As filed with the Securities and Exchange Commission on January 15,
1999
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
Post-Effective Amendment No. 11
and
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 11
__________________
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. 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;
Risk Factors and Special Considerations;
Investment Restrictions; Description of
Common Stock; Share
Price Data; Certain Provisions of the
Articles of Incorporation and Market
Discount; Appendix.
9. Management Management of the Fund; Description
of Common Stock; Custodian, Transfer
Agent, Dividend-Paying Agent, Registrar and
Plan Agent
10. Capital Stock, Long-Term Taxation; Dividends and Distributions,
Dividend Reinvestment Plan;
Debt, and Other Description of Common Stock; Share
Price Data
Securities
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 Cover Page; Description of Common
History Stock (see Prospectus)
17. Investment Objective and Investment Objective and Policies;
Investment
Policies Restrictions
18. Management Investment Manager and Administrator;
Directors and
Executive Officers of the Fund
19. Control Persons and Not Applicable
Principal Holders of
Securities
20. Investment Advisory and Investment Manager and Administrator
Other Services
21. Brokerage Allocation and Portfolio Transactions and Turnover
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 26, 1999
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Municipal High Income Fund Inc.
Common Stock
Listed on the New York Stock Exchange
Trading symbol--MHF
Municipal High Income Fund Inc. is a diversified, closed-end management
investment company. The fund's investment objective is to seek high current
income exempt from federal income tax. The fund invests primarily in
intermediate and long-term municipal debt securities issued by state and local
governments including U.S. territories and possessions, political subdivisions,
agencies and public authorities (municipal obligations).
The market price of shares of closed-end funds is less than the net asset
value per share. For more information about this or other risks of investing in
the fund, see "Risk Factors and Special Considerations" beginning on page 14.
The prospectus contains important information about the fund. For your
benefit and protection, please read it before you invest, and keep it on hand
for future reference.
The statement of additional information (SAI) provides more detailed
information about the fund and is incorporated into this prospectus by
reference. The SAI and shareholder reports can be obtained without charge from
your Salomon Smith Barney Financial Consultant or from the fund by calling
1-800-451-2010 or writing to the fund at 388 Greenwich Street, New York, New
York 10013. You can review the fund's shareholder reports at the Securities and
Exchange Commission's Public Reference Room in Washington, D.C. The Commission
charges a fee for this service. Information about the Public Reference Room may
be obtained by calling 1-800-SEC-0330. You can get the same information free
from the Commission's Internet web site at www.sec.gov
The Securities and Exchange Commission has not approved the fund's shares
as an investment or determined whether this prospectus is accurate or complete.
Any statement to the contrary is a crime.
SALOMON SMITH BARNEY INC.
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Table of Contents
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Prospectus Summary 3
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Fund Expenses 6
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Financial Highlights 7
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The Fund 9
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The Offering 9
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Use of Proceeds 9
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Investment Objective and Policies 9
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Risk Factors and Special Considerations 14
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Investment Restrictions 17
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Share Price Data 18
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Management of the Fund 18
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Dividends and Distributions; Dividend Reinvestment Plan 20
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Net Asset Value 22
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Taxation 23
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Description of Common Stock 24
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Certain Provisions of the Articles of Incorporation and
Market Discount 25
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Custodian, Transfer Agent, Dividend-Paying Agent,
Registrar and Plan Agent 27
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Independent Auditors 27
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Further Information 27
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Appendix A-1
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2
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Prospectus Summary
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The following is a summary of more complete information appearing later in
the prospectus. You should read the entire prospectus because it contains
details that are not in the summary. Cross references in the summary to headings
in the prospectus will help you locate information.
INVESTMENT OBJECTIVE AND PRIMARY INVESTMENTS The fund's investment
objective is high current income exempt from federal income tax. The fund
generally invests in intermediate and long-term municipal obligations.
The fund's municipal obligations may have all types of interest rate
payment and reset terms, including fixed rate, adjustable rate, zero coupon,
payment in kind and auction rate features. See "The Fund," "Investment Objective
and Management Policies" and Appendix A.
TAX-EXEMPT INCOME The fund invests with the objective that dividends paid
by the fund may be excluded by shareholders from their gross incomes for federal
income tax purposes. A portion of the fund's dividends may be taxable. The fund
may invest without limit in private activity bonds. Income from these bonds may
be a special preference item for purposes of the federal alternative minimum tax
(AMT). The fund may not be a suitable investment if you are subject to the AMT.
See "Investment Objective and Management Policies" and "Taxation."
THE OFFERING The fund's shares of common stock trade on the New York Stock
Exchange. Salomon Smith Barney intends to buy and sell the fund's shares and
make a market in the common stock. Salomon Smith Barney is not obligated to
conduct market-making activities and may stop doing so at any time without
notice. See "The Offering" and "Use of Proceeds."
LISTING NYSE.
SYMBOL MHF.
INVESTMENT MANAGER Mutual Management Corp. (MMC) (formerly Smith Barney
Mutual Funds Management Inc.). The manager selects and manages the fund's
investments in accordance with the fund's investment objective and policies. MMC
is also the fund's administrator and oversees the fund's non-investment
operations and its relations with its service providers. For these services, MMC
receives a combined annual fee equal to 0.60% of the fund's average daily net
assets.
