to minimize the risk of loss
due to a decline in the value of the hedged currency, at the same time they
tend to limit any potential gain that might result should the value of the
currency increase.
The portfolio may purchase put options on a foreign currency in which
securities held by the portfolio are denominated to protect against a decline
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 purchase 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.
16
<PAGE>
Investment Objectives and Policies (continued)
When-Issued Securities and Delayed-Delivery Transactions. In order to secure
yields or prices deemed advantageous at the time, the portfolio may purchase or
sell any portfolio securities on a when-issued or delayed-delivery basis. The
portfolio will enter into a when-issued transaction for the purpose of
acquiring portfolio securities and not for the purpose of leverage. In such
transactions delivery of the securities occurs beyond the normal settlement
periods, but no payment or delivery is made by the portfolio prior to the
actual delivery or payment by the other party to the transaction. Due to
fluctuations in the value of securities purchased or sold on a when-issued or
delayed-delivery basis, the yields obtained on such securities may be higher or
lower than the yields available in the market on the dates when the investments
are actually delivered to the buyers. The portfolio will establish a segregated
account consisting of cash, U.S. government securities or other high grade debt
obligations in an amount equal to the amount of its when-issued and delayed-
delivery commitments. Placing securities rather than cash in the 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 had 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
17
<PAGE>
Investment Objectives and Policies (continued)
determinations. Investments in restricted securities such as Rule 144A
securities could have the effect of increasing the level of illiquidity in the
portfolio to the extent that there is temporarily no market for these
securities among qualified institutional buyers.
Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are
generally less diverse and mature, and to political systems that can be
expected to have less stability, than those of developed countries. Historical
experience indicates that the markets of developing countries 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 portfolio would generally have no recourse to the
entity that originated the loans in the
18
<PAGE>
Investment Objective and Policies (continued)
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 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.
Investments in Corporate Loans. The portfolio may invest up to 15% of its
total assets in corporate loans. Corporate loans are negotiated and
underwritten by a bank or syndicate of banks and other institutional investors.
The portfolio may acquire an interest in corporate loans through the primary
market by acting as one of a group of lenders of a corporate loan. The primary
risk in an investment in corporate loans is that the borrower may be unable to
meet its interest and/or principal payment obligations. The occurrence of such
default with regard to a corporate loan in which the portfolio had invested
would have an adverse affect on the portfolio's net asset value. Corporate
loans in which the portfolio may invest may be collateralized or
uncollateralized and senior or subordinate. Investments in uncollateralized
and/or subordinate loans entail a greater risk of nonpayment than do
investments in corporate loans which hold a more senior position in the
borrower's capital structure or that are secured with collateral.
The portfolio may also acquire an interest in corporate loans by purchasing
both participations ("Participations") in and assignments ("Assignments") of
portions of corporate loans from third parties. 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 borrower. The Participations typically
will result in the portfolio having a contractual relationship only with the
lender and 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. The portfolio will acquire
Participations only if the lender interpositioned between
19
<PAGE>
Investment Objective and Policies (continued)
the portfolio and the borrower is determined by management to be creditworthy.
When the portfolio 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.
In addition, the portfolio may have difficulty disposing of its investments
in corporate loans. The liquidity of such securities is limited and the
portfolio anticipates that such securities could be sold only to a limited
number of institutional investors. The lack of a liquid secondary market could
have an adverse impact on the value of such securities and on the portfolio's
ability to dispose of particular Assignments or 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 corporate loans also may make it more
difficult for the portfolio 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
investments in corporate loans.
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 in 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
. 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.
. 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
20
<PAGE>
Investment Objectives and Policies (continued)
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.
. 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.
. 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
. 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
. 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.
. 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
. 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.
21
<PAGE>
Investment Objectives and Policies (continued)
Call or prepayment risk
. 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.
. 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
exercises its prepayment, call or repurchase right.
Extension risk
. 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
. The portfolio's equity securities may decline in value if:
. The stock market goes down.
. Companies in which the portfolio invests suffer unexpected losses or
lower than expected earnings.
