As filed with the Securities and Exchange Commission on January 13, 1997
Securities Act Registration No. 33-20507
Investment Company Act Registration No. 811-5497
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. x
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 9 x
__________________
Municipal High Income Fund Inc.
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 723-9218
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Municipal High IncomeFund Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M. Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
_______________
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of this Registration Statement.
If any securities being registered on this form will be offered on a
delayed or continuous basis in reliance
on Rule 415 under the Securities Act of 1933, other than securities
offered in connection with a dividend
reinvestment plan, check the following box. x_______________
This Registration Statement relates to the registration of an indeterminate
number of shares solely for
market-making transactions. Pursuant to Rule 429, this Registration
Statement relates to shares previously
registered on Form N-2. (Registration No. 33-20507).
It is proposed that this filing will become effective: x when
declared effective pursuant to section 8(c).
Registrant amends this Registration Statement under the Securities
Act of 1933, as amended, on such date
as may be necessary to delay its effective date until Registrant files a
further amendment that specifically states that
this Registration Statement will thereafter become effective in accordance
with the provisions of Section 8(a) of the
Securities Act of 1933, as amended, or until the Registration Statement
becomes effective on such date as the
Securities and Exchange Commission, acting pursuant to
Section 8(a), may determine.
MUNICIPAL HIGH INCOME FUND 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 Cover Page Inside Front
and Outside Back 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
6. Selling Shareholders Not Applicable
7. Use of Proceeds.. Use of Proceeds
8. General Description of the Registrant..... Prospectus Summary; The Fund;
Investment Objectives and Policies;
Description of Common Stock; Share Price
Data; Certain Provisions of the Articles of
Incorporation; Appendix.
9. Management Management of the Fund; Description of
Common Stock; Custodian and Transfer
Agent
10. Capital Stock, Long-Term Debt, and Other
Securities Taxation; Dividend Reinvestment Plan;
Dividends and Distributions; Description of
Common Stock; Share Price Data
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement of
Additional Information Further Information
Part B Statement of Additional
Item No. Information Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and History......... The Fund; Description of Common
Stock (see Prospectus)
17. Investment Objective and Policies Investment Objective and Policies;
Investment Restrictions
18. Management................. Management of the Fund; Directors and
Executive Officers of the Fund
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 Fund Transactions
22. Tax Status Taxes; Taxation (see Prospectus)
23. Financial Statements Financial Statements
Part C
Item No.
Information required to be included in Part C is set forth, under the
appropriate item so numbered, in Part C of this Registration Statement.
<PAGE>
Municipal High Income Fund Inc.
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Prospectus January 15, 1997
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388 Greenwich Street
New York, New York 10013
(212) 723-9218
Municipal High Income Fund Inc. (the "Fund") is a diversified, closed-end
management investment company that seeks high tax-exempt current income by
investing primarily in a variety of obligations issued by or on behalf of
states, territories and possessions of the United States and the District of
Columbia and their political subdivisions, agencies and instrumentalities or
multi-state agencies or authorities ("Municipal Obligations"). For a discussion
of the risks associated with certain of the Fund's investments, see "Investment
Objective and Policies."
This Prospectus is to be used by Smith Barney Inc. ("Smith Barney ") in
connection with offers and sales of the Common Stock in market-making activities
in the over-the-counter market at negotiated prices related to prevailing market
prices at the time of the sale.
Investors are advised to read this Prospectus, which sets forth concisely
the information about the Fund that a prospective investor ought to know before
investing, and to retain it for future reference. A Statement of Additional
Information ("SAI") dated January 15, 1997 has been filed with the Securities
and Exchange Commission and is incorporated by reference in its entirety into
this Prospectus. A copy of the SAI can be obtained without charge by calling or
writing to the Fund at the telephone number or address set forth above or by
contacting any Smith Barney Financial Consultant.
(Continued on page 2)
SMITH BARNEY INC.
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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Municipal High Income Fund Inc.
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Prospectus (continued) January 15 , 1997
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Smith Barney intends to make a market in the Fund's Common Stock, although it
is not obligated to conduct market-making activities and any such activities may
be discontinued at any time, without notice by Smith Barney . The shares of
Common Stock that may be offered from time to time pursuant to this Prospectus
were issued and sold by the Fund on November 28, 1988 in an initial public
offering at a price of $10.00 per share. No assurance can be given as to the
liquidity of, or the trading market for, the Common Stock as a result of any
market-making activities undertaken by Smith Barney. The Fund will not receive
any proceeds from the sale of any Common Stock offered pursuant to this
Prospectus. The Fund's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "MHF."
All dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a Prospectus.
2
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Municipal High Income Fund Inc.
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Table of Contents
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Prospectus Summary 4
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Fund Expenses 7
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Financial Highlights 8
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The Fund 10
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The Offering 10
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Use of Proceeds 10
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Investment Objective and Policies 10
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Share Price Data 17
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Management of the Fund 17
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Dividends and Distributions; Dividend Reinvestment Plan 19
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Net Asset Value 21
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Taxation 21
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Description of Common Stock 23
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Stock Purchases and Tenders 24
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Custodian, Transfer Agent, Dividend-Paying Agent,
Registrar and Plan Agent 26
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Further Information 26
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Appendix A-1
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3
<PAGE>
Municipal High Income Fund Inc.
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Prospectus Summary
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The following summary is qualified in its entirety by the more detailed
information included elsewhere in this Prospectus and in the SAI.
THE FUND The Fund is a diversified, closed-end management investment company
that invests substantially all of its assets in Municipal Obligations. See "The
Fund" and "Investment Objective and Policies."
INVESTMENT OBJECTIVE The Fund's objective is high tax-exempt current income.
INVESTMENTS The Fund ordinarily invests at least 80% of its net assets in
Municipal Obligations. The Fund generally invests in intermediate- and long-term
Municipal Obligations. Thus, under normal market conditions, the Fund will
invest in obligations with remaining maturities at the time of purchase from
three to in excess of twenty years. No assurance can be given that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
THE OFFERING The Common Stock is listed for trading on the New York Stock
Exchange. ("NYSE") In addition, Smith Barney intends to make a market in the
Common Stock. Smith Barney , however, is not obligated to conduct market-making
activities and any such activities may be discontinued at any time without
notice, at the sole discretion of Smith Barney.
LISTING NYSE.
SYMBOL MHF.
INVESTMENT MANAGER AND ADMINISTRATOR Greenwich Street Advisors (the "Investment
Manager"), a division of Smith Barney Mutual Funds Management Inc. ("SBMFM")
serves as the Fund's investment manager. The Investment Manager provides
investment advisory and management services to investment companies affiliated
with Smith Barney. SBMFM is a wholly owned subsidiary of Smith Barney Holdings
Inc., ("Holdings") the parent company of Smith Barney. Holdings is a wholly
owned subsidiary of Travelers Group Inc. ("Travelers"). SBMFM also acts as
administrator of the Fund and in that capacity provides certain administrative
services, including overseeing the Fund's non-investment operations and its
relations with other service providers and providing executive and other
officers to the Fund. The Fund pays the Investment Manager a fee ("Management
Fee") for its services provided to the Fund at an annual rate of 0.40 % of the
value of the Fund's average daily net assets. The Fund pays SBMFM a fee for
administrative services provided to the Fund that is computed daily and paid
monthly at the annual rate of 0.20% of the value of the Fund's average daily net
assets. The Fund will bear other expenses and
4
<PAGE>
Municipal High Income Fund Inc.
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
costs in connection with its operation in addition to the costs of investment
management services. See "Management of the Fund -- Investment Manager and
Administrator."
CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT
PNC Bank, NA ("PNC Bank") serves as the Fund's custodian. First Data Investor
Services Group, Inc. ("First Data") serves as the Fund's transfer agent,
dividend-paying agent, registrar and plan agent under the Fund's Dividend
Reinvestment Plan. See "Custodian, Transfer Agent and Dividend-Paying Agent,
Registrar and Plan Agent."
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN The Fund expects to make
monthly distributions of net investment income and to distribute net realized
capital gains, if any, annually. All distributions will be reinvested
automatically in additional shares through participation in the Fund's Dividend
Reinvestment Plan unless a shareholder elects to receive cash. See "Dividends
and Distributions; Dividend Reinvestment Plan."
DISCOUNT FROM NET ASSET VALUE OF SHARES The Fund is a closed-end investment
company. Shares of closed-end investment companies frequently trade at a
discount from net asset value. Whether investors will realize gains or losses
upon the sale of Common Stock will not depend upon the Fund's net asset value,
but will depend entirely upon whether the market price of the Common Stock at
the time of sale is above or below the original purchase price for the shares.
Since the market price of the Fund's Common Stock will be determined by such
factors as relative demand for and supply of such shares in the market, general
market and economic conditions and other factors beyond the control of the Fund,
the Fund cannot predict whether the Common Stock will trade at, below or above
net asset value. For that reason, shares of the Fund's Common Stock are designed
primarily for long-term investors, and investors in the Fund's Common Stock
should not view the Fund as a vehicle for trading purposes. See "Investment
Objective and Policies--Risk Factors and Special Considerations" and "Share
Price Data."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Fund may invest up to 100% of its
assets in Municipal Obligations rated as low as Ba by Moody's Investors Service
Inc. ("Moody's") or BB by S&P Ratings Group ("S&P") or BB by Fitch Investors
Service, Inc. ("Fitch") or in unrated Municipal Obligations deemed to be of
comparable quality. These low-rated Municipal Obligations are regarded by
Moody's as having speculative elements and by S&P as having predominantly
speculative characteristics with respect to capacity to pay interest and repay
principal and generally involve greater volatility of price and risk of
principal and income than
5
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
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do higher rated securities. In addition, low-rated and unrated securities are
frequently subordinated to the prior payment of senior indebtedness and are
traded in markets that may be relatively less liquid than the market for higher
rated securities. Moreover, because dealers may not maintain daily markets in
Municipal Obligations, retail secondary markets for many of these securities may
not exist. The Fund anticipates that, if a secondary market for securities it
wishes to sell does not exist, the Fund could sell the securities only to
institutional investors. As a result, the Fund's ability to sell these
securities when the Investment Manager deems it appropriate may be diminished.
The Fund is not restricted in its ability to purchase illiquid securities;
however, the Fund is subject to the risk that should it desire to sell any of
these securities when a ready buyer is not available at a price the Fund deems
representative of their value, the value of the Fund's net assets could be
adversely affected. The Fund may also invest up to 30% of its assets in
securities that are not publicly traded. The Fund may be forced to sell these
securities at less than fair market value or may not be able to sell them when
the Investment Manager believes it desirable to do so. The Fund has the right to
invest without limitation in Municipal Obligations that are private activity
bonds, the income from which may be taxable as a specific preference item for
purposes of the Federal alternative minimum tax. Thus, the Fund may not be a
suitable investment for investors who are subject to the alternative minimum
tax. See "Investment Objective and Policies" and "Taxation."
Certain of the investment techniques that the Fund may employ might expose
the Fund to certain risks. These investment techniques include purchasing
municipal leases, securities on a when-issued basis, stand-by commitments and
floating and variable rate demand notes, entering into repurchase agreements,
lending portfolio securities and engaging in financial futures and options
transactions. See "Investment Objective and Policies--Risk Factors and Special
Considerations."
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund and of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices. See "Certain Provisions of the
Articles of Incorporation."
STOCK PURCHASES AND TENDERS The Fund's Board of Directors currently contemplates
that the Fund 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."
6
<PAGE>
Municipal High Income Fund Inc.
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Fund Expenses
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The following tables are intended to assist investors in understanding the
various costs and expenses associated with investing in the Fund.
================================================================================
Shareholder Transaction Expenses
Sales Load (as a percentage of offering price) ................. None
Dividend Reinvestment and Cash Purchase Plan Fees .............. None
================================================================================
Annual Fund Operating Expenses
(as a percentage of net assets)(1)
Investment Advisory and Administration Fees..................... 0.60%
Other Expenses.................................................. 0.17%
================================================================================
TOTAL ANNUAL FUND OPERATING EXPENSES................................ 0.77%
===========================================================================
(1) See "Management of the Fund" for additional information.
HYPOTHETICAL EXAMPLE
An investor would directly or indirectly pay the following expenses on a
$1,000 investment in the Fund, assuming a 5% annual return:
One Year Three Years Five Years Ten Years
================================================================================
$8 $25 $43 $95
===========================================================================
This "Hypothetical Example" assumes that all dividends and other
distributions are reinvested at net asset value and that the percentage amounts
listed under Annual Fund Operating Expenses remain the same in the years shown.
The above tables and the assumptions in the Hypothetical Example of a 5% annual
return and reinvestment at net asset value are required by regulations of the
Securities and Exchange Commission ("SEC") applicable to all investment
companies; the assumed 5% annual return is not a prediction of, and does not
represent, the projected or actual performance of the Fund's Common Stock. This
Example should not be considered a representation of past or future expenses,
and the Fund's actual expenses may be more or less than those shown.
7
<PAGE>
Municipal High Income Fund Inc.
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Financial Highlights
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The following information for the two-year period ended October 31, 1996 has
been audited by KPMG Peat Marwick, LLP independent auditors whose report thereon
appears in the Fund's annual report dated October 31, 1996. The following
information for the fiscal years ended October 31, 1989 through October 31, 1994
has been audited by other independent auditors. This information should be read
in conjunction with the financial statements and related notes that also appear
in the Fund's Annual Report, which is incorporated by reference into the
Statement of Additional Information.
Per Share Operating Performance For a Share of the
Fund's Common Stock Outstanding Throughout Each Period
<TABLE>
<CAPTION>
=====================================================================================================
Year Year Year Year Year
Ended Ended Ended Ended Ended
10/31/96 10/31/95 10/31/94 10/31/93 10/31/92
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $ 9.51 $ 8.98 $ 9.72 $ 9.49 $ 9.42
- -----------------------------------------------------------------------------------------------------
Net Investment Income 0.63 0.64 0.65 0.67 0.70
Net Realized and
Unrealized Gains
(Losses) on Investments -- 0.54 (0.72) 0.23 0.06
- -----------------------------------------------------------------------------------------------------
Total Income (Loss)
from Operations 0.63 1.18 (0.07) 0.90 0.76
- -----------------------------------------------------------------------------------------------------
Less Distributions
Dividends from net
investment income (0.61) (0.65) (0.65) (0.67) (0.69)
Distributions from
capital gains -- -- (0.02) 0 0
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.61) (0.65) (0.67) (0.67) (0.69)
- -----------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 9.53 $ 9.51 $ 8.98 $ 9.72 $ 9.49
Per Share Market Value,
End of Period $ 9.000 $ 9.00 $ 8.250 $ 9.875 $ 9.125
- -----------------------------------------------------------------------------------------------------
Total Investment Return 10.22% 14.17% (10.11%) 17.76% 3.37%
=====================================================================================================
Ratios/Supplemental
Data Net Assets, End
of Period (in 000's) $187,303 $187,048 $176,379 $188,294 $179,104
=====================================================================================================
Ratios to Average
Net Assets:
Operating Expenses 0.77% 0.84% 0.84% 0.87% 0.87%
Average Net Income 6.65 6.87 6.98 6.89 7.31
Portfolio Turnover Rate 17% 18% 17% 13% 12%
=====================================================================================================
</TABLE>
8
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Municipal High Income Fund Inc.
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Financial Highlights (continued)
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Per Share Operating Performance For a Share of the
Fund's Common Stock Outstanding Throughout Each Period
================================================================================
Year Year Year
Ended Ended Ended
10/31/91 10/31/90 10/31/89(1)
- --------------------------------------------------------------------------------
Net Asset Value,
Beginning of Period $ 9.28 $ 9.52 $ 9.35
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Net Investment Income 0.74 0.75 0.66
Net Realized and
Unrealized Gains
(Losses) on Investments 0.15 (0.23) 0.15
- --------------------------------------------------------------------------------
Total from Investment
Operations 0.89 0.52 0.81
Less Distributions
Dividends from net
investment income (0.75) (0.76) (0.64)
Distributions from
capital gains 0 0 0
Total Distributions (0.75) (0.76) (0.64)
- --------------------------------------------------------------------------------
Net Asset Value,
End of Period $ 9.42 $ 9.28 $ 9.52
Per Share Market Value,
End of Period $ 9.50 $ 9.00 $ 9.50
- --------------------------------------------------------------------------------
Total Investment Return 17.88% (1.45%) (1.72%)#
================================================================================
Ratios/Supplemental
Data Net Assets, End
of Period (in 000's) $173,290 $164,531 $ 164,221
================================================================================
Ratios to Average
Net Assets:
Operating Expenses .90% .87% .86%*(2)
Average Net Income 7.90% 8.00% 7.54%*
Portfolio Turnover Rate 22% 11% 16%
================================================================================
(1) For the period from November 28, 1988 (commencement of operations) to
October 31, 1989.
(2) Annualized expense ratio before fees waived by investment adviser was 0.88%
* Annualized
# Total return is not annualized, as it may not be representative of the
total return for the year.
9
<PAGE>
Municipal High Income Fund Inc.
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The Fund
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The Fund is a diversified, closed-end management investment company
designed to invest primarily in Municipal Obligations. The Fund, which was
incorporated under the laws of the State of Maryland on March 4, 1988, is
registered under the Investment Company Act of 1940, as amended (the "1940
Act"), and has its principal office at 388 Greenwich Street, New York, New York
10013. The Fund's telephone number is (212) 723-9218.
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The Offering
- --------------------------------------------------------------------------------
Smith Barney intends to make a market in the Common Stock, although it is
not obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice at the sole discretion of Smith Barney .
No assurance can be given as to the liquidity of, or the trading market for, the
Common Stock as a result of any market-making activities undertaken by Smith
Barney. This Prospectus is to be used by Smith Barney in connection with offers
and sales of the Common Stock in market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of the sale.
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Use of Proceeds
- --------------------------------------------------------------------------------
The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by Smith Barney as a
result of its market-making in Common Stock will be utilized by Smith Barney in
connection with its secondary market operations and for general corporate
purposes.
- --------------------------------------------------------------------------------
Investment Objective and Policies
- --------------------------------------------------------------------------------
The Fund's investment objective is high tax-exempt current income. The
Fund's investment objective may not be changed without the affirmative vote of
the holders of a majority (as defined in the 1940 Act) of the Fund's outstanding
shares. To achieve this objective, the Fund seeks to invest substantially all of
its assets in a diversified portfolio of long-term Municipal Obligations, the
interest from which is, in the opinion of the issuers' counsels, excluded from
gross income for regular federal tax purposes. Under normal conditions, at least
80% of the Fund's assets will be invested in Municipal Obligations. The Fund may
invest up to 100% of its assets in Municipal Obligations rated as low as Ba by
Moody's or BB by S&P or in unrated
10
<PAGE>
Municipal High Income Fund Inc.
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
Municipal Obligations deemed to be of comparable quality. The Fund will not
invest in Municipal Obligations that are rated lower than Baa, MIG 1/VMIG 1 or
P-2 by Moody's or BB, SP-1 or A-1 by S&P. A description of relevant Moody's, S&P
and Fitch ratings is set forth in the Appendix to the SAI. Lower rated bonds are
judged to have speculative elements; their future cannot be considered as well
assured. Although these bonds will likely have some quality and protective
characteristics, these are outweighed by large uncertainties or major risk
exposure to adverse conditions. Often, protection of principal payments may be
characteristically unreliable over any great length of time. The Fund is not
restricted in its ability to purchase securities for which a liquid market does
not exist and up to 30% of the Fund's assets may be invested in non-publicly
traded securities. No assurance can be given that the Fund's investment
objective will be achieved.
Municipal Obligations are debt securities, the interest from which is, in
the opinion of bond counsel to their issuer, excluded from gross income for
Federal income tax purposes. Municipal Obligations bear fixed, floating and
variable rates of interest. Municipal Obligations include "public purpose"
obligations, which generate interest that is exempt from regular federal income
tax and, for individual taxpayers, is not subject to the alternative minimum tax
("AMT"), and qualified "private activity" obligations, which generate interest
that is exempt from regular federal income tax but that, if obligations were
issued after August 7, 1986, is subject to the AMT. Variations exist in the
security of Municipal Obligations, both within a particular classification and
between classifications. The types of Municipal Obligations in which the Fund
may invest are described in an Appendix to this Prospectus.
The yields on and values of Municipal Obligations are dependent on a
variety of factors, including general economic and monetary conditions, money
market factors, conditions in the Municipal Obligations market, size of a
particular offering, maturity of the obligation and rating of the issue.
Consequently, Municipal Obligations with the same maturity, coupon and rating
may have different yields or values, whereas obligations of the same maturity
and coupon with different ratings may have the same yield or value.
Certain Municipal Obligations held by the Fund may permit the issuer to
call or redeem the obligations, in whole or in part, at its option. If an issuer
were to redeem Municipal Obligations held by the Fund during a time of declining
interest rates, the Fund might realize capital gains or losses at a time that it
would not otherwise do so, and the Fund might not be able to reinvest the
proceeds of the redemption in Municipal Obligations providing as high a level of
income as the obligations that were redeemed.
11
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest thereon from regular federal income tax (and also, when
applicable, from the AMT) are rendered by bond counsel to the issuer at the time
of issuance. Neither the Fund nor the Investment Manager will review the
proceedings relating to the issuance of Municipal Obligations or the bases for
such opinions. Issuers of Municipal Obligations may be subject to the provisions
of bankruptcy, insolvency and other laws, such as the Federal Bankruptcy Reform
Act of 1978, affecting the rights and remedies of creditors.
In addition, the obligations of those issuers may become subject to laws
enacted in the future by Congress, state legislatures or referenda extending the
time for payment of principal and/or interest, or imposing other constraints
upon enforcement of the obligations or upon the ability of municipalities to
levy taxes. The possibility also exists that, as a result of litigation or other
conditions, the power or ability of any issuer to pay, when due, the principal
of, and interest on, its obligations may be materially affected.
Under normal conditions, the Fund may hold up to 20% of its assets in cash
or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). When the Investment Manager believes that
long-term Municipal Obligations consistent with the Fund's investment objective
are unavailable, the Fund may take a temporary defensive posture and invest
without limitation in short-term Municipal Obligations and Taxable Investments.
To the extent the Fund holds Taxable Investments and, under certain market
conditions, short-term Municipal Obligations, the Fund will not be fully
achieving its investment objective.
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income.
When-Issued Securities. New issues of Municipal Obligations usually are
offered on a when-issued basis, which means that delivery and payment for the
Municipal Obligations normally take place within 45 days after the date of the
commitment to purchase. The payment obligation and the interest rate that will
be received on the Municipal Obligations are fixed at the time the buyer enters
into the commitment. The Fund will make commitments to purchase when-issued
Municipal Obligations only with the intention of acquiring the securities, but
may sell these securities before the settlement date, if the Investment Manager
deems it advisable. Any gain realized on the sale would be taxable.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment,
12
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
a dealer is obligated to repurchase at the Fund's option specified securities at
a specified price and, in this way, stand-by commitments are comparable to put
options. The exercise of a stand-by commitment, therefore, is subject to the
ability of the seller to make payment on demand. The Fund will acquire stand-by
commitments solely to facilitate portfolio liquidity and does not intend to
exercise its rights thereunder for trading purposes.
Financial Futures and Options Transactions. To protect against a decline in
the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase in the future, the Fund may engage
in financial futures and options transactions. The futures contracts or options
on futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of long-term Municipal Obligations or
relate to debt securities the prices of which are anticipated by the Investment
Manager to correlate with the prices of the Municipal Obligations owned or to be
purchased by the Fund. Regulations by the Commodities Futures Trading Commission
(the "CFTC") applicable to the Fund require that its transactions in futures and
options be engaged in for "bona fide hedging" purposes or other permitted
purposes, provided that aggregate initial margin deposits and premiums required
to establish positions other than those considered by the CFTC to be "bona fide
hedging" will not exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on any such contracts.
An interest rate futures contract provides for the future sale by one party
and the purchase by the other party of a certain amount of a specific debt
security at a specified price, date, time and place. The Fund may enter into
interest rate futures contracts in order to protect against the adverse effect
of changing interest rates on its portfolio securities or those to be purchased
by the Fund.
The Fund may purchase and sell call and put options on interest rate
futures contracts that are traded on a United States exchange or board of trade.
Unlike the direct investment in a futures contract, an option on an interest
rate futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures contract at a specified
exercise price at any time prior to 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 accompanied 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 interest rate futures contracts is limited to the premium paid for the option
(plus transaction costs). The value of the option may change daily and that
change would
13
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
be reflected in the net asset value of the Fund. The Fund may purchase options
on interest rate futures contracts to hedge its portfolio securities against the
risk of adverse changes in interest rates. The Fund will sell options on
interest rate futures contracts as part of closing purchase transactions to
terminate its options positions.
The Fund anticipates utilizing municipal bond index futures to protect
against changes in the market value of the Municipal Obligations in its
portfolio or that it intends to acquire. Municipal bond index futures contracts
are based on an index of long-term Municipal Obligations. The index assigns
relative values to the Municipal Obligations included in the index, and
fluctuates with changes in the market value of the Municipal Obligations. The
contract is an agreement pursuant to which two parties agree to take or make
delivery of an amount of cash based upon the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the index contract was originally written. The acquisition or sale of a
municipal bond index futures contract enables the Fund to protect its assets
from fluctuations in the value of tax-exempt securities without actually buying
or selling the securities. The Fund may purchase and sell put and call options
on municipal bond indexes and municipal bond index futures and enter into
closing transactions with respect to those options.
Lending Portfolio Securities. The Fund is authorized to lend securities it
holds to brokers, dealers and other financial organizations, but it will not
lend securities to any affiliate of the Investment Manager unless the Fund
applies for and receives specific authority to do so from the SEC. Loans of the
Fund's securities, if and when made, may not exceed 33 1/3% of the Fund's assets
taken at value. The Fund's loans of securities will be collateralized by cash,
letters of credit or U.S. Government securities that will be maintained at all
times in a segregated account with the Fund's custodian in an amount at least
equal to 100% of the current market value of the loaned securities.
Repurchase Agreements. The Fund may enter into repurchase agreement
transactions with 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. A repurchase agreement is a contract under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price on an agreed-upon date. Under the terms of a typical
repurchase agreement, the Fund would acquire an underlying debt obligation for a
relatively short period (usually not more than seven days) subject to an
obligation of the seller to repurchase, and the Fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
Fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the Fund's holding period. Under
each repurchase agreement, the selling institution
14
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
will be required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Even though interest-bearing securities, like Municipal Obligations, are
investments that promise a stable stream of income, their prices are inversely
affected by changes in interest rates and, therefore, are subject to the risk of
market price fluctuations. The values of Municipal Obligations with longer
remaining maturities typically fluctuate more than those of similarly rated
Municipal Obligations with shorter remaining maturities. The values of fixed
income securities also may be affected by changes in the credit rating or
financial condition of the issuing entities.