RISK FACTORS AND SPECIAL CONSIDERATIONS The value of the securities in the
fund's portfolio fluctuate in price and the value of your investment in the fund
will go up and down in value. This means that you could lose money on your
investment in the fund or the fund could perform less well than other similar
3
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Prospectus Summary (continued)
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investments. In addition, the price of the shares is determined by market prices
on the NYSE and elsewhere, so you may receive a price that is less than net
asset value when you sell your shares. The principal risks associated with an
investment in the fund are summarized below.
Municipal Obligations. The fund invests primarily in municipal obligations
and may be affected by any of the following:
o Interest rates rise, causing the value of the fund's portfolio generally
to decline.
o When interest rates are declining, the issuer of a security exercises its
right to prepay principal earlier than scheduled, forcing the fund to
reinvest in lower yielding securities. This is known as call or prepayment
risk.
o The underlying revenue source for a municipal obligation other than a
general obligation bond is insufficient to pay principal or interest in a
timely manner.
o The issuer of a security owned by the fund has its credit rating
downgraded or defaults on its obligation to pay principal and/or interest.
o The manager's judgment about the attractiveness, value or income potential
of a particular bond proves to be incorrect.
o Municipal obligations fall out of favor with investors.
o Unfavorable legislation affects the tax-exempt status of municipal
obligations.
Below investment grade securities. The fund is allowed to invest up to
100% of its assets in securities rated below investment grade or considered by
the manager to be of comparable quality. (Investment grade debt securities are
defined as those rated in one of the four highest rating categories by a
nationally recognized statistical rating organization (NRSRO)). Investing in
below investment grade securities involves a substantial risk of loss. These
securities are considered speculative because they have a higher risk of
default, tend to be less liquid, and may be more difficult to value than
investment grade securities.
The fund may invest in securities issued by municipalities that are in
default on their obligations to pay interest and/or principal. The fund may lose
all of its investment in these securities.
Restricted securities. The fund may invest in securities for which there
are restrictions on resale. There is a less liquid market for restricted
securities than for publicly traded securities. Although such securities
sometimes may be resold in private transactions, the prices realized from the
sale may be less than what the fund considers the fair value of the securities.
Derivatives. The fund may hold securities or use investment techniques
that provide for payments based on or "derived" from the performance of an
underlying asset, index or other economic benchmark.
4
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Prospectus Summary (continued)
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Even a small investment in derivative contracts can have a big impact on
the fund's interest rate exposure. Therefore, using derivatives can
disproportionately increase losses and reduce opportunities for gains when
interest rates are changing. The fund may not fully benefit from or may lose
money on derivatives if changes in their value do not correspond accurately to
changes in the value of the fund's holdings. The other parties to certain
derivative contracts present the same types of default risk as issuers of fixed
income securities. Derivatives can also make the fund less liquid and harder to
value, especially in declining markets. Derivatives include futures and options
transactions.
Closed-end investment company. The fund is a closed-end investment company
and its shares may trade on the NYSE at a price that is less than its net asset
value.
See "Risk Factors and Special Considerations" and "Certain Provisions of
the Articles of Incorporation and Market Discount."
DIVIDENDS AND DISTRIBUTIONS Any dividends from net investment income
(income other than net realized capital gains) are paid monthly and any
distributions of net realized capital gains are paid annually. Your dividends or
distributions may be reinvested in additional fund shares if you participate in
the Dividend Reinvestment Plan. The number of shares issued to you by the plan
depends on the price of the shares. The price of the shares is determined by the
market price at the time the shares are purchased.
Market Price of Fund Shares Price of Fund Shares Issued by Plan
- --------------------------- -----------------------------------
Greater than or equal to Shares issued at 98% of net asset value or
98% net asset value 95% of market price, whichever is greater
Less than 98% of net asset value Market price
See "Dividends and Distributions; Dividend Reinvestment Plan."
CUSTODIAN PNC Bank, National Association (PNC Bank) is the fund's
custodian. See "Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and
Plan Agent."
TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT First Data
Investor Services Group, Inc. (First Data) is the fund's transfer agent,
dividend-paying agent and registrar. See "Custodian, Transfer Agent,
Dividend-Paying Agent, Registrar and Plan Agent."
5
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Fund Expenses
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The following table shows the expenses the fund pays. As a shareholder,
you indirectly bear these expenses.
================================================================================
Annual Expenses
(as a percentage of net assets)(1)
Management fees ............................................. 0.60%
Other expenses .............................................. 0.14%
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Total Annual Operating Expenses ................................... 0.74%
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(1) See "Management of the Fund" for additional information.
EXAMPLE
An investor would directly 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
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This example assumes that all dividends and other distributions are
reinvested at net asset value and that the percentage amounts listed under
Annual Expenses remain the same in the years shown. This example should not be
considered a representation of future expenses of the fund. Actual expenses may
be more or less than those shown.
6
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Financial Highlights
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The following information for the four-year period ended October 31, 1998 has
been audited by KPMG LLP, independent auditors, whose report thereon appears in
the fund's annual report dated October 31, 1998. The following information for
the fiscal years ended October 31, 1989 through October 31, 1994 has been
audited by other independent auditors. The following information should be read
in conjunction with the financial statements and related notes that also appear
in the fund's 1998 Annual Report, which is incorporated by reference into this
prospectus and the Statement of Additional Information.
