N-30D 1 dn30d.txt S/B MANAGED MUNICIPALS PORTFOLIO INC. Managed Municipals Portfolio Inc. [GRAPHIC] ANNUAL REPORT May 31, 2002 [GRAPHIC] Managed Municipals Portfolio Inc. Dear Shareholder: We are pleased to provide the annual report for the Managed Municipals Portfolio Inc. ("Fund") for the year ended May 31, 2002. In this report, we summarize what we believe to be the period's prevailing global economic and market conditions and outline our investment strategies. A detailed summary of the Fund's performance can be found in the appropriate sections that follow. We hope you find this report to be useful and informative. We are also pleased to inform you during the quarter ended May 31, 2002 shareholders approved two significant events in the life of the Fund. The first event was the merger of Managed Municipals Portfolio II Inc. with and into Managed Municipals Portfolio Inc. This merger was completed as of the close of business on April 26, 2002, with shareholders of Managed Municipals Portfolio II Inc. becoming shareholders of the Managed Municipals Portfolio Inc. The conversion was done on a net asset value ("NAV")/1/ basis, which translated into a ratio of 0.98036 shares of Managed Municipals Portfolio II Inc. exchanged for each Managed Municipals Portfolio Inc. share received. This transaction was followed by the second significant event in the life of Managed Municipals Portfolio Inc. during the quarter -- the issuance of $250 million in municipal auction rate cumulative "preferred stock" on May 22, 2002. This offering enabled the Fund to invest the proceeds of the offering into additional securities that met the Fund's objectives. While the Fund has grown through these changes, neither the leadership of the Fund nor the objective will change. Joseph P. Deane will continue to serve as the Fund's manager in the same capacity as he has since 1988. ----- 1The NAV is calculated by subtracting total liabilities and outstanding preferred stock from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets of common stockholders) by the total number of the Fund's common shares outstanding. The NAV fluctuates with the changes in the market price of the securities in which the Fund has invested. However, the price at which the investor may buy or sell shares of the Fund is at their market (NYSE) price as determined by supply of and demand for the Fund's shares. [GRAPHIC] 1 Performance Update During the year, the Fund distributed income dividends to common stock shareholders totaling $0.60 per share. The table below details the annualized distribution rate and the twelve-month total return for the Fund based on its May 31, 2002 NAV per share and the New York Stock Exchange ("NYSE") closing price.
Annualized Twelve-Month Price Per Share Distribution Rate/2/ Total Return/2/ --------------- ------------------- -------------- $11.69 (NAV) 5.13% 5.33% $10.57 (NYSE) 5.68% 4.79%
During the period the Fund generated a total return based on NAV of 5.33%. In comparison, the Fund's Lipper Inc. ("Lipper")/3/ peer group of closed-end general and insured municipal funds (unleveraged) returned 4.91% based on NAV for the same period. Investment Strategy The Fund seeks to maximize current interest income, which is excluded from gross income for regular federal income tax purposes to the extent consistent with prudent investment management and the preservation of capital./4/ The Fund invests at least 80% of its assets in municipal securities, which are rated investment-grade at the time of investment or are determined to be of equivalent equality. Municipal securities include securities issued by any of the 50 states and certain other municipal issuers, political subdivisions, agencies ----- 2Total returns are based on changes in NAV or the market price, respectively. Total returns assume the reinvestment of all dividends and/or capital gains distributions in additional shares. Annualized distribution rate is the Fund's current monthly income dividend rate, annualized, and then divided by the NAV or the market price noted in this report. The annualized distribution rate assumes a current monthly income dividend rate of $0.050 for 12 months. This rate is as of May 31, 2002 and is subject to change. The important difference between a total return and an annualized distribution rate is that the total return takes into consideration a number of factors including the fluctuation of the NAV or the market price during the period reported. The NAV fluctuation includes the effects of unrealized appreciation or depreciation in the Fund. Accordingly, since an annualized distribution rate only reflects the current monthly income dividend rate annualized, it should not be used as the sole indicator to judge the return you receive from your Fund investment. Past performance is not indicative of future results. 3Lipper is a major independent mutual fund tracking organization. 4Certain investors may be subject to the Federal Alternative Minimum Tax ("AMT"), and state and local taxes may apply. Capital gains, if any, are fully taxable. [GRAPHIC] 2 and public authorities that pay interest which is excluded from gross income for federal income tax purposes. The Fund focuses primarily on intermediate-term and long-term municipal securities, which have remaining maturities at the time of purchase of from three to more than thirty years. The Fund can invest up to 20% of its assets in below investment-grade/5/ or in unrated securities of equivalent quality (commonly known as "junk bonds"). Investment-grade bonds are those rated in any of the four highest long-term rating categories, or if unrated, of comparable quality. Market Review Since December 11, 2001 the U.S. Federal Reserve Board ("Fed") has held interest rates near 40 year lows, citing the uncertain strength in final demand at its last meeting as a reason to hold steady. We feel the U.S. economic rebound indeed remains soft, a point reflected in weak corporate earnings. Those earnings are also reflective of what we see as a very conservative approach to corporate reporting due to the recent accounting morass. We believe this conservative approach could be maintained through the third quarter of this year and could act as a drag on the economy given the expected negative impact on the stock market. As a result, we feel the environment has been and will remain constructive for bonds, especially in the tax-exempt area. Market Outlook We feel U.S. economic growth will remain tepid through the third quarter of this year before the pace picks up as a result of increased corporate spending and a vibrant consumer. We also expect inflation to remain subdued with little threat of higher prices before 2003, a point that would further support the case for steady interest rates. In general, we think the Fed will stay the course until it is assured the U.S. economy is strong enough to withstand an increase in short-term interest rates. We would also not be surprised to see the Fed hold monetary policy steady until there is evidence cash is moving out of short-term instruments such as Certificates of Deposits and money market funds and into the stock and bond markets as well as the real economy. We feel the time horizon for an increase in interest rates is three to six months. ----- 5Investment-grade bonds are those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc. or AAA, AA, A and BBB by Standard & Poor's Ratings Service, or that have an equivalent rating by any nationally recognized statistical rating organization, or are determined by the Manager to be of equivalent quality. [GRAPHIC] 3 Thank you for your investment in the Managed Municipals Portfolio Inc. We look forward to helping you pursue your investment goals in the years to come. Sincerely, /s/ Heath B. McLendon /s/ Joseph P. Deane Heath B. McLendon Joseph P. Deane Chairman Vice President and Investment Officer June 18, 2002 The information provided in this letter represents the opinion of the manager and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. Further, there is no assurance that certain securities will remain in or out of the Fund. Please refer to pages 6 through 18 for a list and percentage breakdown of the Fund's holdings. Also, please note any discussion of the Fund's holdings is as of May 31, 2002 and is subject to change. [GRAPHIC] 4 Take Advantage of the Fund's Dividend Reinvestment Plan! Did you know that Fund investors may reinvest their dividends in an effort to take advantage of what can be one of the most effective wealth-building tools available today? When the Fund achieves its objectives, systematic investments by shareholders put time to work for them through the strength of compounding. As an investor in the Fund, you can participate in its Dividend Reinvestment Plan ("Plan"), a convenient, simple and efficient way to reinvest your dividends and capital gains, if any, in additional shares of the Fund. Below is a short summary of how the Plan works. Plan Summary If you are a Plan participant who has not elected to receive your dividends in the form of a cash payment, then your dividend and capital gain distributions will be reinvested automatically in additional shares of the Fund. The number of common stock shares in the Fund you will receive in lieu of a cash dividend is determined in the following manner. If the market price of the common stock is equal to or exceeds 98% of the net asset value per share ("NAV") on the determination date, you will be issued shares by the Fund at a price reflecting the NAV, or 95% of the market price, whichever is greater. If the market price is less than 98% of the NAV at the time of valuation (the close of business on the determination date), PFPC Global Fund Services ("Plan Agent"), will buy common stock for your account in the open market. If the Plan Agent begins to purchase additional shares in the open market and the market price of the shares subsequently rises above the previously determined NAV before the purchases are completed, the Plan Agent will attempt to terminate purchases and have the Fund issue the remaining dividend or distribution in shares at the greater of the previously determined NAV or 95% of the market price. In that case, the number of Fund shares you receive will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. A more complete description of the current Plan appears in this report beginning on page 38. To find more detailed information about the Plan and about how you can participate, please call PFPC Global Fund Services at (800) 331-1710. 5 SCHEDULE OF INVESTMENTS May 31, 2002