. 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
. There are additional risks associated with investing in securities of
foreign companies and governments compared to investing in U.S. issuers. These
risks include:
. Less information may be available about foreign companies and markets
due to relaxed disclosure or accounting standards or regulatory practices.
. 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.
. The U.S. dollar appreciates against foreign currencies causing the
value of the portfolio's foreign securities to be worth less.
. Economic, political or social instability in foreign countries disrupts
the markets where the portfolio's foreign securities are traded.
22
<PAGE>
Investment Objectives and Policies (continued)
. 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.
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. These are risks associated with futures and options transactions.
. 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.
. 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.
. 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.
23
<PAGE>
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 SAI dated June 26,
2000. 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.
24
<PAGE>
Share Price Data
The common stock is traded on the NYSE under the symbol "MHY." Salomon Smith
Barney intends to buy and sell the portfolio'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>
Qarterlyu Net Net Asset NYSE Premium
Period Asset Value NYSE Value at Price at (Discount)
Ended Price Range Price Range Quarter Ended Quarter End to NAV
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
5/31/98 $11.80-$11.94 $ 11.25- $11.75 $11.81 $11.438 (3.16)%
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)
8/31/99 10.21- 10.57 8.9375- 10.5625 10.21 9.25 (9.40)
11/30/99 10.00- 10.21 8.25- 9.3125 10.12 8.3125 (17.86)
2/29/00 9.99- 10.25 8.00- 8.6875 10.02 8.125 (18.91)
5/31/00 9.34- 10.06 8.00- 8.375 9.40 8.375 (10.90)
------------------------------------------------------------------------------
</TABLE>
Management of the Portfolio
Board of Directors
Overall responsibility for management and supervision of the portfolio rests
with the portfolio's Board of Directors. The Directors approve all significant
agreements with the portfolio's investment adviser, administrator, custodian
and transfer agent. The day-to-day operations of the portfolio are delegated to
the portfolio's investment adviser and administrator. The SAI contains
background information regarding each Director and executive officer of the
portfolio.
Investment Adviser and Administrator
SSB Citi, located at 388 Greenwich Street, New York, New York 10013, serves
as the portfolio's investment adviser. SSB Citi, through its predecessors has
been in the investment counseling business since 1934 and currently manages
investments in companies with total assets as of May 31, 2000 in excess of $
billion.
25
<PAGE>
Management of the Portfolio (continued)
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, SSB Citi 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 SSB
Citi 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
SSB Citi 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 SSB Citi 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 SSB Citi
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 fixed year.
As the portfolio's administrator, SSB Citi generally manages all aspects of
the portfolio's administration and operation. The portfolio pays SSB Citi a fee
for administration services that is computed daily and paid monthly at the
annual rate of 0.20% of the portfolio's average daily net assets. The combined
annual rate of fees paid by the portfolio for advisory and administrative
services is higher than the rates for similar services paid by other publicly
offered, closed-end management investment companies that have investment
objectives and policies similar to those of the portfolio.
Portfolio Management
John C. Bianchi, Vice President and Investment Officer of the portfolio, is
primarily responsible for the management of the portfolio's assets. Mr. Bianchi
has served the portfolio in this capacity since the portfolio commenced
operations in 1992 and manages the day-to-day operations of the portfolio,
including making
26
<PAGE>
Management of the Portfolio (continued)
all investment decisions. Mr. Bianchi is a Managing Director of SSB Citi 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.
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.
27
<PAGE>
Dividends and Distributions; Dividend Reinvestment Plan (continued)
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
distributions.
Common stock in the account of each Plan participant will be held by the
transfer agent in uncertificated form in the name of the Plan participant, and
each shareholder's proxy will include those shares purchased pursuant to the
Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. The transfer agent's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
portfolio. No brokerage charges apply with respect to shares of common stock
issued directly by the portfolio as a result of dividends or capital gains
distributions payable either in common stock or in cash. Each Plan participant
will, however, bear a
28
<PAGE>
Dividends and Distributions; Dividend Reinvestment Plan (continued)
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 PFPC Global Fund Services,
P.O. Box 8030, Boston, Massachusetts 02266, or by telephone at 1-800-331-1710.