Although they may offer higher current yields than do higher rated
securities, low-rated and unrated securities generally involve greater
volatility of price and risk of principal and income, including the possibility
of default by, or bankruptcy of, the issuers of the securities; the Fund may
incur additional expenses to the extent it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
Municipal leases in which the Fund may invest have special risks not
normally associated with Municipal Obligations. These obligations frequently
contain "non-appropriation" clauses that provide that the governmental issuer of
the obligation has no obligation to make future payments under the lease or
contract unless money is appropriated for that purpose by the legislative body
on a yearly or other periodic basis. Moreover, although a municipal lease will
be secured by financed equipment, the disposition of the equipment in the event
of foreclosure might prove difficult.
The sale of securities that are not traded publicly is typically restricted
under the Federal securities laws. As a result, the Fund may be forced to sell
these securities at less than fair market value or may not be able to sell them
when the Investment Manager believes it desirable to do so.
The Fund's investments in illiquid securities are subject to the risk that
should the Fund desire to sell any of these securities when a ready buyer is not
available at a price the Fund deems representative of their value, the value of
the Fund's net assets could be adversely affected.
The purchase of securities on a when-issued or delayed-delivery basis
involves the risk that, as a result of an increase in yields available in the
market-place, the value of the securities purchased will decline prior to the
settlement date. The sale of securities for delayed delivery involves the risk
that the prices available in the market on the delivery date may be greater than
those obtained in the sale transaction.
The risks associated with lending portfolio securities, as with other
extensions of
15
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
credit, consist of possible loss of rights in the collateral should the borrower
fail financially.
There are several risks in connection with the use of futures contracts and
options on futures contracts as a hedging device. A decision of whether, when
and how to hedge involves the exercise of skill and judgment, and even a
well-conceived hedge may be unsuccessful to some degree because of market
behavior or unexpected trends in interest rates. There can be no assurance that
there will be a correlation between price movements in the securities underlying
the futures or options thereon, on the one hand, and price movements in the
Fund's portfolio securities which are the subject of the hedge, on the other
hand. In addition, the Fund's transactions in futures contracts or put or call
options on them will be based upon predictions as to anticipated interest rate
trends, which could prove to be inaccurate. The potential loss related to the
purchase of an option on a futures contract is limited to the premium paid for
the option. Positions in futures contracts and options on futures contracts may
be closed out only on the exchange or board of trade on which they were entered
into, and there can be no assurance that an active market will exist or be
maintained or that closing transactions can be effected. Losses incurred in
hedging transactions and the costs of these transactions will affect the Fund's
performance.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions that may
not be changed without the prior approval of the holders of a majority of the
Fund's outstanding voting securities. A "majority of the Fund's outstanding
voting securities" for this purpose means the lesser of (a) 67% or more of the
shares of the Fund'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 (b) more than 50% of the outstanding shares. Among the investment
restrictions applicable to the Fund is that the Fund is prohibited from
borrowing money, except for temporary or emergency purposes, or for clearance of
transactions, in amounts not exceeding 15% of its total assets (not including
the amount borrowed) and as otherwise described in this Prospectus--when the
Fund's borrowings exceed 5% of the value of its total assets, the Fund will not
make any additional investments. In addition, the Fund will not invest more than
25% of its total assets in the securities of issuers in any single industry,
except that this limitation will not be applicable to the purchase of Municipal
Obligations and U.S. Government securities. For purposes of this restriction,
industrial development bonds, with respect to which the payment of principal and
interest is the ultimate responsibility of companies within the same industry,
are grouped together as an "industry." For a complete listing of the investment
restrictions applicable to the Fund, see "Investment Restrictions" in the SAI.
16
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------
The Fund's Common Stock is listed on the NYSE under the symbol "MHF." Smith
Barney also intends to make a market in the Common Stock.
The following table sets forth the high and low sales prices for the Fund's
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 for the two
most recent fiscal years.
Quarterly High Price Quarterly Low Price
-------------------- -------------------
Premium Premium
Net Asset NYSE (Discount) Net Asset NYSE (Discount)
Value Price to NAV Value Price to NAV
================================================================================
1/31/95 9.04 8.750 (3.21%) 8.71 7.750 (11.02%)
4/30/95 9.34 9.000 (3.64%) 9.12 8.500 (6.80%)
7/31/95 9.49 9.125 (3.85%) 9.33 8.625 (7.56%)
10/31/95 9.55 9.125 (4.45%) 9.35 8.750 (6.42%)
1/31/96 9.63 9.000 (6.54%) 9.52 8.375 (12.03%)
4/31/96 9.64 9.000 (6.64%) 9.36 8.625 (7.85%)
7/31/96 9.42 9.000 (4.46%) 9.31 8.500 (8.70%)
10/31/96 9.54 9.000 (5.66%) 9.40 8.750 (6.92%)
===========================================================================
As of December 27, 1996, the price per share of Common Stock as quoted on
the NYSE was $9.250, representing a 3.44% discount from the Common Stock's net
asset value calculated on that day.
Since the Fund's commencement of operations, the Fund's Common Stock have
traded in the market at prices that were at times above, but generally were
below, net asset value.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the companies that furnish services to the Fund,
including agreements with the Fund's investment adviser, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to SBMFM. The SAI contains background information regarding each
Director and executive officer of the Fund.
17
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND ADMINISTRATOR
SBMFM, through its Greenwich Street Advisors division, located at 388
Greenwich Street , New York, New York 10013, serves as the Fund's investment
manager. SBMFM, through its predecessors, has been in the investment counseling
business since 1934 and is a registered investment adviser. SBMFM renders
investment advice to a wide variety of individual, institutional and investment
company clients that, as of September 30, 1996, had aggregate assets under
management in excess of $77 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
The Investment Manager manages the Fund's portfolio in accordance with the
Fund's investment objective and policies, places orders to purchase and sell
securities and employs professional portfolio managers and securities analysts
who provide research services to the Fund. For its services, the Investment
Manager is paid a fee computed and paid monthly at an annual rate of 0.40% of
the value of the Fund's average daily net assets. In addition, SBMFM serves as
the Fund's administrator and is paid a fee by the Fund that is computed daily
and paid monthly at a rate of 0.20% of the value of its average daily net
assets.
Transactions on behalf of the Fund are allocated to various dealers by the
Investment Manager 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 research, statistical or
other services to enable the Investment Manager to supplement its own research
and analysis with the views and information of other securities firms. The Fund
may utilize Smith Barney or a Smith Barney affiliated broker in connection with
a purchase or sale of securities when the Investment Manager believes that the
broker's charge for the transaction does not exceed usual and customary levels.
The same standard applies to the use of Smith Barney as a broker in connection
with entering into options and futures contracts. The Fund paid no brokerage
commissions in the last fiscal year.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott, a Vice President and Investment Officer of the Fund,
is primarily responsible for the management of the Fund's assets. Mr. McDermott
has served the Fund in this capacity since the Fund commenced operations in 1988
and manages the day-to-day operations of the Fund, including making all
investment decisions. Mr. McDermott is a Senior Vice President and Managing
Director of Greenwich Street Advisors and is the senior asset manager for a
number of investment companies and other accounts investing in tax-exempt
securities. Prior to August 1993, Mr. McDermott was a Managing Director of
Shearson Lehman Advisors.
18
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Fund's policy, which may be changed by the Fund's Board of Directors,
is to make monthly distributions of substantially all its net investment income
(i.e., income other than market discount net realized capital gains) to the
holders of the Fund's Common Stock. Net income of the Fund consists of all
interest income accrued on portfolio assets less all expenses of the Fund.
Expenses of the Fund are accrued each day. Net realized capital gains, if any,
will be distributed to the shareholders at least once a year.
Under the Fund's Dividend Reinvestment Plan (the "Plan") a shareholder
whose Common Stock is registered in his own name will have all distributions
reinvested automatically by First Data 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 (i.e., 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.
All distributions to investors who do not participate in the Plan will be paid
by check mailed directly to the record holder by or under the direction of First
Data, as dividend-paying agent.
If the Fund declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, non-participants in the Plan will
receive cash, and Plan participants will receive the equivalent in shares of
Common Stock valued in the manner described below. Whenever market price is
equal to or exceeds 98% of net asset value at the time shares are valued for the
purpose of determining the number of shares equivalent to the cash dividend or
capital gains distribution, participants will be issued shares of Common Stock
valued at the greater of (1) 98% of the net asset value most recently determined
as provided under "Net Asset Value" or (2) 95% of the then current market price
of the Fund's Common Stock. To the extent the Fund issues shares to participants
in the Plan at a discount to net asset value, the remaining shareholders'
interests in the Fund's net assets will be proportionately diluted.
If the net asset value of the Common Stock at the time of valuation exceeds
the market price of Common Stock, or if the Fund declares a dividend or capital
gains distribution payable only in cash, First Data 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 First Data has completed
its purchases, the market price exceeds the net asset value of the Common Stock,
First Data will attempt to terminate purchases in the open market and cause the
Fund to issue the remaining dividend or distribution in shares at net asset
value per share. In this case, the number of shares of Common Stock received by
a Plan participant will be based
19
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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 First
Data is unable to stop open market purchases and cause the Fund to issue the
remaining shares, the average per share price paid by First Data may exceed the
net asset value of the Common Stock, resulting in the acquisition of fewer
shares of Common Stock than if the dividend or capital gains distribution had
been paid in Common Stock issued by the Fund. First Data will apply all cash
received as a dividend or capital gains distribution 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 such date,
except when necessary to comply with applicable provisions of the Federal
securities laws.
First Data 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 First Data 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. First Data's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Fund. There will
be no brokerage charges with respect to shares of Common Stock issued directly
by the Fund as a result of dividends or capital gains distributions payable
either in stock or in cash. Each Plan participant will, however, bear a pro-rata
share of brokerage commissions incurred with respect to First Data's open market
purchases in connection with the reinvestment of dividends or capital gains
distributions.
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 90 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data or the Fund on at least 90 days' written notice to Plan
participants. All correspondence concerning the Plan should be directed by mail
to First Data Investor Services Group, Inc., P.O. Box 1376, Boston,
Massachusetts 02104.
20
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
The Fund's net asset value will be calculated as of the close of regular
trading on the NYSE, currently 4:00 p.m., New York time, on the last day on
which the NYSE is open for trading of each week and month. Net asset value is
calculated by dividing the value of the Fund's net assets (the value of its
assets less its liabilities, exclusive of capital stock and surplus) by the
total number of shares of Common Stock outstanding. Investments in U.S.
Government securities having a maturity of 60 days or less are valued at
amortized cost. All other securities and assets are taken at fair value as
determined in good faith by or under the direction of the Board of Directors.
The valuation of the Fund's assets is made by the Investment Manager after
consultation with an independent pricing service (the "Service") approved by the
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 (which may constitute a
majority of the Fund's portfolio securities), are carried at fair value as
determined by the Service. 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 Fund 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 Fund
to do so.
- --------------------------------------------------------------------------------
Taxation
- --------------------------------------------------------------------------------
The following is a summary of the material Federal tax considerations
affecting the Fund and its Common Stockholders; see the SAI for a further
discussion. In addition to the considerations described below and in the SAI,
which are applicable to any investment in the Fund, there may be other Federal,
state, local or foreign tax considerations applicable to particular investors.
Prospective stockholders are therefore urged to consult their tax advisers with
respect to the tax consequences to them of an investment in the Fund.
The Fund has qualified, and intends to continue to qualify each taxable
year, as a regulated investment company ("RIC") under Subchapter M of the
Internal Revenue Code. In each taxable year that the Fund so qualifies, the Fund
will be relieved of Federal income tax on that part of its investment company
taxable income (consisting generally of taxable net investment income, net
short-term capital gain and net realized gains from certain hedging
transactions) and long-term capital gain that is distributed to its
stockholders.
21
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
Distributions that the Fund designates as "exempt-interest dividends"
generally may be excluded from gross income by its stockholders for Federal
income tax purposes; those distributions may, however, be taxable for state and
local tax purposes. In order to pay exempt-interest dividends, the Fund must
(and intends to) satisfy the requirement that, at the close of each quarter of
its taxable year, at least 50% of the value of its total assets consists of
obligations the interest on which is tax-exempt.
Interest on indebtedness incurred by a stockholder to purchase or carry
Fund shares is not deductible to the extent that interest relates to
exempt-interest dividends received from the Fund. If the Fund invests in certain
private activity bonds ("PABs"), the portion of the Fund's exempt-interest
dividends that is attributable to the interest it earns thereon and that is
specified in an annual notice from the Fund must be included by its stockholders
in calculating their liability for the AMT. Corporate stockholders, however,
must include all of their exempt-interest dividends in calculating their
adjusted current earnings for purposes of the AMT.
Entities or persons who are "substantial users" (or persons related to
"substantial users") of facilities financed by industrial development bonds
("IDBs") or PABs should consult their tax advisers before purchasing the Common
Stock because, for users of certain of these facilities, the interest on such
bonds is not exempt from Federal income tax. For these purposes, the term
"substantial user" is defined generally to include a "non-exempt person" who
regularly uses in trade or business a part of a facility financed from the
proceeds of IDBs or PABs.
The Fund will notify its stockholders following the end of each calendar
year of the amounts of exempt-interest dividends, taxable dividends and capital
gain distributions paid (or deemed paid) that year and of any portion thereof
that is subject to the AMT for individuals.
Upon a sale or exchange of shares of Common Stock, a Common Stockholder
will realize a taxable gain or loss equal to the difference between his adjusted
basis for the shares and the amount realized. Any such gain or loss will be
treated as a capital gain or loss if the shares are capital assets in the
stockholder's hands and will be a long-term capital gain or loss if the shares
have been held for more than one year. Any loss realized on a sale or exchange
of shares of Common Stock that were held for six months or less will be
disallowed to the extent of any exempt-interest dividends received on those
shares and (to the extent not so disallowed) will be treated as a long-term,
rather than as a short-term, capital loss to the extent of any capital gain
distributions received thereon. A loss realized on a sale or exchange of shares
of Common Stock also will be disallowed to the extent those shares are replaced
by other shares of Common Stock within a period of 61 days beginning 30
22
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
days before and ending 30 days after the date of disposition of the shares
(which could occur, for example, as the result of participation in the Plan). In
that event, the basis of the replacement shares will be adjusted to reflect the
disallowed loss.
Investors also should be aware that if shares of the Common Stock are
purchased shortly before the record date for any distribution, the investor will
pay full price for the shares and could receive some portion of the price back
as an exempt-interest dividend, a taxable dividend or capital gain distribution.
The Fund is required to withhold 31% of all taxable dividends, capital gain
distributions and repurchase proceeds payable to any individuals and certain
other non-corporate stockholders who do not provide the Fund with a correct
taxpayer identification number. Withholding from taxable dividends and capital
gain distributions also is required for stockholders who otherwise are subject
to backup withholding.
- --------------------------------------------------------------------------------
Description of Common Stock
- --------------------------------------------------------------------------------
Amount
Outstanding
Exclusive of Shares
Amount Held Held by Fund for its
Amount by Fund for its Own Account
Title of Class Authorized Own Account as of December 18, 1996
================================================================================
Common 500,000,000 0 19,659,883
Stock Shares
===========================================================================
No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock are equal as to
earnings, assets, dividends and voting privileges and, when issued, will be
fully paid and non-assessable. Shares of Common Stock are subject to no
conversion, preemptive or other subscription rights. In the event of
liquidation, each share of Common Stock is entitled to its proportion of the
Fund's assets after debts and expenses. Shareholders are entitled to one vote
per share and do not have cumulative voting 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 Fund'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 Fund will
be required to hold an annual meeting of shareholders in each year. If the
Fund's shares
23
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Description of Common Stock (continued)
- --------------------------------------------------------------------------------
are no longer listed on the NYSE (or any other national securities exchange the
rules of which require annual meetings of shareholders), the Fund may decide not
to hold annual meetings of shareholders. See "Stock Purchases and Tenders."
The Fund 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 Fund'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 Fund's outstanding shares.
- --------------------------------------------------------------------------------
Stock Purchases and Tenders
- --------------------------------------------------------------------------------
Although shares of closed-end investment companies sometimes trade at a
premium over net asset value, they frequently trade at a discount, and the Fund
cannot predict whether its shares will trade above, at, or below net asset
value. The Fund believes that, if its shares trade at a discount to net asset
value, the share price will not adequately reflect the value of the Fund to
investors and that investors' financial interests will be furthered if the price
of the Fund's shares more closely reflects its net asset value. For these
reasons, the Board of Directors currently intends to consider from time to time
the repurchase of shares of its Common Stock on the open market or the making of
tender offers for Common Stock.
The Fund may repurchase shares of its Common Stock in the open market or in
privately negotiated transactions when the Fund can do so at prices below their
then current net asset value per share on terms that the Fund's Board 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 shareholder.
Before authorizing any repurchase of Common Stock or offer to the Fund's
shareholders, the Board would consider all relevant factors, including the
market price of the shares of Common Stock, their net asset value per share, the
liquidity of the Fund's portfolio, the effect an offer or repurchase might have
on the Fund 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, as amended. Although the matter will be subject to Board
review at the time, it is not expected that a tender offer would be made if the
anticipated benefit to shareholders
24
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Stock Purchases and Tenders (continued)
- --------------------------------------------------------------------------------
and the Fund would not be commensurate with the anticipated cost to the Fund or
if the number of shares expected to be tendered would not be material.
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors and could
have the effect of depriving shareholders of an opportunity to sell their shares
at a premium over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. The Board of Directors is divided into
three classes, each having a term of three years. At the annual meeting of
shareholders in each year, the term of one class expires. This provision could
delay for up to two years the replacement of a majority of the Board of
Directors. The Articles of Incorporation specify the maximum number of
Directors. A Director may be removed from office or the maximum number of
Directors increased only by vote of the holders of at least 75% of the shares of
the Fund entitled to be voted on the matter.
The Articles of Incorporation require the favorable vote of the holders of
at least 75% of the shares of the Fund then entitled to be voted to approve,
adopt or authorize the following:
(i) a merger or consolidation or statutory share exchange of the Fund
with or into another corporation;
(ii) a sale of all or substantially all of the Fund's assets (other than
in the regular course of the Fund's investment activities); or
(iii) a liquidation of the Fund;
unless the action has been approved, adopted or authorized by the affirmative
vote of two-thirds of the total number of Directors fixed in accordance with the
Fund's By-Laws, in which case the affirmative vote of a majority of the
outstanding shares is required. Conversion of the Fund to an open-end investment
company would require an amendment to the Articles of Incorporation.
Such an amendment would require the affirmative vote of the
holders of a majority of the shares
of a majority of the shares entitled to vote on the matter.
Such a vote
also would satisfy a separate requirement in the 1940 Act that the change be
approved by the shareholders. At any time, the amendment would have to be
declared advisable by the Board of Directors prior to its submission to
shareholders. Shareholders of an open-end investment company may require the
company to redeem their shares at any time (except in certain circumstances as
authorized by or under the 1940 Act) at their net asset value, less any
redemption charges that might be in effect at the time of a redemption.
The Board of Directors has determined that the 75% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act and can only be changed by a similar 75% vote, are in the
best
25
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Stock Purchases and Tenders (continued)
- --------------------------------------------------------------------------------
interests of shareholders generally. Reference should be made to the
Articles of Incorporation on file with the SEC for the full text of these
provisions.
- --------------------------------------------------------------------------------
Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and Plan Agent
- --------------------------------------------------------------------------------
PNC Bank located at 17th and Chestnut Street, Philadelphia, Pennsylvania
19103 acts as custodian of the Fund's investments. First Data, One Exchange
Place, Boston, Massachusetts 02109, acts as the Fund's transfer agent, dividend
paying agent, registrar and as agent under the Plan.
INDEPENDENT AUDITORS
The audited financial statements have been incorporated by reference in the
SAI in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
and upon the reliance of said firm as experts in accounting and auditing,
- --------------------------------------------------------------------------------
Further Information
- --------------------------------------------------------------------------------
Further information concerning the Common Stock and the Fund may be found
in the Registration Statement, of which this Prospectus and the SAI constitute a
part, on file with the SEC.
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Fund or the Fund's investment adviser. This Prospectus does not
constitute an offer to sell or a solicitation of an 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 such offer or solicitation would be unlawful. Neither the
delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Fund since the date hereof. If any material change occurs while
this Prospectus is required by law to be delivered, however, this Prospectus
will be supplemented or amended accordingly.
26
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Appendix
- --------------------------------------------------------------------------------
TYPES OF MUNICIPAL OBLIGATIONS
The Fund may invest in the following types of Municipal Obligations and in such
other types of Municipal Obligations as become available on the market from time
to time.
MUNICIPAL BONDS
Municipal bonds are debt obligations issued to obtain funds for various
public purposes. The two principal classifications of municipal bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or from another specific
source, such as the user of the facility being financed. Certain municipal bonds
are "moral obligation" issues, which normally are issued by special purpose
public authorities. In the case of such issues, an express or implied "moral
obligation" of a related government unit is pledged to the payment of the debt
service but is usually subject to annual budget appropriations.
INDUSTRIAL DEVELOPMENT AND PRIVATE ACTIVITY BONDS
Industrial development bonds ("IDBs") and private activity bonds ("PABs")
are municipal bonds issued by or on behalf of public authorities to finance
various privately operated facilities, such as airports or pollution control
facilities. IDBs and PABs are generally revenue bonds and thus are not payable
from the unrestricted revenue of the issuer. The credit quality of IDBs and PABs
is usually directly related to the credit standing of the user of the facilities
being financed.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations are Municipal Obligations that may take the
form of leases, installment purchase contracts or conditional sales contracts,
or certificates of participation with respect to such contracts or leases.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain Municipal Obligations, however, provide that lease payments are subject
to partial or full abatement if, because of material damage or destruction of
the leased property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance
A-1
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
covering the leased property, the maintenance by the lessee of reserve funds or
the provision of credit enhancements such as letters of credit.
The liquidity of municipal lease obligations varies. Certain municipal
lease obligations contain "non-appropriation" clauses which provide that the
municipality has no obligation to make lease or installment purchase payments in
future years unless money is appropriated for such purpose on a yearly basis. In
the case of a "non-appropriation" lease, the Fund's ability to recover under the
lease in the event of non-appropriation or default will be limited solely to the
repossession of the leased property, without recourse to the general credit of
the lessee, and disposition of the property in the event of foreclosure might
prove difficult. The Fund will not invest more than 10% of its assets in such
"non-appropriation" municipal lease obligations. There is no limitation on the
Fund's ability to invest in other municipal lease obligations.
ZERO COUPON OBLIGATIONS
The Fund may invest up to 25% of its total assets in zero coupon Municipal
Obligations. Such obligations include "pure zero" obligations, which pay no
interest for their entire life (either because they bear no stated rate of
interest or because their stated rate of interest is not payable until
maturity), and "zero/fixed" obligations, which pay no interest for an initial
period and thereafter pay interest currently. Zero coupon obligations also
include securities representing the principal-only components of Municipal
Obligations from which the interest components have been stripped and sold
separately by the holders of the underlying Municipal Obligations. Zero coupon
securities usually trade at a deep discount from their face or par value and
will be subject to greater fluctuations in market value in response to changing
rates than obligations of comparable maturities that make current distributions
of interest. While zero coupon Municipal Obligations will not contribute to the
cash available to the Fund for purposes of paying dividends to stockholders,
Greenwich Street Advisors believes that limited investments in such securities
may facilitate the Fund's ability to preserve capital while generating tax-free
income through the accrual of original issue discount. Zero coupon Municipal
Obligations generally are liquid, although such liquidity may be reduced from
time to time due to interest rate volatility and other factors.
FLOATING RATE OBLIGATIONS
The Fund also may purchase floating and variable rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obligations under
A-2
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
the demand feature of such notes and bonds generally are secured by bank letters
of credit or other credit support arrangements. There frequently will be no
secondary market for variable and floating rate obligations held by the Fund,
although the Fund may be able to obtain payment of principal at face value by
exercising the demand feature of the obligation.
PARTICIPATION INTERESTS
The Fund may invest in participation interests in municipal bonds,
including IDBs, PABs and floating and variable rate securities. A participation
interest gives the Fund an undivided interest in a municipal bond owned by a
bank. The Fund has the right to sell the instrument back to the bank. Such right
is generally backed by the bank's irrevocable letter of credit or guarantee and
permits the Fund to draw on the letter of credit on demand, after specified
notice, for all or any part of the principal amount of the Fund's participation
interest plus accrued interest. Generally, the Fund intends to exercise due
demand under the letters of credit or other guarantees only upon a default under
the terms of the underlying bond, or to maintain the Fund's portfolio in
accordance with its investment objective and policies. The ability of a bank to
fulfill its obligations under a letter of credit or guarantee might be affected
by possible financial difficulties of its borrowers, adverse interest rate or
economic conditions, regulatory limitations or other factors. Greenwich Street
Advisors will monitor the pricing, quality and liquidity of the participation
interests held by the Fund, and the credit standing of banks issuing letters of
credit or guarantees supporting such participation interests on the basis of
published financial information reports of rating services and bank analytical
services.
CUSTODIAL RECEIPTS
The Fund may acquire custodial receipts or certificates underwritten by
securities dealers or banks that evidence ownership of future interest payments,
principal payments or both on certain Municipal Obligations. The underwriter of
these certificates or receipts typically purchases Municipal Obligations and
deposits the obligations in an irrevocable trust or custodial account with a
custodian bank, which then issues receipts or certificates that evidence
ownership of the periodic unmatured coupon payments and the final principal
payment on the obligations. Custodial receipts evidencing specific coupon or
principal payments have the same economic attributes as zero coupon Municipal
Obligations described herein. Although under the terms of a custodial receipt
the Fund would be typically authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund could be required to assert
through the custodian bank those rights that
A-3
<PAGE>
Municipal High Income Fund Inc.
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
may exist against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal or interest when due, the Fund may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Fund had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes paid.
A-4
SMITH BARNEY
------------
A Member of TravelersGroup [Logo]
Municipal
High Income
Fund Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD
Municipal High Income Fund Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
January 15, 1997
Municipal High Income Fund Inc. (the "Fund") is a diversified, closed-end
management investment company. The Fund's investment objective is to achieve
high tax-exempt current income by investing primarily in a variety of
obligations issued by or on behalf of states, territories and possessions of
the United States and the District of Columbia and their political
subdivisions, agencies and instrumentalities or multi-state agencies or
authorities ("Municipal Obligations"). No assurance can be given that the Fund
will be able to achieve its investment objective.
The Greenwich Street Advisors Division of Smith Barney Mutual Funds
Management Inc. (the "Investment Manager") serves as investment manager of the
Fund. This Statement of Additional Information ("SAI") is not a prospectus
and should be read only in conjunction with the Fund's Prospectus, dated
January 15, 1997 (the "Prospectus"). A copy of the Prospectus may be obtained
by calling any Smith Barney Financial Consultant or by writing or calling the
Fund 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 Statement of
Additional Information and, if given or made, such information or
representations must not be relied upon as having been authorized by the Fund
or the Fund's investment adviser. The Prospectus and this Statement of
Additional Information does not constitute an offer to sell or a solicitation
of an offer to buy any security other than the shares of Common Stock. The
Prospectus and this Statement of Additional Information do not 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 such 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 Fund since the date hereof. If any material
change occurs while the Prospectus is required by law to be delivered,
however, the Prospectus or this Statement of Additional Information will be
supplemented or amended accordingly.