Face Amount Rating(a) Security Value ------------------------------------------------------------------------------- MUNICIPAL BONDS AND NOTES -- 100.0% Alabama -- 3.2% $24,510,000 AAA Jefferson County, AL Sewer Revenue Warrants, Series A, FGIC-Insured, 5.375% due 2/1/36 (b) $ 24,634,511 ------------------------------------------------------------------------------- Alaska -- 0.9% 2,895,000 A2* Alaska Industrial Development & Export Authority Revolving Fund GO, Series A, 6.500% due 4/1/14 (c) 2,963,814 4,000,000 AA+ Valdez, AK Marine Terminal Revenue Refunding, BP Pipelines Inc. Project, Series A, 5.850% due 8/1/25 4,040,880 ------------------------------------------------------------------------------- 7,004,694 ------------------------------------------------------------------------------- Arizona -- 1.4% 4,000,000 AAA Mesa, AZ IDA, Discovery Health Systems, Series A, MBIA-Insured, 5.625% due 1/1/29 4,130,160 3,000,000 AAA Phoenix, AZ Civic Improvement Corp. Airport Revenue, Senior Lien, Series B, FGIC-Insured, 5.250% due 7/1/22 (c) 3,004,530 Phoenix, AZ GO, Series B: 400,000 AA+ 5.000% due 7/1/22 395,988 575,000 AA+ 5.000% due 7/1/23 566,875 2,350,000 AA+ 5.000% due 7/1/27 2,303,822 ------------------------------------------------------------------------------- 10,401,375 ------------------------------------------------------------------------------- California -- 10.1% 4,000,000 A-1+ Bay Area Toll Authority, CA Toll Bridge Revenue, Series A, 1.300% due 4/1/36 (d) 4,000,000 7,040,000 Ba1* California Educational Facilities Authority Revenue, (Pooled College & University Projects), Series A, 5.625% due 7/1/23 6,465,958 6,000,000 A3* California Health Facilities Authority Revenue, (Cedars-Sinai Medical Center), Series A, 6.250% due 12/1/34 6,331,020 1,000,000 A+ California Health Facilities Financing Authority Revenue, Sutter Health, Series A, 6.250% due 8/15/35 1,052,720 5,000,000 AAA California State Department of Veterans Affairs, Home Purchase Revenue, Series A, AMBAC-Insured, 5.350% due 12/1/27 5,015,200 2,000,000 AAA California State GO, AMBAC-Insured, 5.000% due 4/1/27 1,952,620
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 6 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ------------------------------------------------------------------------- California -- 10.1% (continued) $ 7,000,000 AAA Los Angeles County, CA COP, Antelope Valley Courthouse, Series A, AMBAC- Insured, 5.250% due 11/1/33 $ 7,032,690 11,400,000 A-1+ Los Angeles County, CA MFH, Series K, 1.400% due 7/1/10 (d) 11,400,000 Orange County, CA Sanitation District COP: 4,500,000 A-1+ Series A, 1.550% due 8/1/29 (d) 4,500,000 5,900,000 A-1+ Series B, 1.550% due 8/1/30 (d) 5,900,000 3,340,000 AAA Rancho Cucamonga, CA Redevelopment Agency Tax Allocation, (Rancho Redevelopment Project ), MBIA- Insured, 5.125% due 9/1/30 3,312,645 2,000,000 AAA Riverside, CA Unified School District GO, Series A, FGIC-Insured, 5.000% due 2/1/27 1,955,500 2,750,000 AAA Sacramento County, CA COP, (Public Facilities Project), MBIA-Insured, 5.375% due 2/1/19 2,846,910 2,500,000 AAA San Francisco, CA City & County Airports Commission, International Airport Revenue, Second Series-27B, FGIC-Insured, 5.000% due 5/1/22 2,478,100 5,000,000 AAA San Francisco, CA City & County Airports Commission, Second Series-28B, MBIA-Insured, 5.000% due 5/1/32 4,863,650 1,000,000 AAA San Jose, CA Redevelopment Agency Tax Allocation, (Merged Area Redevelopment Project), MBIA- Insured, 5.000% due 8/1/32 972,620 7,965,000 VMIG 1* Santa Clara, CA Electric Revenue, Series A, 1.300% due 7/1/10 (d) 7,965,000 ------------------------------------------------------------------------ 78,044,633 ------------------------------------------------------------------------ Colorado -- 10.2% 4,000,000 AAA Arapahoe County, CO Capital Improvement Trust Fund, E-470 Public Highway Authority Revenue, (Pre- Refunded -- Escrowed with U.S. government securities to 8/31/05 Call @ 103), 7.000% due 8/31/26 4,634,320
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 7 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value -------------------------------------------------------------------------------- Colorado -- 10.2% (continued) $ 1,000,000 A- Aspen, CO Sales Tax Revenue, 5.400% due 11/1/19 $ 1,019,490 4,000,000 AAA Colorado Educational & Cultural Facilities Revenue Refunding, (University of Denver Project), AMBAC-Insured, 5.375% due 3/1/23 4,068,000 4,000,000 A Colorado Health Facilities Authority Revenue, Series B, Remarketed 7/8/98, 5.350% due 8/1/15 4,020,640 6,000,000 BBB+ Colorado Springs, CO Airport Revenue, Series A, 7.000% due 1/1/22 (c) 6,147,840 Dawson Ridge, CO Metropolitan District No. 1, (Escrowed to maturity with REFCO Strips): 30,000,000 Aaa* Series A, zero coupon due 10/1/22 (b) 8,488,200 60,000,000 Aaa* Series B, zero coupon due 10/1/22 (b) 16,976,400 Denver, CO City & County Airport Revenue, Series C: 3,155,000 A 6.750% due 11/15/22 (c) 3,248,546 13,630,000 A 6.125% due 11/15/25 (c) 14,140,035 10,945,000 A Escrowed to maturity with U.S. government securities, 6.125% due 11/15/25 (b)(c)(e) 12,468,872 845,000 Aaa* Pre-Refunded -- Escrowed with U.S. government securities to 11/15/02 Call @ 102, 6.750% due 11/15/22 (c) 881,276 2,000,000 AAA Denver, CO City & County COP, Series B, AMBAC-Insured, 5.500% due 12/1/25 2,055,040 -------------------------------------------------------------------------------- 78,148,659 -------------------------------------------------------------------------------- Connecticut -- 0.1% 1,000,000 AAA Connecticut State Health & Education, (Child Care Facilities Project), Series C, AMBAC-Insured, 5.625% due 7/1/29 1,039,920 -------------------------------------------------------------------------------- Delaware -- 2.2% 7,000,000 A-1+ Delaware State Economic Development Authority, Hospital Billing Revenue, Series C, AMBAC-Insured, 1.350% due 12/1/15 (d) 7,000,000
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 8 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ----------------------------------------------------------------------------- Delaware -- 2.2% (continued) $10,000,000 AAA Delaware State Economic Development Authority Revenue, (Pollution Control- Delmarva Project-B), AMBAC-Insured, 5.200% due 2/1/19 $ 10,197,100 ----------------------------------------------------------------------------- 17,197,100 ----------------------------------------------------------------------------- District of Columbia -- 1.4% Metropolitan Washington Airports, DC Authority Airport System Revenue, Series A, FGIC-Insured: 5,355,000 AAA 5.125% due 10/1/22 (c) 5,284,742 6,000,000 AAA 5.125% due 10/1/26 (c) 5,856,960 ----------------------------------------------------------------------------- 11,141,702 ----------------------------------------------------------------------------- Florida -- 4.7% 5,000,000 AAA Florida State Board & Educational Capital Outlay GO, FSA-Insured, 5.000% due 6/1/24 4,908,400 3,000,000 AA+ Florida State Board of Education GO, Series A, 5.125% due 6/1/21 3,020,400 3,145,000 AAA Florida State Department of Transportation GO, FGIC-Insured, 5.000% due 7/1/25 3,077,445 3,000,000 Aaa* Hillsborough County, FL School Board COP, Series A, MBIA-Insured, 5.000% due 7/1/25 2,935,560 6,500,000 BBB- Martin County, FL IDA, (Indiantown Cogeneration Project), Series A, 7.875% due 12/15/25 (c) 6,676,800 1,290,000 AAA Miami Beach, FL Stormwater Revenue, FGIC-Insured, 5.375% due 9/1/30 1,305,338 2,000,000 Aaa* Orange County, FL School Board COP, Series A, MBIA-Insured, 5.250% due 8/1/23 2,018,340 10,000,000 AAA Palm Beach County, FL School Board COP, Series C, FSA-Insured, 5.000% due 8/1/27 9,747,800 2,500,000 Aaa* South Brevard, FL Recreational Facilities Improvement, Special District, AMBAC-Insured, 5.000% due 7/1/20 2,503,200 ----------------------------------------------------------------------------- 36,193,283 -----------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 9 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ---------------------------------------------------------------------------- Georgia -- 2.1% $ 2,800,000 VMIG 1* Atlanta, GA Water & Wastewater Revenue, Series C, FSA-Insured, 1.550% due 11/1/41 (d) $ 2,800,000 6,000,000 AAA Augusta, GA Water & Sewer Revenue, FSA-Insured, 5.250% due 10/1/26 6,030,300 Private Colleges & Universities Authority Revenue, (Mercer University Project): 2,180,000 A3* 5.750% due 10/1/21 2,227,132 Series A: 2,000,000 A3* 5.250% due 10/1/25 1,965,520 1,000,000 A3* 5.375% due 10/1/29 992,130 2,000,000 BBB- Savannah, GA EDA Revenue, College of Art & Design Inc., 6.900% due 10/1/29 2,080,540 ---------------------------------------------------------------------------- 16,095,622 ---------------------------------------------------------------------------- Hawaii -- 0.5% 4,000,000 A Hawaii State Department of Budget & Finance, Special Purpose Revenue, Kaiser Permanente, Series A, 5.100% due 3/1/14 3,961,400 ---------------------------------------------------------------------------- Illinois -- 3.9% 4,095,000 AAA Chicago, IL GO, Series D, FGIC-Insured, 5.500% due 1/1/35 4,139,431 5,300,000 P-1* Chicago, IL O'Hare International Airport, (American Airlines Inc. Project), 1.650% due 12/1/17 (d) 5,300,000 7,400,000 