As filed with the Securities and Exchange Commission on January
23, 1998
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. 10 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 Income Fund 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. Prospectus Caption
1. Outside Front Cover Outside Front Cover of Prospectus
2. Inside Front and Outside Inside Front and Outside Back Cover
Back Cover Page 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 Prospectus Summary; The Fund;
Registrant 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 Taxation; Dividend Reinvestment
Plan;
Debt, and Other Dividends and Distributions;
Description of
Securities Common Stock; Share Price Data
11. Defaults and Arrears on Not Applicable
Senior Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of the Further Information
Statement of Additional
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 The Fund; Description of Common
History Stock (see Prospectus)
17. Investment Objective and Investment Objective and Policies;
Invest-
Policies ment Restrictions
18. Management Management of the Fund; Directors
and
Executive Officers of the Fund
19. Control Persons and Not Applicable
Principal Holders of
Securities
20. Investment Advisory and Management of the Fund
Other Services
21. Brokerage Allocation and Fund Transactions
Other Practices
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.
PART A
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Prospectus February 27, 1998
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Municipal High Income Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
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 outstanding common stock of the Fund
(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 (the "SAI") dated February 27, 1998 has been filed with the
Securities and Exchange Commission (the "SEC") and is incorporated by reference
in its entirety into this Prospectus. A copy of the SAI can be obtained without
charge by calling or writing to the 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
<PAGE>
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Prospectus (continued)
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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
<PAGE>
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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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Certain Provisions of the Articles of Incorporation 24
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Custodian, Transfer Agent, Dividend-Paying Agent,
Registrar and Plan Agent 25
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Independent Auditors 25
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Further Information 25
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Appendix A-1
- --------------------------------------------------------------------------------
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.
3
<PAGE>
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Prospectus Summary
- --------------------------------------------------------------------------------
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.
INVESTMENT POLICIES 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 20 years. No assurance can be given that the Fund's
investment objective will be achieved. See "Investment Objective and Policies."
TAX-EXEMPT INCOME The Fund is intended to operate in such a manner that
dividends paid by the Fund may be excluded by the Fund's shareholders from their
gross incomes for Federal income tax purposes. See "Investment Objective and
Management Policies" and "Taxation." 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 (the "AMT"). Thus, the Fund may not be a
suitable investment for investors who are subject to the AMT. See "Investment
Objective and Policies" and "Taxation."
THE OFFERING The Common Stock is listed for trading on the 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 Mutual Management Corp. ("MMC"), formerly
known as Smith Barney Mutual Funds Management Inc., serves as the Fund's
investment manager. MMC provides investment advisory and management services to
investment companies affiliated with Smith Barney. MMC is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings"), the parent
company of Smith Barney. Holdings is a wholly owned subsidiary of Travelers
Group Inc. ("Travelers"). MMC also acts as administrator of the Fund and in that
4
<PAGE>
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Prospectus Summary (continued)
- --------------------------------------------------------------------------------
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 MMC a fee
("Management Fee") for its investment advisory services at an annual rate of
0.40% of the value of the Fund's average daily net assets. The Fund pays MMC a
fee for administrative services 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 costs in connection with its operation in
addition to the costs of investment management and administrative services. See
"Management of the Fund -- Investment Manager and Administrator."
CUSTODIAN, TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT PNC
Bank, N.A. ("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 generally
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"), BB by S&P Ratings Group ("S&P") or BB by Fitch IBCA, Inc.,
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continued)
- --------------------------------------------------------------------------------
formerly 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 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 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 MMC 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
MMC believes it desirable to do so.
Certain of the investment techniques that the Fund may employ might expose
the Fund to special 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."
6
<PAGE>
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Fund Expenses
- --------------------------------------------------------------------------------
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.................................................. 0.14%
================================================================================
TOTAL ANNUAL FUND OPERATING EXPENSES................................... 0.74%
================================================================================
(1) See "Management of the Fund" for additional information.
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 $24 $41 $92
================================================================================
This 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 tables
and the assumptions in the above example of a 5% annual return and reinvestment
at net asset value are required by the 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>
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Financial Highlights
- --------------------------------------------------------------------------------
The following information for the three-year period ended October 31, 1997 has
been audited by KPMG Peat Marwick LLP, independent auditors, whose report
thereon appears in the Fund's annual report dated October 31, 1997. 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 1997 Annual Report, which is
incorporated by reference into the Statement of Additional Information.