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended October 31, 1998 1997 1996 1995 1994
========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $9.76 $9.53 $9.51 $8.98 $9.72
Income (Loss) From Operations:
Net investment income 0.60 0.61 0.63 0.64 0.65
Net realized and unrealized gain (loss) 0.03 0.24 -- 0.54 (0.72)
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Total Income (Loss) From Operations 0.63 0.85 0.63 1.18 (0.07)
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Less Distributions From:
Net investment income (0.61) (0.62) (0.61) (0.65) (0.65)
In excess of net investment income (0.01) -- -- -- --
------------------------------------------------------------------------------------------------------
Net realized gains -- -- -- -- (0.02)
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Total Distributions (0.62) (0.62) (0.61) (0.65) (0.67)
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Net Asset Value, End of Year $9.77 $9.76 $9.53 $9.51 $8.98
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Total Return, Based on Market Value 9.34% 17.22% 10.22% 14.17% (10.11)%
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Total Return, Based on Net Asset Value 6.75% 9.41% 7.39% 14.00% (0.54)%
Net Assets, End of Year (millions) $198 $194 $187 $187 $176
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Ratios to Average Net Assets:
Expenses 0.74% 0.74% 0.77% 0.84% 0.84%
Net investment income 6.07 6.38 6.65 6.87 6.98
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Portfolio Turnover Rate 57% 35% 17% 18% 17%
========================================================================================================
Market Value, End of Year $10.125 $9.875 $9.000 $9.000 $8.250
========================================================================================================
</TABLE>
7
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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, 1993 1992 1991 1990 1989(1)
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<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $9.49 $9.42 $9.28 $9.52 $9.35
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Income (Loss) From Operations:
Net investment income 0.67 0.70 0.74 0.75 0.66
Net realized and unrealized gain (loss) 0.23 0.06 0.15 (0.23) 0.15
Total Income (Loss) From Operations 0.90 0.76 0.89 0.52 0.81
Less Distributions From:
Net investment income (0.67) (0.69) (0.75) (0.76) (0.64)
In excess of net investment income -- -- -- -- --
-----------------------------------------------------------------------------------------------------------
Net realized gains -- -- -- -- --
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Total Distributions (0.67) (0.69) (0.75) (0.76) (0.64)
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Net Asset Value, End of Year $9.72 $9.49 $9.42 $9.28 $9.52
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Total Return, Based on Market Value 17.07% 2.74% 17.88% (1.45)% 1.72%
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Total Return, Based on Net Asset Value 9.87% 8.47% 10.15% 5.75% 9.02%
=============================================================================================================
Net Assets, End of Year (millions) $188 $179 $173 $165 $164
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Ratios to Average Net Assets:
Expenses 0.87% 0.87% 0.90% 0.87% 0.86%*(2)
Net investment income 6.89 7.31 7.90 8.00 7.54*
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Portfolio Turnover Rate 13% 12% 22% 11% 16%
=============================================================================================================
Market Value, End of Year $9.875 $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
# Not annualized.
8
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The Fund
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The fund was incorporated under the laws of the State of Maryland on March
4, 1988 and is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). Its principal office is located at 388 Greenwich Street, New
York, New York 10013. The fund's telephone number is (800) 451-2010.
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The Offering
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Salomon Smith Barney currently makes a market in the common stock. This
prospectus is to be used by Salomon Smith Barney in connection with offers and
sales of the common stock in market-making transactions in the over-the-counter
market at negotiated prices related to prevailing market prices at the time of
the sale. Salomon Salomon Smith Barney is not required to make a market in the
common stock and may stop doing so at any time. You should not rely on Salomon
Smith Barney's market making activities to provide an active or liquid trading
market for the common stock.
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Use of Proceeds
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The fund will not receive any proceeds from the sale of any common stock
offered pursuant to this prospectus. Proceeds received by Salomon Smith Barney
as a result of its market-making in common stock will be used by Salomon Smith
Barney in connection with its secondary market operations and for general
corporate purposes.
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Investment Objective and Policies
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The fund's investment objective is high tax-exempt current income. The
fund's investment objective may only be changed by the affirmative vote of the
holders of a "majority of the fund's outstanding voting securities," as defined
in the Investment Company Act of 1940, as amended (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 lower-rated
municipal obligations (those that are not "investment grade"). These securities
are rated as low as Ba by Moody's Investors Service, Inc. (Moody's), BB by
Standard & Poor's Rating Group (S&P) or BB by Fitch IBCA (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
9
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Investment Objective and Policies (continued)
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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 ratings is set forth in the Appendix to the SAI.
Lower-rated bonds are judged to have speculative elements. Although these bonds
may 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 may invest up to to 30% of its assets in
non-publicly traded securities. No assurance can be given that the fund will
achieve its investment objective.
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 may bear fixed,
floating or 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.
Municipal obligations also include qualified "private activity bonds", which
generate interest that is exempt from regular Federal income tax but that is
subject to the AMT. Various types of municipal obligations in which the fund may
invest are described in the 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 the manager reviews 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.