AAA Chicago, IL Skyway Toll Bridge Revenue, AMBAC-Insured, 5.500% due 1/1/31 7,542,524 8,000,000 A Illinois Health Facilities Authority Revenue, OSF Healthcare Systems, 6.250% due 11/15/29 8,223,520 5,000,000 AAA Illinois State GO, MBIA-Insured, 5.625% due 6/1/25 5,144,000 ---------------------------------------------------------------------------- 30,349,475 ---------------------------------------------------------------------------- Indiana -- 0.7% 5,000,000 A1* Indiana Port Commission Revenue Refunding, (Cargill Inc. Project), 6.875% due 5/1/12 5,153,600 ---------------------------------------------------------------------------- Iowa -- 0.2% 1,500,000 AA- Dawson, IA IDR, (Cargill Inc. Project), 6.500% due 7/15/12 1,539,135 ----------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 10 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ------------------------------------------------------------------------------ Kentucky -- 0.8% $ 6,400,000 VMIG 1* Breckinridge County, KY Lease Program Revenue, 1.600% due 2/1/32 (d) $ 6,400,000 ------------------------------------------------------------------------------ Louisiana -- 0.7% 5,500,000 A1* St. Martin Parish, LA Industrial Revenue, (Cargill Inc. Project), 6.625% due 10/1/12 5,653,340 ------------------------------------------------------------------------------ Maine -- 0.3% 2,500,000 AA+ Maine State Housing Authority, Mortgage Revenue, Series C, 5.300% due 11/15/23 2,509,125 ------------------------------------------------------------------------------ Maryland -- 1.4% Baltimore, MD Wastewater Project Revenue, Series A, FGIC-Insured: 2,500,000 AAA 5.125% due 7/1/32 2,482,825 3,385,000 AAA 5.200% due 7/1/32 3,392,752 5,000,000 AAA 5.125% due 7/1/42 4,887,500 ------------------------------------------------------------------------------ 10,763,077 ------------------------------------------------------------------------------ Massachusetts -- 1.3% 3,000,000 AA+ Massachusetts Bay Transportation Authority, Sales Tax Revenue, Series A, 5.500% due 7/1/30 3,064,530 1,850,000 AAA Massachusetts Health & Educational Facilities Authority, (University of Massachusetts Projects), Series C, FGIC-Insured, 5.125% due 10/1/27 1,827,874 5,000,000 AAA Massachusetts State Special Obligation Revenue, Series A, FGIC-Insured, 5.000% due 6/1/21 4,957,600 ------------------------------------------------------------------------------ 9,850,004 ------------------------------------------------------------------------------ Michigan -- 2.9% 3,000,000 AAA Anchor Bay, MI School District GO, Q-SBLF-Insured, 5.000% due 5/1/29 2,884,080 5,000,000 AAA East Lansing, MI School District GO, Q-SBLF-Insured, 5.625% due 5/1/30 5,152,400 Michigan State COP, AMBAC-Insured: 2,345,000 AAA 5.500% due 6/1/19 2,438,659 6,000,000 AAA 5.500% due 6/1/27 6,124,260 12,000,000 NR Michigan State Strategic Fund Resources Recovery, Limited Obligation Revenue, (Central Wayne Energy Recovery L.P. Project), Series A, 7.000% due 7/1/27 (c) 6,000,000 ------------------------------------------------------------------------------ 22,599,399 ------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 11 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ------------------------------------------------------------------------------ Minnesota -- 1.5% $ 1,500,000 AAA Dakota County, MN Community Development Agency, MFH Revenue, FNMA-Collateralized, 5.625% due 2/1/26 $ 1,519,350 2,500,000 A1* Duluth, MN IDA, Seaway Port Authority, Dock & Wharf Revenue, (Cargill Inc. Project), 6.800% due 5/1/12 2,561,300 Minneapolis & St. Paul, MN Community Airport Revenue, FGIC-Insured: 2,000,000 AAA Series A, 5.125% due 1/1/25 1,982,740 4,000,000 AAA Sub-Series C, 5.250% due 1/1/26 4,024,520 1,225,000 AA+ Minnesota State Housing Financing Agency, Single-Family Mortgage, Series I, 5.500% due 1/1/17 1,259,594 ------------------------------------------------------------------------------ 11,347,504 ------------------------------------------------------------------------------ Missouri -- 0.5% 1,500,000 AAA Greene County, MO Reorganized School, District No. R-8 GO, FSA-Insured, 5.100% due 3/1/22 1,503,300 2,000,000 AAA St. Louis, MO Airport Revenue, (Airport Development Program), Series A, MBIA-Insured, 5.125% due 7/1/22 2,009,280 ------------------------------------------------------------------------------ 3,512,580 ------------------------------------------------------------------------------ Montana -- 1.2% 10,000,000 NR Montana State Board Investment Resource Recovery Revenue, (Yellowstone Energy L.P. Project), 7.000% due 12/31/19 (c) 9,072,800 ------------------------------------------------------------------------------ Nevada -- 0.9% 4,650,000 Baa2* Clark County, NV IDR, (Southwest Gas Corp. Project), Series B, 7.500% due 9/1/32 (c) 4,768,064 2,250,000 AAA Truckee Meadows, NV Water Authority Revenue, Series A, FSA-Insured, 5.000% due 7/1/25 2,172,263 ------------------------------------------------------------------------------ 6,940,327 ------------------------------------------------------------------------------ New Jersey -- 2.5% 5,200,000 A+ Hudson County, NJ Improvement Authority, 6.625% due 8/1/25 5,324,800 2,800,000 A-1 Municipal Securities Trust Certificates, NJ GO, Series 2001-174, 1.500% due 2/26/15 (d)(f) 2,800,000
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 12 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ------------------------------------------------------------------------------ New Jersey -- 2.5% (continued) $ 8,000,000 A+ New Jersey Health Care Facilities Financing Authority Revenue, Robert Wood Johnson University Hospital, 5.700% due 7/1/20 $ 8,271,280 2,395,000 AA- New Jersey State Highway Authority, Garden State Parkway General Revenue, 5.625% due 1/1/30 2,507,852 ------------------------------------------------------------------------------ 18,903,932 ------------------------------------------------------------------------------ New Mexico -- 0.3% 2,585,000 AAA New Mexico Mortgage Financing Authority, Single-Family Mortgages, Series D-3, 5.625% due 9/1/28 2,624,551 ------------------------------------------------------------------------------ New York -- 11.5% Nassau Health Care Corp., NY Health Systems Revenue, FSA-Insured: 2,000,000 AAA 5.500% due 8/1/19 2,086,040 3,000,000 AAA 5.750% due 8/1/29 3,132,090 6,000,000 AA New York City, NY Municipal Water Financing Authority, Water & Sewer System Revenue, Series D, 5.250% due 6/15/25 6,023,100 14,300,000 A-1+ New York City, NY Transitional Finance Authority, Future Tax Secured, Series A-2, 1.300% due 11/15/27 (d) 14,300,000 New York, NY GO: 4,800,000 A-1+ Series F-6, 1.450% due 2/15/18 (d) 4,800,000 20,000,000 A-1+ Sub-Series J3-Remarketed 5/3/99, 1.300% due 2/15/16 (d) 20,000,000 5,000,000 AAA New York State Dormitory Authority Revenue, Series B, FSA-Insured, 5.500% due 5/15/30 5,115,150 1,000,000 AAA New York State Dormitory Authority Revenue, (Willow Towers Inc. Project), GNMA-Collateralized, 5.250% due 2/1/22 1,005,290 3,000,000 AAA New York State Thruway Authority Highway & Bridge Revenue, Series B-1, FGIC-Insured, 5.400% due 4/1/17 3,136,800 17,000,000 AAA Port Authority of New York & New Jersey, NY GO, FGIC-Insured, 5.250% due 5/15/37 (c) 16,600,500 Triborough Bridge & Tunnel Authority, NY GO, Series A: 3,000,000 AA- 5.125% due 1/1/31 2,910,150 10,000,000 AA- 5.000% due 1/1/32 9,554,100 ------------------------------------------------------------------------------ 88,663,220 ------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 13 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value -------------------------------------------------------------------------------- North Carolina -- 1.3% $10,000,000 A-1+ North Carolina State GO, Public Improvement, Series E, 1.350% due 5/1/21 (d) $ 10,000,000 -------------------------------------------------------------------------------- Ohio -- 6.6% 4,500,000 Aa2* Bexley, OH City School District GO, 5.125% due 12/1/27 4,402,845 2,000,000 AAA Canton, OH City School District GO, Series A, MBIA-Insured, 5.500% due 12/1/20 2,081,100 1,300,000 AA+ Cincinnati, OH Water System Revenue, 5.125% due 12/1/21 1,303,237 4,500,000 AAA Cleveland, OH Airport System Revenue, Series A, FSA-Insured, 5.000% due 1/1/31 4,353,660 6,600,000 A-1+ Cuyahoga County, OH Hospital Revenue, (The Clinic Foundation Project), Series D, 1.600% due 1/1/26 (d) 6,600,000 3,000,000 AAA Cuyahoga County, OH Hospital Revenue Refunding, University Hospitals Health System Inc., AMBAC-Insured, 5.500% due 1/15/30 3,051,420 8,000,000 Aaa* Hamilton County, OH Sales Tax Revenue, AMBAC-Insured, 5.250% due 12/1/32 8,021,680 5,990,000 AAA Lucas County, OH Hospital Revenue, Promedia Healthcare Obligation Group, AMBAC-Insured, 5.375% due 11/15/29 6,031,690 3,025,000 Aaa* Muskingum County, OH GO, Refunding, County Facilities Improvement, MBIA-Insured, 5.125% due 12/1/19 3,071,555 1,375,000 AAA Ohio State Higher Educational Facility Commission Revenue, (University of Dayton Project), AMBAC-Insured, 5.500% due 12/1/25 1,421,186 2,500,000 AAA Portage County, OH GO, MBIA-Insured, 5.250% due 12/1/17 2,579,575 1,500,000 A3* Steubenville, OH Hospital Revenue, 6.375% due 10/1/20 1,557,150 Summit County, OH GO, FGIC-Insured: 1,000,000 AAA 5.000% due 12/1/21 995,070 500,000 AAA 5.000% due 12/1/22 494,940 1,500,000 Aaa* Trumbull County, OH MBIA-Insured, 5.200% due 12/1/20 1,528,605 2,000,000 AAA University of Cincinnati, OH General Receipts Revenue, Series A, FGIC-Insured, 5.250% due 6/1/24 2,017,000