CONTENTS
Investment Objective and Policies
(see in the Prospectus "Appendix")
2
Directors and Officers (see in the
Prospectus "Management of the
Fund") 10
Portfolio Transactions and Turnover
13
Valuation of Shares (see in the
Prospectus
"Net Asset Value") 14
Stock Purchases and Tenders (see in
the
Prospectus "Stock Purchases and
Tenders" and "Description of
Common
Stock") 14
Taxes (see in the Prospectus
"Taxation") 15
Additional Information 18
Financial Statements 18
Appendix A-1
INVESTMENT OBJECTIVE AND POLICIES
General
The Fund's investment objective is high tax-exempt current income. The Fund's
investment objective may not be changed without the affirmative vote of the
holders of a majority (as defined in the Investment Company Act of 1940, as
amended (the "1940 Act")) of the Fund's outstanding shares. No assurance can
be given that the Fund's investment objective will be achieved.
As described in the Prospectus, the Fund will seek to invest substantially all
of its assets in Municipal Obligations and, under normal conditions, at least
80% of the Fund's assets will be invested in Municipal Obligations. In
determining whether the Fund should invest in particular Municipal
Obligations, the Investment Manager will consider factors such as: the price,
coupon and yield to maturity; the Investment Manager's assessment of the
credit quality of the issuer; the issuer's available cash flow and the related
coverage ratios; the property, if any, securing the obligation; and the terms
of the Municipal Obligations, including the subordination, default, sinking
fund and early redemption provisions, if any. The Investment Manager will
also review, in considering particular securities for investment by the Fund,
the ratings, if any, assigned to the securities by Moody's Investors Service,
Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch Investors
Service, Inc. ("Fitch") or other recognized rating agencies. The ratings of
Moody's, S&P, Fitch and other agencies represent their opinions as to the
quality of the Municipal Obligations that they undertake to rate; the ratings
are relative and subjective and are not absolute standards of quality. The
Investment Manager's judgment as to credit quality of a Municipal Obligation
may, thus, differ from that suggested by the ratings published by a rating
service. A description of relevant Moody's, S&P's and Fitch's ratings is set
forth below in the Appendix to this SAI.
The Fund will not invest in Municipal Obligations that are rated lower than
Ba, MIG 1/VMIG 1 or P-2 by Moody's or BB, SP-1 or A-1 by S&P or BB by Fitch
Investors Service, Inc. Additional information about these ratings is
included in the Appendix to this SAI. The Fund will invest in unrated
Municipal Obligations that, in the judgment of the Investment Manager, are of
comparable quality to rated securities in which the Fund may invest. The Fund
is subject to no limit on the amount of assets that it may invest in Municipal
Obligations rated Ba by Moody's or BB by S&P or in unrated Municipal
Obligations that are of comparable quality. Municipal Obligations rated Ba by
Moody's are regarded as having speculative elements while Municipal
Obligations rated BB by S&P are regarded as having predominantly speculative
characteristics with respect of capacity to pay interest and repay principal.
Special risks associated with these low-rated and unrated securities are
described below under "Risk Factors and Special Considerations."
The Fund will generally invest in long-term Municipal Obligations. Thus,
under normal market conditions, the weighted average maturity of the Fund's
portfolio is expected to exceed ten years. The Fund may invest without limit
in Municipal Obligations that are repayable out of revenue streams generated
from economically related projects or facilities. Sizeable investments in
those obligations could involve an increased risk to the Fund should any of
the related projects or facilities experience financial difficulties.
The Fund is not restricted in its ability to purchase securities as to which a
liquid trading market does not exist. These illiquid securities may include
securities for which market quotations are not readily available, certain
municipal leases, time deposits and repurchase agreements maturing in more
than seven days, options traded in the over-the-counter market and securities
used to cover these options. Special risks associated with investing in
illiquid securities are described below under "Risk Factors and Special
Considerations."
The Fund may invest up to 30% of its assets in non-publicly traded Municipal
Obligations. The Investment Manager believes that these securities, which may
be considered speculative, often provide attractive high yields. Investment
in non-publicly traded securities involves certain risks, which are described
below under "Risk Factors and Special Considerations."
The Fund may invest without limit in Municipal Obligations that are tax-exempt
private "activity bonds," as defined in the Internal Revenue Code of 1986 (the
"Code"), which are in most cases revenue bonds and generally do not carry the
pledge of the credit of the issuing municipality, but are guaranteed by the
corporate entity on whose behalf they are issued. Interest income on certain
types of private activity bonds issued after August 7, 1986 to finance
nongovernmental activities is a specific tax preference item for purposes of
the Federal individual and corporate alternative minimum taxes. Individual and
corporate shareholders may be subject to a Federal alternative minimum tax to
the extent the Fund's dividends are derived from interest on these bonds.
Dividends derived from interest income on Municipal Obligations are a "book
income" adjustment item for purposes of the Federal corporate alternative
minimum tax. See "Taxes." Private activity bonds held by the Fund will be
included in the term "Municipal Obligations" for purposes of determining
compliance with the 80% limitation described above.
Among the Municipal Obligations in which the Fund may invest are municipal
leases and zero coupon securities. Municipal leases, which are generally
participations in intermediate- and short-term obligations issued by
municipalities consisting of leases or installment purchase contracts for
property or equipment, are subject to special risks described below under
"Risk Factors and Special Considerations."
The Fund may invest up to 25% of its assets in zero coupon Municipal
Obligations. A zero coupon Municipal Obligation is an obligation that does
not pay interest currently for its entire life (a "Pure Zero Coupon Municipal
Obligation") or for some initial period, following which interest is paid
currently (a "Zero/Fixed Interest Municipal Obligation"). In the case of a
Pure Zero Coupon Municipal Obligation, the failure to pay interest currently
may result from the obligation's having no stated interest rate, in which case
the Municipal Obligation pays only principal at maturity and is sold at a
discount. The value to the investor of a zero coupon Municipal Obligation
consists of the economic accretion either of the difference between the
purchase price and the nominal principal amount (if no interest is stated to
accrue) or of accrued, unpaid interest during the Municipal Obligations' life
or payment deferral period.
The Fund may purchase floating and variable rate demand notes, which are tax-
exempt obligations normally having a stated maturity in excess of one year,
but which permit the holder to demand payment of principal at any time, or at
specified intervals. The issuer of these notes normally has a corresponding
right, after a given period, to prepay at its discretion the outstanding
principal amount of the notes plus accrued interest upon a specified number of
days' notice to the noteholders. The interest rate on a floating rate demand
note is based on a known lending rate, such as a bank's prime rate, and is
adjusted automatically each time the rate is adjusted. The interest rate on a
variable rate demand note is adjusted automatically at specified intervals.
Frequently, floating and variable rate obligations are secured by letters of
credit or other credit support arrangements provided by banks. Use of letters
of credit or other credit support arrangements will not adversely affect the
tax-exempt status of these obligations. Because they are direct lending
arrangements between the lender and borrower, floating and variable rate notes
will generally not be traded. In addition, no secondary market generally
exists for these notes, although they are putable at face value. For these
reasons, when floating and variable rate notes held by the Fund are not
secured by letters of credit or other credit support arrangements, the Fund's
right to demand payment is dependent on the ability of the borrower to pay
principal and interest on demand. The Investment Manager, on behalf of the
Fund, will consider the creditworthiness of the issuers of floating and
variable rate demand notes in the Fund's portfolio on an ongoing basis.
The Fund may purchase from financial institutions tax-exempt participation
interests in Municipal Obligations (such as private activity bonds and
municipal lease/purchase agreements). A participation interest gives the Fund
an undivided interest in the Municipal Obligation in the proportion that the
Fund's participation interest bears to the total amount of the Municipal
Obligation. These instruments may have floating or variable rates of
interest. If the participation interest is unrated, it will be backed by an
irrevocable letter of credit or guarantee of a bank that the Fund's Board of
Directors has determined meets certain quality standards or the payment
obligation otherwise will be collateralized by obligations of the United
States government and its agencies and instrumentalities ("Government
Securities"). For certain participation interests, the Fund will have the
right to demand payment, on a specified number of days' notice, for all or any
part of the Fund's participation interest in the Municipal Obligation, plus
accrued interest. The Fund intends to exercise its right with respect to
these instruments to demand payment only upon a default under the terms of the
Municipal Obligation or to maintain or improve the quality of the investment
portfolio.
Taxable Investments
Under normal conditions, the Fund may hold up to 20% of its assets in cash or
money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). When the Investment Manager believes
that long-term Municipal Obligations consistent with the Fund's investment
objective are unavailable, the Fund may take a temporary defensive posture and
invest without limitation in short-term Municipal Obligations and Taxable
Investments. To the extent the Fund holds Taxable Investments and, under
certain market conditions, short-term Municipal Obligations, the Fund will not
be fully achieving its investment objective.
Money market instruments in which the Fund may invest include: Government
Securities; bank obligations (including certificates of deposit, time deposits
and bankers' acceptances of domestic or foreign banks, domestic savings and
loan associations and similar institutions); commercial paper rated no lower
than A-1 by S&P or P-2 by Moody's or the equivalent from another major rating
service or, if unrated, of an issuer having an outstanding, unsecured debt
issue then rated within the three highest rating categories; and repurchase
agreements.
The Fund will invest in an obligation of a foreign bank or foreign branch of a
United States bank only if the Investment Manager determines that the
obligation presents minimal credit risks. Obligations of foreign banks or
foreign branches of United States banks in which the Fund will invest may be
traded in the United States or outside the United States, but denominated in
United States Dollars. These obligations entail risks that are different from
those of investments in obligations of United States banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on
the obligations, foreign exchange controls and foreign withholding or other
taxes on income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to domestic
banks, such as mandatory reserve requirements, loan limitations, and
accounting, auditing and financial record-keeping requirements. In addition,
less information may be publicly available about a foreign branch of a
domestic bank than about a domestic bank.
Government Securities in which the Fund may invest include direct obligations
of the United States Treasury and obligations issued by United States
government agencies and instrumentalities. Included among 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 those 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 United States 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).
The Fund may enter into repurchase agreement transactions with 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. A repurchase agreement
is a contract under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed-upon price on an agreed-upon
date. Under the terms of a typical repurchase agreement, the Fund would
acquire an underlying debt obligation for a relatively short period (usually
not more than seven days) subject to an obligation of the seller to
repurchase, and the Fund to resell, the obligation at an agreed-upon price and
time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. Under each repurchase
agreement, the selling institution will be required to maintain the value of
the securities subject to the repurchase agreement at not less than their
repurchase price.
Investment Techniques
The Fund may employ, among others, the investment techniques described below,
which may give rise to taxable income.
When-Issued Securities. New issues of Municipal Obligations usually are
offered on a when-issued basis, which means that delivery and payment for the
Municipal Obligations normally take place within 45 days after the date of the
commitment to purchase. The payment obligation and the interest rate that
will be received on the Municipal Obligations are fixed at the time the buyer
enters into the commitment. The Fund will make commitments to purchase when-
issued Municipal Obligations only with the intention of acquiring the
securities, but may sell these securities before the settlement date, if the
Investment Manager deems it advisable. Any gain realized on the sale would be
taxable.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Obligations held in its portfolio. Under a stand-by
commitment, a dealer is obligated to repurchase at the Fund's option specified
securities at a specified price and, in this way, stand-by commitments are
comparable to put options. The exercise of a stand-by commitment, therefore,
is subject to the ability of the seller to make payment on demand. The Fund
will acquire stand-by commitments solely to facilitate portfolio liquidity and
does not intend to exercise its rights thereunder for trading purposes. The
Fund anticipates that stand-by commitments will be available from brokers,
dealers and banks without the payment of any direct or indirect consideration.
The Fund may pay for stand-by commitments if payment were deemed necessary,
thus, increasing to a degree the cost of the underlying Municipal Obligation
and similarly decreasing the security's yield to investors.
Financial Futures and Options Transactions. To protect against a decline in
the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase in the future, the Fund may
engage in financial futures and options transactions. The futures contracts
or options on futures contracts that may be entered into by the Fund will be
restricted to those that are either based on an index of long-term Municipal
Obligations or relate to debt securities the prices of which are anticipated
by the Investment Manager to correlate with the prices of the Municipal
Obligations owned or to be purchased by the Fund.
In entering into a futures contract, the Fund will be required to deposit with
the broker an amount of cash or cash equivalents equal to approximately 5% of
the contract amount. This amount is subject to change by the exchange or
board of trade on which the contract is traded and members of the exchange or
board of trade may charge a higher amount. This amount is known as "initial
margin" and is in the nature of a performance bond or good faith deposit on
the contract that is returned to the Fund upon termination of the futures
contract, assuming all contractual obligations have been satisfied. In
accordance with a process known as "marking-to-market," subsequent payments,
known as "variation margin," to and from the broker will be made daily as the
price of the index or securities underlying the futures contract fluctuates,
making the long and short positions in the futures contract more or less
valuable. At any time prior to the expiration of a futures contract, the Fund
may elect to close the position by taking an opposite position, which will
operate to terminate the Fund's existing position in the contract.
An interest rate futures contract provides for the future sale by one party
and the purchase by the other party of a certain amount of a specific debt
security at a specified price, date, time and place. The Fund may enter into
interest rate futures contracts in order to protect against the adverse effect
of changing interest rates on its portfolio securities or those to be
purchased by the Fund.
The Fund may purchase and sell call and put options on interest rate futures
contracts that are traded on a United States exchange or board of trade.
Unlike the direct investment in a futures contract, an option on an interest
rate futures contract gives the purchaser the right, in return for the premium
paid, to assume a position in an interest rate futures contract at a specified
exercise price at any time prior to 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 accompanied 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 interest rate futures contracts is limited to the
premium paid for the option (plus transaction costs). The value of the option
may change daily and that change would be reflected in the net asset value of
the Fund. The Fund may purchase options on interest rate futures contracts to
hedge its portfolio securities against the risk of adverse changes in interest
rates. The Fund will sell options on interest rate futures contracts as part
of closing purchase transactions to terminate its options positions.
The Fund anticipates utilizing municipal bond index futures to protect against
changes in the market value of the Municipal Obligations in its portfolio or
that it intends to acquire. Municipal bond index futures contracts are based
on an index of long-term Municipal Obligations. The index assigns relative
values to the Municipal Obligations included in the index, and fluctuates with
changes in the market value of the Municipal Obligations. The contract is an
agreement pursuant to which two parties agree to take or make delivery of an
amount of cash based upon the difference between the value of the index at the
close of the last trading day of the contract and the price at which the index
contract was originally written. The acquisition or sale of a municipal bond
index futures contract enables the Fund to protect its assets from
fluctuations in the value of tax-exempt securities without actually buying or
selling the securities. The Fund may purchase and sell put and call options
on municipal bond indexes and municipal bond index futures and enter into
closing transactions with respect to those options.
Regulations of the Commodity Futures Trading Commission (the "CFTC")
applicable to the Fund require that its transactions in futures and opinions
on futures be engaged in for "bona fide hedging" purposes or other permitted
purposes, provided that the aggregate initial margin deposits and premiums
required to establish positions other than those considered by the CFTC to be
"bona fide hedging" will not exceed 5% of the Fund's net asset value, after
taking into account unrealized profits and unrealized losses on any such
contracts. In addition, the Fund will maintain cash and cash equivalents in a
segregated account in an amount at least equal to the commodity value of each
long futures or opinions position less any accrued profit on those positions
held by a futures commission merchant. The Fund's ability to trade in futures
and opinions on futures may be limited to some extent by the requirements of
the Code applicable to a regulated investment company described below under
"Taxes."
Lending Portfolio Securities. The Fund is authorized to lend securities it
holds to brokers, dealers and other financial organizations, but it will not
lend securities to any affiliate of the Investment Manager unless the Fund
applies for and receives specific authority to do so from the Securities and
Exchange Commission ("SEC"). Loans of the Fund's securities, if and when
made, may not exceed 33 1/3% of the Fund's assets taken at value. The Fund's
loans of securities will be collateralized by cash, letters of credit or
Government Securities that will be maintained at all times in a segregated
account with the Fund's custodian in an amount at least equal to the current
market value of the loaned securities. From time to time, the Fund 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 Fund and that is acting as a "finder."
By lending its portfolio securities, the Fund 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 Government Securities are used as
collateral. The Fund will adhere to the following conditions whenever it
lends its securities: (1) the Fund 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 Fund must be able to terminate the loan at any time; (4) the Fund 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 Fund 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 Fund's Board of Directors must terminate
the loan and regain the Fund's right to vote the securities.
Risk Factors and Special Considerations
Investment in the Fund involves risk factors and special considerations, such
as those described below:
Municipal Obligations. Even though interest-bearing securities are
investments that promise a stable stream of income, their prices are inversely
affected by changes in interest rates and, therefore, are subject to the risk
of market price fluctuations. The values of Municipal Obligations with longer
remaining maturities typically fluctuate more than those of similarly rated
Municipal Obligations with shorter remaining maturities. The values of fixed
income securities also may be affected by changes in the rating or financial
condition of the issuing entities.
Low-rated and Unrated Municipal Obligations. Although they may offer higher
current yields than do higher rated securities, low-rated and unrated
securities generally involve greater volatility of price and risk of principal
and income, including the possibility of default by, or bankruptcy of, the
issuers of the securities; the Fund may incur additional expenses to the
extent it is required to seek recovery upon a default in the payment of
principal or interest on its portfolio holdings. Low-rated and unrated
securities held by the Fund are frequently subordinated to the prior payment
of senior indebtedness and are traded in markets that may be relatively less
liquid than the market for higher rated securities. Moreover, because dealers
may not maintain daily markets in Municipal Obligations, retail secondary
markets for many of these securities may not exist. The Fund anticipates
that, if a secondary market for securities it wished to sell did not exist,
the Fund could sell the securities only to institutional investors. The
existence of limited markets for particular securities may diminish the Fund's
ability to sell low-rated or unrated Municipal Obligations at fair value to
respond to changes in the economy or in the financial markets.
Municipal Leases. Municipal leases in which the Fund may invest have special
risks not normally associated with Municipal Obligations. These obligations
frequently contain "non-appropriation" clauses that provide that the
governmental issuer of the obligation has no obligation to make future
payments under the lease or contract unless money is appropriated for that
purpose by the legislative body on a yearly or other periodic basis.
Moreover, although a municipal lease will be secured by financed equipment,
the disposition of the equipment in the event of foreclosure might prove
difficult. In order to limit the risks, the Fund will purchase either: (a)
municipal leases rated in the four highest categories by Moody's or S&P or (b)
unrated municipal leases purchased principally from domestic banks or other
responsible third parties that have entered into an agreement with the Fund
providing the seller will either remarket or repurchase the municipal leases
within a short period after demand by the Fund. The Fund will not invest more
than 10% of its assets in lease obligations that contain "non-appropriation"
clauses and will purchase those "non-appropriation" lease obligations when the
lease payments will commence amortization of principal at an early date
resulting in an average life of seven years or less for the lease obligation.
Non-Publicly Traded Securities. The sale of securities that are not traded
publicly is typically restricted under the Federal securities laws. As a
result, the Fund may be forced to sell these securities at less than fair
market value or may not be able to sell when the Investment Manager believes
it desirable to do so.
Illiquid Securities. The Fund's investments in illiquid securities are
subject to risk that should the Fund desire to issue any of these securities
when a ready buyer is not available at a price the Fund deems representative
of their value, the value of the Fund's net assets could be adversely
affected.
Potential Legislation. In past years, the Federal government has enacted
various laws that have restricted or diminished the income tax exemption on
various types of Municipal Obligations and may enact other similar laws in the
future. If any such laws were enacted that would reduce the availability of
Municipal Obligations for investment by the Fund so as to affect Fund
shareholders adversely, the Fund would reevaluate its investment objective and
policies and might submit possible changes in the Fund's structure to
shareholders for their consideration. If legislation were enacted that would
treat a type of Municipal Obligation as taxable for Federal income tax
purposes, the Fund would treat the security as a permissible Taxable
Investment within the applicable limits set forth in this Prospectus.
Organization of the Fund. The Fund is a closed-end investment company.
Shares of closed-end investment companies frequently trade at a discount from
net asset value. Since the Fund's commencement of operations, the Fund's
Common Stock has generally traded at a slight discount from its net asset
value per share. The market value of Municipal Obligations (and, accordingly,
the Fund's net asset value) generally increases when interest rates decline
and decrease when interest rates rise. Whether investors will realize gains
or losses upon the sale of Common Stock will not depend upon the Fund's net
asset value, but will depend entirely upon whether the market price of the
Common Stock at the time of sale is above or below the original purchase price
for the shares. Since the market price of the Fund's Common Stock will be
determined by such factors as relative demand for and supply of such shares in
the market, general market and economic conditions and other factors beyond
the control of the Fund, the Fund cannot predict whether the Common Stock will
trade at, below or above net asset value. For that reason, shares of the
Fund's Common Stock are designed primarily for long-term investors, and
investors in the Fund's Common Stock should not view the Fund as a vehicle for
trading purposes.
Repurchase Agreements. Repurchase agreements could involve certain risks in
the event of default or insolvency of the seller, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
In evaluating these potential risks, the Investment Manager, acting under the
supervision of the Fund's Board of Directors, and on an ongoing basis,
monitors (1) the value of the collateral underlying each repurchase agreement
of the Fund to ensure that the value is at least equal to the total amount of
the purchase obligation, including interest, and (2) the creditworthiness of
the banks and dealers with which the Fund enters into repurchase agreements.
When-Issued Securities. Municipal Obligations purchased on a when-issued
basis and the securities held in the Fund's portfolio are generally subject to
changes in value (both generally changing in the same way, i.e., appreciating
when interest rates decline and depreciating when interest rates rise) based
upon the public's perception of the creditworthiness of the issuer and
changes, real or anticipated, in the level of interest rates. Municipal
Obligations purchased on a when-issued basis may expose the Fund to risk
because they may experience these fluctuations prior to their actual delivery.
The Fund will not accrue income with respect to a when-issued security prior
to its stated delivery rate. Purchasing Municipal Obligations on a when-
issued basis can involve the additional risk that the yield available in the
market when the delivery takes place actually may be higher than that obtained
in the transaction itself. A segregated account of the Fund consisting of
cash or liquid debt securities equal at all times to the amount of the when-
issued commitments will be established and maintained with the Fund's
custodian.
Financial Futures and Options. Although the Fund intends to enter into
futures or options contracts only if an active market exists for the
contracts, no assurance can be given that an active market will exist for the
contracts at any particular time. If it is not possible to close a futures
position in anticipation of adverse price movements, the Fund would be
required to make daily cash payments of variation margin. In those
circumstances, an increase in the value of the portion of the portfolio being
hedged, if any, may offset partially or completely losses on the futures
contract. No assurance can be given, however, that the price of the securities
being hedged will correlate with the price movements in a futures contract
and, thus, provide an offset to losses on the futures contract or option on
the futures contract. In addition, in light of the risk of an imperfect
correlation between securities in the Fund's portfolio that are the subject of
a hedging transaction and the futures or options contract used as a hedging
device, the hedge may not be fully effective because, for example, losses on
the portfolio securities may be in excess of gains on the futures contract or
losses on the futures contract may be in excess of gains on the portfolio
securities that were the subject of the hedge. In an effort to compensate for
the imperfect correlation of movements in the price of the securities being
hedged and movements in the price of futures contracts, the Fund may enter
into futures contracts or options on futures contracts in a greater or lesser
dollar amount than the dollar amount of the securities being hedged if the
historical volatility of the futures contract has been less or greater than
that of the securities. This "over hedging" or "under hedging" may adversely
affect the Fund's net investment results if market movements are not as
anticipated when the hedge is established.
If the Fund has hedged against the possibility of an increase in interest
rates adversely affecting the value of securities held in its portfolio and
rates decrease instead, the Fund will lose part or all of the benefit of the
increased value of securities that it has hedged because it will have
offsetting losses in its futures or options positions. In addition, in those
situations, if the Fund has insufficient cash, it may have to sell securities
to meet daily variation margin requirements on the futures contracts at a time
when it may be disadvantageous to do so. These sales of securities may, but
will not necessarily, be at increased prices that reflect the decline in
interest rates.
Investment Restrictions
The Fund has adopted certain fundamental investment restrictions that may not
be changed without the prior approval of the holders of a majority of the
Fund's outstanding voting securities. A "majority of the Fund's outstanding
voting securities" for this purpose means the lesser of (a) 67% or more of the
shares of the Fund'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 (b) more than 50% of the outstanding shares. For purposes
of the restrictions listed below, all percentage limitations apply immediately
after a purchase or initial investment, and any subsequent change in any
applicable percentage resulting from market fluctuations does not require
elimination of any security from the Fund's portfolio. Under its fundamental
restrictions, the Fund may not:
1. Purchase securities other than Municipal Obligations and Taxable
Investments as those terms are described in the Prospectus.
2. Purchase securities (other than Government Securities) of any issuer
if as a result of the purchase more than 5% of the value of the
Fund's total assets would be invested in the securities of the
issuer, except that up to 25% of the value of the Fund's total assets
may be invested without regard to this 5% limitation.
3. Purchase more than 10% of the voting securities of any one issuer,
except that this limitation is not applicable to the Fund's
investments in Government Securities.
4. Borrow money, except for temporary or emergency purposes, or for
clearance of transactions, in amounts not exceeding 15% of its total
assets (not including the amount borrowed) and as otherwise described
in the Prospectus. When the Fund's borrowings exceed 5% of the value
of its total assets, the Fund will not make any additional
investments.
5. Sell securities short or purchase securities on margin, except for
such short-term credits as are necessary for the clearance of
transactions, but the Fund may make margin deposits in connection
with transactions in options, futures and options on futures.
6. Underwrite any issue of securities, except to the extent that the
purchase of Municipal Obligations may be deemed to be an
underwriting.
7. Purchase, hold or deal in real estate or oil and gas interests,
except that the Fund may invest in Municipal Obligations secured by
real estate or interests in real estate.
8. Invest in commodities, except that the Fund may enter into futures
contracts, including those relating to indexes, and options on
futures contracts or indexes, as described in the Prospectus.
9. Lend any funds or other assets, except through purchasing Municipal
Obligations or Taxable Investments, lending portfolio securities and
entering into repurchase agreements consistent with the Fund's
investment objective.
10. Issue senior securities.
11. Invest more than 25% of its total assets in the securities of issuers
in any single industry, except that this limitation will not be
applicable to the purchase of Municipal Obligations and Government
Securities. For purposes of this restriction, industrial development
bonds, with respect to which the payment of principal and interest is
the ultimate responsibility of companies within the same industry,
are grouped together as an "industry."
12. Make any investments for the purpose of exercising control or
management of any company.