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended October 31, 1997 1996 1995 1994 1993
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 9.53 $ 9.51 $ 8.98 $ 9.72 $ 9.49
- -----------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.61 0.63 0.64 0.65 0.67
Net realized and unrealized gain (loss) 0.24 -- 0.54 (0.72) 0.23
- -----------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.85 0.63 1.18 (0.07) 0.90
- -----------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.62) (0.61) (0.65) (0.65) (0.67)
Net realized gains -- -- -- (0.02) --
- -----------------------------------------------------------------------------------------------------
Total Distributions (0.62) (0.61) (0.65) (0.67) (0.67)
- -----------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.76 $ 9.53 $ 9.51 $ 8.98 $ 9.72
- -----------------------------------------------------------------------------------------------------
Total Return, Based on Market Value 17.22% 10.22% 14.17% (10.11)% 17.76%
- -----------------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value 9.41% 7.39% 14.00% (0.54)% 9.87%
=====================================================================================================
Net Assets, End of Year (000s) $194,133 $187,303 $187,048 $176,379 $188,294
- -----------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.74% 0.77% 0.84% 0.84% 0.87%
Net investment income 6.38 6.65 6.87 6.98 6.89
- -----------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 35% 17% 18% 17% 13%
=====================================================================================================
Market Value, End of Year $ 9.875 $ 9.000 $ 9.000 $ 8.250 $ 9.875
=====================================================================================================
</TABLE>
8
<PAGE>
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Financial Highlights (continued)
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For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended October 31, 1992 1991 1990 1989(1)
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 9.42 $ 9.28 $ 9.52 $ 9.35
- ------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.70 0.74 0.75 0.66
Net realized and unrealized gain (loss) 0.06 0.15 (0.23) 0.15
- ------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.76 0.89 0.52 0.81
- ------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.69) (0.75) (0.76) (0.64)
Net realized gains -- -- -- --
- ------------------------------------------------------------------------------------------
Total Distributions (0.69) (0.75) (0.76) (0.64)
- ------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 9.49 $ 9.42 $ 9.28 $ 9.52
- ------------------------------------------------------------------------------------------
Total Return, Based on Market Value 3.37% 17.88% (1.45)% 1.72%#
- ------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value 8.47% 10.15% 5.75% 9.02%
==========================================================================================
Net Assets, End of Year (000s) $179,104 $173,290 $164,531 $164,221
- ------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.87% 0.90% 0.87% 0.86%*(2)
Net investment income 7.31 7.90 8.00 7.54*
- ------------------------------------------------------------------------------------------
Portfolio Turnover Rate 12% 22% 11% 16%
==========================================================================================
Market Value, End of Year $ 9.125 $ 9.50 $ 9.00 $ 9.50
==========================================================================================
</TABLE>
(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>
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The Fund
- --------------------------------------------------------------------------------
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 (800) 451-2010.
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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.
- --------------------------------------------------------------------------------
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 of the Fund's outstanding voting securities" (as
defined in the 1940 Act). To achieve this objective, the Fund seeks to invest
substantially all of its assets in a diversified portfolio of long-term
Municipal Obligations. 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, BB by S&P
or BB by Fitch, or in unrated Municipal Obligations deemed to be of comparable
quality. The Fund will not invest in Municipal Obligations that are rated lower
than Ba, MIG 1/VMIG 1 or P-2 by Moody's, BB, SP-1 or A-1 by S&P, or BB by Fitch.
A description of relevant Moody's, S&P and Fitch
10
<PAGE>
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
ratings is set forth in the Appendix to the SAI. Lower-rated bonds are judged to
have speculative elements. 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
regular 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 AMT, and qualified
"private activity" obligations, which generate interest that is exempt from
regular Federal income tax but that 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 when 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.
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 MMC 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 Federal bankruptcy laws, affecting the rights and
remedies of creditors.
11
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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
("Taxable Investments"). When MMC 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 that the Fund holds
Taxable Investments and, under certain market conditions, short-term Municipal
Obligations, the Fund will not be fully pursuing 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 MMC 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.
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
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 MMC 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 the Fund's 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 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
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 MMC 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 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 payments 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 may also 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
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 MMC 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
marketplace, 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 credit, consist of possible loss 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.
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 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 ("IDBs"), 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>
- --------------------------------------------------------------------------------
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
================================================================================
1/31/98 9.92 10.2500 3.33% 9.75 9.1875 (5.77%)
10/31/97 9.76 10.0625 3.10% 9.76 9.3750 (3.94%)
7/31/97 9.71 10.0000 2.99% 9.71 9.1250 (6.02%)
4/30/97 9.64 9.5000 (1.45%) 9.47 9.1250 (3.64%)
1/31/97 9.61 9.5000 (1.14%) 9.52 9.0000 (5.46%)
10/31/96 9.54 9.0000 (5.66%) 9.40 8.7500 (6.92%)
7/31/96 9.42 9.0000 (4.46%) 9.31 8.5000 (8.70%)
4/31/96 9.64 9.0000 (6.64%) 9.36 8.6250 (7.85%)
1/31/96 9.63 9.0000 (6.54%) 9.52 8.3750 (12.03%)
================================================================================
As of January 30, 1998, the price per share of Common Stock as quoted on
the NYSE was $10.125, representing a 2.48% premium from the Common Stock's net
asset value calculated on that day.