Net Asset Value
The net asset value of shares of the common stock is calculated as of the
close of regular trading on the NYSE, currently 4:00 p.m., Eastern time, on
each day on which the NYSE is open for trading. The portfolio reserves the
right to cause its net asset value to be calculated on a less frequent basis as
determined by the 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 by the number of shares
outstanding. 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
29
<PAGE>
Net Asset Value (continued)
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 SSB Citi 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.
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.
30
<PAGE>
Taxes (continued)
Shareholders are required to pay tax on all taxable distributions, even if
those distributions are automatically reinvested in additional shares. A
portion of the dividends paid by the portfolio may qualify for the corporate
dividends received deduction. Dividends consisting of interest from U.S.
government securities may be exempt from state and local income taxes. The
portfolio will inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
A 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 an additional tax, and
may be claimed as a credit on the shareholder's 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
31
<PAGE>
Description of Common Stock (continued)
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
<TABLE>
<CAPTION>
Shares Issued
Shares and Outstanding
Title of Shares Authorized and as of
Class Authorized Not Issued May 31, 2000
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock 500,000,000 456,954,393.202 43,045,606.7980
-----------------------------------------------------------------------------------------
</TABLE>
Stock Purchases and Tenders
Although shares of closed-end investment companies sometimes trade at
premiums over net asset value, they frequently trade at discounts. Since the
portfolio's commencement of operations, the common stock has traded primarily
at a slight discount 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.
32
<PAGE>
Stock Purchases and Tenders (continued)
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.
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 Commission for the full text of their
provisions.
33
<PAGE>
Custodian, Transfer Agent, 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.
PFPC, located at 101 Federal Square, Boston, Massachusetts 02110, 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."
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 Commission.
34
<PAGE>
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.
A-1
<PAGE>
Appendix A (continued)
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.
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.
A-2
<PAGE>
Appendix A (continued)
BBB Bonds rated BBB are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds
in higher rated categories.
BB, B, Bonds rated BB, B, CCC and C are regarded, on balance, as predominantly
CCC, speculative with respect to the issuer's capacity to pay interest and
CC,C repay principal in accordance with the terms of the obligation. BB
indicates the lowest degree of speculation and C the highest degree of
speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties
or major risk exposures to adverse conditions.
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.
A-3
<PAGE>
Appendix A (continued)
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.
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.
A-4
<PAGE>
Appendix A (continued)
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 charges 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 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.
A-5
<PAGE>
Appendix A (continued)
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-6
<PAGE>
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<PAGE>
[LOGO OF SALOMON SMITH BARNEY]
Managed High Income Portfolio
Inc.
388 Greenwich Street
New York, New York 10013
Common Stock
FD01148 6/00
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.
PART B STATEMENT OF ADDITIONAL INFORMATION
MANAGED HIGH INCOME PORTFOLIO INC.
388 Greenwich Street
New York, New York 10013
1-800-451-2010
STATEMENT OF ADDITIONAL INFORMATION
June 26, 2000
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 26, 2000, 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")
17
Additional Information (see in the Prospectus
"Custodian, Transfer Agent, 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, SSB Citi Fund Management LLC (SSB Citi or the
manager) (successor to SSBC Fund Management Inc.) 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 SSB Citi 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 SSB
Citi 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 SSB Citi. Among the
factors that will also be considered by SSB Citi 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 SSB Citi'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 SSB Citi 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 policies 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 contracts (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 SSB Citi's ability to predict correctly changes
in interest rate relationships or other factors. No assurance can
be given that SSB Citi'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 SSB Citi 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 contracts
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 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 29, 2000.
Allocation of transactions, including their frequency, to
various dealers is determined by SSB Citi 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 SSB Citi 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 SSB Citi, and the fees of SSB Citi are not reduced as a
consequence of their receipt of such supplemental information.
Such information may be useful to SSB Citi 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 SSB Citi 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 SSB
Citi, 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 SSB Citi 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
SSB Citi 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 29,
2000, the portfolio turnover rate was 80%.
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 SSB Citi, 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
seventy-one Investment
companies managed by
affiliates of Citigroup
Inc. ("Citigroup");
Formerly Chairman of Smith
Barney Strategy Advisers
Inc.; Director and
President of SSB Citi and
of Travelers Investment
Adviser, Inc. ("TIA"); age
67.