DIRECTORS AND OFFICERS
The overall management of the business and affairs of the Fund is vested with
its board of directors. The board of directors approves all significant
agreements between the Fund and persons or companies furnishing services to
it, including the Fund's agreements with the Investment Manager and SBMFM,
custodian and transfer agent, dividend paying agent, registrar and plan agent.
The day-to-day operations of the Fund are delegated to its officers and to the
Investment Manager and SBMFM, subject always to investment objective and
policies of the Fund and to general supervision by the Fund's Board of
Directors.
The directors and officers of the Fund, their addresses and their principal
occupations for at least the past five years are set forth below:
Name and Address
Positions Held
with the Fund
Principal Occupations
During Past 5 Years
*Heath B. McLendon, age
63
388 Greenwich Street
New York, New York
10013
Chairman of the
Board of
Directors, Chief
Executive Officer
and Director
Managing Director of Smith
Barney Inc.; Director and
President of SBMFM; Chairman of
Smith Barney Strategy Advisers
Inc.; prior to July, 1993,
Senior Executive Vice President
of Shearson and Vice Chairman of
the Board of Shearson Asset
Management..
Charles Barber, age 79
66 Glenwood Drive
Greenwich, Connecticut
06830
Director
Consultant; formerly Chairman of
the Board, ASARCO Incorporated.
Martin Brody, age 75
Three ADP Boulevard
Roseland, New Jersey
07068
Director
Retired Vice Chairman of the
Board of Restaurant Associates
Corp.; Director of Jaclyn, Inc.
Allen J. Bloostein, age
67
27 West 67th Street,
Apt. 5FW
New York, New York
10023
Director
Consultant; formerly Vice
Chairman of the Board of
Directors of May Department
Stores; Director of Crystal
Brands, Inc., Melville Corp.,
R.G. Barry Corp. and Hechinger
Co.
Dwight B. Crane, age 58
Graduate School of
Business
Administration
Harvard University
Soldiers Field Road
Boston, Massachusetts
02163
Director
Professor, Graduate School of
Business Administration, Harvard
University; Director, Peer
Review Analysis, Inc.
Robert A. Frankel, age
69...............
102 Grand Street
Croton-on-Hudson
New York, New York
10520
Director
Managing Partner of Robert A.
Frankel Managing Consultants;
formerly Vice President of the
Reader's Digest Association,
Inc.
William R. Hutchinson,
age 53.......
Amoco Corp
200 East Randolph
Drive
Chicago, Illinois
60601
Director
Vice President, Financial
Operations of Amoco Corp.;
Director of Associated Bank
Corp.
Jessica M. Bibliowicz,
age 36
388 Greenwich Street
New York, New York
10013
President
Executive Vice President of
Smith Barney Inc.; Chairman and
Chief Executive Officer of
SBMFM; prior to 1994, Director
of Sales and Marketing for
Prudential Mutual Funds.
Lawrence T. McDermott,
age 48.......
388 Greenwich Street
New York, New York
10013
Vice President
and Investment
Officer
Managing Director of Smith
Barney Inc; prior to July, 1993,
Managing Director of Shearson
Lehman Advisors.
Michael J. Maher, age 34
388 Greenwich Street
New York, New York
10013
Investment
Officer
Vice President of Smith Barney
Inc.; prior to July, 1993, Vice
President of Shearson Lehman
Advisors.
Lewis E. Daidone, age 38
388 Greenwich Street
New York, New York
Senior Vice
President; Chief
Financial and
Accounting
Officer and
Treasurer
Managing Director of Smith
Barney Inc.; Director and Senior
Vice President of SBMFM.
Christina T. Sydor, Esq,
age 45.
388 Greenwich Street
New York, New York
Secretary
Managing Director of Smith
Barney Inc.; General Counsel and
Secretary of SBMFM.
___________
__
* "Interested person" of the Fund (as defined in the 1940 Act).
Director and/or trustee of other registered investment companies with which
Smith Barney is affiliated.
____________________
The Fund pays each of its directors who is not a director, officer or employee
of the Investment Manager or any of its affiliates an annual fee of $5,000
plus $500 for each Board of Directors meeting attended, and $100 for each
Board meeting held via telephone. In addition, the Fund will reimburse these
directors for travel and out-of-pocket expenses incurred in connection with
Board of Directors meetings. For the fiscal year ended October 31, 1996, such
fees and expenses totalled $43,000.
Number of Funds
Total for which
Total
Compensation Director Serves
Compensation
from Fund Within Fund
Name of Person from Fund
Complex Complex
- ------------------------ --------------
---------------- -------------------
Charles Barber $7,000* $
38,700 6
Martin Brody $6,500
$115,850 19
Dwight Crane $7,000
$134,200 22
Allan Bloostein $7,000 $
82,850 8
Robert Frankel $7,000 $
65,900 8
William R. Hutchinson $7,000 $ 38,600
6
Heath B. McLendon -- --
42
- ----------
* Mr. Barber's total compensation from the Fund is deferred, of which is
$7,000.
Principal Stockholders
There are no persons known to the Fund to be control persons of the Fund,
as such term is defined in Section 2(a)(9) of the 1940 Act. There is no
person known to the Fund to hold beneficially more than 5% of the outstanding
shares of the Common Stock. The following person is the only person holding
of record more than 5% of the outstanding shares of Common Stock as of
December 18, 1996:
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
17,019,791
86.57%
17,019,791 of the shares held of record by Cede & Co., representing 86.57%
of the outstanding shares of Common Stock, were held by The Depository Trust
Company as nominee for Smith Barney, representing accounts for which Smith
Barney has discretionary and non-discretionary authority.
As of December 18, 1996, the Directors and officers of the Fund, as a group,
beneficially owned less than 1% of the Fund's outstanding shares of Common
Stock.
INVESTMENT MANAGER AND ADMINISTRATOR
The Investment Manager serves as the Fund's investment adviser pursuant to a
written agreement dated
(the "Advisory Agreement"). Subject to the supervision and direction of the
Fund's Board of Directors, Greenwich Street Advisors manages the Fund's
portfolio in accordance with the Fund's stated investment objective and
policies, makes investment decisions for the Fund, places orders to purchase
and sell securities and employs professional portfolio managers and securities
analysts who provide research services to the Fund. The Investment Manager
bears all expenses in connection with the performance of its services and pays
the salaries of all officers or employees who are employed by both it and the
Fund.
As compensation for Investment Manager's services rendered to the Fund, the
Fund pays a fee computed and paid monthly at an annual rate of 0.40% of the
value of the Fund's average daily net assets. For the fiscal years ended
October 31, 1994, 1995 and 1996 the Fund paid the Investment Manager $731,864,
$726,621 and $747,137 respectively, in investment advisory fees.
The Advisory Agreement was initially approved by the Fund's Board of Directors
and by a majority of the directors who are not "interested persons" of the
Fund or the Investment Manager ("Non-Interested Directors") on April 7, 1993
and by its shareholders at an annual shareholder meeting of the holders of the
Common Stock of the Fund on June 9, 1993. The Advisory Agreement became
effective upon the Closing and, unless sooner terminated, the Advisory
Agreement will continue for an initial two-year period and 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 vote of a
majority of the outstanding voting securities (i.e., the holders of the Common
Stock).
Under the Advisory Agreement, the Investment Manager will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the Advisory Agreement, except a loss resulting from
willful misfeasance, bad faith or gross negligence on the part of the
Investment Manager 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 Investment Manager. The Advisory Agreement may also be
terminated by the Investment Manager on 90 days' written notice to the Fund.
The Advisory Agreement terminates automatically upon its assignment.
SBMFM serves as administrator to the Fund pursuant to a written agreement
dated June 1, 1994 (the "Administration Agreement"). SBMFM calculates the
net asset value of the Fund's shares and generally assists in all aspects of
the Fund's administration and operation. In addition, SBMFM pays the salaries
of all officers and employees who are employed both by it and the Fund,
maintains office facilities for the Fund, furnishes the Fund with statistical
and research data, clerical help and accounting, data processing, bookkeeping,
internal auditing and legal services and certain other services required by
the Fund, prepares reports to the Fund's shareholders and prepares tax returns
and reports to and filings with the SEC and state blue sky authorities. SBMFM
bears all expenses in connection with the performance of its services. As
compensation for SBMFM's services rendered to the Fund, the Fund pays a fee
computed and paid monthly at an annual rate of 0.20% of the value of the
Fund's average daily net assets. For the 1994, 1995 and 1996 fiscal years,
the Fund paid SBMFM $365,932, $363,310 and $373,569 respectively, in fees.
Pursuant to the Administration Agreement, SBMFM will exercise its best
judgment in rendering the services listed above. SBMFM will not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which the Administration Agreement relates
except by reason of SBMFM's willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason of SBMFM's reckless
disregard of its obligations and duties under the Administration Agreement.
The Administration Agreement will continue automatically for successive annual
periods provided that such continuance is specifically approved at least
annually by the Board of Directors of the Fund 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 Administration Agreement is terminable,
without penalty, on 60 days' written notice, by the Board of Directors of the
Fund or by vote of holders of a majority of the Fund's shares, or upon 90
days' written notice, by SBMFM.
PORTFOLIO TRANSACTIONS AND TURNOVER
Portfolio Transactions
Portfolio securities transactions for the Fund are placed on behalf of the
Fund by the Investment Manager. In selecting brokers or dealers to execute
portfolio transactions for the Fund, the Investment Manager seeks the best
overall terms available. The Advisory Agreement provides that, in assessing
the best overall terms available for any transaction, the Investment Manager
will consider the factors it deems relevant, including the breadth of the
market in the security, the financial condition and execution capability of
the broker or dealer, and the reasonableness of the commission, if any, for
the specific transaction and on a continuing basis. In addition, the
Advisory Agreement authorizes the Investment Manager, in selecting brokers or
dealers, to execute a particular transaction, and, in evaluating the best
overall terms available, to consider the brokerage and research services
provided to the Fund and/or other accounts over which the Investment Manager
or an affiliate exercises investment discretion. The Investment Manager's fee
under the Advisory Agreement is not reduced by reason of its receiving such
brokerage and research services.
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly-issued securities
ordinarily are purchased directly from the issuer or from an underwriter;
other purchases and sales usually are placed with those dealers from which it
appears that the best price or execution will be obtained. Usually no
brokerage commissions, as such, are paid by the Fund for such purchases and
sales, although the price paid usually includes an undisclosed compensation to
the dealer acting as agent. The prices paid to underwriters of newly-issued
securities usually include a concession paid by the issuer to the underwriter,
and purchases of after-market securities from dealers ordinarily are executed
at a price between the bid and asked price. The Fund has paid no brokerage
commissions since commencement of its operations.
Although investment decisions for the Fund are made independently from those
of other accounts managed by the Investment Manager, investments of the type
the Fund may make may also be made by those other accounts. When the Fund and
one or more other accounts managed by the Investment Manager 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 the
Investment Manager to be equitable to each. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund.
The Fund may, from time to time, in accordance with an exemptive order granted
by the SEC, enter into principal transactions involving certain money market
instruments with dealers affiliated with the Investment Manager.
The Fund's Board of Directors will review periodically the commissions paid by
the Fund to determine if the commissions paid over representative periods of
time were reasonable in relation to the benefits inuring to the Fund.
Portfolio Turnover
The Fund cannot accurately predict its portfolio turnover rate, but
anticipates that its annual turnover rate will not exceed 100%. Portfolio
turnover rate is calculated by dividing the lesser of the Fund's annual sales
or purchases of portfolio securities by the monthly average value of
securities in the portfolio during the year, excluding any portfolio security
the maturity of which at the time of acquisition was one year or less. Higher
portfolio turnover rates can result in corresponding increases in brokerage
commissions. The Fund will not consider turnover rate a limiting factor in
making investment decisions consistent with its investment objective and
policies. For the 1994, 1995 and 1996 fiscal years, the Fund's portfolio
turnover rates were 17%, 18% and 17% respectively.
VALUATION OF SHARES
The Fund's net asset value will be calculated as of the close of regular
trading on the New York Stock Exchange, Inc. ("NYSE"), currently 4:00 p.m.,
New York time, on the last day on which the NYSE is open for trading of each
week and month. Net asset value is calculated by dividing the value of the
Fund's net assets (the value of its assets less its liabilities, exclusive of
capital stock and surplus) by the total number of shares of Common Stock
outstanding. Investments in Government Securities having a maturity of 60
days or less are valued at amortized cost. All other securities and assets
are taken at fair value as determined in good faith by or under the direction
of the Board of Directors.
The valuation of the Fund's assets is made by SBMFM after consultation with an
independent pricing service (the "Service") approved by the 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 (which may
constitute a majority of the Fund's portfolio securities), are carried at fair
value as determined by the Service. 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
Fund 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 Fund to do so.
STOCK PURCHASES AND TENDERS
The Fund may repurchase shares of its Common Stock in the open market or in
privately negotiated transactions when the Fund can do so at prices below
their then current net asset value per share on terms that the Fund'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 shareholder.
No assurance can be given that repurchases and/or tenders will result in the
Fund's shares trading at a price that is equal to their net asset value. The
market prices of the Fund's shares will, among other things, be determined by
the relative demand for and supply of the shares in the market, the Fund's
investment performance, the Fund's dividends and yield and investor perception
of the Fund's overall attractiveness as an investment as compared with other
investment alternatives. The Fund's acquisition of Common Stock will decrease
the total assets of the Fund and therefore have the effect of increasing the
Fund's expense ratio. The Fund may borrow money to finance the repurchase of
shares subject to the limitations described in the Prospectus. Any interest
on the borrowings will reduce the Fund's net income. Because of the nature of
the Fund's investment objective, policies and portfolio, the Investment
Manager does not anticipate that repurchases and tenders will have an adverse
effect on the Fund's investment performance and does not anticipate any
material difficulty in disposing of portfolio securities to consummate Common
Stock repurchases and tenders.
When a tender offer is authorized to be made by the Fund'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 318 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 his
shares.
The policy of the Fund's Board of Directors with respect to tender offers and
to repurchases, which may be changed by the Board, is that the Fund will not
accept tenders or effect repurchases if (1) those transactions, if
consummated, would (a) result in the delisting of the Common Stock from the
NYSE (the NYSE having advised the Fund that it would consider delisting if the
aggregate market value of the Fund's outstanding publicly held Common Stock is
less than $5,000,000, the number of publicly held shares of Common Stock falls
below 600,000 or the number of round-lot holders falls below 1,200), or (b)
impair the Fund's status as a regulated investment company under the Code; (2)
the Fund would not be able to liquidate portfolio securities in an orderly
manner and consistently with the Fund's investment objective and policies to
repurchase Common Stock; or (3) there is, in the Board's judgment, any (a)
material legal action or proceeding instituted or threatened challenging the
transactions or otherwise materially adversely affecting the Fund, (b)
suspension of or limitation on prices for trading securities generally on the
NYSE or any exchange on which portfolio securities of the Fund are traded, (c)
declaration of a banking moratorium by Federal or state authorities or any
suspension of payment by banks in the United States, (d) limitation affecting
the Fund or issuers of its portfolio securities imposed by Federal, state or
local authorities on the extension of credit by lending institutions, (e)
commencement of war, armed hostilities or other international or national
calamity directly or indirectly involving the United States, or (f) other
event or condition that would have a material adverse effect on the Fund or
its shareholders if shares of Common Stock were repurchased. The Board of
Directors may modify these conditions in light of experience.
If the Fund liquidates portfolio securities in order to repurchase shares of
Common Stock, the Fund may realize gains and losses. These gains, if any, may
be realized on securities held for less than three months. Because the Fund
must derive less than 30% of its gross income for any taxable year from the
sale or disposition of stock and securities held less than three months (in
order to retain the Fund's regulated investment company status under the
Code), gains realized by the Fund due to a liquidation of portfolio securities
held for less than three months would reduce the amount of gain on sale of
other securities held for less than three months that the Fund could realize
in the ordinary course of its portfolio management, which may adversely affect
the Fund's performance. The portfolio turnover rate of the Fund may or may
nor be affected by the Fund's repurchases of shares of Common Stock pursuant
to a tender offer.
TAXES
Taxation of the Fund and its Investments
The Fund has qualified, and intends to continue to qualify each taxable year,
as a "regulated investment company" under Subchapter M of the Code. In
addition, the Fund has satisfied and intends to satisfy each taxable year
conditions contained in the Code that will enable interest from Municipal
Obligations, excluded from gross income for Federal income tax purposes with
respect to the Fund, to retain that tax-exempt status when distributed to the
shareholders of the Fund (i.e., to be classified as "exempt-interest"
dividends of the Fund).
If it qualifies as a regulated investment company, the Fund will pay no
Federal income taxes on its taxable net investment income (i.e., taxable
income other than net realized capital gains) and its net realized capital
gains that are distributed to shareholders. To qualify under Subchapter M of
the Code, the Fund must, among other things: (1) distribute to its
shareholders at least 90% of its taxable net investment income (for this
purpose consisting of taxable net investment income and net realized short-
term capital gains) and 90% of its tax-exempt income (reduced by certain
expenses); (2) derive less than 30% of its annual gross income from the sale
or other disposition of stock, securities, options, futures or forward
contracts held for less than three months; and (3) diversify its holdings so
that, at the end of each fiscal quarter of the Fund (a) at least 50% of the
market value of the Fund's assets is represented by cash, Government
Securities and other securities, with these other securities limited, with
respect to any one issuer, to an amount no greater than 5% of the Fund's
assets and (b) not more than 25% of the market value of the Fund's assets is
invested in the securities of any one issuer (other than Government Securities
or securities of other regulated investment companies). In meeting these
requirements, the Fund may be restricted in the selling of portfolio
securities held for less than three months and in the utilization of certain
of the investment techniques described under "Investment Objective and
Policies" "Investment Techniques." As a regulated investment company, the Fund
will be subject to a 4% non-deductible excise tax measured with respect to
certain undistributed amounts of ordinary income and capital gain. The Fund
expects to pay dividends and distributions necessary to avoid the application
of this excise tax.
Financial Futures and Options. Under Section 1256 of the Code, gain or loss
realized by the Fund from certain financial futures and options transactions
will be treated as 60% long-term capital gain or loss and 40% short-term
capital gain or loss. Gain or loss will arise upon exercise or lapse of those
options transactions as well as from closing purchase transactions. In
addition, futures and options positions remaining open at the end of the
Fund's taxable year will be treated as sold for their then fair market value,
resulting in additional gain or loss in the Fund characterized in the manner
described above.
Offsetting positions held by the Fund involving financial futures and options
transactions may be considered, for tax purposes, to constitute "straddles,"
which are defined to include "offsetting positions" in actively traded
personal property. The tax treatment of "straddles" is governed by Section
1092 of the Code, which, in certain circumstances, overrides or modifies the
provisions of Section 1256. If the Fund was treated as entering into
"straddles" by reason of its futures and options transactions, the "straddles"
could be characterized as mixed "straddles" if the futures and options
transactions constituting a part of the "straddles" arc governed by Section
1256. The Fund may make one or more elections with respect to "mixed
straddles." Depending on which election is made, if any, the results to the
Fund may differ. If no election is made, to the extent the "straddle" rules
apply to positions established by the Fund, losses realized by the Fund would
be deferred to the extent of unrealized gain in the offsetting position.
Moreover, as a result of the "straddle" rules, short-term capital losses on
"straddle" positions may be recharacterized as long-term capital losses, and
long-term capital gains may be treated as short-term capital gains.
Taxation of the Fund's Shareholders
The Fund anticipates that all dividends it pays, other than dividends from
Taxable Investments and from income or gain derived from securities
transactions and from the use of certain of the investment techniques
described under "Investment Objective and Policies" "Investment Techniques,"
will be exempt-interest dividends that may be excluded by shareholders from
their gross income for Federal income tax purposes. Dividends derived from
Taxable Investments, and distributions derived from any realized short-term
capital gains, are taxable as ordinary income whether or not reinvested in
additional Fund shares. Dividends paid by the Fund will not qualify for the
dividends-received deduction for corporations.
Any net long-term capital gains realized by the Fund will be distributed
annually as described below. Such distributions ("capital gain dividends")
will be taxable to shareholders as long-term capital gains, regardless of how
long a shareholder has held Fund shares, and will be designated as capital
gain dividends in a written notice mailed by the Fund to shareholders after
the close of the Fund's taxable year. If a shareholder receives a capital
gain dividend with respect to any share and if the share has been held by the
shareholder for six months or less, then any loss (to the extent not
disallowed pursuant to the other six-month rule described in the Prospectus
relating to exempt-interest dividends) on the sale or exchange of such share
will be treated as a long-term capital loss to the extent of the capital gain
dividend.
If, as described above under "Stock Purchases and Tenders," the Fund
repurchases Common Stock pursuant to a tender offer, then, as a general rule,
pursuant to Section 302 of the Code, a sale by a shareholder pursuant to a
tender offer will be treated as a sale or exchange of Fund shares if the
receipt of cash upon the sale (1 ) is not essentially equivalent to a dividend
with respect to the selling shareholder, (2) is substantially disproportionate
with respect to the selling shareholder or (3) results in a complete
redemption of the selling shareholder's interest in the Fund. If a
shareholder is unable to satisfy any of these three conditions, then,
depending upon the Fund's earnings and profits and the shareholder's basis in
his Common Stock, amounts received pursuant to a tender offer could be treated
as ordinary income, as capital gains, or as a non-taxable return of capital.
As a general rule, dividends and distributions paid by the Fund are treated as
received when actually received by the shareholder. If, however, any dividend
or distribution is declared by the Fund in any October, November or December,
payable to shareholders of record on a specified date in October, November or
December and actually paid during January of the following year, then the
dividend or distribution will be treated as received on December 31 of the
preceding calendar year.
Exempt-Interest Dividends. Because the Fund will distribute exempt-interest
dividends, interest on indebtedness incurred by a shareholder to purchase or
carry Fund shares is not deductible for Federal income tax purposes. If a
shareholder receives exempt-interest dividends with respect to any share and
if the share is held by the shareholder for six months or less, then any loss
on the sale or exchange of the share may, to the extent of the exempt-interest
dividends, be disallowed. The Code may also require a shareholder, if he
receives exempt-interest dividends, to treat as taxable income a portion of
certain otherwise non-taxable social security and railroad retirement benefit
payments. In addition, that portion of any exempt interest dividend paid by
the Fund that represents income derived from private activity bonds held by
the Fund may not retain its tax-exempt status in the hands of a shareholder
who is a "substantial user" of a facility financed by the bonds, or a "related
person" of the substantial user. Moreover, although the Fund's exempt-
interest dividends may be excluded by shareholders from their gross incomes
for Federal income tax purposes, all or a portion of the exempt-interest
dividends will be a specific preference item for purposes of the Federal
individual and corporate alternative minimum taxes to the extent that they are
derived from certain types of private activity bonds issued after August 7,
1986, and all the Fund's exempt-interest dividends will be a component of the
"adjusted current earnings" adjustment item for purposes of the Federal
corporate alternative minimum tax. The receipt of Fund dividends and capital
gain distributions may affect a corporate shareholder's Federal
"environmental" tax liability, a foreign corporate shareholder's Federal
"branch profits" tax liability and a Subchapter S corporation shareholder's
Federal "excess net passive income" tax liability.
Shareholders should consult their tax advisors to determine whether (1) a
portion of their otherwise non-taxable social security and railroad benefits
will be treated as taxable income, (2) they are "substantial users" with
respect to a facility or "related" to these users within the meaning of the
Code and (3) they are subject to a Federal alternative minimum tax, the
Federal "environmental" tax, the Federal "branch profits" tax, and the Federal
"excess net passive income" tax.
Dividend Reinvestment Plan. Shareholders receiving dividends or
distributions in the form of additional shares pursuant to the Plan should be
treated for United States federal income tax purposes as receiving a
distribution in the amount equal to the amount of money that the shareholders
receiving cash dividends will receive, and should have a cost basis in the
shares received equal to such amount. If the Fund distributes cash to First
Data Investor Services Group, Inc., the Plan administrator ("First Data"), to
be used by First Data to purchase shares of Common Stock on the open market, a
Plan participant will be deemed to have received a cash distribution in the
amount of the cash distribution to First Data on his behalf.
Statements and Notices. Each shareholder will receive after the close of the
calendar year an annual statement as to the Federal income tax status of his
dividends and capital gain distributions from the Fund for the prior calendar
year. These statements will also designate the amount of exempt-interest
dividends that is a specific preference item for purposes of the Federal
individual and corporate alternative minimum taxes. Each shareholder will
also receive, if appropriate, various written notices after the close of the
Fund's prior taxable year as to the Federal income tax status of his dividends
and capital gain distributions that were received from the Fund during the
Fund's prior taxable year. Shareholders should consult their tax advisors as
to any state and local taxes that may apply to these dividends and capital
gain distributions. The dollar amount of dividends exempt from Federal income
taxation and the dollar amount subject to state and local taxation will vary
for each shareholder depending upon the size and duration of each
shareholder's investment in the Fund. In the event that the Fund earns
taxable net investment income, it intends to designate as taxable dividends
the same percentage of each day's dividend as its taxable net investment
income bears to its total net investment income earned on that day.
Therefore, the percentage of the dividend designated as taxable, if any, may
vary from day to day.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he has provided a correct taxpayer identification number
and that he is not subject to backup withholding, the shareholder may be
subject to a 31% "backup withholding" tax with respect to (1) taxable
dividends and capital gain distributions and (2) the proceeds of any sales or
repurchases of Fund shares. An individual's taxpayer identification number is
his social security number. The 31% backup withholding tax is not an
additional tax and may be credited against a taxpayer's Federal income tax
liability.
ADDITIONAL INFORMATION
Legal Matters
Willkie Farr & Gallagher serves as counsel to the Fund. The Directors who are
not "interested persons" of the Fund have selected Stroock & Stroock & Lavan
as their counsel.
Independent Public Accountants
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has been
selected to serve as the Fund's independent auditor to examine and report on
the Fund's financial statements and highlights for the fiscal year ending
October 31, 1997.
Custodian and Transfer Agent
PNC Bank, N.A. is located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103, and serves as the Fund's custodian pursuant to a custody
agreement. Under the custody agreement, PNC Bank holds the Fund's portfolio
securities and keeps all necessary accounts and records. The assets of the
Fund are held under bank custodianship in compliance with the 1940 Act.
First Data Investors Services Group Inc, ("First Data")is located at Exchange
Place, Boston, Massachusetts 02109, and pursuant to a transfer agency
agreement serves as the Fund's transfer agent. Under the transfer agency
agreement, First Data maintains the shareholder account records for the Fund,
handles certain communications between shareholders and the Fund, and
distributes dividends and distributions payable by the Fund.
FINANCIAL STATEMENTS
The Fund will send unaudited semiannual and audited annual financial
statements of the Fund to shareholders, including a list of the portfolio of
investments held by the Fund.
THE AUDITED FINANCIAL STATEMENTS FOR THE FISCAL YEAR ENDED OCTOBER 31, 1996
ARE INCORPORATED BY REFERENCE INTO THIS SAI FROM THE FUND'S ANNUAL REPORT.