10
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Investment Objective and Policies (continued)
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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 the manager believes that long-term municipal obligations
consistent with the fund's investment objective are unavailable, the fund may
take a temporary defensive posture and invest without limitation in short-term
municipal obligations and Taxable Investments. To the extent that the fund holds
taxable investments and, under certain market conditions, short-term municipal
obligations, the fund may not fully achieve its investment objective.
INVESTMENT TECHNIQUES
The fund may employ, among others, the investment techniques described
below, which may give rise to taxable income or gain.
When-Issued Securities. New issues of municipal obligations usually are
offered on a when-issued basis, which means that delivery and payment for the
municipal obligations normally take place within 45 days after the date of the
commitment to purchase. The payment obligation and the interest rate that will
be received on the municipal obligations are fixed at the time the buyer enters
into the commitment. The fund will make commitments to purchase when-issued
municipal obligations only with the intention of acquiring the securities, but
may sell these securities before the settlement date if the manager deems it
advisable. Any gain realized on the sale would be taxable.
Stand-By Commitments. The fund may acquire "stand-by commitments" with
respect to municipal obligations held in its portfolio. Under a stand-by
commitment, a dealer is obligated to repurchase at the fund's option specified
securities at a specified price and, in this way, stand-by commitments are
comparable to put options. The exercise of a stand-by commitment, therefore, is
subject to the ability of the party 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
11
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Investment Objective and Policies (continued)
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that may be entered into by the fund will be restricted to those that are either
based on an index of long-term municipal obligations or relate to debt
securities the prices of which are anticipated by the manager to correlate with
the prices of the municipal obligations owned or to be purchased by the fund.
Regulations by the Commodities Futures Trading Commission (the "CFTC")
applicable to the fund require that 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
12
<PAGE>
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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 the manager unless the fund applies for and
receives specific authority to do so from the SEC. Loans of the fund's
securities, if and when made, may not exceed 33 1/3% of the fund's assets taken
at value. The fund's loans of securities will be collateralized by cash, letters
of credit or U.S. Government securities that will be maintained at all times in
a segregated account with the fund's custodian in an amount at least equal to
100% of the current market value of the loaned securities.
Repurchase Agreements. The fund may enter into repurchase agreement
transactions with member banks of the Federal Reserve System or with certain
dealers listed on the Federal Reserve Bank of New York's list of reporting
dealers. A repurchase agreement is a contract under which the buyer of a
security simultaneously commits to resell the security to the seller at an
agreed-upon price on an agreed-upon date. Under the terms of a typical
repurchase agreement, the fund would acquire an underlying debt obligation for a
relatively short period (usually not more than seven days) subject to an
obligation of the seller to repurchase, and the fund to resell, the obligation
at an agreed-upon price and time, thereby determining the yield during the
fund's holding period. This arrangement results in a fixed rate of return that
is not subject to market fluctuations during the fund's holding period. Under
each repurchase agreement, the selling institution will be required to maintain
the value of the securities subject to the repurchase agreement at not less than
their repurchase price.
Year 2000. The investment management services provided to the fund by MMC
depend on the smooth functioning of its computer system. 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 fund's operations, including the
handling of securities trades, pricing and account services. MMC has advised the
fund that it has been reviewing all of its computer systems and actively working
on necessary changes to its systems to prepare for the year 2000 and expects
that its systems will be compliant before that date. In addition, MMC has been
advised by the fund's custodian, transfer agent and accounting service agent
that they are also in the process of modifying their systems with the same goal.
There can, however, be no assurance that MMC, or any other service provider will
be successful, or that
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
interaction with other non-complying computer systems will not impair fund
services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
- --------------------------------------------------------------------------------
Risk Factors and Special Considerations
- --------------------------------------------------------------------------------
There are various risks associated with an investment in the fund. You
should consider whether the fund is an appropriate investment for you. The fund
invests substantially all of its assets in municipal obligations, and
circumstances or events that affect the value of municipal obligations will
affect the fund's net asset value. The fund may invest primarily in lower-rated
securities. An investment in these securities has speculative characteristics
and involves a substantial risk of loss. While certain risks are discussed
elsewhere in this prospectus, the following is intended to provide a summary of
the principal risks of an investment in the fund.
Interest rate sensitivity
o Municipal obligations are fixed-income securities which are sensitive to
changes in interest rates. Generally, when interest rates are rising, the value
of the fund's fixed-income securities can be expected to decrease. When interest
rates are declining, the value of the fund's fixed-income securities can be
expected to increase. The fund's net asset value will fluctuate in response to
the increasing or decreasing value of the fund's fixed-income securities.
Less liquid markets for some municipal obligations
o The market for municipal obligations, in particular those that are rated
below investment grade or are unrated, may be less liquid than for corporate
bonds. Less liquid markets tend to be more volatile and react more negatively to
adverse publicity and investor perception than more liquid markets.
Call or prepayment risk
o Municipal obligations frequently permit their issuers to prepay, call or
repurchase the securities from their holders, such as the fund. As a result of
declining interest rates, the issuer of a municipal obligation may exercise its
prepayment, call or repurchase right on the security, forcing the fund to
replace the security with a lower yielding security. This would decrease the
return to the fund.
o If the fund purchased a municipal obligation at a premium, it would
experience
14
<PAGE>
- --------------------------------------------------------------------------------
Risk Factors and Special Considerations (continued)
- --------------------------------------------------------------------------------
a loss of that premium in the event that the issuer of that security exercises
its prepayment, call or repurchase right.