*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 one
investment company managed
by affiliates of Salomon
Smith Barney; age 58.
* Director and/or trustee of other registered investment companies
with which Salomon Smith Barney is affiliated.
Name and Address
Positions Held
With the Portfolio
Principal Occupations
During Past 5 Years and Age
*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 68.
*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 72.
John C. Bianchi
388 Greenwich Street
New York, NY 10013
Vice President and
Investment Officer
Managing Director of
Salomon Smith Barney; age
44.
Lewis E. Daidone
388 Greenwich Street
New York, NY 10013
Senior Vice President
and Treasurer
Managing Director of
Salomon Smith Barney;
Senior Vice President or
Executive Vice President
and Treasurer of sixty-one
investment companies
managed by affiliates of
Citigroup; Director and
Senior Vice President SSB
Citi and TIA; age 42.
Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of
Salomon Smith Barney and
Secretary of sixty-one
investment companies
associated with Citigroup;
General Counsel and
Secretary of SSB Citi and
TIA; age 49.
* 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 SSB Citi, 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 29, 2000, 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)
$ 7,700.00
$19,150.00
**Alessandro di
Montezemolo (2)
$4,475.00
$13,245.00
***Andrea Farace (2)
$5,350.00
$16,100.00
Paul Hardin (14)
$7,700.00
$139,583.00
Heath McLendon (71)
-----
-----
George Pavia (2)
$7,100.00
$17,900.00
* Number of Funds for which Director serves within Salomon Smith
Barney Holdings Inc.
** Mr. di Montezemolo achieved emeritus status as of July 1,
1999; part of his payment was as a director and part as
emeritus director
*** Mr. Farace resigned as a director as of December 1, 1999.
Upon attainment of age 80 Directors are required to change
to emeritus status. Directors Emeritus are entitled to serve in
emeritus status for a maximum of 10 years during which time they
are paid 50% of the annual retainer fee and meeting fees otherwise
applicable to the Fund Directors together with reasonable out-of-
pocket expenses for each meeting attended.
Principal Stockholders. There are no persons known to the
portfolio to be control persons of the portfolio, as such term is
defined in Section 2(a)(9) of the 1940 Act. There is no person
known to the portfolio to hold beneficially more than 5% of the
outstanding shares of the common stock except as set forth below.
The following is the only holder of more than 5% of the
outstanding shares of common stock as of June 2, 2000.
Name and Address
of Record Owner
Amount of
Record
Ownership
Percent of
Common Stock
Outstanding
Cede & Co.
as Nominee for The Depository Trust
Company
P.O. Box 20
Bowling Green Station
New York, New York 10004
42,193,189.0000
98.02%
As of June 2, 2000, 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 -- SSB Citi
SSB Citi 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 SSB Citi ("Non-
Interested Directors"), on August 12, 1999. 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. SSB Citi 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. SSB Citi pays the salary of any officer or employee who
is employed by both it and the portfolio. SSB Citi bears all
expenses in connection with the performance of its services as
investment adviser. For services rendered to the portfolio, SSB
Citi 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,
1998, February 28, 1999 and February 29, 2000, total investment
advisory fees paid by the portfolio amounted to $4,548,319,
$4,469,951, and $4,145,340, respectively. For the fiscal year
ended February 29, 2000 the manager waived investment advisory
fees of $167,472 for the portfolio.
Under the Advisory Agreement, SSB Citi 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 SSB Citi 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 SSB Citi. The Advisory
agreement may also be terminated by SSB Citi on 90 days' written
notice to the portfolio. The Advisory Agreement terminates
automatically upon its assignment.
SSB Citi 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, 1999. Pursuant to the
Administration Agreement, SSB Citi 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 SSB Citi'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, 1998, February 28, 1999
and February 29, 2000, total administration fees paid by the
portfolio amounted to $1,010,715, $993,322 and $921,187,
respectively.
Pursuant to the Administration Agreement, SSB Citi will
exercise its best judgment in rendering services to the portfolio.
SSB Citi 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 SSB Citi'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 SSB Citi.