COPIES OF THE ANNUAL REPORT MAY BE OBTAINED FROM ANY SMITH BARNEY FINANCIAL
CONSULTANT OR BY CALLING OR WRITING TO THE FUND AT THE TELEPHONE NUMBER OR
ADDRESS SET FORTH ON THE COVER PAGE OF THIS SAI.
APPENDIX
DESCRIPTION OF MOODY'S, S&P AND FITCH RATINGS
Description of Moody's Municipal Bond Ratings:
Aaa Bonds that are rated Aaa are judged to be of the best quality, carry the
smallest degree of investment risk and are generally referred to as "gilt
edge." Interest payments with respect to these bonds are protected by a large
or by an exceptionally stable margin, and principal is secure. Although the
various protective elements applicable to these bonds are likely to change,
those changes are most unlikely to impair the fundamentally strong position of
these bonds.
Aa Bonds that are rated Aa are judged to be of high quality by all standards
and together with the Aaa group comprise what are generally known as high
grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or other elements may be
present that make the long-term risks appear somewhat larger than in Aaa
securities.
A Bonds that are rated A possess many favorable investment attributes and are
to be considered as upper medium grade obligations. Factors giving security
to principal and interest with respect to these bonds are considered adequate,
but elements may be present that suggest a susceptibility to impairment
sometime in the future.
Baa Bonds rated Baa are considered to be medium grade obligations, that is
they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. These bonds lack outstanding investment characteristics and
may have speculative characteristics as well.
Ba Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue
ranks in the lower end of its generic rating category.
Description of Moody's Municipal Note Ratings:
Moody's ratings for state and municipal notes and other short-term loans are
designated Moody's Investment Grade (MIG) and for variable demand obligations
are designated Variable Moody's Investment Grade (VMIG). This distinction
recognizes the differences between short-term credit risk and long-term risk.
Loans bearing the designation MIG 1/VMIG 1 are of the best quality, enjoying
strong protection from established cash flows of funds for their servicing or
from established and broad-based access to the market for refinancing, or
both. Loans bearing the designation MIG 2/VMIG 2 are of high quality, with
margins of protection ample, although not as large as the preceding group.
Loans bearing the designation MIG 3/VMIG 3 are of favorable quality, with all
security elements accounted for but lacking the undeniable strength of the
preceding grades. Market access for refinancing, in particular, is likely to
be less well established.
Description of Moody's Commercial Paper Ratings:
The rating Prime-1 is the highest commercial paper rating assigned by Moody's.
Issuers rated Prime-1 (or related supporting institutions) are considered to
have a superior capacity for repayment of short-term promissory obligations.
Issuers rated Prime-2 (or related supporting institutions) are considered to
have a strong capacity for repayment of short-term promissory obligations
normally evidenced by many of the characteristics of issuers rated P-1 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 alternative
liquidity is maintained.
Description of S&P Municipal Bond Ratings:
AAA These bonds are the obligations of the highest quality and have the
strongest capacity for timely payment of debt service.
General Obligation Bonds Rated AAA In a period of economic stress, the issuers
of these bonds will suffer the smallest declines in income and will be least
susceptible to autonomous decline. Debt burden is moderate. A strong revenue
structure appears more than adequate to meet future expenditure requirements.
Quality of management appears superior.
Revenue Bonds Rated AAA Debt service coverage with respect to these bonds has
been, and is expected to remain, substantial. Stability of the pledged
revenues is also exceptionally strong due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic security
provisions (including rate covenant, earnings test for issuance of additional
bonds, debt service reserve requirements) are rigorous. There is evidence of
superior management.
AA The investment characteristics of bonds in this group are only slightly
less marked than those of the prime quality issues. Bonds rated AA have the
second strongest capacity for payment of debt service.
A Principal and interest payments on bonds in this category are regarded as
safe although the bonds are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than bonds in higher rated
categories. This rating describes the strongest capacity for payment of debt
service.
General Obligation Bonds Rated A There is some weakness, either in the local
economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse
circumstances, any one such weakness might impair the ability of the issuer to
meet debt obligations at future date.
Revenue Bonds Rated A Debt service is good, but not exceptional. Stability of
the pledged revenues could show some variations because of increased
competition or economic influences on revenues. Basic security provisions,
while satisfactory, are less stringent. Management performance appearance
appears adequate.
BBB The bonds in this group are regarded as having an adequate capacity to pay
interest and repay principal. Whereas bonds in this group 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 debt in this category than in higher rated categories.
Bonds rated BBB have the fourth strongest capacity for payment of debt
service.
BB Bonds rated BB are regarded, on balance, as predominately speculative with
respect to capacity to pay interest and repay principal in accordance with the
terms of the obligation. BB indicates the lowest 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.
S&P's letter ratings may be modified by the addition of a plus or minus sign,
which is used to show relative standing within the major rating categories,
except in the AAA category.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years or less are usually given note
ratings (designated SP-1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-
1+. Notes rated SP-2 have a satisfactory capacity to pay principal and
interest.
Description of S&P Commercial Paper Ratings:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
Municipal High
Income Fund Inc.
Statement of
Additional Information
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
- Included in Part A:
* Financial Highlights
- Included in Part B:
* The Registrant's Annual Report for the
fiscal year ended October 31, 1996 and
Report of Independent Accountants
dated December 10, 1996 are incorporated by
reference to the Definitive 30(b)2-1 filed
on January 13, 1997,
Accession # 91155-97-18
(2) Exhibits:
(a) (i) Articles of Incorporation are
incorporated by reference to the
Registrant's initial Registration
Statement, Registration No.33-20507,
filed with the SEC on March 8, 1988.
(ii) First Amendment to Articles of
Incorporation are incorporated by
reference to Registrant's Amendment
No. 2 to the Registration Statement,
Registration No. 33-20507, filed with the
SEC on October 24, 1988.
(iii) Second Amendment to Articles of
Incorporation are incorporated by
reference to Registrant's Amendment
No. 3 to the Registration Statement,
Registration No. 33-20507, filed with the
SEC on November 17, 1988
(b) (i) Amended Bylaws of Registrant are
incorporated by reference to the
Registrant's Amendment No. 3 to the
Registration Statement, Registration No.
33-20507, filed with the SEC on
November 17, 1988
(ii) Amendment to the Amended Bylaws of
Registrant are incorporated by reference
to the Registrant's Amendment No.4 to
its Registration Statement, Registration
No.811-5497, filed with the SEC on
March 1, 1990.
(c) Not Applicable
(d) Specimen Certificate of Common Stock, par
value $.01 per share is incorporated by reference
to the Registrant's Amendment No. 3 to the
Registration Statement, Registration No. 33-
20507, filed with the SEC on November 17,
1988
(e) Dividend Reinvestment Plan
(f) Not Applicable
(g)(i) Form of Investment Advisory Agreement
between Registrant and Greenwich Street
Advisors
(h) Form of Distribution Agreement between
Registrant and Smith Barney Shearson.
(i) Not Applicable
(j) Form of Custody Agreement between Registrant
and PNC Bank, National Association (filed herewith)
(k) (i) Form of Administration Agreement between
Registrant and Smith Barney Mutual Funds
Management, Inc.,
is filed herewith.
(l) Opinion and Consent of Counsel is incorporated by
reference to Pre-Effective Amendment No.1.
(m) Not Applicable
(n) Consent of Independent Auditors is filed herein.
(o) Not Applicable
(p) Subsciption Agreement between Registrant and Shearson
incorporated by reference to Registrant's
Amendment No. 3 to the Registration Statement,
Registration No. 33-20507, filed with the SEC
on November 17, 1988
(q) Not Applicable
(r) Financial Data Schedule for Registrant as of October 31, 1996
is filed herein.
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 $5000
Legal Fees $0
Accounting Expenses $0
Miscellaneous Expenses $0
Item 27. Persons Controlled by or Under Common Control
None
Item 28. Number of Holders of Securities
Title of Class Number of
Record
Stockholders
17,019,791 as of December 18, 1996
Shares of Common Stock,
par value $0.01 per share 1,749
Item 29. Indemnification
Under Article VII of Registrant's Articles of Incorporation, any past
or present director or officer of Registrant is indemnified to the fullest
extent permitted by law against liability and all expenses reasonably
incurred by him in connection with any action, suit or proceeding to which
he may be a party or otherwise involved by reason or his being or having
been a director or officer of Registrant. This provision does not
authorize indemnification when it is determined that the director or
officer would otherwise be liable to Registrant or its shareholders by
reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of his duties. Expenses may be paid by Registrant in advance of
the final disposition of any action, suit or proceeding upon receipt of an
undertaking by a director or officer to repay those expenses to Registrant
in the event that it is ultimately determined that indemnification of the
expenses is not authorized under Registrant's Articles of Incorporation.
Insofar as indemnification for liability arising under the Securities
Act of 1933, as amended (the "Securities Act"), may be permitted to
directors, officers and controlling persons of Registrant pursuant to the
foregoing provisions, or otherwise, Registrant has been advised that in the
opinion of the Securities and Exchange Commission, such indemnification is
against policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by Registrant of expenses incurred or
paid by a director, officer or controlling person of Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
See "Management of the Fund" in the Prospectus.
Smith Barney Mutual Funds Management Inc., ("Funds Management")
a New York corporation, is a registered investment adviser and is
wholly owned by Smith Barney Holdings Inc., which in turn is
wholly owned by Travelers Group Inc. Funds Management is
primarily engaged in the investment advisory business. Information
as to executive officers and directors of Funds Management is
included in its Form ADV filed with the Securities and Exchange
Commission (Registration number 801-3387) and is incorporated
herein by reference.
Item 31. Location of Accounts and Records
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
PNC Bank, N.A.
17th & Chestnut Streets
Philadelphia, Pennsylvania 19103
Item 32. Management Services
None
Item 33. Undertakings
1. Not Applicable
2. Not Applicable
3. Not Applicable
4. The Fund hereby undertakes:
(a) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933 (the "Act");
(2) to reflect in the Prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
Registration Statement; and
(3) to include any material information with respect to the plan of
distribution not previously disclosed in the Registration Statement or any
material change to such information in the Registration Statement.
(b) For the purpose of determining any liability under the Act, each
post-effective amendment shall be deemed to be a new Registration Statement
relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide
offering thereof.
(c) Not Applicable
5. Not Applicable
6. The Fund 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, as
amended, and the Investment Company Act of 1940, as amended, the
Registrant, MUNICIPAL HIGH INCOME FUND INC., has duly caused this
Amendment to the Registration Statement on Form N-2 to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
New York, State of New York on the 13th day of January, 1997.
MUNICIPAL HIGH INCOME FUND INC.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chief Executive Officer
We, the undersigned, hereby severally constitute and appoint Heath B.
McLendon, Christina T. Sydor and Michael Kocur
, our true and lawful attorneys, with full power,
to sign for us, and in our hands and in the capacities indicated below,
any and all
Post-Effective 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 full 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 on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon
Heath B. McLendon Chairman of the Board 1/13/97
Chief Executive Officer
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial 1/ 13 /97
and Accounting Officer)
/s/ Charles F. Barber*
Charles F. Barber Director 1/13/97
/s/ Allan J. Bloostein*
Allan J. Bloostein Director 1/13/97
/s/ Martin Brody*
Martin Brody Director 1/13/97
/s/ Dwight B. Crane*
Dwight B. Crane Director 1/13/97
/s/ Robert A. Frankel*
Robert A. Frankel Director 1/13/97
/s/ William R. Hutchinson*
William Hutchinson Director 1/13/97
*Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power-of-attorney dated December 3, 1996.
EXHIBIT INDEX
2(j) Custody Agreement
2(k) Administration Agreement
2(n) Auditors' Consent
Municipal High Income Fund Inc.
388 Greenwich Street
New York, New York 10013
A-3
CUSTODY AGREEMENT
Agreement made as of this day of , 1994,
between Municipal High Income Fund Inc, a corporation organized
and existing under the laws of the State of Maryland, having its
principal office and place of business at 388 Greenwich Street, New York,
NY 10013 (hereinafter called the "Fund"), and PNC Bank, National
Association
Pennsylvania corporation authorized to do banking business, hav-
ing its principal office and place of business at 17th and Chestnut
Streets, Philadelphia, Pennsylvania 19103 (hereinafter called the
"Custodian").
W I T N E S S E T H :
that for and in consideration of the mutual promises
hereinafter set forth, the Fund and the Custodian agree as
follows:
ARTICLE I
DEFINITIONS
Whenever used in this Agreement, the following words and
phrases, unless the context otherwise requires, shall have the
following meanings:
1. "Book-Entry System" shall mean the Federal
Reserve/Treasury book-entry system for United States and
federal agency securities, its successor or successors and its
nominee or nominees.
2. "Call Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and payment of the exercise
price, as specified therein, to purchase from the writer
thereof the specified underlying Securities.
3. "Certificate" shall mean any notice, instruction, or
other instrument in writing, authorized or required by this
Agreement to be given to the Custodian which is actually
received by the Custodian and signed on behalf of the Fund by
any two Officers, and the term Certificate shall also include
instructions by the Fund to the Custodian communicated by a
Terminal Link.
4. "Clearing Member" shall mean a registered
broker-dealer which is a clearing member under the rules of
O.C.C. and a member of a national securities exchange
qualified to act as a custodian for an investment company, or
any broker-dealer reasonably believed by the Custodian to be
such a clearing member.
5. "Collateral Account" shall mean a segregated account
so denominated which is specifically allocated to a Series and
pledged to the Custodian as security for, and in consideration
of, the Custodian's issuance of (a) any Put Option guarantee
letter or similar document described in paragraph 8 of Article
V herein, or (b) any receipt described in Article V or VIII
herein.
6. "Covered Call Option" shall mean an exchange traded
option entitling the holder, upon timely exercise and payment
of the exercise price, as specified therein, to purchase from
the writer thereof the specified underlying Securities
(excluding Futures Contracts) which are owned by the writer
thereof and subject to appropriate restrictions.
7. "Depository" shall mean The Depository Trust Company
("DTC"), a clearing agency registered with the Securities and
Exchange Commission, its successor or successors and its
nominee or nominees. The term "Depository" shall further mean
and include any other person authorized to act as a depository
under the Investment Company Act of 1940, its successor or
successors and its nominee or nominees, specifically identi-
fied in a certified copy of a resolution of the Fund's Board
of Trustees specifically approving deposits therein by the
Custodian.
8. "Financial Futures Contract" shall mean the firm
commitment to buy or sell fixed income securities including,
without limitation, U.S. Treasury Bills, U.S. Treasury Notes,
U.S. Treasury Bonds, domestic bank certificates of deposit,
and Eurodollar certificates of deposit, during a specified
month at an agreed upon price.
9. "Futures Contract" shall mean a Financial Futures
Contract and/or Stock Index Futures Contracts.
10. "Futures Contract Option" shall mean an option with
respect to a Futures Contract.
11. "Margin Account" shall mean a segregated account in
the name of a broker, dealer, futures commission merchant, or
a Clearing Member, or in the name of the Fund for the benefit
of a broker, dealer, futures commission merchant, or Clearing
Member, or otherwise, in accordance with an agreement between
the Fund, the Custodian and a broker, dealer, futures commis-
sion merchant or a Clearing Member (a "Margin Account Agree-
ment"), separate and distinct from the custody account, in
which certain Securities and/or money of the Fund shall be
- 2 -
deposited and withdrawn from time to time in connection with
such transactions as the Fund may from time to time
determine. Securities held in the Book-Entry System or the
Depository shall be deemed to have been deposited in, or
withdrawn from, a Margin Account upon the Custodian's effect-
ing an appropriate entry in its books and records.
12. "Money Market Security" shall be deemed to include,
without limitation, certain Reverse Repurchase Agreements,
debt obligations issued or guaranteed as to interest and
principal by the government of the United States or agencies
or instrumentalities thereof, any tax, bond or revenue
anticipation note issued by any state or municipal government
or public authority, commercial paper, certificates of deposit
and bankers' acceptances, repurchase agreements with respect
to the same and bank time deposits, where the purchase and
sale of such securities normally requires settlement in
federal funds on the same day as such purchase or sale.
13. "O.C.C." shall mean the Options Clearing Corpora-
tion, a clearing agency registered under Section 17A of the
Securities Exchange Act of 1934, its successor or successors,
and its nominee or nominees.
14. "Officers" shall be deemed to include the President,
any Vice President, the Secretary, the Clerk, the Treasurer,
the Controller, any Assistant Secretary, any Assistant Clerk,
any Assistant Treasurer, and any other person or persons,
whether or not any such other person is an officer of the
Fund, duly authorized by the Board of Trustees of the Fund to
execute any Certificate, instruction, notice or other instru-
ment on behalf of the Fund and listed in the Certificate an-
nexed hereto as Appendix A or such other Certificate as may be
received by the Custodian from time to time.
15. "Option" shall mean a Call Option, Covered Call Op-
tion, Stock Index Option and/or a Put Option.
16. "Oral Instructions" shall mean verbal instructions
actually received by the Custodian from an Officer or from a
person reasonably believed by the Custodian to be an Officer.
17. "Put Option" shall mean an exchange traded option
with respect to Securities other than Stock Index Options,
Futures Contracts, and Futures Contract Options entitling the
holder, upon timely exercise and tender of the specified
underlying Securities, to sell such Securities to the writer
thereof for the exercise price.
18. "Reverse Repurchase Agreement" shall mean an agree-
ment pursuant to which the Fund sells Securities and agrees to
repurchase such Securities at a described or specified date
and price.
- 3 -
19. "Security" shall be deemed to include, without
limitation, Money Market Securities, Call Options, Put Op-
tions, Stock Index Options, Stock Index Futures Contracts,
Stock Index Futures Contract Options, Financial Futures
Contracts, Financial Futures Contract Options, Reverse
Repurchase Agreements, common stocks and other securities hav-
ing characteristics similar to common stocks, preferred
stocks, debt obligations issued by state or municipal govern-
ments and by public authorities, (including, without limita-
tion, general obligation bonds, revenue bonds, industrial
bonds and industrial development bonds), bonds, debentures,
notes, mortgages or other obligations, and any certificates,
receipts, warrants or other instruments representing rights to
receive, purchase, sell or subscribe for the same, or evidenc-
ing or representing any other rights or interest therein, or
any property or assets.
20. "Senior Security Account" shall mean an account
maintained and specifically allocated to a Series under the
terms of this Agreement as a segregated account, by recorda-
tion or otherwise, within the custody account in which certain
Securities and/or other assets of the Fund specifically al-
located to such Series shall be deposited and withdrawn from
time to time in accordance with Certificates received by the
Custodian in connection with such transactions as the Fund may
from time to time determine.
21. "Series" shall mean the various portfolios, if any,
of the Fund as described from time to time in the current and
effective prospectus for the Fund and listed on Appendix B
hereto as amended from time to time.
22. "Shares" shall mean the shares of beneficial inter-
est of the Fund, each of which is, in the case of a Fund hav-
ing Series, allocated to a particular Series.
23. "Stock Index Futures Contract" shall mean a
bilateral agreement pursuant to which the parties agree to
take or make delivery of an amount of cash equal to a
specified dollar amount times the difference between the value
of a particular stock index at the close of the last business
day of the contract and the price at which the futures
contract is originally struck.
24. "Stock Index Option" shall mean an exchange traded
option entitling the holder, upon timely exercise, to receive
an amount of cash determined by reference to the difference
between the exercise price and the value of the index on the
date of exercise.
25. "Terminal Link" shall mean an electronic data
transmission link between the Fund and the Custodian requiring
in connection with each use of the Terminal Link by or on
behalf of the Fund use of an authorization code provided by
- 4 -
the Custodian and at least two access codes established by the
Fund.
ARTICLE II
APPOINTMENT OF CUSTODIAN
1. The Fund hereby constitutes and appoints the
Custodian as custodian of the Securities and moneys at any
time owned by the Fund during the period of this Agreement.
2. The Custodian hereby accepts appointment as such
custodian and agrees to perform the duties thereof as
hereinafter set forth.
ARTICLE III
CUSTODY OF CASH AND SECURITIES
1. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, the Fund will deliver or cause to
be delivered to the Custodian all Securities and all moneys
owned by it, at any time during the period of this Agreement,
and shall specify with respect to such Securities and money
the Series to which the same are specifically allocated. The
Custodian shall segregate, keep and maintain the assets of the
Series separate and apart. The Custodian will not be
responsible for any Securities and moneys not actually
received by it. The Custodian will be entitled to reverse any
credits made on the Fund's behalf where such credits have been
previously made and moneys are not finally collected. The
Fund shall deliver to the Custodian a certified resolution of
the Board of Trustees of the Fund, substantially in the form
of Exhibit A hereto, approving, authorizing and instructing
the Custodian on a continuous and on-going basis to deposit in
the Book-Entry System all Securities eligible for deposit
therein, regardless of the Series to which the same are
specifically allocated and to utilize the Book-Entry System to
the extent possible in connection with its performance
hereunder, including, without limitation, in connection with
settlements of purchases and sales of Securities, loans of
Securities and deliveries and returns of Securities col-
lateral. Prior to a deposit of Securities specifically al-
located to a Series in the Depository, the Fund shall deliver
to the Custodian a certified resolution of the Board of
Trustees of the Fund, substantially in the form of Exhibit B
hereto, approving, authorizing and instructing the Custodian
on a continuous and ongoing basis until instructed to the
contrary by a Certificate actually received by the Custodian
to deposit in the Depository all Securities specifically al-
located to such Series eligible for deposit therein, and to
utilize the Depository to the extent possible with respect to
such Securities in connection with its performance hereunder,
- 5 -
including, without limitation, in connection with settlements
of purchases and sales of Securities, loans of Securities, and
deliveries and returns of Securities collateral. Securities
and moneys deposited in either the Book-Entry System or the
Depository will be represented in accounts which include only
assets held by the Custodian for customers, including, but not
limited to, accounts in which the Custodian acts in a
fiduciary or representative capacity and will be specifically
allocated on the Custodian's books to the separate account for
the applicable Series. Prior to the Custodian's accepting,
utilizing and acting with respect to Clearing Member confirma-
tions for Options and transactions in Options for a Series as
provided in this Agreement, the Custodian shall have received
a certified resolution of the Fund's Board of Trustees,
substantially in the form of Exhibit C hereto, approving,
authorizing and instructing the Custodian on a continuous and
on-going basis, until instructed to the contrary by a
Certificate actually received by the Custodian, to accept,
utilize and act in accordance with such confirmations as
provided in this Agreement with respect to such Series.
2. The Custodian shall establish and maintain separate
accounts, in the name of each Series, and shall credit to the
separate account for each Series all moneys received by it for
the account of the Fund with respect to such Series. Money
credited to a separate account for a Series shall be disbursed
by the Custodian only:
(a) As hereinafter provided;
(b) Pursuant to Certificates setting forth the name
and address of the person to whom the payment is to be made,
the Series account from which payment is to be made and the
purpose for which payment is to be made; or
(c) In payment of the fees and in reimbursement of
the expenses and liabilities of the Custodian attributable to
such Series.
3. Promptly after the close of business on each day,
the Custodian shall furnish the Fund with confirmations and a
summary, on a per Series basis, of all transfers to or from
the account of the Fund for a Series, either hereunder or with
any co-custodian or sub-custodian appointed in accordance with
this Agreement during said day. Where Securities are
transferred to the account of the Fund for a Series, the
Custodian shall also by book-entry or otherwise identify as
belonging to such Series a quantity of Securities in a
fungible bulk of Securities registered in the name of the
Custodian (or its nominee) or shown on the Custodian's account
on the books of the Book-Entry System or the Depository. At
least monthly and from time to time, the Custodian shall
furnish the Fund with a detailed statement, on a per Series
basis, of the Securities and moneys held by the Custodian for
the Fund.
- 6 -
4. Except as otherwise provided in paragraph 7 of this
Article and in Article VIII, all Securities held by the
Custodian hereunder, which are issued or issuable only in
bearer form, except such Securities as are held in the
Book-Entry System, shall be held by the Custodian in that
form; all other Securities held hereunder may be registered in
the name of the Fund, in the name of any duly appointed
registered nominee of the Custodian as the Custodian may from
time to time determine, or in the name of the Book-Entry
System or the Depository or their successor or successors, or
their nominee or nominees. The Fund agrees to furnish to the
Custodian appropriate instruments to enable the Custodian to
hold or deliver in proper form for transfer, or to register in
the name of its registered nominee or in the name of the
Book-Entry System or the Depository any Securities which it
may hold hereunder and which may from time to time be
registered in the name of the Fund. The Custodian shall hold
all such Securities specifically allocated to a Series which
are not held in the Book-Entry System or in the Depository in
a separate account in the name of such Series physically
segregated at all times from those of any other person or
persons.
5. Except as otherwise provided in this Agreement and
unless otherwise instructed to the contrary by a Certificate,
the Custodian by itself, or through the use of the Book-Entry
System or the Depository with respect to Securities held
hereunder and therein deposited, shall with respect to all
Securities held for the Fund hereunder in accordance with
preceding paragraph 4:
(a) Collect all income due or payable;
(b) Present for payment and collect the amount pay-
able upon such Securities which are called, but only if either
(i) the Custodian receives a written notice of such call, or
(ii) notice of such call appears in one or more of the
publications listed in Appendix C annexed hereto, which may be
amended at any time by the Custodian without the prior
notification or consent of the Fund;
(c) Present for payment and collect the amount pay-
able upon all Securities which mature;
(d) Surrender Securities in temporary form for
definitive Securities;
(e) Execute, as custodian, any necessary declara-
tions or certificates of ownership under the Federal Income
Tax Laws or the laws or regulations of any other taxing
authority now or hereafter in effect; and
(f) Hold directly, or through the Book-Entry System
or the Depository with respect to Securities therein
deposited, for the account of a Series, all rights and similar
- 7 -
securities issued with respect to any Securities held by the
Custodian for such Series hereunder.
6. Upon receipt of a Certificate and not otherwise, the
Custodian, directly or through the use of the Book-Entry
System or the Depository, shall:
(a) Execute and deliver to such persons as may be
designated in such Certificate proxies, consents, authoriza-
tions, and any other instruments whereby the authority of the
Fund as owner of any Securities held by the Custodian
hereunder for the Series specified in such Certificate may be
exercised;
(b) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate in
exchange for other Securities or cash issued or paid in con-
nection with the liquidation, reorganization, refinancing,
merger, consolidation or recapitalization of any corporation,
or the exercise of any conversion privilege and receive and
hold hereunder specifically allocated to such Series any cash
or other Securities received in exchange;
(c) Deliver any Securities held by the Custodian
hereunder for the Series specified in such Certificate to any
protective committee, reorganization committee or other person
in connection with the reorganization, refinancing, merger,
consolidation, recapitalization or sale of assets of any
corporation, and receive and hold hereunder specifically al-
located to such Series such certificates of deposit, interim
receipts or other instruments or documents as may be issued to
it to evidence such delivery;
(d) Make such transfers or exchanges of the assets
of the Series specified in such Certificate, and take such
other steps as shall be stated in such Certificate to be for
the purpose of effectuating any duly authorized plan of
liquidation, reorganization, merger, consolidation or
recapitalization of the Fund; and
(e) Present for payment and collect the amount pay-
able upon Securities not described in preceding paragraph 5(b)
of this Article which may be called as specified in the
Certificate.