Since the Fund's commencement of operations, the Fund's Common Stock has
traded in the market at prices that were generally 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 Board of Directors approves 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 MMC. The SAI contains background information regarding
each Director and executive officer of the Fund.
17
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
INVESTMENT MANAGER AND ADMINISTRATOR
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's investment manager. MMC, through its predecessors, has been in the
investment counseling business since 1934 and is a registered investment
adviser. MMC renders investment advice to a wide variety of individual,
institutional and investment company clients that, as of January 31, 1998, had
aggregate assets under management in excess of $94 billion.
Subject to the supervision and direction of the Fund's Board of Directors,
MMC 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, MMC is paid a Management Fee at
an annual rate of 0.40% of the value of the Fund's average daily net assets. In
addition, MMC 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 MMC
in its best judgment. The primary consideration is prompt and effective
execution of orders at the most favorable price. Subject to that primary
consideration, dealers may be selected for research, statistical or other
services that enable MMC 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-dealer in connection with a purchase
or sale of securities when MMC believes that the charge for the transaction does
not exceed usual and customary levels. The same standard applies to the use of
Smith Barney in connection with entering into options and futures contracts. The
Fund paid no brokerage commissions in the last fiscal year.
Year 2000. The investment management services provided to the Fund by the
Manager and the services provided to shareholders by the Distributor and the
Transfer Agent depend on the smooth functioning of their computer systems. Many
computer software systems in use today cannot recognize the year 2000, but
revert to 1900 or some other date, due to the manner in which dates were encoded
and calculated. That failure could have a negative impact on the handling of
securities trades, pricing and account services. The Manager, the Distributor
and the Transfer Agent have been actively working on necessary changes to their
own computer systems to prepare for the year 2000 and expect that their systems
will be adapted before that date, but there can be no assurance that they will
be successful, or that interaction with other non-complying computer systems
will not impair services at that time.
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
18
<PAGE>
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
and manages the day-to-day operations of the Fund, including making all
investment decisions. Mr. McDermott is a Managing Director of Smith Barney 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.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Fund's policy, which may be changed by the Fund's Board of Directors,
is generally to make monthly distributions of substantially all its net
investment income (i.e., income other than net realized capital gains) to the
holders of the Fund's Common Stock. From time to time, when the Fund makes a
substantial capital gains distribution, it may do so in lieu of paying its
regular monthly dividend. 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 or her own name will have all
distributions reinvested automatically by First Data as purchasing agent under
the Plan, unless the shareholder elects to receive cash. Distributions with
respect to shares registered in the name of a broker-dealer or other nominee
(that is, in "street name") will be reinvested by the broker or nominee in
additional shares under the Plan, unless the service is not provided by the
broker or nominee or the shareholder elects to receive distributions in cash.
Investors who own Common Stock registered in street name should consult their
broker-dealers for details regarding reinvestment. All distributions to
shareholders who do not participate in the Plan will be paid by check mailed
directly to the record holder by or under the direction of First Data, as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds 98% of net asset
value per share on the date of valuation, 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 market
price. To the extent that the Fund issues shares to participants in the Plan at
a discount to net asset value, the interests of remaining shareholders (i.e.,
those who do not participate in the Plan) in the Fund's net assets will be
proportionately diluted.
If 98% of the net asset value per share 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
19
<PAGE>
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Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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 98% of the net asset value
per share of the Common Stock, First Data will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining portion of the
dividend or distribution by issuing shares at a price equal to 98% of the net
asset value per share. In this case, the number of shares of Common Stock
received by a Plan participant will be based on the weighted average of prices
paid for shares purchased in the open market and the price at which the Fund
issues the remaining shares. To the extent 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 98% of the net asset value per
share 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 at 98% of the net asset value per share. First
Data will begin 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 shall such purchases continue later than 30 days
after that 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.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges shall apply with respect to shares of Common Stock
issued directly by the Fund under the Plan. Each Plan participant will, however,
bear a pro-rata share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 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 8030, Boston,
Massachusetts 02266-8030 or by telephone at 1-800-331-1710.
20
<PAGE>
- --------------------------------------------------------------------------------
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 MMC 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 Fund shareholders; please refer to the SAI for further
discussion. In addition to the considerations described below and in the SAI,
there may be other Federal, state, local or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisers for more detailed information with respect to the
tax consequences of any investment.