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.
Code of Ethics
Pursuant to Rule 17j-1 of the 1940 Act, the portfolio, its
investment advisers and principal underwriter have adopted codes
of ethics that permit personnel to invest in securities for their
own accounts, including securities that may be purchased or held
by the fund. All personnel must place the interests of clients
first and avoid activities, interests and relationships that might
interfere with the duty to make decisions in the best interests of
the clients. All personal securities transactions by employees
must adhere to the requirements of the codes and must be conducted
in such a manner as to avoid any actual or potential conflict of
interest, the appearance of such a conflict, or the abuse of an
employee's position of trust and responsibility.
A copy of the portfolio's Code of Ethics is on file with the
SEC.
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 continue to qualify as a "regulated
investment company" under Subchapter M of the Code. So long as it
continues to qualify as a regulated investment company, the
portfolio will pay no federal income taxes on its investment
company taxable income (that is, taxable income other than any
excess of its net realized long-term capital gains over its net
realized short-term capital losses ("net realized capital gains")
or on 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; (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 stock, securities or
foreign currencies, 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 stock,
securities or foreign currencies (3) diversify its holdings so
that, at the end of each quarter of the portfolio's taxable year
(a) at least 50% of the market value of the portfolio's assets is
represented by cash, securities of other regulated investment
companies, U.S. government securities and other securities, with
such 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 which 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.
At February 29, 2000, the unused capital loss carryovers of
the portfolio were approximately $57,559 as follows: For Federal
income tax purposes, these amounts are available to be applied
against future securities gains, if any, realized. The carryovers
expire as follows:
February 28,
(in thousands)
2003
2004
2005
2007
2008
Carryforward Amount
$9,404
$18,115
$239
$2,616
$27,185
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 their portfolio shares 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 portfolio shares 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 under the
Code, 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 once 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, SSB Citi 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, 757 Third Avenue, New York, NY 10017, has been
selected as the portfolio's independent auditor to examine and
report on the portfolio's financial statements and highlights for
the fiscal year ending February 28, 2001.
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.
PFPC Global Fund Services (PFPC) (formerly First Data
Investor Services Group, Inc.), located at 101 Federal Street,
Boston, Massachusetts 02110, serves as the portfolio's transfer
agent pursuant to a transfer agency agreement. Under the transfer
agency agreement, PFPC 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.
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 29, 2000 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.
G:FundAccounting\legal\funds\#mhy\2000\secdocs\sai2000.doc 22
G:|\Fund Accounting\Legal\Funds\#MHY\2000\SECDOCS\sai2000.doc
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
- Included in Part A:
Financial Highlights Table
- Included in Part B:
Report of Independent Accountants is filed
herein.
?/R? Incorporated by Reference into Part B: Annual Report
(audited) for period ended February 29, 2000 as Filed with the
Securities and Exchange Commission on April 25, 2000 as Accession
0000895523-00-003419
(2) Exhibits:
(a) (i) Articles of Incorporation are incorporated by
reference to the Registrants initial Registration
Statement on Form N-2 (the "Registration
Statement"), Registration No. 33-56408, filed
with the SEC on December 28, 1992.(ii) Articles
of Amendment to Articles of Incorporation are
incorporated by reference to the Registrants Pre-
Effective Amendment No. 1 to the Registration
Statement on Form N-2, filed with the SEC on
February 11, 1993 (Pre Effective Amendment No.
1).
(b)(i) Bylaws of Registrant are incorporated by
reference to the Registration Statement.(ii)
Amended Bylaws of Registrant are incorporated by
reference to Pre-Effective Amendment No. 1.
(c) Not Applicable
(d) Specimen Certificate of Common Stock, par value
$.01 per share is incorporated by reference to
Pre-Effective Amendment No. 1.
(e) Dividend Reinvestment Plan is incorporated by
reference
to Pre-Effective Amendment No. 1.
(f) Not Applicable
(g) (i) Form of Investment Advisory Agreement between
Registrant and Shearson Lehman Advisors is
incorporated by reference to Pre- Effective
Amendment No. 1.