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 14 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value -------------------------------------------------------------------------------- Ohio -- 6.6% (continued) $ 1,500,000 AAA Warrensville Heights, OH City School District, School Improvements, FGIC-Insured, 5.625% due 12/1/20 $ 1,586,400 -------------------------------------------------------------------------------- 51,097,113 -------------------------------------------------------------------------------- Oregon -- 2.4% 3,210,000 AA Clackamas County, OR Hospital Facilities Authority Revenue, Legacy Health System, 5.750% due 5/1/16 3,370,500 4,895,000 AA+ Oregon State Department of Transportation, Highway User Tax Revenue, Series A, 5.125% due 11/15/23 4,912,524 10,000,000 AA Oregon State Veterans Welfare GO, Series 82, 5.500% due 12/1/42 10,029,200 -------------------------------------------------------------------------------- 18,312,224 -------------------------------------------------------------------------------- South Carolina -- 6.0% 6,250,000 AAA Grand Strand Water & Sewer Authority, SC Waterworks & Sewer System Revenue, FSA-Insured, 5.000% due 6/1/31 6,036,625 15,000,000 AA- Greenville County, SC School District Installment Purchase Revenue, 5.500% due 12/1/28 (b) 14,794,050 20,000,000 AAA South Carolina State Public Service Authority Revenue, Series B, FSA-Insured, 5.125% due 1/1/37 (b) 19,509,000 South Carolina Transportation Infrastructure Bank Revenue, Series A: 3,000,000 AAA AMBAC-Insured, 5.500% due 10/1/30 3,063,990 2,505,000 Aaa* MBIA-Insured, 5.125% due 10/1/31 2,465,596 -------------------------------------------------------------------------------- 45,869,261 -------------------------------------------------------------------------------- Tennessee -- 3.7% 1,150,000 NR Hardeman County, TN Correctional Facilities Corp., 7.750% due 8/1/17 1,136,729 Memphis-Shelby County, TN Sports Authority Income Revenue, (Memphis Arena Project), Series A, AMBAC-Insured: 6,420,000 AAA 5.125% due 11/1/21 6,442,791 14,500,000 AAA 5.125% due 11/1/28 14,262,200
SEE NOTES TO FINANCIAL STATEMENTS. [GRAPHIC] 15 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ----------------------------------------------------------------------------- Tennessee -- 3.7% (continued) $ 3,600,000 VMIG 1* Montgomery County, TN Authority Pooled Financing Revenue, 1.650% due 4/1/32 (d) $ 3,600,000 3,000,000 AA Tennessee State GO, Series A, 5.250% due 3/1/17 3,105,780 -------------------------------------------------------------------------- 28,547,500 -------------------------------------------------------------------------- Texas -- 2.4% 1,595,000 AAA Burleson, TX ISD, GO, PSFG, 6.750% due 8/1/24 1,767,085 Fort Worth, TX International Airport Facility Improvement Corp. Revenue, (American Airlines Inc. Project): 12,000,000 BB- 6.375% due 5/1/35 (b)(c) 9,473,399 3,400,000 BB- Series A, 5.950% due 5/1/29 (c) 3,339,888 3,000,000 BB- Series B, 6.050% due 5/1/29 (c) 2,871,990 1,000,000 AAA Harris County, TX Health Facilities, Development Corp., Hospital Revenue, School Health Care Systems, Series B, (Escrowed to maturity with U.S. government securities), 5.750% due 7/1/27 1,092,850 -------------------------------------------------------------------------- 18,545,212 -------------------------------------------------------------------------- Utah -- 1.0% 7,900,000 A-1+ Utah State GO, Series A, 1.400% due 7/1/16 (d) 7,900,000 -------------------------------------------------------------------------- Virginia -- 2.2% Virginia State HDA, MFH: 1,655,000 AA+ Series D, 6.250% due 1/1/15 1,716,616 1,245,000 AA+ Series D, Sub-Series D-3- Remarketed 5/30/96, 5.700% due 7/1/09 1,306,528 715,000 AA+ Series F, Sub-Series F-1-Remarketed 9/12/95, 6.400% due 7/1/17 731,095 1,235,000 AAA Series H, AMBAC-Insured, 6.300% due 11/1/15 1,297,874 10,000,000 AA+ Series H, Sub-Series H-1, MBIA- Insured, 5.350% due 7/1/31 (b) 10,000,300 600,000 AA+ Series K, 5.800% due 11/1/10 636,030 925,000 AA+ Series K, 5.900% due 11/1/11 976,504 -------------------------------------------------------------------------- 16,664,947 --------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. [GRAPHIC] 16 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value -------------------------------------------------------------------------------- Washington -- 2.5% Chelan County, WA GO, Public Utilities, District No. 1, Columbus River Rock: $22,685,000 AAA Series A, MBIA-Insured, zero coupon due 6/1/22 (b) $ 7,653,919 4,750,000 AA Series B, Remarketed 7/1/92, Mandatory put 7/1/19, 6.750% due 7/1/62 (c) 5,098,223 6,980,000 AAA Washington State GO, Variable Purpose-Series 02-A, FSA-Insured, 5.000% due 7/1/25 (b) 6,738,841 ------------------------------------------------------------------------------- 19,490,983 ------------------------------------------------------------------------------- West Virginia -- 1.2% West Virginia State Housing Development Fund, Housing Finance: 3,845,000 AAA Series B, 5.300% due 5/1/24 3,861,034 5,000,000 AAA Series C, 5.350% due 11/1/27 5,020,800 ------------------------------------------------------------------------------- 8,881,834 ------------------------------------------------------------------------------- Wisconsin -- 1.3% Wisconsin Housing & Economic Development Authority, Home Ownership Revenue, Series A: 1,815,000 AA 6.450% due 3/1/17 1,878,561 1,370,000 AA 5.650% due 11/1/23 1,384,727 4,070,000 AA- Wisconsin State GO, Series B, 6.600% due 1/1/22 (c) 4,082,006 Wisconsin State Health & Educational Facilities Authority Revenue, MBIA-Insured: 1,100,000 A Kenosha Hospital & Medical Center Project, 5.700% due 5/15/20 1,084,171 1,250,000 AAA The Medical College of Wisconsin Inc. Project, MBIA-Insured, 5.400% due 12/1/16 1,297,025 ------------------------------------------------------------------------------- 9,726,490 ------------------------------------------------------------------------------- Wyoming -- 2.0% 1,400,000 A-1+ Kemmerer, WY Pollution Control Revenue, (Exxon Mobil Corp. Project), 1.500% due 11/1/14 (d) 1,400,000 13,200,000 A-1+ Lincoln County, WY Pollution Control Revenue, (Exxon Mobil Corp. Project), 1.600% due 8/1/15 (d) 13,200,000
SEE NOTES TO FINANCIAL STATEMENTS. [GRAPHIC] 17 SCHEDULE OF INVESTMENTS May 31, 2002 (continued)
Face Amount Rating(a) Security Value ------------------------------------------------------------------------ Wyoming -- 2.0% (continued) $ 600,000 P-1* Uinta County, WY Pollution Control Revenue, (Chevron USA Inc. Project), 1.550% due 8/15/20 (d) $ 600,000 ------------------------------------------------------------------------ 15,200,000 ------------------------------------------------------------------------ TOTAL INVESTMENTS -- 100% (Cost -- $759,199,903**) $769,980,532 ------------------------------------------------------------------------
(a)All ratings are by Standard & Poor's Ratings Service, except for those which are identified by an asterisk (*), are rated by Moody's Investors Service, Inc. (b)All or a portion of this security has been segregated by the custodian for extended settlements. (c)Income from this issue is considered a preference item for purposes of calculating the alternative minimum tax. (d)Variable rate obligation payable at par on demand at any time on no more than seven days notice. (e)Pre-Refunded bonds escrowed by U.S. government securities and bonds escrowed to maturity by U.S. government securities are considered by the investment adviser to be triple-A rated even if issuer has not applied for new ratings. (f)Security is exempt from registration under Rule 144A of the Securities Act of 1933. This security may be resold in transactions that are exempt from registration, normally to qualified institutional buyers. ** Aggregate cost for Federal income tax purposes is substantially the same. See pages 20 and 21 for definitions of ratings and certain security descriptions. SEE NOTES TO FINANCIAL STATEMENTS. [GRAPHIC] 18 SUMMARY OF INVESTMENTS BY COMBINED RATINGS May 31, 2002 (unaudited) [GRAPHIC OF ] Percentage of Moody's and/or Standard & Poor's Total Investments Aaa AAA 48.0% Aa AA 14.2 A A 12.0 Baa BBB 2.6 Ba BB 2.9 VMIG 1/P-1 SP-1/A-1 18.2 NR NR 2.1 ----- 100.0% ===== ======================== [GRAPHIC] 19 BOND RATINGS (unaudited) The definitions of the applicable rating symbols are set forth below: Standard & Poor's Ratings Service ("Standard and Poor's") -- Ratings from "AA" to "B" may be modified by the addition of a plus (+) or minus (-) sign to show relative standings within the major rating categories. AAA --Bonds rated "AAA" have the highest rating assigned by Standard & Poor's. 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 issue only in a small degree. A --Bonds rated "A" have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories. BBB --Bonds rated "BBB" are regarded as having an adequate capacity to pay interest and repay principal. Whereas they normally exhibit adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for bonds in this category than in higher rated categories. BB --Bonds rated "BB" and "B" are regarded, on balance, as predominantly speculative and B with respect to the issuer's capacity to pay interest and repay principal in accordance with the terms of the obligation. "BB" indicates the lowest degree of speculation and "B" 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. Moody's Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating from "Aa" to "Ba," where 1 is the highest and 3 the lowest ranking within its generic category. 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 such issues. 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 in "Aaa" securities or fluctuation of protective elements may be of greater amplitude or there may be other elements present which 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 which suggest a susceptibility to impairment some time in the future. Baa --Bonds rated "Baa" are considered as medium grade obligations, i.e., they are neither highly protected nor poorly secured. Interest payments 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 thereby not well safeguarded during both good and bad times over the future. Uncertainty of position characterizes bonds in this class. NR --Indicates that the bond is not rated by Standard & Poor's or Moody's.