The Fund has qualified and intends to qualify, so long as such
qualification is in the best interests of its shareholders, under Subchapter M
of the Internal Revenue Code (the "Code") for tax treatment as a regulated
investment company. In each taxable year that the Fund qualifies, the Fund will
pay no Federal income tax on its net investment income and long-term capital
gains that are distributed to shareholders. The Fund also intends to satisfy
conditions that will enable it to pay "exempt-interest dividends" to
shareholders. Exempt-interest dividends are generally not subject to regular
Federal income taxes but may be considered taxable for state and local income
(or intangible) tax purposes.
21
<PAGE>
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Taxation (continued)
- --------------------------------------------------------------------------------
Exempt-interest dividends attributable to interest received by the Fund on
certain private activity bonds will be treated as a specific tax preference item
to be included in a shareholder's Federal AMT computation. In addition to the
AMT, corporate shareholders must include 75% of the interest as an adjustment
("the current earnings adjustment") in computing corporate minimum taxable
income. Exempt-interest dividends derived from the interest earned on private
activity bonds will not be exempt from Federal income tax for those shareholders
who are "substantial users" (or persons related to "substantial users") of the
facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to Federal income tax.
The interest expenses incurred by a shareholder on borrowings made to
purchase or carry Fund shares are not deductible for Federal income tax purposes
to the extent related to the exempt-interest dividends received on such shares.
Dividends paid by the Fund from interest income on taxable investments,
net realized short-term securities gains, and all or a portion of any gains
realized from the sale or other disposition of certain market discount bonds are
subject to Federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Fund shares. The recently enacted Taxpayer Relief Act of
1997 provides that net capital gains, for taxpayers other than corporations,
generally will not be subject to Federal income taxes at a rate in excess of 28%
for assets held for more than one year but not more than 18 months, with a
reduced maximum rate of 20% for assets held more than 18 months.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Fund shares. None
of the dividends paid by the Fund will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions, including their eligibility for the reduced maximum
20% capital gains tax rate, promptly after the close of each calendar year.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' Federal income tax return.
22
<PAGE>
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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 17, 1997
================================================================================
Common 500,000,000 0 0
Stock Shares
================================================================================
No shares of Common Stock, 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 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 "Certain Provisions
of the Articles of Incorporation."
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.
23
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
- --------------------------------------------------------------------------------
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) merger or consolidation or statutory share exchange of the Fund with
or into another corporation;
(ii) 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) 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 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 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.
24
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- --------------------------------------------------------------------------------
Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and Plan Agent
- --------------------------------------------------------------------------------
PNC Bank, located at 17th and Chestnut Streets, 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.
- --------------------------------------------------------------------------------
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.
25
<PAGE>
- --------------------------------------------------------------------------------
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 in 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 covering the leased property, the maintenance by the
lessee of reserve funds or the provision of credit enhancements such as letters
of credit.
A-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
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, MMC
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 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.
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix (continued)
- --------------------------------------------------------------------------------
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. MMC 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 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-3
<PAGE>
SMITH BARNEY
A Member of TravelersGroup[Logo]
Municipal
High Income
Fund Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD 01257 2/98
PART B
MUNICIPAL HIGH INCOME FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information February 27, 1998
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. Mutual Management Corp., formerly
known as Smith Barney Mutual Funds Management Inc. ("MMC") 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 February 27, 1998 (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 do 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")
11
Investment Manager and Administrator
14
Portfolio Transactions and Turnover
15
Valuation of Shares (see in the Prospectus "Net Asset Value")
16
Stock Purchases and Tenders (see in the Prospectus "Certain
Provisions of the Articles of Incorporation" and "Description of
Common Stock")
16
Taxes (see in the Prospectus "Taxation")
17
Additional Information
20
Financial Statements
20
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, MMC
will consider factors such as: the price, coupon and yield to maturity;
MMC'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. MMC 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 IBCA, 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. MMC'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 MMC,
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. Sizable 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. MMC 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 non-
governmental 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. 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 Obligation's 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. MMC, 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 MMC 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 MMC 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 MMC 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 MMC 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 options 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 options
position less any accrued profit on those positions held by a futures
commission merchant. The Fund's ability to trade in futures and options
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 MMC
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 as
well as 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 only 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 MMC believes
it desirable to do so.
Illiquid Securities. The Fund's investments in illiquid
securities are subject to the 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 decreases 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, MMC, 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 MMC, the
Fund's custodian, transfer agent, dividend paying agent, registrar and
plan agent. The day-to-day operations of the Fund are delegated to its
officers and to MMC, 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
Position Held
with the Fund
Principal Occupations
During the Past Five Years
*+Heath B. McLendon (64)
388 Greenwich Street
New York NY 10013
Chairman of the Board,
Chief Executive
Officer and President
Managing Director of Smith
Barney Inc.; President and
Director of MMC; President and
Director of Travelers Advisers,
Inc. ("TIA"); Chairman of Smith
Barney Strategy Advisers Inc.