7. Notwithstanding any provision elsewhere contained
herein, the Custodian shall not be required to obtain posses-
sion of any instrument or certificate representing any Futures
Contract, any Option, or any Futures Contract Option until
after it shall have determined, or shall have received a
Certificate from the Fund stating, that any such instruments
or certificates are available. The Fund shall deliver to the
Custodian such a Certificate no later than the business day
preceding the availability of any such instrument or
certificate. Prior to such availability, the Custodian shall
- 8 -
comply with Section 17(f) of the Investment Company Act of
1940, as amended, in connection with the purchase, sale,
settlement, closing out or writing of Futures Contracts, Op-
tions, or Futures Contract Options by making payments or
deliveries specified in Certificates received by the Custodian
in connection with any such purchase, sale, writing, settle-
ment or closing out upon its receipt from a broker, dealer, or
futures commission merchant of a statement or confirmation
reasonably believed by the Custodian to be in the form
customarily used by brokers, dealers, or future commission
merchants with respect to such Futures Contracts, Options, or
Futures Contract Options, as the case may be, confirming that
such Security is held by such broker, dealer or futures com-
mission merchant, in book-entry form or otherwise, in the name
of the Custodian (or any nominee of the Custodian) as
custodian for the Fund, provided, however, that notwithstand-
ing the foregoing, payments to or deliveries from the Margin
Account and payments with respect to Securities to which a
Margin Account relates, shall be made in accordance with the
terms and conditions of the Margin Account Agreement.
Whenever any such instruments or certificates are available,
the Custodian shall, notwithstanding any provision in this
Agreement to the contrary, make payment for any Futures
Contract, Option, or Futures Contract Option for which such
instruments or such certificates are available only against
the delivery to the Custodian of such instrument or such
certificate, and deliver any Futures Contract, Option or
Futures Contract Option for which such instruments or such
certificates are available only against receipt by the
Custodian of payment therefor. Any such instrument or
certificate delivered to the Custodian shall be held by the
Custodian hereunder in accordance with, and subject to, the
provisions of this Agreement.
ARTICLE IV
PURCHASE AND SALE OF INVESTMENTS OF THE FUND
OTHER THAN OPTIONS, FUTURES CONTRACTS AND
FUTURES CONTRACT OPTIONS
1. Promptly after each purchase of Securities by the
Fund, other than a purchase of an Option, a Futures Contract,
or a Futures Contract Option, the Fund shall deliver to the
Custodian (i) with respect to each purchase of Securities
which are not Money Market Securities, a Certificate, and (ii)
with respect to each purchase of Money Market Securities, a
Certificate or Oral Instructions, specifying with respect to
each such purchase: (a) the Series to which such Securities
are to be specifically allocated; (b) the name of the issuer
and the title of the Securities; (c) the number of shares or
the principal amount purchased and accrued interest, if any;
(d) the date of purchase and settlement; (e) the purchase
price per unit; (f) the total amount payable upon such
purchase; (g) the name of the person from whom or the broker
- 9 -
through whom the purchase was made, and the name of the
clearing broker, if any; and (h) the name of the broker to
whom payment is to be made. The Custodian shall, upon receipt
of Securities purchased by or for the Fund, pay to the broker
specified in the Certificate out of the moneys held for the
account of such Series the total amount payable upon such
purchase, provided that the same conforms to the total amount
payable as set forth in such Certificate or Oral Instructions.
2. Promptly after each sale of Securities by the Fund,
other than a sale of any Option, Futures Contract, Futures
Contract Option, or any Reverse Repurchase Agreement, the Fund
shall deliver to the Custodian (i) with respect to each sale
of Securities which are not Money Market Securities, a
Certificate, and (ii) with respect to each sale of Money
Market Securities, a Certificate or Oral Instructions,
specifying with respect to each such sale: (a) the Series to
which such Securities were specifically allocated; (b) the
name of the issuer and the title of the Security; (c) the
number of shares or principal amount sold, and accrued
interest, if any; (d) the date of sale; (e) the sale price per
unit; (f) the total amount payable to the Fund upon such sale;
(g) the name of the broker through whom or the person to whom
the sale was made, and the name of the clearing broker, if
any; and (h) the name of the broker to whom the Securities are
to be delivered. The Custodian shall deliver the Securities
specifically allocated to such Series to the broker specified
in the Certificate against payment upon receipt of the total
amount payable to the Fund upon such sale, provided that the
same conforms to the total amount payable as set forth in such
Certificate or Oral Instructions.
ARTICLE V
OPTIONS
1. Promptly after the purchase of any Option by the
Fund, the Fund shall deliver to the Custodian a Certificate
specifying with respect to each Option purchased: (a) the
Series to which such Option is specifically allocated; (b) the
type of Option (put or call); (c) the name of the issuer and
the title and number of shares subject to such Option or, in
the case of a Stock Index Option, the stock index to which
such Option relates and the number of Stock Index Options
purchased; (d) the expiration date; (e) the exercise price;
(f) the dates of purchase and settlement; (g) the total amount
payable by the Fund in connection with such purchase; (h) the
name of the Clearing Member through whom such Option was
purchased; and (i) the name of the broker to whom payment is
to be made. The Custodian shall pay, upon receipt of a Clear-
ing Member's statement confirming the purchase of such Option
held by such Clearing Member for the account of the Custodian
(or any duly appointed and registered nominee of the
Custodian) as custodian for the Fund, out of moneys held for
- 10 -
the account of the Series to which such Option is to be
specifically allocated, the total amount payable upon such
purchase to the Clearing Member through whom the purchase was
made, provided that the same conforms to the total amount pay-
able as set forth in such Certificate.
2. Promptly after the sale of any Option purchased by
the Fund pursuant to paragraph 1 hereof, the Fund shall
deliver to the Custodian a Certificate specifying with respect
to each such sale: (a) the Series to which such Option was
specifically allocated; (b) the type of Option (put or call);
(c) the name of the issuer and the title and number of shares
subject to such Option or, in the case of a Stock Index Op-
tion, the stock index to which such Option relates and the
number of Stock Index Options sold; (d) the date of sale; (e)
the sale price; (f) the date of settlement; (g) the total
amount payable to the Fund upon such sale; and (h) the name of
the Clearing Member through whom the sale was made. The
Custodian shall consent to the delivery of the Option sold by
the Clearing Member which previously supplied the confirmation
described in preceding paragraph 1 of this Article with
respect to such Option against payment to the Custodian of the
total amount payable to the Fund, provided that the same
conforms to the total amount payable as set forth in such
Certificate.
3. Promptly after the exercise by the Fund of any Call
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver to the Custodian a Certificate specify-
ing with respect to such Call Option: (a) the Series to which
such Call Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the
Call Option; (c) the expiration date; (d) the date of exercise
and settlement; (e) the exercise price per share; (f) the
total amount to be paid by the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Call
Option was exercised. The Custodian shall, upon receipt of
the Securities underlying the Call Option which was exercised,
pay out of the moneys held for the account of the Series to
which such Call Option was specifically allocated the total
amount payable to the Clearing Member through whom the Call
Option was exercised, provided that the same conforms to the
total amount payable as set forth in such Certificate.
4. Promptly after the exercise by the Fund of any Put
Option purchased by the Fund pursuant to paragraph 1 hereof,
the Fund shall deliver to the Custodian a Certificate specify-
ing with respect to such Put Option: (a) the Series to which
such Put Option was specifically allocated; (b) the name of
the issuer and the title and number of shares subject to the
Put Option; (c) the expiration date; (d) the date of exercise
and settlement; (e) the exercise price per share; (f) the
total amount to be paid to the Fund upon such exercise; and
(g) the name of the Clearing Member through whom such Put Op-
tion was exercised. The Custodian shall, upon receipt of the
- 11 -
amount payable upon the exercise of the Put Option, deliver or
direct the Depository to deliver the Securities specifically
allocated to such Series, provided the same conforms to the
amount payable to the Fund as set forth in such Certificate.
5. Promptly after the exercise by the Fund of any Stock
Index Option purchased by the Fund pursuant to paragraph 1
hereof, the Fund shall deliver to the Custodian a Certificate
specifying with respect to such Stock Index Option: (a) the
Series to which such Stock Index Option was specifically al-
located; (b) the type of Stock Index Option (put or call); (c)
the number of Options being exercised; (d) the stock index to
which such Option relates; (e) the expiration date; (f) the
exercise price; (g) the total amount to be received by the
Fund in connection with such exercise; and (h) the Clearing
Member from whom such payment is to be received.
6. Whenever the Fund writes a Covered Call Option, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Covered Call Option: (a) the
Series for which such Covered Call Option was written; (b) the
name of the issuer and the title and number of shares for
which the Covered Call Option was written and which underlie
the same; (c) the expiration date; (d) the exercise price; (e)
the premium to be received by the Fund; (f) the date such
Covered Call Option was written; and (g) the name of the
Clearing Member through whom the premium is to be received.
The Custodian shall deliver or cause to be delivered, in
exchange for receipt of the premium specified in the
Certificate with respect to such Covered Call Option, such
receipts as are required in accordance with the customs
prevailing among Clearing Members dealing in Covered Call Op-
tions and shall impose, or direct the Depository to impose,
upon the underlying Securities specified in the Certificate
specifically allocated to such Series such restrictions as may
be required by such receipts. Notwithstanding the foregoing,
the Custodian has the right, upon prior written notification
to the Fund, at any time to refuse to issue any receipts for
Securities in the possession of the Custodian and not
deposited with the Depository underlying a Covered Call Op-
tion.
7. Whenever a Covered Call Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian a
Certificate instructing the Custodian to deliver, or to direct
the Depository to deliver, the Securities subject to such
Covered Call Option and specifying: (a) the Series for which
such Covered Call Option was written; (b) the name of the is-
suer and the title and number of shares subject to the Covered
Call Option; (c) the Clearing Member to whom the underlying
Securities are to be delivered; and (d) the total amount pay-
able to the Fund upon such delivery. Upon the return and/or
cancellation of any receipts delivered pursuant to paragraph 6
of this Article, the Custodian shall deliver, or direct the
- 12 -
Depository to deliver, the underlying Securities as specified
in the Certificate against payment of the amount to be
received as set forth in such Certificate.
8. Whenever the Fund writes a Put Option, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing with respect to such Put Option: (a) the Series for which
such Put Option was written; (b) the name of the issuer and
the title and number of shares for which the Put Option is
written and which underlie the same; (c) the expiration date;
(d) the exercise price; (e) the premium to be received by the
Fund; (f) the date such Put Option is written; (g) the name of
the Clearing Member through whom the premium is to be received
and to whom a Put Option guarantee letter is to be delivered;
(h) the amount of cash, and/or the amount and kind of Securi-
ties, if any, specifically allocated to such Series to be
deposited in the Senior Security Account for such Series; and
(i) the amount of cash and/or the amount and kind of Securi-
ties specifically allocated to such Series to be deposited
into the Collateral Account for such Series. The Custodian
shall, after making the deposits into the Collateral Account
specified in the Certificate, issue a Put Option guarantee
letter substantially in the form utilized by the Custodian on
the date hereof, and deliver the same to the Clearing Member
specified in the Certificate against receipt of the premium
specified in said Certificate. Notwithstanding the foregoing,
the Custodian shall be under no obligation to issue any Put
Option guarantee letter or similar document if it is unable to
make any of the representations contained therein.
9. Whenever a Put Option written by the Fund and
described in the preceding paragraph is exercised, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing: (a) the Series to which such Put Option was written; (b)
the name of the issuer and title and number of shares subject
to the Put Option; (c) the Clearing Member from whom the
underlying Securities are to be received; (d) the total amount
payable by the Fund upon such delivery; (e) the amount of cash
and/or the amount and kind of Securities specifically al-
located to such Series to be withdrawn from the Collateral
Account for such Series and (f) the amount of cash and/or the
amount and kind of Securities, specifically allocated to such
Series, if any, to be withdrawn from the Senior Security Ac-
count. Upon the return and/or cancellation of any Put Option
guarantee letter or similar document issued by the Custodian
in connection with such Put Option, the Custodian shall pay
out of the moneys held for the account of the Series to which
such Put Option was specifically allocated the total amount
payable to the Clearing Member specified in the Certificate as
set forth in such Certificate against delivery of such Securi-
ties, and shall make the withdrawals specified in such
Certificate.
10. Whenever the Fund writes a Stock Index Option, the
Fund shall promptly deliver to the Custodian a Certificate
- 13 -
specifying with respect to such Stock Index Option: (a) the
Series for which such Stock Index Option was written; (b)
whether such Stock Index Option is a put or a call; (c) the
number of options written; (d) the stock index to which such
Option relates; (e) the expiration date; (f) the exercise
price; (g) the Clearing Member through whom such Option was
written; (h) the premium to be received by the Fund; (i) the
amount of cash and/or the amount and kind of Securities, if
any, specifically allocated to such Series to be deposited in
the Senior Security Account for such Series; (j) the amount of
cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in the
Collateral Account for such Series; and (k) the amount of cash
and/or the amount and kind of Securities, if any, specifically
allocated to such Series to be deposited in a Margin Account,
and the name in which such account is to be or has been
established. The Custodian shall, upon receipt of the premium
specified in the Certificate, make the deposits, if any, into
the Senior Security Account specified in the Certificate, and
either (1) deliver such receipts, if any, which the Custodian
has specifically agreed to issue, which are in accordance with
the customs prevailing among Clearing Members in Stock Index
Options and make the deposits into the Collateral Account
specified in the Certificate, or (2) make the deposits into
the Margin Account specified in the Certificate.
11. Whenever a Stock Index Option written by the Fund
and described in the preceding paragraph of this Article is
exercised, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to such Stock Index Op-
tion: (a) the Series for which such Stock Index Option was
written; (b) such information as may be necessary to identify
the Stock Index Option being exercised; (c) the Clearing
Member through whom such Stock Index Option is being
exercised; (d) the total amount payable upon such exercise,
and whether such amount is to be paid by or to the Fund; (e)
the amount of cash and/or amount and kind of Securities, if
any, to be withdrawn from the Margin Account; and (f) the
amount of cash and/or amount and kind of Securities, if any,
to be withdrawn from the Senior Security Account for such
Series; and the amount of cash and/or the amount and kind of
Securities, if any, to be withdrawn from the Collateral Ac-
count for such Series. Upon the return and/or cancellation of
the receipt, if any, delivered pursuant to the preceding
paragraph of this Article, the Custodian shall pay out of the
moneys held for the account of the Series to which such Stock
Index Option was specifically allocated to the Clearing Member
specified in the Certificate the total amount payable, if any,
as specified therein.
12. Whenever the Fund purchases any Option identical to
a previously written Option described in paragraphs, 6, 8 or
10 of this Article in a transaction expressly designated as a
"Closing Purchase Transaction" in order to liquidate its posi-
tion as a writer of an Option, the Fund shall promptly deliver
- 14 -
to the Custodian a Certificate specifying with respect to the
Option being purchased: (a) that the transaction is a Closing
Purchase Transaction; (b) the Series for which the Option was
written; (c) the name of the issuer and the title and number
of shares subject to the Option, or, in the case of a Stock
Index Option, the stock index to which such Option relates and
the number of Options held; (d) the exercise price; (e) the
premium to be paid by the Fund; (f) the expiration date; (g)
the type of Option (put or call); (h) the date of such
purchase; (i) the name of the Clearing Member to whom the
premium is to be paid; and (j) the amount of cash and/or the
amount and kind of Securities, if any, to be withdrawn from
the Collateral Account, a specified Margin Account, or the
Senior Security Account for such Series. Upon the Custodian's
payment of the premium and the return and/or cancellation of
any receipt issued pursuant to paragraphs 6, 8 or 10 of this
Article with respect to the Option being liquidated through
the Closing Purchase Transaction, the Custodian shall remove,
or direct the Depository to remove, the previously imposed
restrictions on the Securities underlying the Call Option.
13. Upon the expiration, exercise or consummation of a
Closing Purchase Transaction with respect to any Option
purchased or written by the Fund and described in this
Article, the Custodian shall delete such Option from the
statements delivered to the Fund pursuant to paragraph 3
Article III herein, and upon the return and/or cancellation of
any receipts issued by the Custodian, shall make such
withdrawals from the Collateral Account, and the Margin Ac-
count and/or the Senior Security Account as may be specified
in a Certificate received in connection with such expiration,
exercise, or consummation.
ARTICLE VI
FUTURES CONTRACTS
1. Whenever the Fund shall enter into a Futures
Contract, the Fund shall deliver to the Custodian a
Certificate specifying with respect to such Futures Contract,
(or with respect to any number of identical Futures
Contract(s)): (a) the Series for which the Futures Contract is
being entered; (b) the category of Futures Contract (the name
of the underlying stock index or financial instrument); (c)
the number of identical Futures Contracts entered into; (d)
the delivery or settlement date of the Futures Contract(s);
(e) the date the Futures Contract(s) was (were) entered into
and the maturity date; (f) whether the Fund is buying (going
long) or selling (going short) on such Futures Contract(s);
(g) the amount of cash and/or the amount and kind of Securi-
ties, if any, to be deposited in the Senior Security Account
for such Series; (h) the name of the broker, dealer, or
futures commission merchant through whom the Futures Contract
was entered into; and (i) the amount of fee or commission, if
- 15 -
any, to be paid and the name of the broker, dealer, or futures
commission merchant to whom such amount is to be paid. The
Custodian shall make the deposits, if any, to the Margin Ac-
count in accordance with the terms and conditions of the
Margin Account Agreement. The Custodian shall make payment
out of the moneys specifically allocated to such Series of the
fee or commission, if any, specified in the Certificate and
deposit in the Senior Security Account for such Series the
amount of cash and/or the amount and kind of Securities
specified in said Certificate.
2. (a) Any variation margin payment or similar payment
required to be made by the Fund to a broker, dealer, or
futures commission merchant with respect to an outstanding
Futures Contract, shall be made by the Custodian in accordance
with the terms and conditions of the Margin Account Agree-
ment.
(b) Any variation margin payment or similar payment
from a broker, dealer, or futures commission merchant to the
Fund with respect to an outstanding Futures Contract, shall be
received and dealt with by the Custodian in accordance with
the terms and conditions of the Margin Account Agreement.
3. Whenever a Futures Contract held by the Custodian
hereunder is retained by the Fund until delivery or settlement
is made on such Futures Contract, the Fund shall deliver to
the Custodian a Certificate specifying: (a) the Futures
Contract and the Series to which the same relates; (b) with
respect to a Stock Index Futures Contract, the total cash
settlement amount to be paid or received, and with respect to
a Financial Futures Contract, the Securities and/or amount of
cash to be delivered or received; (c) the broker, dealer, or
futures commission merchant to or from whom payment or
delivery is to be made or received; and (d) the amount of cash
and/or Securities to be withdrawn from the Senior Security
Account for such Series. The Custodian shall make the payment
or delivery specified in the Certificate, and delete such
Futures Contract from the statements delivered to the Fund
pursuant to paragraph 3 of Article III herein.
4. Whenever the Fund shall enter into a Futures
Contract to offset a Futures Contract held by the Custodian
hereunder, the Fund shall deliver to the Custodian a
Certificate specifying: (a) the items of information required
in a Certificate described in paragraph 1 of this Article, and
(b) the Futures Contract being offset. The Custodian shall
make payment out of the money specifically allocated to such
Series of the fee or commission, if any, specified in the
Certificate and delete the Futures Contract being offset from
the statements delivered to the Fund pursuant to paragraph 3
of Article III herein, and make such withdrawals from the
Senior Security Account for such Series as may be specified in
such Certificate. The withdrawals, if any, to be made from
- 16 -
the Margin Account shall be made by the Custodian in ac-
cordance with the terms and conditions of the Margin Account
Agreement.
ARTICLE VII
FUTURES CONTRACT OPTIONS
1. Promptly after the purchase of any Futures Contract
Option by the Fund, the Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to such
Futures Contract Option: (a) the Series to which such Option
is specifically allocated; (b) the type of Futures Contract
Option (put or call); (c) the type of Futures Contract and
such other information as may be necessary to identify the
Futures Contract underlying the Futures Contract Option
purchased; (d) the expiration date; (e) the exercise price;
(f) the dates of purchase and settlement; (g) the amount of
premium to be paid by the Fund upon such purchase; (h) the
name of the broker or futures commission merchant through whom
such option was purchased; and (i) the name of the broker, or
futures commission merchant, to whom payment is to be made.
The Custodian shall pay out of the moneys specifically al-
located to such Series, the total amount to be paid upon such
purchase to the broker or futures commissions merchant through
whom the purchase was made, provided that the same conforms to
the amount set forth in such Certificate.
2. Promptly after the sale of any Futures Contract Op-
tion purchased by the Fund pursuant to paragraph 1 hereof, the
Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to each such sale: (a) Series to which
such Futures Contract Option was specifically allocated; (b)
the type of Future Contract Option (put or call); (c) the type
of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the
Futures Contract Option; (d) the date of sale; (e) the sale
price; (f) the date of settlement; (g) the total amount pay-
able to the Fund upon such sale; and (h) the name of the
broker of futures commission merchant through whom the sale
was made. The Custodian shall consent to the cancellation of
the Futures Contract Option being closed against payment to
the Custodian of the total amount payable to the Fund,
provided the same conforms to the total amount payable as set
forth in such Certificate.
3. Whenever a Futures Contract Option purchased by the
Fund pursuant to paragraph 1 is exercised by the Fund, the
Fund shall promptly deliver to the Custodian a Certificate
specifying: (a) the Series to which such Futures Contract Op-
tion was specifically allocated; (b) the particular Futures
Contract Option (put or call) being exercised; (c) the type of
Futures Contract underlying the Futures Contract Option; (d)
the date of exercise; (e) the name of the broker or futures
- 17 -
commission merchant through whom the Futures Contract Option
is exercised; (f) the net total amount, if any, payable by the
Fund; (g) the amount, if any, to be received by the Fund; and
(h) the amount of cash and/or the amount and kind of Securi-
ties to be deposited in the Senior Security Account for such
Series. The Custodian shall make, out of the moneys and
Securities specifically allocated to such Series, the pay-
ments, if any, and the deposits, if any, into the Senior
Security Account as specified in the Certificate. The
deposits, if any, to be made to the Margin Account shall be
made by the Custodian in accordance with the terms and condi-
tions of the Margin Account Agreement.
4. Whenever the Fund writes a Futures Contract Option,
the Fund shall promptly deliver to the Custodian a Certificate
specifying with respect to such Futures Contract Option: (a)
the Series for which such Futures Contract Option was written;
(b) the type of Futures Contract Option (put or call); (c) the
type of Futures Contract and such other information as may be
necessary to identify the Futures Contract underlying the
Futures Contract Option; (d) the expiration date; (e) the
exercise price; (f) the premium to be received by the Fund;
(g) the name of the broker or futures commission merchant
through whom the premium is to be received; and (h) the amount
of cash and/or the amount and kind of Securities, if any, to
be deposited in the Senior Security Account for such Series.
The Custodian shall, upon receipt of the premium specified in
the Certificate, make out of the moneys and Securities
specifically allocated to such Series the deposits into the
Senior Security Account, if any, as specified in the
Certificate. The deposits, if any, to be made to the Margin
Account shall be made by the Custodian in accordance with the
terms and conditions of the Margin Account Agreement.
5. Whenever a Futures Contract Option written by the
Fund which is a call is exercised, the Fund shall promptly
deliver to the Custodian a Certificate specifying: (a) the
Series to which such Futures Contract Option was specifically
allocated; (b) the particular Futures Contract Option
exercised; (c) the type of Futures Contract underlying the
Futures Contract Option; (d) the name of the broker or futures
commission merchant through whom such Futures Contract Option
was exercised; (e) the net total amount, if any, payable to
the Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount of
cash and/or the amount and kind of Securities to be deposited
in the Senior Security Account for such Series. The Custodian
shall, upon its receipt of the net total amount payable to the
Fund, if any, specified in such Certificate make the payments,
if any, and the deposits, if any, into the Senior Security
Account as specified in the Certificate. The deposits, if any,
to be made to the Margin Account shall be made by the
Custodian in accordance with the terms and conditions of the
Margin Account Agreement.
- 18 -
6. Whenever a Futures Contract Option which is written
by the Fund and which is a put is exercised, the Fund shall
promptly deliver to the Custodian a Certificate specifying:
(a) the Series to which such Option was specifically al-
located; (b) the particular Futures Contract Option exercised;
(c) the type of Futures Contract underlying such Futures
Contract Option; (d) the name of the broker or futures commis-
sion merchant through whom such Futures Contract Option is
exercised; (e) the net total amount, if any, payable to the
Fund upon such exercise; (f) the net total amount, if any,
payable by the Fund upon such exercise; and (g) the amount and
kind of Securities and/or cash to be withdrawn from or
deposited in, the Senior Security Account for such Series, if
any. The Custodian shall, upon its receipt of the net total
amount payable to the Fund, if any, specified in the
Certificate, make out of the moneys and Securities
specifically allocated to such Series, the payments, if any,
and the deposits, if any, into the Senior Security Account as
specified in the Certificate. The deposits to and/or
withdrawals from the Margin Account, if any, shall be made by
the Custodian in accordance with the terms and conditions of
the Margin Account Agreement.
7. Whenever the Fund purchases any Futures Contract
Option identical to a previously written Futures Contract Op-
tion described in this Article in order to liquidate its posi-
tion as a writer of such Futures Contract Option, the Fund
shall promptly deliver to the Custodian a Certificate specify-
ing with respect to the Futures Contract Option being
purchased: (a) the Series to which such Option is specifically
allocated; (b) that the transaction is a closing transaction;
(c) the type of Future Contract and such other information as
may be necessary to identify the Futures Contract underlying
the Futures Option Contract; (d) the exercise price; (e) the
premium to be paid by the Fund; (f) the expiration date; (g)
the name of the broker or futures commission merchant to whom
the premium is to be paid; and (h) the amount of cash and/or
the amount and kind of Securities, if any, to be withdrawn
from the Senior Security Account for such Series. The
Custodian shall effect the withdrawals from the Senior
Security Account specified in the Certificate. The withdraw-
als, if any, to be made from the Margin Account shall be made
by the Custodian in accordance with the terms and conditions
of the Margin Account Agreement.
8. Upon the expiration, exercise, or consummation of a
closing transaction with respect to, any Futures Contract Op-
tion written or purchased by the Fund and described in this
Article, the Custodian shall (a) delete such Futures Contract
Option from the statements delivered to the Fund pursuant to
paragraph 3 of Article III herein and, (b) make such withdraw-
als from and/or in the case of an exercise such deposits into
the Senior Security Account as may be specified in a
Certificate. The deposits to and/or withdrawals from the
- 19 -
Margin Account, if any, shall be made by the Custodian in ac-
cordance with the terms and conditions of the Margin Account
Agreement.