Issuer of a municipal obligation defaults or rating is downgraded
o The issuer of a municipal obligation may not be able to make timely
payments of interest and principal because of general economic downturns or
adverse allocation of government cost burdens. This could result in a decrease
in the fund's net asset value. This risk of default may be greater for private
activity bonds or other municipal obligations whose payments are dependent upon
a specific source of revenue. Adverse changes in the issuer's financial
condition may negatively affect its credit rating or presumed creditworthiness.
These developments would adversely affect the market value of the issuer's
obligations.
Below investment grade securities
o The risk of default is greater for lower-rated securities than for
investment grade securities. Issuers of below investment grade securities may
have difficulty servicing their debt, especially during prolonged economic
recessions or periods of rising interest rates. The prices of these securities
are volatile and may go down due to market perceptions of deteriorating issuer
creditworthiness or economic conditions. Below investment grade securities may
become illiquid and hard to value in down markets.
o Even if the issuer does not actually default, adverse changes in the
issuer's financial condition may negatively affect its credit rating presumed
creditworthiness. The market value of lower-rated securities is more sensitive
to changes in the issuer's financial condition and changes in economic
conditions than is the market value of investment grade securities.
o The issuer of a below investment grade security might declare or be in
bankruptcy and the fund could experience loss or delays collecting interest and
principal. To enforce its rights to collect principal and interest payments, the
fund might be required to incur additional expenses which would reduce its net
asset value. The fund may lose some or all of its investment in below investment
grade securities upon default or bankruptcy because these securities are
generally not secured by collateral.
Issuer of a municipal obligation declares bankruptcy
o The issuer of a municipal obligation might declare bankruptcy. To
enforce its rights to principal and interest, the fund might be required to take
possession of and manage the assets securing the issuer's obligation. This may
increase the fund's expenses and reduce its net asset value and increase the
amount of the fund's distributions that are taxable.
15
<PAGE>
- --------------------------------------------------------------------------------
Risk Factors and Special Considerations (continued)
- --------------------------------------------------------------------------------
Adverse governmental action
o The U.S. government has enacted laws that have eliminated, restricted or
diminished the income tax exemption on some municipal obligations and it may do
so again in the future. If this were to happen, shareholders could receive more
of the distributions from the fund that are taxable.
Other
o The issuer of a municipal obligation may be obligated to redeem the
security at face value, but if the fund paid more than face value for the
security, the fund may lose money on the security when it is sold.
o There may be less extensive information available about the financial
condition of issuers of municipal obligations than for corporate issuers with
publicly traded securities.
When-Issued and Delayed Delivery Transactions
The fund may use when-issued and delayed delivery transactions to purchase
securities. The value of securities purchased in these transactions may decrease
before they are delivered to the fund. Also, the yield on securities purchased
in these transactions may be higher in the market when the delivery takes place.
Financial Futures and Options
The fund may use financial futures contracts and options on these
contracts to protect the fund from a decline in the price of municipal
obligations it owns or an increase in the price of a municipal obligation it
plans to buy. There are risks associated with futures and options transaction.
o Because it is not possible to correlate perfectly the price of the
securities being hedged with the price movement in a futures or option contract,
it is not possible to provide a perfect offset to losses on the securities.
Losses on the fund's security may be greater than gains on the futures or option
contract, or losses on the futures or option contract may be greater than gains
on the securities subject to the hedge.
o To compensate for imperfect correlation, the fund may over-hedge or
under-hedge by entering into futures contracts or options on futures contracts
in dollar amounts greater or lesser than the dollar amounts of the securities
being hedged. If market movements are not as anticipated, the fund could lose
money from these positions.
o If the fund hedges against an increase in interest rates, and rates
decline instead, the fund will lose all or part of the benefit of the increase
in value of the securities it hedged because it will have offsetting losses in
its futures or options positions. Also, in order to meet margin requirements,
the fund may have to sell securities at a time it
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Restrictions
- --------------------------------------------------------------------------------
The fund has adopted certain fundamental investment restrictions that may
be changed only with 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 a complete
listing of the investment restrictions applicable to the fund, see "Investment
Restrictions" in the SAI.
The following are several of the restrictions applicable to the fund. Any
percentage limits apply only at the time of purchase or initial investment. The
fund is not required to sell securities if the limits are exceeded after the
purchase or investment is completed. The fund may not:
o Borrow money, except for temporary or emergency purposes, and then
not in amounts that are greater than 15% of total assets (including
the amount borrowed).
o Buy more securities if the fund has borrowed money in amounts
greater than 5% of net assets.
o Invest more than 25% of total assets in securities of issuers in a
single industry. This restriction does not apply to the fund's
investments in municipal obligations and U.S. government securities.
17
<PAGE>
- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------
The fund's common stock is listed on the NYSE under the symbol "MHF."
Salomon Smith Barney intends to buy and sell the fund's shares in order 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 and each full fiscal quarter since then.