Prior to July 1993, Senior
Executive Vice President of
Shearson Lehman Brothers Inc.;
Vice Chairman of Shearson Asset
Management.
+Martin Brody (76)
c/o HMK Associates
30 Columbia Turnpike
Florham Park, NJ
07932
Director
Consultant, HMK Associates;
Retired Vice Chairman of the
Board of Restaurant Associates
Corp.; Director of Jaclyn, Inc.
+Allan J. Bloostein (68)
717 Fifth Avenue
21st Floor
New York, NY 10022
Director
President, Allan J. Bloostein
Associates, Consultant and
retired Vice Chairman of the
Board of May Department Stores
Company; Director of Taubman
Centers, Inc. and CVS
Corporation.
+Dwight B. Crane (59)
Harvard Business
School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business
School.
+Robert A. Frankel (69)
102 Grand Street
Croton-on-Hudson,
New York, NY 10520
Director
Managing Partner of Robert A.
Frankel Management Consultants;
formerly Corporate Vice
President of The Reader's Digest
Association, Inc.
+William R. Hutchinson (54)
Amoco Corp.
200 East Randolph
Drive
Chicago, IL 60601
Director
Vice President, Financial
Operations of Amoco Corp.;
Director of Associated Banks and
Associated Bank Corp.
Lawrence T. McDermott (49)
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 (35)
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 (40)
388 Greenwich Street
New York, NY 10105
Senior Vice President and
Treasurer
Managing Director of Smith
Barney; Director and Senior Vice
President of MMC and TIA.
Christina T. Sydor (46)
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Smith
Barney; General Counsel and
Secretary of MMC and TIA.
* "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 MMC 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, 1997, such expenses totaled $3,832.
<TABLE>
<CAPTION>
Total
Number of
Aggregate Pension or Compensation Funds for
Compen- Retirement from Fund Which
sation Benefits and Fund Director
from Fund Accrued Complex Serves
the fiscal as part for the Within
year ended of Fund year ended Fund
Name 10/31/97 Expenses 12/31/97 Complex
<S> <C> <C> <C> <C>
Charles Barber*+ $4,625 0 $ 38,700 6
Martin Brody 7,000 0 124,286 19
Dwight Crane 7,000 0 140,375 22
Allan Bloostein ,000 0 83,150 8
Robert Frankel 7,000 0 66,100 8
William R. Hutchinson 6,500 0 38,800 6
Heath B. McLendon 0 0 0 42
</TABLE>
* Pursuant to the Fund's deferred compensation plan, Mr. Barber elected,
effective January 2, 1996, to defer the payment of some or all of the
compensation due to him from the Fund.
+Upon attainment of age 80, Fund Directors are required to change to
emeritus status. Directors Emeritus are entitled to serve in emeritus
status for a maximum of 10 years, during which time they are paid 50%
of the annual retainer fee and meeting fees otherwise applicable to
Fund Directors, together with reasonable out-of-pocket expenses for
each meeting attended. Effective February 26, 1997, Mr. Barber became
a Director Emeritus.
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 17, 1997:
<TABLE>
<CAPTION>
Name and Address Amount of Percent of Common
of Record Owner Record Ownership Stock Outstanding
<S> <C> <C>
Cede & Co., as Nominee for
The Depository Trust Company
P.O. Box 20
Bowling Green Station
New York, New York 10004 17,311,285 86.91%
</TABLE>
8,158,787 of the shares held of record by Cede & Co., representing
40.96% 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 17, 1997, 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
MMC serves as the Fund's investment adviser pursuant to a written
agreement dated December 31, 1994 (the "Advisory Agreement"). Subject
to the supervision and direction of the Fund's Board of Directors, MMC
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. MMC 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 MMC'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, 1995, 1996 and 1997 the Fund paid MMC $726,621,
$747,137 and $757,896, 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 ("Non-Interested Directors") on April 7, 1993 and
by its shareholders on June 9, 1993. The Advisory Agreement became
effective upon the Closing and, unless sooner terminated, the Advisory
Agreement will continue for successive annual periods 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, MMC 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 MMC in
the performance of its duties or from reckless disregard of its duties
and obligations under the Advisory Agreement. The Advisory Agreement is
terminable by vote of the Board of Directors or by the holders of a
majority of the Common Stock, at any time without penalty, on 60 days'
written notice to the Investment Manager. The Advisory Agreement may
also be terminated by MMC on 90 days' written notice to the Fund. The
Advisory Agreement terminates automatically upon its assignment.
MMC also serves as administrator to the Fund pursuant to a written
agreement dated June 1, 1994 (the "Administration Agreement"). MMC
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, MMC 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. MMC bears
all expenses in connection with the performance of its services. As
compensation for MMC's administration 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 1995, 1996
and 1997 fiscal years, the Fund paid MMC $363,310, $373,569 and
$378,948, respectively, in administration fees.