9. Futures Contracts acquired by the Fund through the
exercise of a Futures Contract Option described in this
Article shall be subject to Article VI hereof.
ARTICLE VIII
SHORT SALES
1. Promptly after any short sales by any Series of the
Fund, the Fund shall promptly deliver to the Custodian a
Certificate specifying: (a) the Series for which such short
sale was made; (b) the name of the issuer and the title of the
Security; (c) the number of shares or principal amount sold,
and accrued interest or dividends, if any; (d) the dates of
the sale and settlement; (e) the sale price per unit; (f) the
total amount credited to the Fund upon such sale, if any, (g)
the amount of cash and/or the amount and kind of Securities,
if any, which are to be deposited in a Margin Account and the
name in which such Margin Account has been or is to be
established; (h) the amount of cash and/or the amount and kind
of Securities, if any, to be deposited in a Senior Security
Account, and (i) the name of the broker through whom such
short sale was made. The Custodian shall upon its receipt of
a statement from such broker confirming such sale and that the
total amount credited to the Fund upon such sale, if any, as
specified in the Certificate is held by such broker for the
account of the Custodian (or any nominee of the Custodian) as
custodian of the Fund, issue a receipt or make the deposits
into the Margin Account and the Senior Security Account
specified in the Certificate.
2. In connection with the closing-out of any short
sale, the Fund shall promptly deliver to the Custodian a
Certificate specifying with respect to each such closing out:
(a) the Series for which such transaction is being made; (b)
the name of the issuer and the title of the Security; (c) the
number of shares or the principal amount, and accrued interest
or dividends, if any, required to effect such closing-out to
be delivered to the broker; (d) the dates of closing-out and
settlement; (e) the purchase price per unit; (f) the net total
amount payable to the Fund upon such closing-out; (g) the net
total amount payable to the broker upon such closing-out; (h)
the amount of cash and the amount and kind of Securities to be
withdrawn, if any, from the Margin Account; (i) the amount of
cash and/or the amount and kind of Securities, if any, to be
withdrawn from the Senior Security Account; and (j) the name
of the broker through whom the Fund is effecting such
closing-out. The Custodian shall, upon receipt of the net
total amount payable to the Fund upon such closing-out, and
the return and/or cancellation of the receipts, if any, issued
- 20 -
by the Custodian with respect to the short sale being
closed-out, pay out of the moneys held for the account of the
Fund to the broker the net total amount payable to the broker,
and make the withdrawals from the Margin Account and the
Senior Security Account, as the same are specified in the
Certificate.
ARTICLE IX
REVERSE REPURCHASE AGREEMENTS
1. Promptly after the Fund enters a Reverse Repurchase
Agreement with respect to Securities and money held by the
Custodian hereunder, the Fund shall deliver to the Custodian a
Certificate, or in the event such Reverse Repurchase Agreement
is a Money Market Security, a Certificate or Oral Instructions
specifying: (a) the Series for which the Reverse Repurchase
Agreement is entered; (b) the total amount payable to the Fund
in connection with such Reverse Repurchase Agreement and
specifically allocated to such Series; (c) the broker or
dealer through or with whom the Reverse Repurchase Agreement
is entered; (d) the amount and kind of Securities to be
delivered by the Fund to such broker or dealer; (e) the date
of such Reverse Repurchase Agreement; and (f) the amount of
cash and/or the amount and kind of Securities, if any,
specifically allocated to such Series to be deposited in a
Senior Security Account for such Series in connection with
such Reverse Repurchase Agreement. The Custodian shall, upon
receipt of the total amount payable to the Fund specified in
the Certificate or Oral Instructions make the delivery to the
broker or dealer, and the deposits, if any, to the Senior
Security Account, specified in such Certificate or Oral
Instructions.
2. Upon the termination of a Reverse Repurchase Agree-
ment described in preceding paragraph 1 of this Article, the
Fund shall promptly deliver a Certificate or, in the event
such Reverse Repurchase Agreement is a Money Market Security,
a Certificate or Oral Instructions to the Custodian
specifying: (a) the Reverse Repurchase Agreement being
terminated and the Series for which same was entered; (b) the
total amount payable by the Fund in connection with such
termination; (c) the amount and kind of Securities to be
received by the Fund and specifically allocated to such Series
in connection with such termination; (d) the date of termina-
tion; (e) the name of the broker or dealer with or through
whom the Reverse Repurchase Agreement is to be terminated; and
(f) the amount of cash and/or the amount and kind of Securi-
ties to be withdrawn from the Senior Securities Account for
such Series. The Custodian shall, upon receipt of the amount
and kind of Securities to be received by the Fund specified in
the Certificate or Oral Instructions, make the payment to the
broker or dealer, and the withdrawals, if any, from the Senior
- 21 -
Security Account, specified in such Certificate or Oral
Instructions.
ARTICLE X
LOAN OF PORTFOLIO SECURITIES OF THE FUND
1. Promptly after each loan of portfolio Securities
specifically allocated to a Series held by the Custodian
hereunder, the Fund shall deliver or cause to be delivered to
the Custodian a Certificate specifying with respect to each
such loan: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the
title of the Securities, (c) the number of shares or the
principal amount loaned, (d) the date of loan and delivery,
(e) the total amount to be delivered to the Custodian against
the loan of the Securities, including the amount of cash col-
lateral and the premium, if any, separately identified, and
(f) the name of the broker, dealer, or financial institution
to which the loan was made. The Custodian shall deliver the
Securities thus designated to the broker, dealer or financial
institution to which the loan was made upon receipt of the
total amount designated as to be delivered against the loan of
Securities. The Custodian may accept payment in connection
with a delivery otherwise than through the Book-Entry System
or Depository only in the form of a certified or bank
cashier's check payable to the order of the Fund or the
Custodian drawn on New York Clearing House funds and may
deliver Securities in accordance with the customs prevailing
among dealers in securities.
2. Promptly after each termination of the loan of
Securities by the Fund, the Fund shall deliver or cause to be
delivered to the Custodian a Certificate specifying with
respect to each such loan termination and return of Securi-
ties: (a) the Series to which the loaned Securities are
specifically allocated; (b) the name of the issuer and the
title of the Securities to be returned, (c) the number of
shares or the principal amount to be returned, (d) the date of
termination, (e) the total amount to be delivered by the
Custodian (including the cash collateral for such Securities
minus any offsetting credits as described in said
Certificate), and (f) the name of the broker, dealer, or
financial institution from which the Securities will be
returned. The Custodian shall receive all Securities returned
from the broker, dealer, or financial institution to which
such Securities were loaned and upon receipt thereof shall
pay, out of the moneys held for the account of the Fund, the
total amount payable upon such return of Securities as set
forth in the Certificate.
- 22 -
ARTICLE XI
CONCERNING MARGIN ACCOUNTS, SENIOR SECURITY
ACCOUNTS, AND COLLATERAL ACCOUNTS
1. The Custodian shall, from time to time, make such
deposits to, or withdrawals from, a Senior Security Account as
specified in a Certificate received by the Custodian. Such
Certificate shall specify the Series for which such deposit or
withdrawal is to be made and the amount of cash and/or the
amount and kind of Securities specifically allocated to such
Series to be deposited in, or withdrawn from, such Senior
Security Account for such Series. In the event that the Fund
fails to specify in a Certificate the Series, the name of the
issuer, the title and the number of shares or the principal
amount of any particular Securities to be deposited by the
Custodian into, or withdrawn from, a Senior Securities Ac-
count, the Custodian shall be under no obligation to make any
such deposit or withdrawal and shall so notify the Fund.
2. The Custodian shall make deliveries or payments from
a Margin Account to the broker, dealer, futures commission
merchant or Clearing Member in whose name, or for whose
benefit, the account was established as specified in the
Margin Account Agreement.
3. Amounts received by the Custodian as payments or
distributions with respect to Securities deposited in any
Margin Account shall be dealt with in accordance with the
terms and conditions of the Margin Account Agreement.
4. The Custodian shall have a continuing lien and
security interest in and to any property at any time held by
the Custodian in any Collateral Account described herein. In
accordance with applicable law the Custodian may enforce its
lien and realize on any such property whenever the Custodian
has made payment or delivery pursuant to any Put Option
guarantee letter or similar document or any receipt issued
hereunder by the Custodian. In the event the Custodian should
realize on any such property net proceeds which are less than
the Custodian's obligations under any Put Option guarantee
letter or similar document or any receipt, such deficiency
shall be a debt owed the Custodian by the Fund within the
scope of Article XIV herein.
5. On each business day the Custodian shall furnish the
Fund with a statement with respect to each Margin Account in
which money or Securities are held specifying as of the close
of business on the previous business day: (a) the name of the
Margin Account; (b) the amount and kind of Securities held
therein; and (c) the amount of money held therein. The
Custodian shall make available upon request to any broker,
dealer, or futures commission merchant specified in the name
of a Margin Account a copy of the statement furnished the Fund
with respect to such Margin Account.
- 23 -
6. Promptly after the close of business on each busi-
ness day in which cash and/or Securities are maintained in a
Collateral Account for any Series, the Custodian shall furnish
the Fund with a statement with respect to such Collateral Ac-
count specifying the amount of cash and/or the amount and kind
of Securities held therein. No later than the close of busi-
ness next succeeding the delivery to the Fund of such state-
ment, the Fund shall furnish to the Custodian a Certificate
specifying the then market value of the Securities described
in such statement. In the event such then market value is
indicated to be less than the Custodian's obligation with
respect to any outstanding Put Option guarantee letter or
similar document, the Fund shall promptly specify in a
Certificate the additional cash and/or Securities to be
deposited in such Collateral Account to eliminate such
deficiency.
ARTICLE XII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS
1. The Fund shall furnish to the Custodian a copy of
the resolution of the Board of Trustees of the Fund, certified
by the Secretary, the Clerk, any Assistant Secretary or any
Assistant Clerk, either (i) setting forth with respect to the
Series specified therein the date of the declaration of a
dividend or distribution, the date of payment thereof, the
record date as of which shareholders entitled to payment shall
be determined, the amount payable per Share of such Series to
the shareholders of record as of that date and the total
amount payable to the Dividend Agent and any sub-dividend
agent or co-dividend agent of the Fund on the payment date, or
(ii) authorizing with respect to the Series specified therein
the declaration of dividends and distributions on a daily
basis and authorizing the Custodian to rely on Oral Instruc-
tions or a Certificate setting forth the date of the
declaration of such dividend or distribution, the date of
payment thereof, the record date as of which shareholders
entitled to payment shall be determined, the amount payable
per Share of such Series to the shareholders of record as of
that date and the total amount payable to the Dividend Agent
on the payment date.
2. Upon the payment date specified in such resolution,
Oral Instructions or Certificate, as the case may be, the
Custodian shall pay out of the moneys held for the account of
each Series the total amount payable to the Dividend Agent and
any sub-dividend agent or co-dividend agent of the Fund with
respect to such Series.
- 24 -
ARTICLE XIII
SALE AND REDEMPTION OF SHARES
1. Whenever the Fund shall sell any Shares, it shall
deliver to the Custodian a Certificate duly specifying:
(a) The Series, the number of Shares sold, trade
date, and price; and
(b) The amount of money to be received by the
Custodian for the sale of such Shares and specifically al-
located to the separate account in the name of such Series.
2. Upon receipt of such money from the Transfer Agent,
the Custodian shall credit such money to the separate account
in the name of the Series for which such money was received.
3. Upon issuance of any Shares of any Series described
in the foregoing provisions of this Article, the Custodian
shall pay, out of the money held for the account of such
Series, all original issue or other taxes required to be paid
by the Fund in connection with such issuance upon the receipt
of a Certificate specifying the amount to be paid.
4. Except as provided hereinafter, whenever the Fund
desires the Custodian to make payment out of the money held by
the Custodian hereunder in connection with a redemption of any
Shares, it shall furnish to the Custodian a Certificate
specifying:
(a) The number and Series of Shares redeemed; and
(b) The amount to be paid for such Shares.
5. Upon receipt from the Transfer Agent of an advice
setting forth the Series and number of Shares received by the
Transfer Agent for redemption and that such Shares are in good
form for redemption, the Custodian shall make payment to the
Transfer Agent out of the moneys held in the separate account
in the name of the Series the total amount specified in the
Certificate issued pursuant to the foregoing paragraph 4 of
this Article.
6. Notwithstanding the above provisions regarding the
redemption of any Shares, whenever any Shares are redeemed
pursuant to any check redemption privilege which may from time
to time be offered by the Fund, the Custodian, unless
otherwise instructed by a Certificate, shall, upon receipt of
an advice from the Fund or its agent setting forth that the
redemption is in good form for redemption in accordance with
the check redemption procedure, honor the check presented as
part of such check redemption privilege out of the moneys held
in the separate account of the Series of the Shares being
redeemed.
- 25 -
ARTICLE XIV
OVERDRAFTS OR INDEBTEDNESS
1. If the Custodian, should in its sole discretion
advance funds on behalf of any Series which results in an
overdraft because the moneys held by the Custodian in the
separate account for such Series shall be insufficient to pay
the total amount payable upon a purchase of Securities
specifically allocated to such Series, as set forth in a
Certificate or Oral Instructions, or which results in an
overdraft in the separate account of such Series for some
other reason, or if the Fund is for any other reason indebted
to the Custodian with respect to a Series, including any
indebtedness to The Bank of New York under the Fund's Cash
Management and Related Services Agreement, (except a borrowing
for investment or for temporary or emergency purposes using
Securities as collateral pursuant to a separate agreement and
subject to the provisions of paragraph 2 of this Article),
such overdraft or indebtedness shall be deemed to be a loan
made by the Custodian to the Fund for such Series payable on
demand and shall bear interest from the date incurred at a
rate per annum (based on a 360-day year for the actual number
of days involved) equal to 1/2% over Custodian's prime
commercial lending rate in effect from time to time, such rate
to be adjusted on the effective date of any change in such
prime commercial lending rate but in no event to be less than
6% per annum. In addition, the Fund hereby agrees that the
Custodian shall have a continuing lien and security interest
in and to any property specifically allocated to such Series
at any time held by it for the benefit of such Series or in
which the Fund may have an interest which is then in the
Custodian's possession or control or in possession or control
of any third party acting in the Custodian's behalf. The Fund
authorizes the Custodian, in its sole discretion, at any time
to charge any such overdraft or indebtedness together with
interest due thereon against any balance of account standing
to such Series' credit on the Custodian's books. In addition,
the Fund hereby covenants that on each Business Day on which
either it intends to enter a Reverse Repurchase Agreement and/
or otherwise borrow from a third party, or which next succeeds
a Business Day on which at the close of business the Fund had
outstanding a Reverse Repurchase Agreement or such a borrow-
ing, it shall prior to 9 a.m., New York City time, advise the
Custodian, in writing, of each such borrowing, shall specify
the Series to which the same relates, and shall not incur any
indebtedness not so specified other than from the Custodian.
2. The Fund will cause to be delivered to the Custodian
by any bank (including, if the borrowing is pursuant to a
separate agreement, the Custodian) from which it borrows money
for investment or for temporary or emergency purposes using
Securities held by the Custodian hereunder as collateral for
such borrowings, a notice or undertaking in the form currently
- 26 -
employed by any such bank setting forth the amount which such
bank will loan to the Fund against delivery of a stated amount
of collateral. The Fund shall promptly deliver to the
Custodian a Certificate specifying with respect to each such
borrowing: (a) the Series to which such borrowing relates; (b)
the name of the bank, (c) the amount and terms of the borrow-
ing, which may be set forth by incorporating by reference an
attached promissory note, duly endorsed by the Fund, or other
loan agreement, (d) the time and date, if known, on which the
loan is to be entered into, (e) the date on which the loan
becomes due and payable, (f) the total amount payable to the
Fund on the borrowing date, (g) the market value of Securities
to be delivered as collateral for such loan, including the
name of the issuer, the title and the number of shares or the
principal amount of any particular Securities, and (h) a
statement specifying whether such loan is for investment
purposes or for temporary or emergency purposes and that such
loan is in conformance with the Investment Company Act of 1940
and the Fund's prospectus. The Custodian shall deliver on the
borrowing date specified in a Certificate the specified col-
lateral and the executed promissory note, if any, against
delivery by the lending bank of the total amount of the loan
payable, provided that the same conforms to the total amount
payable as set forth in the Certificate. The Custodian may,
at the option of the lending bank, keep such collateral in its
possession, but such collateral shall be subject to all rights
therein given the lending bank by virtue of any promissory
note or loan agreement. The Custodian shall deliver such
Securities as additional collateral as may be specified in a
Certificate to collateralize further any transaction described
in this paragraph. The Fund shall cause all Securities
released from collateral status to be returned directly to the
Custodian, and the Custodian shall receive from time to time
such return of collateral as may be tendered to it. In the
event that the Fund fails to specify in a Certificate the
Series, the name of the issuer, the title and number of shares
or the principal amount of any particular Securities to be
delivered as collateral by the Custodian, the Custodian shall
not be under any obligation to deliver any Securities.
ARTICLE XV
TERMINAL LINK
1. At no time and under no circumstances shall the Fund
be obligated to have or utilize the Terminal Link, and the
provisions of this Article shall apply if, but only if, the
Fund in its sole and absolute discretion elects to utilize the
Terminal Link to transmit Certificates to the Custodian.
2. The Terminal Link shall be utilized by the Fund only
for the purpose of the Fund providing Certificates to the
Custodian with respect to transactions involving Securities or
for the transfer of money to be applied to the payment of
- 27 -
dividends, distributions or redemptions of Fund Shares, and
shall be utilized by the Custodian only for the purpose of
providing notices to the Fund. Such use shall commence only
after the Fund shall have delivered to the Custodian a
Certificate substantially in the form of Exhibit D and shall
have established access codes. Each use of the Terminal Link
by the Fund shall constitute a representation and warranty
that the Terminal Link is being used only for the purposes
permitted hereby, that at least two Officers have each
utilized an access code, that such safekeeping procedures have
been established by the Fund, and that such use does not
contravene the Investment Company Act of 1940, as amended, or
the rules or regulations thereunder.
3. The Fund shall obtain and maintain at its own cost
and expense all equipment and services, including, but not
limited to communications services, necessary for it to uti-
lize the Terminal Link, and the Custodian shall not be re-
sponsible for the reliability or availability of any such
equipment or services.
4. The Fund acknowledges that any data bases made
available as part of, or through the Terminal Link and any
proprietary data, software, processes, information and docu-
mentation (other than any such which are or become part of the
public domain or are legally required to be made available to
the public) (collectively, the "Information"), are the
exclusive and confidential property of the Custodian. The
Fund shall, and shall cause others to which it discloses the
Information, to keep the Information confidential by using the
same care and discretion it uses with respect to its own
confidential property and trade secrets, and shall neither
make nor permit any disclosure without the express prior
written consent of the Custodian.
5. Upon termination of this Agreement for any reason,
the Fund shall return to the Custodian any and all copies of
the Information which are in the Fund's possession or under
its control, or which the Fund distributed to third parties.
The provisions of this Article shall not affect the copyright
status of any of the Information which may be copyrighted and
shall apply to all Information whether or not copyrighted.
6. The Custodian reserves the right to modify the Ter-
minal Link from time to time without notice to the Fund except
that the Custodian shall give the Fund notice not less than 75
days in advance of any modification which would materially
adversely affect the Fund's operation, and the Fund agrees
that the Fund shall not modify or attempt to modify the
Terminal Link without the Custodian's prior written consent.
The Fund acknowledges that any software or procedures provided
the Fund as part of the Terminal Link are the property of the
Custodian and, accordingly, the Fund agrees that any
modifications to the Terminal Link, whether by the Fund, or by
- 28 -
the Custodian and whether with or without the Custodian's
consent, shall become the property of the Custodian.
7. Neither the Custodian nor any manufacturers and
suppliers it utilizes or the Fund utilizes in connection with
the Terminal Link makes any warranties or representations,
express or implied, in fact or in law, including but not
limited to warranties of merchantability and fitness for a
particular purpose.
8. The Fund will cause its Officers and employees to
treat the authorization codes and the access codes applicable
to Terminal Link with extreme care, and irrevocably authorizes
the Custodian to act in accordance with and rely on
Certificates received by it through the Terminal Link. The
Fund acknowledges that it is its responsibility to assure that
only its Officers use the Terminal Link on its behalf, and
that a Custodian shall not be responsible nor liable for use
of the Terminal Link on the Fund's behalf by persons other
than such persons or Officers, or by only a single Officer,
nor for any alteration, omission, or failure to promptly
forward.
9(a). Except as otherwise specifically provided in
Section 9(b) of this Article, the Custodian shall have no
liability for any losses, damages, injuries, claims, costs or
expenses arising out of or in connection with any failure,
malfunction or other problem relating to the Terminal Link
except for money damages suffered as the direct result of the
negligence of the Custodian in an amount not exceeding for any
incident $25,000 provided, however, that the Custodian shall
have no liability under this Section 9 if the Fund fails to
comply with the provisions of Section 11.
9(b). The Custodian's liability for its negligence in
executing or failing to execute in accordance with a
Certificate received through Terminal Link shall be only with
respect to a transfer of funds which is not made in accordance
with such Certificate after such Certificate shall have been
duly acknowledged by the Custodian, and shall be contingent
upon the Fund complying with the provisions of Section 12 of
this Article, and shall be limited to (i) restoration of the
principal amount mistransferred, if and to the extent that the
Custodian would be required to make such restoration under
applicable law, and (ii) the lesser of (A) a Fund's actual
pecuniary loss incurred by reason of its loss of use of the
mistransferred funds or the funds which were not transferred,
as the case may be, or (B) compensation for the loss of the
use of the mistransferred funds or the funds which were not
transferred, as the case may be, at a rate per annum equal to
the average federal funds rate as computed from the Federal
Reserve Bank of New York's daily determination of the
effective rate for federal funds, for the period during which
a Fund has lost use of such funds. In no event shall the
Custodian have any liability for failing to execute in
- 29 -
accordance with a Certificate a transfer of funds where the
Certificate is received by the Custodian through Terminal Link
other than through the applicable transfer module for the
particular instructions contained in such Certificate.
10. Without limiting the generality of the foregoing, in
no event shall the Custodian or any manufacturer or supplier
of its computer equipment, software or services relating to
the Terminal Link be responsible for any special, indirect,
incidental or consequential damages which the Fund may incur
or experience by reason of its use of the Terminal Link even
if the Custodian or any manufacturer or supplier has been
advised of the possibility of such damages, nor with respect
to the use of the Terminal Link shall the Custodian or any
such manufacturer or supplier be liable for acts of God, or
with respect to the following to the extent beyond such
person's reasonable control: machine or computer breakdown or
malfunction, interruption or malfunction of communication
facilities, labor difficulties or any other similar or
dissimilar cause.
11. The Fund shall notify the Custodian of any errors,
omissions or interruptions in, or delay or unavailability of,
the Terminal Link as promptly as practicable, and in any event
within 24 hours after the earliest of (i) discovery thereof,
(ii) the Business Day on which discovery should have occurred
through the exercise of reasonable care and (iii) in the case
of any error, the date of actual receipt of the earliest
notice which reflects such error, it being agreed that
discovery and receipt of notice may only occur on a business
day. The Custodian shall promptly advise the Fund whenever
the Custodian learns of any errors, omissions or interruption
in, or delay or unavailability of, the Terminal Link.
12. The Custodian shall verify to the Fund, by use of
the Terminal Link, receipt of each Certificate the Custodian
receives through the Terminal Link, and in the absence of such
verification the Custodian shall not be liable for any failure
to act in accordance with such Certificate and the Fund may
not claim that such Certificate was received by the Custodian.
Such verification, which may occur after the Custodian has
acted upon such Certificate, shall be accomplished on the same
day on which such Certificate is received.
ARTICLE XVI
DUTIES OF THE CUSTODIAN WITH RESPECT TO PROPERTY
OF ANY SERIES HELD OUTSIDE OF THE UNITED STATES
1. The Custodian is authorized and instructed to
employ, as sub-custodian for each Series' Foreign Securities
(as such term is defined in paragraph (c)(1) of Rule 17f-5
under the Investment Company Act of 1940, as amended) and
other assets, the foreign banking institutions and foreign
- 30 -
securities depositories and clearing agencies designated on
Schedule I hereto ("Foreign Sub-Custodians") to carry out
their respective responsibilities in accordance with the terms
of the sub-custodian agreement between each such Foreign Sub-
Custodian and the Custodian, copies of which have been
previously delivered to the Fund and receipt of which is
hereby acknowledged (each such agreement, a "Foreign Sub-
Custodian Agreement"). Upon receipt of a Certificate,
together with a certified resolution substantially in the form
attached as Exhibit E of the Fund's Board of Trustees, the
Fund may designate any additional foreign sub-custodian with
which the Custodian has an agreement for such entity to act as
the Custodian's agent, as its sub-custodian and any such
additional foreign sub-custodian shall be deemed added to
Schedule I. Upon receipt of a Certificate from the Fund, the
Custodian shall cease the employment of any one or more
Foreign Sub-Custodians for maintaining custody of the Fund's
assets and such Foreign Sub-Custodian shall be deemed deleted
from Schedule I.
2. Each Foreign Sub-Custodian Agreement shall be
substantially in the form previously delivered to the Fund and
will not be amended in a way that materially adversely affects
the Fund without the Fund's prior written consent.
3. The Custodian shall identify on its books as
belonging to each Series of the Fund the Foreign Securities of
such Series held by each Foreign Sub-Custodian. At the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claims by the
Fund or any Series against a Foreign Sub-Custodian as a
consequence of any loss, damage, cost, expense, liability or
claim sustained or incurred by the Fund or any Series if and
to the extent that the Fund or such Series has not been made
whole for any such loss, damage, cost, expense, liability or
claim.
4. Upon request of the Fund, the Custodian will,
consistent with the terms of the applicable Foreign Sub-
Custodian Agreement, use reasonable efforts to arrange for the
independent accountants of the Fund to be afforded access to
the books and records of any Foreign Sub-Custodian insofar as
such books and records relate to the performance of such
Foreign Sub-Custodian under its agreement with the Custodian
on behalf of the Fund.
5. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the
securities and other assets of each Series held by Foreign
Sub-Custodians, including but not limited to, an
identification of entities having possession of each Series'
Foreign Securities and other assets, and advices or
notifications of any transfers of Foreign Securities to or
from each custodial account maintained by a Foreign Sub-
Custodian for the Custodian on behalf of the Series.