(ii) Form of Investment Advisory Agreement
between
Registrant and Greenwich Street Advisors is
incorporated by reference to the Registrants
Post-Effective Amendment No. 1 to its
Registration Statement on Form N-2, filed
with
the SEC on July 14, 1994 (Post Effective
Amendment No. 1).
(iii)Form of Transfer and Assumption of
Investment
Advisory Agreement between the Registrant
and
Smith Barney Mutual Funds Management Inc.
is
incorporated by reference to the
Registrants
Post-Effective Amendment No.2 to its
registration Form N-2 filed with the SEC on
June
13, 1996.
(h) Form of Underwriting Agreement between
Registrant
and Shearson Lehman Brothers Inc. is
incorporated by
reference to Pre-Effective Amendment No. 1.
(i) Not Applicable
(j) Form of Custody Agreement between Registrant
and PNC
Bank, National Association is incorporated by
reference to the Registrants Post-Effective
Amendment
No.2 to its registration Form N-2 filed with
the SEC
on June 13, 1996.
(k) (i) Transfer Agency and Registrar Agreement
between Registrant and First Data Investor
Services
Group is incorporated by reference to Pre-
Effective
Amendment No. 1.
(ii) Administration Agreement between Registrant
and
Smith Barney Advisors, Inc. is incorporated by
reference to Post-Effective Amendment No. 1.
(iii) Form of Market-Making Agreement between the
Registrant and Smith Barney Inc. is incorporated
by
reference to the Registrants Post-Effective
Amendment
No.2 to its registration Form N-2 filed with
the SEC
on June 13, 1996.
(l) Opinion and Consent of Counsel is incorporated by reference
to the
Registrants Pre-Effective Amendment No. 2 to its
Registration
Statement on Form N-2, filed with the SEC on March 18, 1993.
(m) Not Applicable
(n) Consent of Independent Auditors is filed herein.
(o) Financial Data Schedule is filed herein.
(p) Form of Purchase Agreement between Registrant and
Shearson Lehman Brothers Inc. is incorporated by
reference to Pre Effective Amendment No. 1.
(r) Code of Ethics is filed herein
(q) Not Applicable
Item 25. Marketing Arrangements
None
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be
incurred in
connection with the offering described in this
Registration
Statement:
Securities and Exchange Commission Fees $0
Printing and Engraving Expenses $161,753
Legal Fees $19,118
Accounting Expenses $31,912
Miscellaneous Expenses $12,494
Total $225,277
Item 27. Persons Controlled by or Under Common Control
None
Item 28. Number of Holders of Securities
Number of Record Stockholders
as of June 2, 2000
Title of Class
Shares of Common Stock par value
760 $0.01 per share
Item 29. Indemnification
Under Article VII of Registrants Articles of
Incorporation, any past or present director or
officer
of Registrant is indemnified to the fullest extent
permitted by law against liability and all expenses
reasonably incurred by him in connection with any
action,
suit or proceeding to which he may be a party or
otherwise
involved by reason or his being or having been a
director
or officer of Registrant. This provision does not
authorize indemnification when it is determined that
the
director or officer would otherwise be liable to
Registrant or its shareholders by reason of willful
misfeasance, bad faith, gross negligence or reckless
disregard of his duties. Expenses may be paid
by Registrant in advance of the final disposition
of any action, suit or proceeding upon receipt of an
undertaking by a director or officer to repay those
expenses to Registrant in the event that it is
ultimately determined that indemnification of the
expenses is not authorized under Registrants
Articles of
Incorporation. Insofar as indemnification for
liability
?/R? arising under the 1933 Act, as amended, may be
permitted to directors,
officers and controlling persons of Registrant
pursuant
to the foregoing provisions, or otherwise,
Registrant has
been advised that in the opinion of the Securities
and
Exchange Commission, such indemnification is against
policy as expressed in the Securities Act and is,
therefore, unenforceable. In the event that a claim
for
indemnification against such liabilities (other than
the
payment by Registrant of expenses incurred or paid
by a
director, officer or controlling person of
Registrant in
the successful defense of any action, suit or
proceeding)
is asserted by such director, officer or
controlling
person in connection with the securities being
registered, Registrant will, unless in the opinion
of its
counsel the matter has been settled by controlling
precedent, submit to a court of appropriate
jurisdiction
the question whether such indemnification by it is
against
public policy as expressed in the Securities Act and
will
be governed by the final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
Investment Adviser - - SSB Citi Fund Management
LLC,
("SSB Citi") successor to SSBC Fund Management Inc
SSB Citi was incorporated in December 1968 under the
laws
of the State of Delaware. SSB Citi is a wholly
owned
subsidiary of Salomon Smith Barney Holdings Inc.