Pursuant to the Administration Agreement, MMC will exercise its
best judgment in rendering the services listed above. MMC 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 MMC's willful
misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of MMC'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 MMC.
PORTFOLIO TRANSACTIONS AND TURNOVER
Portfolio Transactions
Portfolio securities transactions for the Fund are placed on
behalf of the Fund by MMC. In selecting brokers or dealers to execute
portfolio transactions for the Fund, MMC seeks the best overall terms
available. The Advisory Agreement provides that, in assessing the best
overall terms available for any transaction, MMC 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 MMC, 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 MMC or an
affiliate exercises investment discretion. MMC'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 MMC, 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 MMC are prepared to invest in,
or desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by MMC to
be equitable to each. In some cases, this procedure may adversely
affect the 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 MMC.
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 1995,
1996 and 1997 fiscal years, the Fund's portfolio turnover rates were
18%, 17% and 35%, 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 MMC 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, but has no obligation to do so.
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 and this SAI. Any interest on the borrowings will reduce the
Fund's net income.
If the Fund liquidates portfolio securities in order to repurchase
shares of Common Stock, the Fund may realize gains and losses.
TAXES
As described above and in the Prospectus, the Fund is designed to
provide investors with current income which is excluded from gross
income for Federal income tax purposes. The Fund is not intended to
constitute a balanced investment program and is not designed for
investors seeking capital gains or maximum tax-exempt income
irrespective of fluctuations in principal. Investment in the Fund would
not be suitable for tax-exempt institutions, qualified retirement plans,
H.R. 10 plans and individual retirement accounts because such investors
would not gain any additional tax benefit from the receipt of tax-exempt
income.
The following is a summary of selected Federal income tax
considerations that may affect the Fund and its shareholders. The
summary is not intended as a substitute for individual tax advice and
investors are urged to consult their own tax advisors as to the tax
consequences of an investment in the Fund.
Taxation of the Fund and its Investments
The Fund has qualified and intends to qualify as a "regulated
investment company" under Subchapter M of the Internal Revenue Code of
1986, as amended (the "Code"). In addition, the Fund intends to satisfy
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 (that is, 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 (that
is, taxable income other than net realized capital gains) and its net
realized capital gains that are distributed to shareholders. To qualify
under Subchapter M of the Code, the 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 net investment income (reduced by certain expenses); (2) derive
at least 90% of its gross income from dividends, interest, payments with
respect to loans of securities, gains from the sale or other disposition
of securities, or other income (including, but not limited to, gains
from options, futures, and forward contracts) derived with respect to
the Fund's business of investing in securities; 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, U.S. government securities and other securities, with those 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 U.S. government securities or securities of other
regulated investment companies) or of two or more issuers that the Fund
controls and that are determined to be in the same or similar trades or
businesses or related trades or businesses. As a regulated investment
company, the 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.
As described above in this SAI and in the Prospectus, the Fund may
invest in financial futures contracts and options on financial futures
contracts that are traded on a U.S. exchange or board of trade. The Fund
anticipates that these investment activities will not prevent the Fund
from qualifying as a regulated investment company. As a general rule,
these investment activities will increase or decrease the amount of
long-term and short-term capital gains or losses realized by the Fund
and, thus, will affect the amount of capital gains distributed to the
Fund shareholders.
For Federal income tax purposes, gain or loss on the futures and
options described above (collectively referred to as "Section 1256
Contracts") would, as a general rule, be taxed pursuant to a special
"mark-to-market system." Under the mark-to-market system, the Fund may
be treated as realizing a greater or lesser amount of gains or losses
than actually realized. As a general rule gain or loss on Section 1256
Contracts is treated as 60% long term capital gain or loss and 40%
short-term capital gain or loss, and as a result, the mark-to-market
system will generally affect the amount of capital gains or losses
taxable to the Fund and the amount of distributions taxable to a
shareholder. Moreover, if the Fund invests in both Section 1256
Contracts and offsetting positions in those contracts, then the Fund
might not be able to receive the benefit of certain realized losses for
an indeterminate period of time. The Fund expects that its activities
with respect to Section 1256 Contracts and offsetting positions in those
Contracts (1) will not cause it or its shareholders to be treated as
receiving a materially greater amount of capital gains or distributions
than actually realized or received and (2) will permit it to use
substantially all of its losses for the fiscal years in which the losses
actually occur.