Quarterly High Price Quarterly Low Price
-------------------- -------------------
Premium Premium
Net Asset NYSE (Discount) Net Asset NYSE (Discount)
Value Price to NAV Value Price to NAV
================================================================================
1/31/99
10/31/98 9.88 10.1875 3.11% 9.76 9.8125 (0.54%)
7/31/98 9.88 10.125 2.48% 9.78 9.375 (4.14%)
4/30/98 9.93 10.1875 2.59% 9.77 9.500 (2.76%)
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%)
================================================================================
As of January 29, 1999, the price per share of common stock as quoted on
the NYSE was $____, representing a ___% 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 (Board). The Board 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 the manager. The SAI contains background information regarding each
Director and executive officer of the fund.
18
<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 1968 and is a registered investment
adviser. MMC renders investment advice to a wide variety of individual,
institutional and investment company clients that, as of December 31, 1998, had
aggregate assets under management in excess of $109 billion. The manager and
Salomon Smith Barney are subsidiaries of Citigroup Inc. Citigroup businesses
produce a broad range of financial services--asset management, banking and
consumer finance, credit and charge cards, insurance, investments, investment
banking and trading--and use diverse channels to make them available to consumer
and corporate customers around the world. Among these businesses are Citibank,
Commercial Credit, Primerica Financial Services, Salomon Smith Barney, SSBC
Asset Management, Travelers Life & Annuity, and Travelers Property Casualty.
Subject to the supervision and direction of the fund's Board, 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 an administration fee by the fund that is
computed daily and paid monthly at an annual 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 Salomon
Smith Barney or a Salomon 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 Salomon Smith Barney in connection with entering into
options and futures contracts. The fund paid no brokerage commissions in the
last fiscal year.
Citigroup is a bank holding company subject to regulation under the Bank
Holding Company Act of 1956 (the "BHCA"), the requirements of the Glass-Steagall
Act and certain other laws and regulations.
Salomon Smith Barney and the manager believe that the manager's investment
management and administration services and the market-making activities
performed by Salomon Smith Barney are not underwriting and are consistent with
the BHCA, the Glass-Steagall Act and other federal and state laws applicable to
19
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Citigroup. However, there is little controlling precedent regarding the
performance of the combination of investment advisory and administrative
activities by subsidiaries of bank holding companies. If Salomon Smith Barney
and the manager, or their affiliates, were to be prevented from acting as the
manager or administrator, the fund would seek alternative means for obtaining
these services. The fund does not expect that shareholders would suffer any
adverse financial consequences as a result of any such occurrence.
PORTFOLIO MANAGEMENT
Lawrence T. McDermott is a Vice President and Investment Officer of the
fund and has served the fund in this capacity since the fund commenced
operations in 1988. He manages the day-to-day investment operations of the fund,
including making all investment decisions. Mr. McDermott is a Managing Director
of Salomon 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 expects to pay monthly dividends of substantially all net
investment income to the holders of the common stock. Net investment income is
income (including tax-exempt income and accrued original issue discount income)
other than net realized capital gains. Under the fund's current policy, which
may be changed at any time by its board of directors, the fund's monthly
dividends will be paid at a level that reflects the past and projected
performance of the fund, which policy over time will result in the distribution
of all net investment income of the fund. From time to time, when the fund makes
a 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 the
fund's 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 per year.
Under the fund's Dividend Reinvestment Plan (plan), a shareholder whose
shares of common stock are registered in his own name will have all
distributions from the fund reinvested automatically by 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
20
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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. When the
market price of the common stock is equal to or exceeds 98% of the net asset
value per share of the common stock on the determination date (generally, the
record date for the distribution), plan participants will be issued shares of
common stock by the fund at a price equal to the greater of 98% of the net asset
value determined as described below under "Net Asset Value" or 95% of the market
price of the common stock.
If the market price of the common stock is less than 98% of the net asset
value of the common stock at the time of valuation (which is the close of
business on the determination date), or if the fund declares a dividend or
capital gains distribution payable only in cash, First Data will buy common
stock in the open market, on the AMEX 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
of the common stock as of the valuation time, 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 in shares at a price equal to the
greater of (a) 98% of the net asset value as of the valuation time or (b) 95% of
the then current market price. In this case, the number of shares received by a
plan participant will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the fund issues the
remaining shares. To the extent First Data is unable to stop open market
purchases and cause the fund to issue the remaining shares, the average per
share purchase price paid by First Data may exceed 98% of the net asset value of
the common stock as of the valuation time, resulting in the acquisition of fewer
shares than if the dividend or capital gains distribution had been paid in
common stock issued by the fund at 98% of net asset value. First Data will begin
to purchase common stock on the open market as soon as practicable after the
determination date for the dividend or capital gains distribution, but in no
event shall such purchases continue later than 30 days after the payment date
for such dividend or distribution, or the record date for a succeeding dividend
or distribution, except when necessary to comply with applicable provisions of
the federal securities laws.
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.
21
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
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 apply with respect to shares of common stock issued
directly by the fund under the plan. Each plan participant will, however, bear a
proportionate share of any brokerage commissions actually incurred with respect
to any open market purchases made under the plan.
Experience under the plan may indicate that changes to it are desirable.
The fund reserves the right to amend or terminate the plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The plan also may be amended or
terminated by First Data, with the fund's prior written consent, on at least 30
days' written notice to plan participants. All correspondence concerning the
plan should be directed by mail to First Data Investor Services Group, P.O. Box
8030, Boston, Massachusetts 02266-8030 or by telephone at 1-800-451-2010.