- 31 -
6. The Custodian shall furnish annually to the Fund, as
mutually agreed upon, information concerning the Foreign Sub-
Custodians employed by the Custodian. Such information shall
be similar in kind and scope to that furnished to the Fund in
connection with the Fund's initial approval of such Foreign
Sub-Custodians and, in any event, shall include information
pertaining to (i) the Foreign Custodians' financial strength,
general reputation and standing in the countries in which they
are located and their ability to provide the custodial
services required, and (ii) whether the Foreign Sub-Custodians
would provide a level of safeguards for safekeeping and
custody of securities not materially different form those
prevailing in the United States. The Custodian shall monitor
the general operating performance of each Foreign Sub-
Custodian. The Custodian agrees that it will use reasonable
care in monitoring compliance by each Foreign Sub-Custodian
with the terms of the relevant Foreign Sub-Custodian Agreement
and that if it learns of any breach of such Foreign Sub-
Custodian Agreement believed by the Custodian to have a
material adverse effect on the Fund or any Series it will
promptly notify the Fund of such breach. The Custodian also
agrees to use reasonable and diligent efforts to enforce its
rights under the relevant Foreign Sub-Custodian Agreement.
7. The Custodian shall transmit promptly to the Fund
all notices, reports or other written information received
pertaining to the Fund's Foreign Securities, including without
limitation, notices of corporate action, proxies and proxy
solicitation materials.
8. Notwithstanding any provision of this Agreement to
the contrary, settlement and payment for securities received
for the account of any Series and delivery of securities
maintained for the account of such Series may be effected in
accordance with the customary or established securities
trading or securities processing practices and procedures in
the jurisdiction or market in which the transaction occurs,
including, without limitation, delivery of securities to the
purchaser thereof or to a dealer therefor (or an agent for
such purchaser or dealer) against a receipt with the
expectation of receiving later payment for such securities
from such purchaser or dealer.
9. Notwithstanding any other provision in this
Agreement to the contrary, with respect to any losses or
damages arising out of or relating to any actions or omissions
of any Foreign Sub-Custodian the sole responsibility and
liability of the Custodian shall be to take appropriate action
at the Fund's expense to recover such loss or damage from the
Foreign Sub-Custodian. It is expressly understood and agreed
that the Custodian's sole responsibility and liability shall
be limited to amounts so recovered from the Foreign Sub-
Custodian.
- 32 -
ARTICLE XVII
CONCERNING THE CUSTODIAN
1. Except as hereinafter provided, or as provided in
Article XVI neither the Custodian nor its nominee shall be
liable for any loss or damage, including counsel fees,
resulting from its action or omission to act or otherwise,
either hereunder or under any Margin Account Agreement, except
for any such loss or damage arising out of its own negligence
or willful misconduct. In no event shall the Custodian be
liable to the Fund or any third party for special, indirect or
consequential damages or lost profits or loss of business,
arising under or in connection with this Agreement, even if
previously informed of the possibility of such damages and
regardless of the form of action. The Custodian may, with
respect to questions of law arising hereunder or under any
Margin Account Agreement, apply for and obtain the advice and
opinion of counsel to the Fund or of its own counsel, at the
expense of the Fund, and shall be fully protected with respect
to anything done or omitted by it in good faith in conformity
with such advice or opinion. The Custodian shall be liable to
the Fund for any loss or damage resulting from the use of the
Book-Entry System or any Depository arising by reason of any
negligence or willful misconduct on the part of the Custodian
or any of its employees or agents.
2. Without limiting the generality of the foregoing,
the Custodian shall be under no obligation to inquire into,
and shall not be liable for:
(a) The validity of the issue of any Securities
purchased, sold, or written by or for the Fund, the legality
of the purchase, sale or writing thereof, or the propriety of
the amount paid or received therefor;
(b) The legality of the sale or redemption of any
Shares, or the propriety of the amount to be received or paid
therefor;
(c) The legality of the declaration or payment of
any dividend by the Fund;
(d) The legality of any borrowing by the Fund using
Securities as collateral;
(e) The legality of any loan of portfolio Securi-
ties, nor shall the Custodian be under any duty or obligation
to see to it that any cash collateral delivered to it by a
broker, dealer, or financial institution or held by it at any
time as a result of such loan of portfolio Securities of the
Fund is adequate collateral for the Fund against any loss it
might sustain as a result of such loan. The Custodian
specifically, but not by way of limitation, shall not be under
any duty or obligation periodically to check or notify the
- 33 -
Fund that the amount of such cash collateral held by it for
the Fund is sufficient collateral for the Fund, but such duty
or obligation shall be the sole responsibility of the Fund.
In addition, the Custodian shall be under no duty or obliga-
tion to see that any broker, dealer or financial institution
to which portfolio Securities of the Fund are lent pursuant to
Article X of this Agreement makes payment to it of any
dividends or interest which are payable to or for the account
of the Fund during the period of such loan or at the termina-
tion of such loan, provided, however, that the Custodian shall
promptly notify the Fund in the event that such dividends or
interest are not paid and received when due; or
(f) The sufficiency or value of any amounts of
money and/or Securities held in any Margin Account, Senior
Security Account or Collateral Account in connection with
transactions by the Fund. In addition, the Custodian shall be
under no duty or obligation to see that any broker, dealer,
futures commission merchant or Clearing Member makes payment
to the Fund of any variation margin payment or similar payment
which the Fund may be entitled to receive from such broker,
dealer, futures commission merchant or Clearing Member, to see
that any payment received by the Custodian from any broker,
dealer, futures commission merchant or Clearing Member is the
amount the Fund is entitled to receive, or to notify the Fund
of the Custodian's receipt or non-receipt of any such pay-
ment.
3. The Custodian shall not be liable for, or considered
to be the Custodian of, any money, whether or not represented
by any check, draft, or other instrument for the payment of
money, received by it on behalf of the Fund until the
Custodian actually receives and collects such money directly
or by the final crediting of the account representing the
Fund's interest at the Book-Entry System or the Depository.
4. The Custodian shall have no responsibility and shall
not be liable for ascertaining or acting upon any calls,
conversions, exchange offers, tenders, interest rate changes
or similar matters relating to Securities held in the
Depository, unless the Custodian shall have actually received
timely notice from the Depository. In no event shall the
Custodian have any responsibility or liability for the failure
of the Depository to collect, or for the late collection or
late crediting by the Depository of any amount payable upon
Securities deposited in the Depository which may mature or be
redeemed, retired, called or otherwise become payable.
However, upon receipt of a Certificate from the Fund of an
overdue amount on Securities held in the Depository the
Custodian shall make a claim against the Depository on behalf
of the Fund, except that the Custodian shall not be under any
obligation to appear in, prosecute or defend any action suit
or proceeding in respect to any Securities held by the
Depository which in its opinion may involve it in expense or
liability, unless indemnity satisfactory to it against all
- 34 -
expense and liability be furnished as often as may be
required.
5. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount due to
the Fund from the Transfer Agent of the Fund nor to take any
action to effect payment or distribution by the Transfer Agent
of the Fund of any amount paid by the Custodian to the
Transfer Agent of the Fund in accordance with this Agreement.
6. The Custodian shall not be under any duty or obliga-
tion to take action to effect collection of any amount if the
Securities upon which such amount is payable are in default,
or if payment is refused after due demand or presentation,
unless and until (i) it shall be directed to take such action
by a Certificate and (ii) it shall be assured to its satisfac-
tion of reimbursement of its costs and expenses in connection
with any such action.
7. The Custodian may in addition to the employment of
Foreign Sub-Custodians pursuant to Article XVI appoint one or
more banking institutions as Depository or Depositories, as
Sub-Custodian or Sub-Custodians, or as Co-Custodian or
Co-Custodians including, but not limited to, banking
institutions located in foreign countries, of Securities and
moneys at any time owned by the Fund, upon such terms and
conditions as may be approved in a Certificate or contained in
an agreement executed by the Custodian, the Fund and the
appointed institution.
8. The Custodian shall not be under any duty or obliga-
tion (a) to ascertain whether any Securities at any time
delivered to, or held by it or by any Foreign Sub-Custodian,
for the account of the Fund and specifically allocated to a
Series are such as properly may be held by the Fund or such
Series under the provisions of its then current prospectus, or
(b) to ascertain whether any transactions by the Fund, whether
or not involving the Custodian, are such transactions as may
properly be engaged in by the Fund.
9. The Custodian shall be entitled to receive and the
Fund agrees to pay to the Custodian all out-of-pocket expenses
and such compensation as may be agreed upon from time to time
between the Custodian and the Fund. The Custodian may charge
such compensation and any expenses with respect to a Series
incurred by the Custodian in the performance of its duties
pursuant to such agreement against any money specifically al-
located to such Series. Unless and until the Fund instructs
the Custodian by a Certificate to apportion any loss, damage,
liability or expense among the Series in a specified manner,
the Custodian shall also be entitled to charge against any
money held by it for the account of a Series such Series' pro
rata share (based on such Series net asset value at the time
of the charge to the aggregate net asset value of all Series
at that time) of the amount of any loss, damage, liability or
- 35 -
expense, including counsel fees, for which it shall be
entitled to reimbursement under the provisions of this Agree-
ment. The expenses for which the Custodian shall be entitled
to reimbursement hereunder shall include, but are not limited
to, the expenses of sub-custodians and foreign branches of the
Custodian incurred in settling outside of New York City
transactions involving the purchase and sale of Securities of
the Fund.
10. The Custodian shall be entitled to rely upon any
Certificate, notice or other instrument in writing received by
the Custodian and reasonably believed by the Custodian to be a
Certificate. The Custodian shall be entitled to rely upon any
Oral Instructions actually received by the Custodian
hereinabove provided for. The Fund agrees to forward to the
Custodian a Certificate or facsimile thereof confirming such
Oral Instructions in such manner so that such Certificate or
facsimile thereof is received by the Custodian, whether by
hand delivery, telecopier or other similar device, or
otherwise, by the close of business of the same day that such
Oral Instructions are given to the Custodian. The Fund agrees
that the fact that such confirming instructions are not
received, or that contrary instructions are received, by the
Custodian shall in no way affect the validity of the
transactions or enforceability of the transactions hereby
authorized by the Fund. The Fund agrees that the Custodian
shall incur no liability to the Fund in acting upon Oral
Instructions given to the Custodian hereunder concerning such
transactions provided such instructions reasonably appear to
have been received from an Officer.
11. The Custodian shall be entitled to rely upon any
instrument, instruction or notice received by the Custodian
and reasonably believed by the Custodian to be given in ac-
cordance with the terms and conditions of any Margin Account
Agreement. Without limiting the generality of the foregoing,
the Custodian shall be under no duty to inquire into, and
shall not be liable for, the accuracy of any statements or
representations contained in any such instrument or other
notice including, without limitation, any specification of any
amount to be paid to a broker, dealer, futures commission
merchant or Clearing Member.
12. The books and records pertaining to the Fund which
are in the possession of the Custodian shall be the property
of the Fund. Such books and records shall be prepared and
maintained as required by the Investment Company Act of 1940,
as amended, and other applicable securities laws and rules and
regulations. The Fund, or the Fund's authorized representa-
tives, shall have access to such books and records during the
Custodian's normal business hours. Upon the reasonable
request of the Fund, copies of any such books and records
shall be provided by the Custodian to the Fund or the Fund's
authorized representative, and the Fund shall reimburse the
- 36 -
Custodian its expenses of providing such copies. Upon reason-
able request of the Fund, the Custodian shall provide in hard
copy or on micro-film, whichever the Custodian elects, any
records included in any such delivery which are maintained by
the Custodian on a computer disc, or are similarly maintained,
and the Fund shall reimburse the Custodian for its expenses of
providing such hard copy or micro-film.
13. The Custodian shall provide the Fund with any report
obtained by the Custodian on the system of internal accounting
control of the Book-Entry System, the Depository or O.C.C.,
and with such reports on its own systems of internal account-
ing control as the Fund may reasonably request from time to
time.
14. The Fund agrees to indemnify the Custodian against
and save the Custodian harmless from all liability, claims,
losses and demands whatsoever, including attorney's fees,
howsoever arising or incurred because of or in connection with
this Agreement, including the Custodian's payment or
non-payment of checks pursuant to paragraph 6 of Article XIII
as part of any check redemption privilege program of the Fund,
except for any such liability, claim, loss and demand arising
out of the Custodian's own negligence or willful misconduct.
15. Subject to the foregoing provisions of this Agree-
ment, including, without limitation, those contained in
Article XVI the Custodian may deliver and receive Securities,
and receipts with respect to such Securities, and arrange for
payments to be made and received by the Custodian in
accordance with the customs prevailing from time to time among
brokers or dealers in such Securities. When the Custodian is
instructed to deliver Securities against payment, delivery of
such Securities and receipt of payment therefor may not be
completed simultaneously. The Fund assumes all responsibility
and liability for all credit risks involved in connection with
the Custodian's delivery of Securities pursuant to instruc-
tions of the Fund, which responsibility and liability shall
continue until final payment in full has been received by the
Custodian.
16. The Custodian shall have no duties or
responsibilities whatsoever except such duties and
responsibilities as are specifically set forth in this Agree-
ment, and no covenant or obligation shall be implied in this
Agreement against the Custodian.
ARTICLE XVIII
TERMINATION
1. Either of the parties hereto may terminate this
Agreement by giving to the other party a notice in writing
specifying the date of such termination, which shall be not
- 37 -
less than ninety (90) days after the date of giving of such
notice. In the event such notice is given by the Fund, it
shall be accompanied by a copy of a resolution of the Board of
Trustees of the Fund, certified by the Secretary, the Clerk,
any Assistant Secretary or any Assistant Clerk, electing to
terminate this Agreement and designating a successor custodian
or custodians, each of which shall be a bank or trust company
having not less than $2,000,000 aggregate capital, surplus and
undivided profits. In the event such notice is given by the
Custodian, the Fund shall, on or before the termination date,
deliver to the Custodian a copy of a resolution of the Board
of Trustees of the Fund, certified by the Secretary, the
Clerk, any Assistant Secretary or any Assistant Clerk,
designating a successor custodian or custodians. In the
absence of such designation by the Fund, the Custodian may
designate a successor custodian which shall be a bank or trust
company having not less than $2,000,000 aggregate capital,
surplus and undivided profits. Upon the date set forth in
such notice this Agreement shall terminate, and the Custodian
shall upon receipt of a notice of acceptance by the successor
custodian on that date deliver directly to the successor
custodian all Securities and moneys then owned by the Fund and
held by it as Custodian, after deducting all fees, expenses
and other amounts for the payment or reimbursement of which it
shall then be entitled.
2. If a successor custodian is not designated by the
Fund or the Custodian in accordance with the preceding
paragraph, the Fund shall upon the date specified in the
notice of termination of this Agreement and upon the delivery
by the Custodian of all Securities (other than Securities held
in the Book-Entry System which cannot be delivered to the
Fund) and moneys then owned by the Fund be deemed to be its
own custodian and the Custodian shall thereby be relieved of
all duties and responsibilities pursuant to this Agreement,
other than the duty with respect to Securities held in the
Book Entry System which cannot be delivered to the Fund to
hold such Securities hereunder in accordance with this Agree-
ment.
ARTICLE XIX
MISCELLANEOUS
1. Annexed hereto as Appendix A is a Certificate signed
by two of the present Officers of the Fund under its seal,
setting forth the names and the signatures of the present
Officers. The Fund agrees to furnish to the Custodian a new
Certificate in similar form in the event that any such present
Officer ceases to be an Officer or in the event that other or
additional Officers are elected or appointed. Until such new
Certificate shall be received, the Custodian shall be fully
protected in acting under the provisions of this Agreement
- 38 -
upon Oral Instructions or signatures of the present Officers
as set forth in the last delivered Certificate.
2. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the
Custodian, shall be sufficiently given if addressed to the
Custodian and mailed or delivered to it at its offices at 90
Washington Street, New York, New York 10286, or at such other
place as the Custodian may from time to time designate in
writing.
3. Any notice or other instrument in writing,
authorized or required by this Agreement to be given to the
Fund shall be sufficiently given if addressed to the Fund and
mailed or delivered to it at its office at the address for the
Fund first above written, or at such other place as the Fund
may from time to time designate in writing.
4. This Agreement may not be amended or modified in any
manner except by a written agreement executed by both parties
with the same formality as this Agreement and approved by a
resolution of the Board of Trustees of the Fund.
5. This Agreement shall extend to and shall be binding
upon the parties hereto, and their respective successors and
assigns; provided, however, that this Agreement shall not be
assignable by the Fund without the written consent of the
Custodian, or by the Custodian without the written consent of
the Fund, authorized or approved by a resolution of the Fund's
Board of Trustees.
6. This Agreement shall be construed in accordance with
the laws of the State of New York without giving effect to
conflict of laws principles thereof. Each party hereby
consents to the jurisdiction of a state or federal court
situated in New York City, New York in connection with any
dispute arising hereunder and hereby waives its right to trial
by jury.
7. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original,
but such counterparts shall, together, constitute only one
instrument.
8. A copy of the Declaration of Trust of the Fund is on
file with the Secretary of The Commonwealth of Massachusetts,
and notice is hereby given that this instrument is executed on
behalf of the Board of Trustees of the Fund as Trustees and
not individually and that the obligations of this instrument
are not binding upon any of the Trustees or shareholders
individually but are binding only upon the assets and property
of the Fund; provided, however, that the Declaration of Trust
of the Fund provides that the assets of a particular Series of
the Fund shall under no circumstances be charged with li-
abilities attributable to any other Series of the Fund and
- 39 -
that all persons extending credit to, or contracting with or
having any claim against a particular Series of the Fund shall
look only to the assets of that particular Series for payment
of such credit, contract or claim.
- 40 -
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed by their respective Officers,
thereunto duly authorized and their respective seals to be
hereunto affixed, as of the day and year first above written.
Municipal High Income Fund Inc.
[SEAL] By:_______________________
Attest:
_______________________
PNC Bank, NA
[SEAL] By:_______________________
Name:
Title:
Attest:
_______________________
ADMINISTRATION AGREEMENT
MUNICIPAL HIGH INCOME FUND INC.
June 1, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
Dear Sirs:
Municipal High Income Fund Inc. (the "Fund"), a corporation organized
under the laws of the State of Maryland, confirms its agreement with Smith,
Barney Advisers, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Articles of Incorporation dated March 4, 1988, as amended
from time to time (the "Articles"), in its Prospectus and Statement of
Additional Information as from time to time in effect and in such manner and
to such extent as may from time to time be approved by the Board of Directors
of the Fund (the "Board"). Copies of the Fund's Prospectus, Statement of
Additional Information and Articles have been or will be submitted to SBA.
Greenwich Street Advisors Division of Mutual Management Corp. ("Greenwich
Street Advisors") serves as the Fund's investment adviser and the Fund desires
to employ and hereby appoints SBA to act as its administrator. SBA accepts
this appointment and agrees to furnish the services to the Fund for the
compensation set forth below. SBA is hereby authorized to retain third
parties and is hereby authorized to delegate some or all of its duties and
obligations hereunder to such persons provided that such persons shall remain
under the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA will:
(a) assist in supervising all aspects of the Fund's operations except those
performed by the Fund's investment adviser under its investment advisory
agreement; (b) supply the Fund with office facilities (which may be in SBA's
own offices), statistical and research data, data processing services,
clerical, accounting and bookkeeping services, including, but not limited to,
the calculation of (i) the net asset value of shares of the Fund, (ii)
applicable contingent deferred sales charges and similar fees and charges and
(iii) distribution fees, internal auditing and legal services, internal
executive and administrative services, and stationary and office supplies; and
(c) prepare reports to shareholders of the Fund, tax returns and reports to
and filings with the Securities and Exchange Commission (the "SEC") and state
blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this Agreement,
the Fund will pay SBA on the first business day of each month a fee for the
previous month at an annual rate of .20 of 1.00% of the Fund's average daily
net assets. The fee for the period from the date the Fund's initial
registration statement is declared effective by the SEC to the end of the
month during which the initial registration statement is declared effective
shall be prorated according to the proportion that such period bears to the
full monthly period. Upon any termination of this Agreement before the end of
any month, the fee for such part of a month shall be prorated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's Prospectus and
Statement of Additional Information as from time to time in effect.
4. Expenses
SBA will bear all expenses in connection with the performance of
its services under this Agreement. The Fund will bear certain other expenses
to be incurred in its operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of the members of the Board of the Fund who are
not officers, directors or employees of Smith Barney Shearson Inc. or its
affiliates or any person who is an affiliate of any person to whom duties may
be delegated hereunder; SEC fees and state blue sky qualification fees;
charges of custodians and transfer and dividend disbursing agents; the Fund's
and Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal expenses;
costs of maintaining the Fund's existence; costs attributable to investor
services, including, without limitation, telephone and personnel expenses;
costs of preparing and printing prospectuses and statements of additional
information for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings of the officers or
Board and any extraordinary expenses. In addition, the Fund will pay all
distribution fees pursuant to a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment advisory
agreement (s), but excluding distribution fees, interest, taxes, brokerage
and, if permitted by state securities commissions, extraordinary expenses)
exceed the expense limitations of any state having jurisdiction over the Fund,
SBA will reimburse the Fund for that excess expense to the extent required by
state law in the same proportion as its respective fees bear to the combined
fees for investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder. Such
expense reimbursement, if any, will be estimated, reconciled and paid on a
monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the services
listed in paragraph 2 above, and SBA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates, provided that nothing herein
shall be deemed to protect or purport to protect SBA against liability to the
Fund or to its shareholders to which SBA would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of SBA's reckless disregard of its
obligations and duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive annual
periods, provided such continuance is specifically approved at least annually
by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act and
may act in the future as administrator to one or more other investment
companies, and the Fund has no objection to SBA so acting. In addition, the
Fund understands that the persons employed by SBA or its affiliates to assist
in the performance of its duties hereunder will not devote their full time to
such service and nothing contained herein shall be deemed to limit or restrict
the right of SBA or its affiliates to engage in and devote time and attention
to other businesses or to render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers, directors,
employees, affiliates, controlling persons, agents (including persons to whom
responsibilities are delegated hereunder) ("indemnitees") against any loss,
claim, expense or cost of any kind (including reasonable attorney's fees)
resulting or arising in connection with this Agreement or from the performance
or failure to perform any act hereunder, provided that no such indemnification
shall be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940 Act, and
relevant state law. Each indemnitee shall be entitled to advancement of its
expenses in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitation of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon the
assets and property of the Fund, as provided in the Articles and Bylaws. The
execution and delivery of this Agreement has been duly authorized by the Fund,
SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board members of the Fund, nor the execution
and delivery by the officer of the Fund shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally,
but shall bind only the assets and property of the Fund as provided in the
Articles and Bylaws.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed
copy hereof.
Very truly yours,
Municipal High Income Fund Inc.
By: ______________________
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
Smith, Barney Advisers, Inc.
By: ______________________
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive accrual-based
recordkeeping and management information. They include maintaining a fund's
books and records in accordance with the Investment Company Act of 1940, as
amended (the "1940 Act"), net asset value calculation, daily dividend
calculation, tax accounting and portfolio accounting.
The designated fund accountants interact with the Fund's custodian,
transfer agent and investment adviser daily. As required, the
responsibilities of each fund accountant may include:
Cash Reconciliation - Reconcile prior day's ending cash balance
per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
Cash Availability - Combine all activity affecting the Fund's cash
account and produce a net cash amount available for investment;
Formal Reconciliations - Reconcile system generated reports to
prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to
the custodian;
Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
Reconcile and Calculate N.O.A. (net other assets) - Compile all
activity affecting asset and liability accounts other than
investment account;
Calculate Net Income, Mil Rate and Yield for Daily Distribution
Funds - Calculate income on purchase and sales, calculate change
in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and
yields (1 day, 7 day and 30 day);
Mini-Cycle (except for Money Market Funds) - Review intra day
trial balance and reports, review trial balance N.O.A.;
Holdings Reconciliation - Reconcile the portfolio holdings per the
system to custodian records;
Pricing - Determine N.A.V. for Fund using market value of all
securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price
changes (over 5%);
Money Market Fund Pricing - Monitor valuation for compliance with
Rule 2a-7;
System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
Net Asset Value Reconciliation - Identify the impact of current
day's Fund activity on a per share basis;
Reporting of Price to NASDAQ - 5:30 P.M. is the final deadline for
Fund prices being reported to the newspaper;
Reporting of Price to Transfer Agent- N.A.V.s are reported to
transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate actions of
portfolio holdings to portfolio managers; initiate notification to custodian
procedures on outstanding income receivables; provide information to the
Fund's treasurer for reports to shareholders, SEC, Board members, tax
authorities, statistical and performance reporting companies and the Fund's
auditors; interface with the Fund's auditors; prepare monthly reconciliation
packages, including expense pro forma; prepare amortization schedules for
premium and discount bonds based on the effective yield method; prepare vault
reconciliation reports to indicate securities currently "out-for-transfer;"
and calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial Reporting;
Statistical Reporting; and Publications. The following is a summary of the
services made available to the Fund by the Financial Administration Division:
Financial Reporting
Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
Total return reporting;
SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
Prepare dividend summary;
Prepare quarter-end reports;
Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and
special letters or supplements;
Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available to
the Fund:
Provide a Treasurer and Assistant Treasurer for the Fund;
Determine expenses properly chargeable to the Fund;
Authorize payment of bills for expenses of the Fund;
Establish and monitor the rate of expense accruals;
Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
Recommend dividends to be voted by the Fund's Board;
Monitor mark-to-market comparisons for money market funds;
Recommend valuation to be used for securities which are not
readily saleable;
Function as a liaison with the Fund's outside auditors and
arrange for audits;
Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the
Fund's structure or operations;
Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public Disclosure
Assistance; Corporate and Secretarial Services; Compliance Services; and Blue
Sky Registration. The following is a summary of the legal and regulatory
services available to the Fund:
SEC and Public Disclosure Assistance
File annual amendments to the Fund's registration
statements, including updating the prospectus and statement
of additional information where applicable;
File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
Prepare and file proxy statements;
Review marketing material for SEC and NASD clearance;
Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
Provide a Secretary and an Assistant Secretary for the Fund;
Maintain general corporate calendar;
Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare
minutes and follow-up matters raised at Board meetings;
Organize, attend and keep minutes of shareholder meetings;
Maintain Master Trust Agreement and By-Laws of the Fund.
Legal Consultation and Business Planning
Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential
changes in the Fund's investment policies, operations or
structure;
Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the
Fund, update the Fund's Board and the investment adviser on
those developments and provide related planning assistance
where requested or appropriate;
Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various
agents;
Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations
and investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel and
performing on-going testing of the Fund's portfolio to assist the Fund's
investment adviser in complying with prospectus guidelines and limitations,
1940 Act requirements and Internal Revenue Code requirements. The Department
may also act as liaison to the SEC during its routine examinations of the
Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software developed by Price
Waterhouse. In addition to being responsible for the initial and on-going
registration of shares in each state, the Department acts as liaison between
the Fund and state regulators, and monitors and reports on shares sold and
remaining registered shares.
4
A-4
Independent Auditors' Consent
To the Shareholders and Directors of
Municipal High Income Fund Inc.:
We consent to the use of our report dated December 10, 1996 incorporated
herein by reference and to the references to our Firm under the headings
"Financial Highlights" and "Independent Auditors" in the Prospectus and
"Independent Public Accountants" in the Statement of Additional Information.
KPMG PEAT MARWICK LLP
New York, New York
January 13, 1997
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<NAME> MUNICIPAL HIGH INCOME FUND INC.
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