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" will be
derived from interest on Municipal Obligations and thus will be exempt-
interest dividends that may be excluded by shareholders from their gross
income for Federal income tax purposes if the Fund satisfies certain
asset percentage requirements. The Fund's net realized short-term
capital gains are taxable to shareholders of the Fund as ordinary
income, and distributions of net realized long-term capital gains are
taxable to shareholders as long-term capital gains, regardless of the
length of time shareholders have held shares of Common Stock and whether
the distributions are received in cash or reinvested in additional
shares. As a general rule, a shareholder's gain or loss on a sale of
his or her shares of Common Stock will be a long-term gain or loss if he
or she has held his or her shares for more than one year and will be a
short-term capital gain or loss if he or she has held his or her shares
for one year or less. Gain on shares held for more than 18 months will
be eligible for the reduced 20% maximum capital gains tax rate.
Dividends and distributions paid by the Fund will not qualify for the
Federal dividends-received deduction for corporations.
Exempt-Interest Dividends
Interest on indebtedness incurred by a shareholder to purchase or
carry shares of Common Stock is not deductible for Federal income tax
purposes. If a shareholder receives exempt-interest dividends with
respect to any share of Common Stock and if the share is held by the
shareholder for six months or less, then any loss on the sale of the
share may, to the extent of the exempt-interest dividends, be
disallowed. The Code may also require a shareholder if he or she
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, the 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.
Although the Fund's exempt-interest dividends may be excluded by
shareholders from their gross income for Federal income tax purposes,
some or all of the Fund's exempt-interest dividends may be a specific
preference item, or a component of an adjustment item, for purposes of
the Federal individual and corporate alternative minimum taxes. The
receipt of dividends and distributions from the Fund may affect a
foreign corporate shareholder's Federal "branch profits" tax liability
and a corporate shareholder's Federal "excess net passive income" tax
liability. Shareholders should consult their own tax advisors to
determine whether they are (1) "substantial users" with respect to a
facility or "related" to those users within the meaning of the Code or
(2) subject to a Federal alternative minimum tax, the Federal "branch
profits" tax, or the Federal "excess net passive income" tax.
Dividend Reinvestment Plan
A shareholder of the Fund receiving dividends or distributions in
additional shares pursuant to the Plan should be treated for Federal
income tax purposes as receiving a distribution in an amount equal to
the amount of money that a shareholder receiving cash dividends or
distributions receives and should have a cost basis in the shares
received equal to that amount.
Statements and Notices
Statements as to the tax status of the dividends and distributions
received by shareholders of the Fund are mailed annually. These
statements show the dollar amount of income excluded from Federal income
taxes and the dollar amount, if any, subject to Federal income taxes,
including the portion if any, long-term capital gains distributions
eligible for the reduced 20% maximum capital gains tax rate. The
statements will also designate the amount of exempt interest dividends
that are a specific preference item for purposes of the Federal
individual and corporate alternative minimum taxes and will indicate the
shareholder's share of the investment expenses of the Fund. The Fund
will notify shareholders annually as to the interest excluded from
Federal income taxes earned by the Fund with respect to those states and
possessions in which the Fund has or had investments. The dollar amount
of dividends paid by the Fund that is excluded from Federal income
taxation and the dollar amount of dividends paid by the Fund that is
subject to Federal income taxation, if any, will vary for each
shareholder depending upon the size and duration of the shareholder's
investment in the Fund. To the extent 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 each day's 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 distributions
and (2) the proceeds of any sales or repurchases of shares of Common
Stock. An individual's taxpayer identification number is his or her
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 LLP 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, 1998.
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 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 quarterly and semi-annual financial
statements 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, 1997 are incorporated by reference into this SAI from the Fund's
1997 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.
Description of Fitch Municipal Bond Ratings:
AAA - Bonds rated AAA by Fitch have the lowest expectation of
credit risk. The obligor has an exceptionally strong capacity for
timely payment of financial commitments which is highly unlikely to be
adversely affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit
risk. They indicate very strong capacity for timely payment of
financial commitment. This capacity is not significantly vulnerable to
foreseeable events.
A - Bonds rated A by Fitch are considered to have a low
expectation of credit risk. The capacity for timely payment of
financial commitments is considered to be strong, but may be more
vulnerable to changes in economic conditions and circumstances than
bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial commitments
is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to impair this capacity .
This is the lowest investment grade category assigned by Fitch.
Plus and minus signs are used by Fitch to indicate the relative
position of a credit within a rating category. Plus and minus signs
however, are not used in the AAA category
Description of Fitch Short-Term Ratings:
Fitch's short-term ratings apply to debt obligations that are
payable on demand or have original maturities of generally up to three
years, including commercial paper, certificates of deposit, medium-term
notes, and municipal and investment notes.
The short-term rating places greater emphasis than a long-term
rating on the existence of liquidity necessary to meet financial
commitment in a timely manner.