======================== [GRAPHIC] 20 SHORT-TERM SECURITY RATINGS (unaudited) SP-1 --Standard & Poor's highest rating indicating very strong or strong capacity to pay principal and interest; those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign. A-1 --Standard & Poor's highest commercial paper and variable-rate demand obligation (VRDO) rating indicating that the degree of safety regarding timely payment is either overwhelming or very strong; those issues determined to possess overwhelming safety characteristics are denoted with a plus (+) sign. VMIG 1 --Moody's highest rating for issues having a demand feature -- VRDO. P-1 --Moody's highest rating for commercial paper and for VRDO prior to the advent of the VMIG 1 rating. SECURITY DESCRIPTIONS (unaudited) ABAG --Association of Bay Area Governments AIG --American International Guaranty AMBAC --AMBAC Indemnity Corporation BAN --Bond Anticipation Notes BIG --Bond Investors Guaranty CDA --Community Development Administration CGIC --Capital Guaranty Insurance Company CHFCLI --California Health Facility Construction Loan Insurance COP --Certificate of Participation EDA --Economic Development Authority ETM --Escrowed To Maturity FAIRS --Floating Adjustable Interest Rate Securities FGIC --Financial Guaranty Insurance Company FHA --Federal Housing Administration FHLMC --Federal Home Loan Mortgage Corporation FNMA --Federal National Mortgage Association FRTC --Floating Rate Trust Certificates FSA --Financial Security Assurance GIC --Guaranteed Investment Contract GNMA --Government National Mortgage Association GO --General Obligation HDA --Housing Development Authority HDC --Housing Development Corporation HFA --Housing Finance Authority IDA --Industrial Development Authority IDB --Industrial Development Board IDR --Industrial Development Revenue INFLOS --Inverse Floaters ISD --Independent School District LOC --Letter of Credit MBIA --Municipal Bond Investors Assurance Corporation MFH --Multi-Family Housing MVRICS --Municipal Variable Rate Inverse Coupon Security PCR --Pollution Control Revenue PFA --Public Finance Authority PSFG --Permanent School Fund Guaranty Q-SBLF --Qualified School Bond Loan Fund RAN --Revenue Anticipation Notes RIBS --Residual Interest Bonds RITES --Residual Interest Tax-Exempt Securities SYCC --Structured Yield Curve Certificate TAN --Tax Anticipation Notes TECP --Tax Exempt Commercial Paper TOB --Tender Option Bonds TRAN --Tax and Revenue Anticipation Notes VAN --Veterans Administration VRDD --Variable Rate Daily Demand VRWE --Variable Rate Wednesday Demand ======================== [GRAPHIC] 21 STATEMENT OF ASSETS AND LIABILITIES
May 31, 2002 ------------------------------------------------------------------------------- ASSETS: Investments, at value (Cost -- $759,199,903) $ 769,980,532 Cash 727,134 Receivable for securities sold 43,236,200 Interest receivable 8,490,061 Receivable from manager 495,018 ------------------------------------------------------------------------------- Total Assets 822,928,945 ------------------------------------------------------------------------------- LIABILITIES: Payable for securities purchased 82,299,772 Dividends payable 743,773 Administration fee payable 96,986 Accrued preferred stock distribution payable 48,984 Accrued expenses 405,063 ------------------------------------------------------------------------------- Total Liabilities 83,594,578 ------------------------------------------------------------------------------- Series M, T, W, Th and F Auction Rate Cumulative Preferred Stock (10,000 shares authorized; 10,000 shares issued at $25,000 per share for each Series) (Note 7) 250,000,000 ------------------------------------------------------------------------------- Total Net Assets $ 489,334,367 ------------------------------------------------------------------------------ NET ASSETS: Par value of capital shares $ 41,856 Capital paid in excess of par value 509,148,009 Undistributed net investment income 2,124 Accumulated net realized loss from security transactions (30,638,251) Net unrealized appreciation of investments 10,780,629 ------------------------------------------------------------------------------- Total Net Assets (Equivalent to $11.69 a share on 41,855,576 capital shares of $0.001 par value outstanding; 500,000,000 capital shares authorized) $489,334,367 ------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 22 STATEMENT OF OPERATIONS
Year Ended May 31, 2002 ---------------------------------------------------------------------------------- INVESTMENT INCOME: Interest $ 21,791,436 ---------------------------------------------------------------------------------- EXPENSES: Investment advisory fee (Note 3) 2,739,884 Administration fee (Note 3) 787,716 Shareholder communications 166,998 Shareholder and system servicing fees 100,507 Audit and legal 95,676 Directors' fees 60,333 Custody 18,705 Pricing service fees 13,858 Registration fees 13,000 Other 94,514 ---------------------------------------------------------------------------------- Total Expenses 4,091,191 Less: Investment advisory fee waiver (Note 3) (1,966,471) ---------------------------------------------------------------------------------- Net Expenses 2,124,720 ---------------------------------------------------------------------------------- Net Investment Income 19,666,716 ---------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS (NOTE 4): Realized Loss From Security Transactions (excluding short-term securities): Proceeds from sales 157,654,209 Cost of securities sold 169,167,053 ---------------------------------------------------------------------------------- Net Realized Loss (11,512,844) ---------------------------------------------------------------------------------- Increase in Net Unrealized Appreciation (Note 1) 12,747,045 ---------------------------------------------------------------------------------- Net Gain on Investments 1,234,201 ---------------------------------------------------------------------------------- Distributions Paid to Auction Rate Cumulative Preferred Stockholders From Net Investment Income (103,927) ---------------------------------------------------------------------------------- Increase in Net Assets From Operations $ 20,796,990 ---------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 23 STATEMENTS OF CHANGES IN NET ASSETS
For the Years Ended May 31, -------------------------- 2002 2001 ---------------------------------------------------------------------------------- OPERATIONS: Net investment income $ 19,666,716 $ 19,132,327 Net realized gain (loss) (11,512,844) 3,688,224 Increase in net unrealized appreciation 12,747,045 21,646,189 Distributions Paid to Auction Rate Cumulative Preferred Stockholders from net investment income (103,927) -- --------------------------------------------------------------------------------- Increase in Net Assets From Operations 20,796,990 44,466,740 --------------------------------------------------------------------------------- DISTRIBUTIONS PAID TO: Common Stock shareholders from net investment income (19,609,532) (19,162,536) --------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (19,609,532) (19,162,536) --------------------------------------------------------------------------------- FUND SHARE TRANSACTIONS (NOTES 7 AND 8): Underwriting commissions and expenses for the issuance of Auction Rate Cumulative Preferred Stock (Note 7) (2,793,000) -- Net asset value of shares issued in connection with the transfer of Managed Municipals Portfolio II Inc.'s net assets 117,162,040 -- Treasury stock acquired -- (3,648,358) --------------------------------------------------------------------------------- Increase (Decrease) in Net Assets From Fund Share Transactions 114,369,040 (3,648,358) --------------------------------------------------------------------------------- Increase in Net Assets 115,556,498 21,655,846 NET ASSETS: Beginning of year 373,777,869 352,122,023 --------------------------------------------------------------------------------- End of year* $489,334,367 $373,777,869 -------------------------------------------------------------------------------- * Includes undistributed net investment income of: $2,124 $22,877 --------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS. ======================== [GRAPHIC] 24 NOTES TO FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES Managed Municipals Portfolio Inc. ("Fund"), a Maryland corporation, is registered under the Investment Company Act of 1940, as amended, as a non-diversified, closed-end management investment company. The significant accounting policies consistently followed by the Fund are: (a) security transactions are accounted for on trade date; (b) securities are valued at the mean between bid and ask prices provided by an independent pricing service that are based on transactions in municipal obligations, quotations from municipal bond dealers, market transactions in comparable securities and various relationships between securities; (c) securities maturing within 60 days or less are valued at cost plus accreted discount, or minus amortized premium, which approximates value; (d) gains or losses on sale of securities are calculated by using the specific identification method; (e) interest income, adjusted for amortization of premium and accretion of discount, is recorded on an accrual basis; (f) dividends and distributions to shareholders are recorded on the ex-dividend date; (g) the Fund intends to comply with the applicable provisions of the Internal Revenue Code of 