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 fund's Board.
The valuation of the fund's assets is made by MMC after consultation with
an independent pricing service approved by the Board. 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, which may replace the service at any time if it determines it to be in
the best interests of the fund to do so.
22
<PAGE>
- --------------------------------------------------------------------------------
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, you are urged to consult your tax
adviser 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 short-term 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 tax purposes, and shares of the fund may also be subject to state
and local intagible property taxes.
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. Under the AMT,
corporate shareholders must include 75% of tax-exempt 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 capital 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 capital gains are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned fund shares.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional fund shares. None
of the divi-
23
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
dends 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 repurchase,
regardless of whether gain or loss is realized upon the repurchase, for
shareholders who do not provide the fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from the
proceeds of open-market sales and from taxable dividends and capital gain
distributions also is required for shareholders who otherwise are subject to
backup withholding. Any tax withheld as a result of backup withholding does not
constitute an additional tax, and may be claimed as a credit on the
shareholders' Federal income tax return.
- --------------------------------------------------------------------------------
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 January 6, 1999
================================================================================
Common 500,000,000 0 20,319,365.535
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 and Market Discount."
Under the rules of the NYSE applicable to listed companies, the fund is
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 and Market Discount."
24
<PAGE>
- --------------------------------------------------------------------------------
Description of Common Stock (continued)
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
- --------------------------------------------------------------------------------
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 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 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 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
25
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
(continued)
- --------------------------------------------------------------------------------
have to be declared advisable by the Board 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 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.
MARKET DISCOUNT
Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium. Shares
of closed-end investment companies investing primarily in fixed-income
securities tend to trade on the basis of income yield on the market price of the
shares and the market price may also be affected by trading volume, general
market conditions and economic conditions and other factors beyond the control
of the fund. As a result, the market price of the fund's shares may be greater
or less than the net asset value. Since the commencement of the fund's
operations, the fund's shares have traded in the market at prices that were at
times equal to, but generally were below, net asset value.
Some closed-end investment companies have taken certain actions, including
the repurchase of common stock in the market at market prices and the making of
one or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value.
The fund's Board of directors has seen no reason to adopt any of the steps
specified above, which some other closed-end funds have used to address the
discount. The experience of many closed-end funds suggests that the effect of
many of these steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, there can be no assurance that any of these actions
will be taken or, if undertaken, will cause the fund's shares to trade at a
price equal to their net asset value. The manager may voluntarily waive its fees
from time to time in order to increase the fund's dividend yield in an effort to
reduce the discount. Any such waiver may be terminated at any time, and there
can be no assurance that such actions would be successful at reducing the
discount.
26
<PAGE>
- --------------------------------------------------------------------------------
Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and Plan
- --------------------------------------------------------------------------------
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 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.
27
<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 variableand 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, and income earned by the fund could be taxable.
A-3
<PAGE>
SALOMON SMITH BARNEY
----------------------------
A member of citigroup [LOGO]
Municipal
High Income
Fund Inc.
388 Greenwich Street
New York, New York 10013
Common Stock
All dealers effecting transactions in the fund's securities, whether or not
participating in this distribution, may be required to give investors a
prospectus.
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. This prospectus does not offer any
security other than the fund's shares of common stock. Neither the fund nor
Salomon Smith Barney is offering to sell shares of the fund to any person to
whom the fund may not lawfully sell its shares.
The fund will publish a supplement to the prospectus if there are any material
changes in its business after the date of this prospectus.
PART B
MUNICIPAL HIGH INCOME FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
STATEMENT OF ADDITIONAL INFORMATION
February 26, 1999
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 26, 1999 (the "Prospectus"). A copy of the
Prospectus may be obtained by calling any Salomon 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 SAI 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 SAI 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 SAI 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 SAI 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 Prospectus discusses the fund's investment objective and the
policies it employs to achieve that objective. The following discussion
supplements the description of the fund's investment policies in the
Prospectus. 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 Investment Company
Act of 1940, as amended (the "1940 Act"). 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, S&P, Fitch or
other nationally recognized statistical rating organizations ("NRSROs").
The ratings of Moody's, S&P, Fitch and other NRSROs 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 an NRSRO. The Appendix to this SAI contains
information concerning the ratings of Moody's, S&P and Fitch and their
significance.
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. The fund may 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 not subject to any
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 (and in the
Prospectus) 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.
Illiquid and Non-Public Securities
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 or payable from funds provided 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, and a corporate shareholder's liability
for alternative minimum tax may also be increased by tax-exempt
dividends derived from interest on the fund's tax-exempt obligations
that are not private activity bonds. See "Taxes." Private activity
bonds held by the fund are included in the term "municipal obligations"
for purposes of determining compliance with the 80% limitation described
above.
Municipal Leases and Zero Coupon Securities
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.
Floating and Variable Rate Demand Notes
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 (the "Board") 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").
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 NRSRO 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 or gain.
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 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. Lower-rated and unrated securities held by the fund may be
subordinated to the prior payment of senior indebtedness and 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 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.
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 the Prospectus and this SAI.