Fitch's short-term ratings are as follows:
F1+ - Issues assigned this rating are regarded as having the
strongest capacity for timely payments of financial commitments. The
"+" denotes an exceptionally strong credit feature.
F1 - Issues assigned this rating are regarded as having the
strongest capacity for timely payment of financial commitments.
F2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety is not
as great as in the case of the higher ratings.
F3 - The capacity for the timely payment of financial commitments
is adequate; however, near-term adverse changes could result in a
reduction to non-investment grade.
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, 1997 and Report of Independent Accountants
dated December 8, 1997 are incorporated by reference to
the Definitive 30(b)2-1 filed on January 9, 1998,
Accession #0000091155-98-000020.
(2) Exhibits:
(a)(i) Articles of Incorporation are incorporated by
reference to the Registrant's Registration Statement,
Registration No.33-20507, filed on March 8, 1988 (the
"Registration Statement").
(ii) First Amendment to Articles of Incorporation is
incorporated by reference to Amendment No. 2 to the
Registration Statement, filed on October 24, 1988.
(iii) Second Amendment to Articles of Incorporation is
incorporated by reference to Amendment No. 3 to the
Registration Statement, filed on November 17, 1988.
(b)(i) Amended Bylaws of Registrant are incorporated by
reference to Amendment No. 3 to the Registration
Statement, filed on November 17, 1988.
(ii) Amendment to the Amended Bylaws of Registrant are
incorporated by reference to Amendment No. 4 to the
Registration Statement, filed on March 1, 1990.
(c) Not Applicable.
(d) Specimen Certificate of Common Stock, par value $.01
per share is incorporated by reference to Amendment
No. 3 to the Registration Statement, filed on November
17, 1988.
(e) Dividend Reinvestment Plan is incorporated by
reference to Amendment No. 8 to the Registration
Statement, filed on June 25, 1993.
(f) Not Applicable.
(g)(i) Form of Investment Advisory Agreement between
Registrant and Greenwich Street Advisors is
incorporated by reference to Amendment No. 8 to the
Registration Statement, filed on June 25, 1993.
(h) Form of Distribution Agreement between Registrant and
Smith Barney Shearson is incorporated by reference to the Registration
Statement.
(i) Not Applicable.
(j) Form of Custody Agreement between Registrant and PNC
Bank, National Association is incorporated by
reference to Post-Effective Amendment No. 9 to the
Registration Statement, filed on January 13, 1997.
(k)(i) Form of Administration Agreement between
Registrant and Smith Barney Mutual Funds Management
Inc. is incorporated by reference to Post-Effective
Amendment No. 9 to the Registration Statement, filed
on January 13, 1997.
(l) Opinion and Consent of Counsel is incorporated by
reference to Pre-Effective Amendment No.1 to the
Registration Statement.
(m) Not Applicable.
(n) Consent of Independent Auditors (filed herewith).
(o) Not Applicable.
(p) Subsciption Agreement between Registrant and Shearson
incorporated by reference to Amendment No. 3 to the
Registration Statement, filed on November 17, 1988.
(q) Not Applicable.
(r) Financial Data Schedule for Registrant as of October
31, 1997 (filed herewith).
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
Number of Record Stockholders
Title of Class as of December 17, 1997
19,919,714
Shares of Common Stock,
par value $0.01 per share 1,625
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.
Mutual Management Corp. ("MMC") a New York corporation, is a
registered investment adviser and is wholly owned by Salomon
Smith Barney Holdings Inc., which in turn is wholly owned by
Travelers Group Inc. MMC 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
Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
PNC Bank, 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
20th day of January, 1998.
MUNICIPAL HIGH INCOME FUND INC.
By: /s/ Heath B. McLendon
Heath B. McLendon
Chief Executive Officer
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
Chief Executive Officer 1/20/98
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer) 1/20/98
/s/ Charles F. Barber*
Charles F. Barber Director 1/20/98
/s/ Allan J. Bloostein*
Allan J. Bloostein Director 1/20/98
/s/ Martin Brody*
Martin Brody Director 1/20/98
/s/ Dwight B. Crane*
Dwight B. Crane Director 1/20/98
/s/ Robert A. Frankel*
Robert A. Frankel Director 1/20/98
/s/ William R. Hutchinson*
William Hutchinson Director 1/20/98
*Signed by Heath B. McLendon, their duly authorized attorney-in-
fact, pursuant to power-of-attorney dated December 3, 1996.
EXHIBIT INDEX
2(n) Auditors' Consent
2(r) Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Municipal High Income Fund Inc.:
We consent to the use of our report dated December 8, 1997, for Municipal
High Income Fund Inc., 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
February 23, 1998
<TABLE> <S> <C>
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<NAME> MUNICIPAL HIGH INCOME FUND INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<INVESTMENTS-AT-COST> 179,490,677
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</TABLE>