formerly
known as Smith Barney Holdings Inc. ("Holdings"),
which in
turn is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). SSB Citi is. registered as an
investment
adviser under the Investment Advisers Act of 1940
(the
"Advisers Act").
The list required by this Item 30 of officers and directors of
SSB Citi
together with information as to any other business, profession,
vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated
by
reference to Schedules A and D of FORM ADV filed by SSB Citi
pursuant to the
Advisers Act (SEC File No. 801-8314).
Item 31. Location of Accounts and Records
Managed High Income Portfolio Inc.
388 Greenwich Street
New York, New York 10013
SSB Citi Fund Management LLC
388 Greenwich Street
New York, New York 10013
PFPC Global Fund Services
101 Federal Street.
Boston, Massachusetts 02109
PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103
Item 32. Management Services
None
Item 33. Undertakings
1. Not Applicable.
2. Not Applicable.
3. Not Applicable.
4. The Portfolio hereby undertakes:
(a) To file, during any period in which offers or sales are
being
made, a post-effective amendment to this Registration
Statement:(1) to include any prospectus required by
Section
?/R? 10(a)(3) of the 1933 Act; (2) to
reflect in the Prospectus any facts or events arising
after
the effective date of the Registration Statement (or
the most
recent post effective amendment thereof) which,
individually
or in the aggregate, represent a fundamental change in
the
information set forth in the Registration Statement; and
(3) to include any material information with respect to
the
plan of distribution not previously disclosed in the
Registration Statement or any material change to such
information in the Registration Statement.
(b) For the purpose of determining any liability under the
Act,
each post-effective amendment shall be deemed to be a
new
Registration Statement relating to the securities
offered
therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide
offering
thereof.
(c) Not Applicable
5. Not Applicable.
6. The Portfolio undertakes to send by first class mail or
other means designed to ensure equally prompt delivery,
within
two business days of receipt of a written or oral
request, any
Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933
and the
Investment Company Act of 1940, as amended, the Registrant has
duly
caused this Amendment to its Registration Statement to be signed
on
its behalf by the undersigned, thereunto duly authorized, in the
City
of New York and State of New York, on the 9th day of June, 2000.
MANAGED HIGH INCOME PORTFOLIO INC.
By:/s/Heath B. McLendon
Health B. McLendon
Chairman of the Board
We, the undersigned, hereby severally constitute and
appoint Heath B. McLendon, and Christina T. Sydor and each of
them singly, our true and lawful attorneys, with full power to
them and each of them to sign for us, and in our hands and in
the capacities indicated below, any and all Amendments to this
Registration Statement and to file the same, with all exhibits
thereto, and other documents therewith, with the Securities and
Exchange Commission, granting unto said attorneys and each of
them, acting alone, full authority and power to do and perform
each and every act and thing requisite or necessary to be done
in the premises, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and
confirming all that said attorneys or any of them may lawfully do
or cause to be done by virtue thereof.
WITNESS our hands on the date set forth below. Pursuant to
the requirements of the Securities Act of 1933, as amended, this
Amendment to the Registration Statement and the above Power of
Attorney has been signed below by the following persons in the
capacities and as of the dates indicated.
Signature Title Date
/s/ Heath B.McLendon Chairman of the Board, June 9,
2000
Heath B. McLendon Chief Executive Officer
and Director
/s/ Lewis E.Daidone Senior Vice President June 9,
2000
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer)
/s/ Paolo M.Cucchi Director June 9, 2000
Paolo M. Cucchi
/s/ PaulHardin Director June 9,
2000
Paul Hardin
/s/ George M. Pavia Director June 9,
2000
George M. Pavia