1986, as amended, pertaining to regulated investment companies and to make distributions of taxable income sufficient to relieve it from substantially all Federal income and excise taxes; (h) the character of income and gains to be distributed are determined in accordance with income tax regulations which may differ from accounting principles generally accepted in the United States of America. At May 31, 2002, reclassifications were made to the Fund's capital accounts to reflect permanent book/tax differences and income and gains available for distributions under income tax regulations. Accordingly, a portion of overdistributed net investment income amounting to $13,447 was reclassified from paid-in capital. Net investment income, net realized gains and net assets were not affected by this adjustment; and (i) estimates and assumptions are required to be made regarding assets, liabilities and changes in net assets resulting from operations when financial statements are prepared. Changes in the economic environment, financial markets and any other parameters used in determining these estimates could cause actual results to differ. In November 2000, the American Institute of Certified Public Accountants ("AICPA") issued a revised Audit and Accounting Guide for Investment Companies ("Guide"). This revised version is effective for financial statements issued for fiscal years beginning after December 15, 2000. The revised Guide requires the Fund to amortize premium and accrete all discounts on all fixed-income securities. The Fund adopted this requirement effective June 1, 2001. This change does not affect the Fund's net asset value, but does change the classification of certain amounts in the statement of operations. For the year ended May 31, 2002, interest income increased by $89,361, net realized loss ======================== [GRAPHIC] 25 NOTES TO FINANCIAL STATEMENTS (continued) increased by $5,419 and the change in net unrealized appreciation of investments decreased by $83,942. In addition, the Fund recorded adjustments to increase the cost of securities and increase accumulated undistributed net investment income by $59,169 to reflect the cumulative effect of this change up to the date of the adoption. 2. EXEMPT-INTEREST DIVIDENDS AND OTHER DISTRIBUTIONS The Fund intends to satisfy conditions that will enable interest from municipal securities, which is exempt from regular Federal income tax and from designated state income taxes, to retain such tax-exempt status when distributed to the shareholders of the Fund. Capital gain distributions, if any, are taxable to shareholders, and are declared and paid at least annually. 3. INVESTMENT ADVISORY AGREEMENT, ADMINISTRATION AGREEMENT AND OTHER TRANSACTIONS Smith Barney Fund Management LLC ("SBFM"), a subsidiary of Salomon Smith Barney Holdings Inc., which, in turn, is a subsidiary of Citigroup Inc. ("Citigroup"), acts as investment adviser to the Fund. The Fund pays SBFM a fee calculated at an annual rate of 0.70% of the average daily total net assets of the Fund. This fee is calculated daily and paid monthly. For the year ended May 31, 2002, SBFM waived $1,966,471 of its investment advisory fee. SBFM also acts as the Fund's administrator for which the Fund pays a fee calculated at an annual rate of 0.20% of the average daily total net assets. This fee is calculated daily and paid monthly. However, effective upon the issuance of the Fund's preferred shares, SBFM agreed to reduce its aggregate investment advisory and administrative fees to an aggregate annual rate of 0.65% on those assets of the Fund equal to the product of the number of preferred shares outstanding multiplied by the liquidation value of such shares. All officers and one Director of the Fund are employees of Citigroup or its affiliates. 4. INVESTMENTS During the year ended May 31, 2002, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows: ----------------------------------------------------------------------------- Purchases $413,336,306 ----------------------------------------------------------------------------- Sales 157,654,209 ----------------------------------------------------------------------------- [GRAPHIC] 26 NOTES TO FINANCIAL STATEMENTS (continued) At May 31, 2002, aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows: ---------------------------------------------------------------------------- Gross unrealized appreciation $20,414,380 Gross unrealized depreciation (9,633,751) ----------------------------------------------------------------------------- Net unrealized appreciation $10,780,629 ---------------------------------------------------------------------------- 5. FUTURES CONTRACTS Initial margin deposits made upon entering into futures contracts are recognized as assets. Securities equal to the initial margin amount are segregated by the custodian in the name of the broker. Additional securities are also segregated up to the current market value of the futures contracts. During the period the futures contract is open, changes in the value of the contract are recognized as unrealized gains or losses by "marking-to-market" on a daily basis to reflect the market value of the contract at the end of each day's trading. Variation margin payments are received or made and recognized as assets due from or liabilities due to broker, depending upon whether unrealized gains or losses are incurred. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the proceeds from (or cost of) the closing transactions and the Fund's basis in the contract. The Fund enters into such contracts to hedge a portion of its portfolio. The Fund bears the market risk that arises from changes in the value of the financial instruments and securities indices (futures contracts). At May 31, 2002, the Fund did not hold any futures contracts. 6. SECURITIES TRADED ON A WHEN-ISSUED BASIS In a when-issued transaction, the Fund commits to purchasing securities for which specific information is not yet known at the time of the trade. Securities purchased on a when-issued basis are not settled until they are delivered to the Fund. Beginning on the date the Fund enters into the when-issued transaction, the custodian maintains cash, U.S. government securities or other liquid high grade debt obligations in a segregated account equal in value to the purchase price of the when-issued security. These transactions are subject to market fluctuations and their current value is determined in the same manner as for other securities. At May 31, 2002, the Fund did not hold any when-issued securities. [GRAPHIC] 27 NOTES TO FINANCIAL STATEMENTS (continued) 7. AUCTION RATE CUMULATIVE PREFERRED STOCK On May 22, 2002, the Fund issued 2,000 shares of Series M, Series T, Series W, Series Th and Series F, respectively, of Auction Rate Cumulative Preferred Stock ("ARCPS"). The underwriting discount of $2,500,000 and offering expenses of $293,000 associated with the ARCPS offering were recorded as a reduction of the capital paid in excess of par value of common stock. The ARCPS' dividends are cumulative at a rate determined at an auction and the dividend period is typically 7 days. The dividend rates ranged from 1.50%-1.55% for the year ended May 31, 2002. The ARCPS are redeemable under certain conditions by the Fund, or subject to mandatory redemption (if the Fund is in default of certain coverage requirements) at a redemption price equal to $25,000 per share plus accumulated and unpaid dividends. ARCPS have a liquidation preference of $25,000 per share plus accumulated and unpaid dividends. The Fund is required to maintain certain asset coverages with respect to the ARCPS under the Investment Company Act of 1940. Salomon Smith Barney Inc. ("SSB"), another subsidiary of Citigroup also currently acts as a broker/dealer in connection with the auction of ARCPS. After each auction, the auction agent will pay to each broker/dealer, from monies the Fund provides a participation fee at the annual rate of 0.25% of the purchase price of the ARCPS that the broker/dealer places at the auction. For the year ended May 31, 2002, SSB earned $2,057 as the broker/dealer. Under Emerging Issues Task Force ("EITF") announcement Topic D-98, Classification and Measurement of Redeemable Securities, which was issued on July 19, 2001, preferred securities that are redeemable for cash or other assets are to be classified outside of permanent equity to the extent that the redemption is at a fixed or determinable price and at the option of the holder or upon the occurrence of an event that is not solely within the control of the issuer. 8. TRANSFER OF NET ASSETS On April 26, 2002, the Fund acquired the assets and certain liabilities of Managed Municipals Portfolio II Inc. pursuant to a plan of reorganization approved by Managed Municipals Portfolio II Inc. shareholders on April 10, 2002. Total shares issued by the Fund and the total net assets of the Managed Municipals Portfolio II Inc. and the Fund on the date of the transfer were as follows: Acquired Shares Issued Total Net Assets of Total Net Assets Fund by the Fund Managed Municipals Portfolio II Inc. of the Fund ------------------------------------------------------------------------------ Managed Municipals Portfolio II Inc. 10,006,932 $117,162,040 $372,831,933 ------------------------------------------------------------------------------ ======================== [GRAPHIC] 28 NOTES TO FINANCIAL STATEMENTS (continued) The total net assets of Managed Municipals Portfolio II Inc. before acquisition included unrealized depreciation of $2,101,130, accumulated net realized loss of $5,251,582, and overdistributed net investment income of $14,313. Total net assets of the Fund immediately after the transfer were $489,993,973. The transaction was structured to qualify as a tax-free reorganization under the Internal Revenue Code of 1986, as amended. 9. CAPITAL LOSS CARRYFORWARD At May 31, 2002, the Fund had, for Federal income tax purposes, approximately $18,142,000 of unused capital loss carryforwards available to offset future capital gains. To the extent that these carryforward losses are used to offset capital gains, it is probable that the gains so offset will not be distributed. Expirations occur on May 31 of the years below:
2006 2007 2008 ----------------------------------------------------------------------------------------- Carryforward Amounts $302,000 $4,855,000 $12,985,000 -----------------------------------------------------------------------------------------
10. CAPITAL SHARES At May 31, 2002, the Fund had 500,000,000 shares of common stock authorized with a par value of $0.001 per share. On June 21, 1999, the Fund commenced a share repurchase plan. Since the inception of the repurchase plan, the Fund repurchased and retired 2,758,300 shares with a total cost of $26,171,171. For the year ended May 31, 2001, the Fund repurchased and retired 370,700 shares with a total cost of $3,648,358. On January 16, 2001, the Fund suspended the share repurchase plan. [GRAPHIC] 29 FINANCIAL HIGHLIGHTS For a share of capital stock outstanding throughout each year ended May 31, unless otherwise noted:
2002 2001 2000 1999 1998 ----------------------------------------------------------------------------------------- Net Asset Value, Beginning of Year $11.74 $10.93 $11.97 $12.37 $11.90 ---------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income/(1)(2)/ 0.60 0.60 0.58 0.58 0.54 Net realized and unrealized gain (loss)/(2)/ 0.02 0.79 (1.14) (0.32) 0.83 Distributions Paid to Auction Rate Cumulative Preferred Stockholders from net investment income (0.00)* -- -- -- -- ---------------------------------------------------------------------------------------- Total Income (Loss) From Operations 0.62 1.39 (0.56) 0.26 1.37 ---------------------------------------------------------------------------------------- Gain From Repurchase of Treasury Stock -- 0.02 0.12 -- -- ---------------------------------------------------------------------------------------- Underwriting Commission and Expenses of Issuance of Auction Rate Cumulative Preferred Stock (0.07) -- -- -- -- ---------------------------------------------------------------------------------------- Distributions Paid To: Common Stock Shareholders from net investment income (0.60) (0.60) (0.60) (0.54) (0.61) Common Stock Shareholders from net realized gains -- -- -- (0.12) (0.29) ---------------------------------------------------------------------------------------- Total Distributions (0.60) (0.60) (0.60) (0.66) (0.90) ---------------------------------------------------------------------------------------- Net Asset Value, End of Year $11.69 $11.74 $10.93 $11.97 $12.37 ---------------------------------------------------------------------------------------- Total Return, Based on Market Value/(3)/ 4.79% 20.69% (3.88)% 0.11% 2.08% ---------------------------------------------------------------------------------------- Total Return, Based on Net Asset Value/(3)/ 5.33% 13.90% (2.82)% 2.66% 12.14% ---------------------------------------------------------------------------------------- Net Assets, End of Year (millions) $489 $374 $352 $414 $428 ----------------------------------------------------------------------------------------
======================== [GRAPHIC] 30 FINANCIAL HIGHLIGHTS (continued) For a share of capital stock outstanding throughout each year ended May 31, unless otherwise noted:
2002 2001 2000 1999 1998 ------------------------------------------------------------------------------- Ratios to Average Net Assets Based on Common Shares Outstanding/(4)/: Net investment income/(2)/ 4.84% 5.15% 5.19% 4.72% 4.35% Auction fees 0.00* -- -- -- -- Operating expenses/(1)/ 0.52 0.68 0.89 0.94 0.99 Total expenses 0.52 0.68 0.89 0.94 0.99 ------------------------------------------------------------------------------ Portfolio Turnover Rate 39% 58% 35% 23% 87% ------------------------------------------------------------------------------ Market Price, End of Year $10.57 $10.67 $9.375 $10.375 $11.00 ------------------------------------------------------------------------------
(1) The investment adviser waived a portion of its fees for the years ended May 31, 2002, 2001 and 2000. In addition, the investment adviser and administrator waived a portion of their fees for the year ended May 31, 1999. If such fees were not waived, the per share decreases in net investment income and actual expense ratios would have been as follows: Per share decreases in Expense ratios net investment income without fee waivers ---------------------- ------------------- 2002 $0.05 1.01% 2001 0.04 1.01 2000 0.02 1.04 1999 0.01 1.02 (2) Without the adoption of the change in the accounting method discussed in Note 1 to the financial statements, for the year ended May 31, 2002, the ratio of net investment income to average net assets would have been 4.81%. Per share, ratios and supplemental data for the periods prior to June 1, 2001 have not been restated to reflect this change in presentation. In addition, the impact of this change to net investment income and net realized and unrealized gain per share was less than $0.01. (3) The total return calculation assumes that dividends are reinvested in accordance with the Fund's dividend reinvestment plan. (4) Calculated on basis of average net assets of common shareholders. Ratios do not reflect the effect of dividend payments to preferred shareholders. * Amount represents less than $0.01 per share. ======================== [GRAPHIC] 31 INDEPENDENT AUDITORS' REPORT The Shareholders and Board of Directors of Managed Municipals Portfolio Inc.: We have audited the accompanying statement of assets and liabilities, including the schedule of investments, of the Managed Municipals Portfolio Inc. ("Fund") as of May 31, 2002, and the related statement of operations for the year then ended, the statements of changes in net assets for each of the years in the two-year period then ended and financial highlights for each of the years in the five-year period then ended. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of May 31, 2002, by correspondence with the custodian. As to securities purchased or sold but not yet received or delivered, we performed other appropriate auditing procedures. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of the Fund as of May 31, 2002, the results of its operations for the year then ended, the changes in its net assets for each of the years in the two-year period then ended and financial highlights for each of the years in the five-year period then ended, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP New York, New York July 10, 2002 ======================== [GRAPHIC] 32 FINANCIAL DATA (unaudited) For a share of capital stock outstanding throughout each period:
NYSE Net Dividend Record Payable Closing Asset Dividend Reinvestment Date Date Price+ Value+ Paid Price ------------------------------------------------------- 6/27/00 6/30/00 $ 9.750 $11.20 $0.050 $ 9.91 7/25/00 7/28/00 9.688 11.37 0.050 9.89 8/22/00 8/25/00 10.000 11.54 0.050 10.04 9/26/00 9/29/00 9.688 11.42 0.050 9.80 10/24/00 10/27/00 9.688 11.49 0.050 9.78 11/20/00 11/24/00 9.750 11.47 0.050 9.80 12/26/00 12/29/00 9.938 11.85 0.050 10.25 1/23/01 1/26/01 10.688 11.92 0.050 10.70 2/20/01 2/23/01 10.770 11.88 0.050 10.81 3/27/01 3/30/01 10.450 11.89 0.050 10.58 4/24/01 4/27/01 10.370 11.65 0.050 10.55 5/22/01 5/25/01 10.650 11.71 0.050 10.69 6/26/01 6/29/01 10.400 11.80 0.050 10.61 7/24/01 7/27/01 10.590 11.88 0.050 10.71 8/28/01 8/31/01 10.830 12.09 0.050 11.00 9/25/01 9/28/01 10.330 11.87 0.050 10.65 10/23/01 10/26/01 10.640 11.93 0.050 10.82 11/27/01 11/30/01 10.580 11.83 0.050 10.51 12/24/01 12/28/01 10.310 11.63 0.050 10.43 1/22/02 1/25/02 10.600 11.81 0.050 10.74 2/19/02 2/22/02 10.600 11.77 0.050 10.72 3/25/02 3/28/02 10.250 11.55 0.050 10.43 4/23/02 4/26/02 10.300 11.66 0.050 10.51 5/28/02 5/31/02 10.500 11.65 0.050 10.62 ------------------------------------------------------
+ As of record date. ======================== [GRAPHIC] 33 OTHER FINANCIAL INFORMATION (unaudited) The table below sets out information with respect to Auction Rate Cumulative Preferred Stock:
2002/(1)/ --------------------------------------------------------- Auction Rate Cumulative Preferred Stock/(2)/: Total Amount Outstanding (000s) 250,000 Asset Coverage Per Share 74,000 Involuntary Liquidating Preference Per Share 25,000 Average Market Value Per Share/(3)/ 25,000 -------------------------------------------------------
(1)As of May 31, 2002. (2)On May 22, 2002, the Fund issued 2,000 shares of Auction Rate Cumulative Preferred Stock at $25,000 a share, for Series M, Series T, Series W, Series Th and Series F, respectively. (3)Excludes accrued interest or accumulated undeclared dividends. [GRAPHIC] 34 ADDITIONAL INFORMATION (unaudited) Information about Directors and Officers The business and affairs of Managed Municipals Portfolio Inc., ("Investment Company") are managed under the direction of the Board of Directors. Information pertaining to the Directors and Officers of the Investment Company is set forth below.
Number of Investment Term of Companies Office* and Principal in Fund Other Position(s) Length of Occupation(s) Complex Directorships Name, Address Held with Time During Past Overseen Held by and Age Fund Served 5 Years by Director Director ---------------------------------------------------------------------------------------------- Non-Interested Directors: Allan J. Bloostein Class I Since President, Allan 16 Taubman 27 West 67th Street Director 1992 J. Bloostein Realty New York, NY 10023 Associates; Vice Corporation Age 72 Chairman (a NYSE (retired), May listed real Department estate Stores investment trust) Dwight B. Crane Class III Since Professor, 23 None Harvard Business School Director 1992 Harvard Soldiers Field Road Business School Morgan Hall #375 Boston, MA 02163 Age 64 Paulo M. Cucchi Class I Since Vice President 7 None Drew University Director 2001 and Dean of 108 Brothers College College of Madison, NJ 07940 Liberal Arts Age 60 at Drew University Robert A. Frankel Class II Since Managing 9 None 8 John Walsh Blvd. Director 1994 Partner of Peekskill, NY 10566 Robert A. Age 75 Frankel Management Consultants Dr. Paul Hardin Class II Since Chancellor 16 None 12083 Morehead Director 2001 Emeritus and Chapel Hill, NC 27514 Professor of Age 71 Law at the University of North Carolina at Chapel Hill William R. Hutchinson Class III Since President, WR 7 Director of 535 N. Michigan Director 1995 Hutchinson & Associate Suite 1012 Associates, Inc.; Bank Chicago, IL 60611 formerly Group and Associated Age 59 Vice President, Banc-Corp Mergers & Acquisitions BP Amoco
[GRAPHIC] 35 ADDITIONAL INFORMATION (unaudited) (continued)
Number of Investment Term of Companies Office* and Principal in Fund Other Position(s) Length of Occupation(s) Complex Directorships Name, Address Held with Time During Past Overseen Held by and Age Fund Served 5 Years by Director Director ----------------------------------------------------------------------------------------------- George M. Pavia Class III Since Senior Partner, 7 None 600 Madison Avenue Director 2001 Pavia & Harcourt New York, NY 10022 Attorneys Age 73 Interested Directors: Heath B. McLendon Class II Since Managing Director 74 None SSB Director/ 1992 of Salomon Smith 125 Broad Street Chairman Barney 9th Floor Inc. ("SSB"); New York, NY 10004 President and Age 69 Director of Smith Barney Fund Management LLC ("SBFM") and Travelers Investment Adviser, Inc. ("TIA"); Director of The Travelers Investment Management Company R. Jay Gerken Class I Since Managing 41 None SSB Director, 2002 Director of SSB 125 Broad Street Also serves 9th Floor as New York, NY 10004 President Age 51 ----- *Directors are elected for a term of three years. Officers: Lewis E. Daidone Senior Vice Since Managing Director N/A N/A SSB President and 1994 of SSB; Chief 125 Broad Street Chief Administration 11th Floor Administrative Officer of the New York, NY 10004 Officer Smith Barney Age 44 Mutual Funds; Director and Senior Vice President of SBFM and TIA
[GRAPHIC] 36 ADDITIONAL INFORMATION (unaudited) (continued)
Number of Investment Term of Companies Office and Principal in Fund Other Position(s) Length of Occupation(s) Complex Directorships Name, Address Held with Time During Past Overseen Held by and Age Fund Served 5 Years by Director Director ------------------------------------------------------------------------------------------------- Richard L. Peteka Chief Since Chief Financial N/A N/A SSB Financial 2002 Officer and 125 Broad Street Officer and Treasurer of certain 11th Floor Treasurer Smith Barney New York, NY 10004 Mutual Funds; Age 40 Director and Head of Internal Control for Citigroup Asset Management U.S. Mutual Fund Administration from 1999-2002 Vice President Head of Mutual Fund Administration and Treasurer at Oppenheimer Capital from 1996- 1999 Joseph P. Deane Vice President Since Managing Director N/A N/A SSB and 1993 of SBFM 333 W 34th Street Investment New York, NY 10001 Officer Age 46 Kaprel Ozsolak Controller Since Vice President of N/A N/A SSB 2002 SSB 125 Broad Street 9th Floor New York, NY 10004 Age 36 Christina T. Sydor Secretary Since Managing Director N/A N/A SSB 1994 of SSB; General 300 First Stamford Place Counsel and Stamford, CT 06902 Secretary of SBFM Age 51 and TIA
TAX INFORMATION (unaudited) For Federal tax purposes the Fund hereby designates for the fiscal year ended May 31, 2002: . 99.90% of the dividends paid by the Fund from net investment income as tax exempt for regular Federal income tax purposes. [GRAPHIC] 37 DIVIDEND REINVESTMENT PLAN (unaudited) Under the Fund's Dividend Reinvestment Plan ("Plan"), a shareholder whose shares of common stock are registered in his own name will have all distributions from the Fund reinvested automatically by PFPC Global Fund Services ("PFPC"), as purchasing 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 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 PFPC as dividend paying agent. The number of shares of common stock distributed to participants in the Plan in lieu of a cash dividend is determined in the following manner. When the market price of the common stock is equal to or exceeds 98% of the net asset value per share of the common stock on the determination date (generally, the record date for the distribution), Plan participants will be issued shares of common stock by the Fund at a price equal to the greater of net asset value determined as described below under "Net Asset Value" or 95% of the market price of the common stock. If the market price of the common stock is less than 98% of the net asset value of the common stock at the time of valuation (which is the close of business on the determination date), PFPC 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 PFPC has completed its purchases, the market price exceeds the net asset value of the common stock as of the valuation time, PFPC will attempt to terminate purchases in the open market and cause the Fund to issue the remaining portion of the dividend or distribution in shares at a price equal to the greater of (a) net asset value as of the valuation time or (b) 95% of the then current market price. In this case, the number of shares received by a Plan participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. To the extent PFPC is unable to stop open market purchases and cause the Fund to issue the remaining shares, the average per share purchase price paid by PFPC may exceed the net asset value of the common stock as of the valuation time, resulting in the acquisition of fewer shares than if the dividend or capital gains ======================== [GRAPHIC] 38 DIVIDEND REINVESTMENT PLAN (unaudited) (continued) distribution had been paid in common stock issued by the Fund at such net asset value. PFPC will begin to purchase common stock on the open market as soon as practicable after the determination date for the dividend or capital gains distribution, but in no event shall such purchases continue later than 30 days after the payment date for such dividend or distribution, or the record date for a succeeding dividend or distribution, except when necessary to comply with applicable provisions of the federal securities laws. PFPC maintains all shareholder accounts in the Plan and furnishes written confirmations of all transactions in each account, including information needed by a shareholder for personal and tax records. The automatic reinvestment of dividends and capital gains distributions will not relieve Plan participants of any income tax that may be payable on the dividends or capital gains distributions. Common stock in the account of each Plan participant will be held by PFPC in uncertificated form in the name of the Plan participant. Plan participants are subject to no charge for reinvesting dividends and capital gains distributions under the Plan. PFPC's fees for handling the reinvestment of dividends and capital gains distributions will be paid by the Fund. No brokerage charges apply with respect to shares of common stock issued directly by the Fund under the Plan. Each Plan participant will, however, bear a proportionate share of any brokerage commissions actually incurred with respect to any open market purchases made under the Plan. Experience under the Plan may indicate that changes to it are desirable. The Fund 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 PFPC, with the Fund'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 02266-8030 or by telephone at (800) 331-1710. SHARE REPURCHASE NOTICE (unaudited) Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase shares of its common stock in the open market. ======================== [GRAPHIC] 39 Managed Municipals Portfolio Inc. DIRECTORS Allan J. Bloostein Dwight B. Crane Paolo M. Cucchi Robert A. Frankel R. Jay Gerken Paul Hardin William R. Hutchinson Heath B. McLendon, Chairman George M. Pavia OFFICERS R. Jay Gerken President and Chief Executive Officer Lewis E. Daidone Senior Vice President and Chief Administrative Officer Richard L. Peteka Chief Financial Officer and Treasurer Joseph P. Deane Vice President and Investment Officer David Fare Investment Officer Kaprel Ozsolak Controller Christina T. Sydor Secretary INVESTMENT ADVISER AND ADMINISTRATOR Smith Barney Fund Management LLC 333 W. 34th Street New York, New York 10001 TRANSFER AGENT PFPC Global Fund Services P.O. Box 8030 Boston, Massachusetts 02266-8030 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 ======================== [GRAPHIC] 40 [GRAPHIC] THIS REPORT IS ONLY INTENDED FOR SHAREHOLDERS OF THE MANAGED MUNICIPALS PORTFOLIO INC. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THE REPORT. FD2246 7/02