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 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 in 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
(65)
388 Greenwich Street
New York NY 10013
Chairman of
the Board,
Chief
Executive
Officer and
President
Managing Director of Salomon
Smith Barney Inc.; President and
Director of MMC; President and
Director of Travelers Advisers,
Inc. ("TIA"); Chairman of
Salomon Smith Barney Strategy
Advisers Inc.
+Martin Brody (77)
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
(69)
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 (61)
Harvard Business
School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business
School.
+Robert A. Frankel
(71)
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
(56)
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
(50)
388 Greenwich Street
New York, New York
10013
Vice
President and
Investment
Officer
Managing Director of Salomon
Smith Barney Inc.
Michael J. Maher (36)
388 Greenwich Street
New York, New York
10013
Investment
Officer
Vice President of Salomon Smith
Barney Inc.
Lewis E. Daidone (41)
388 Greenwich Street
New York, NY 10105
Senior Vice
President and
Treasurer
Managing Director of Salomon
Smith Barney; Director and
Senior Vice President of MMC and
TIA.
Christina T. Sydor
(48)
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Salomon
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 Salomon 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, 1998, such expenses totaled $3,677.53.
Name
Aggregate
Compensati
on from
fund for
the fiscal
year ended
10/31/98
Pension or
Retirement
Benefits
Accrued as
part of fund
Expenses
Compensation
from fund
and fund
Complex for
the year
ended
12/31/97
Total Number
of funds for
Which
Director
Serves
Within fund
Complex
Martin Brody
6,200
0
119,814
19
Dwight Crane
7,100
0
133,850
22
Allan Bloostein
7,600
0
85,850
8
Robert Frankel
7,600
0
65,900
8
William R.
Hutchinson
7,600
0
35,750
6
Heath B. McLendon
0
0
0
42
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. During the fund's last fiscal year $3,300 was
paid by the fund to Directors 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 January 6, 1999:
Name and Address
of Record Owner
Amount of
Record Ownership
Percent of Common
Stock Outstanding
Cede & Co., as Nominee
for The Depository
Trust Company
P.O. Box 20
Bowling Green Station
New York, New York
10004
18,041,886
90.41%
8,064,764 of the shares held of record by Cede & Co., representing
40.42% of the outstanding shares of common stock, were held by The
Depository Trust Company as nominee for Salomon Smith Barney,
representing accounts for which Salomon Smith Barney has discretionary
and non-discretionary authority. As of January 6, 1999, 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, 1996, 1997 and 1998 the fund paid MMC $747,137,
$757,896 and $786,802, respectively, in investment advisory fees.
The Advisory Agreement was initially approved by the fund's Board
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 was last approved
on August 19, 1998 and, unless sooner terminated, 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 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 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 1996, 1997
and 1998 fiscal years, the fund paid MMC $373,569, $378,948 and
$393,401, 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 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 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 1996,
1997 and 1998 fiscal years, the fund's portfolio turnover rates were
17%, 35% and 57%, 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.
The valuation of the fund's assets is made by MMC after
consultation with an independent pricing service (the "Service"). 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, 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 Board believes represent a favorable investment opportunity,
but has no obligation to do so.
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. Any
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 a tender offer is authorized to be made by the Portfolio's
Board, it will be an offer to purchase at a price equal to the net asset
value of all (but not less than all) of the shares owned by the
shareholder (or attributed to him or her for Federal income tax purposes
under Sections 318(a) and 302(c) of the Code). A shareholder who
tenders all of the shares actually and constructively owned by that
shareholder will realize a taxable gain or loss depending upon the
amount of cash received and his or her basis in his or her shares.
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 does not address all of the potential federal income tax
consequences that may be applicable to the fund or to all categories of
investors, some of which may be subject to special tax rules. 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 continue 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 any net realized short-term capital gain in excess of net
realized long-term capital loss) 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, securities of other regulated
investment companies 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.
The fund may acquire securities which do not pay interest
currently, such as zero coupon or delayed interest securities. As the
holder of such a security, the fund is required to include in taxable or
tax-exempt income an amount of deemed interest known as "original issue
discount" that accrues on the security for the taxable year under
federal income tax law, even if the fund receives no payment on the
security during the year. Because the fund must distribute annually
substantially all of its net taxable income and tax-exempt income,
including any accrued original issue discount, in order to qualify as a
regulated investment company and to avoid imposition of income tax and
the 4% excise tax, the fund may be required in a particular year to
distribute dividends in an amount that is greater than the total amount
the fund actually receives in interest or other distributions on the
securities it owns. Those distributions will be made from the fund's
cash assets or from the proceeds of sales of portfolio securities, if
necessary. The fund may realize capital gains or losses from those
sales, which would increase or decrease the fund's taxable income or net
realized capital gains.
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 to 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 to 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 (to the extent it realizes corresponding gains in such
year).
Any capital losses resulting from the disposition of securities or
other transactions can be used only to offset capital gains and cannot
be used to reduce the fund's ordinary taxable or tax-exempt income. Any
unused capital losses may be carried forward by the fund for eight
years.
Taxation of the fund's Shareholders
The fund anticipates that all dividends it pays, other than
dividends from Taxable Investments and market discount on municipal
obligations 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. Distributions of 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. Dividends and distributions paid by the fund will
not qualify for the Federal dividends-received deduction for
corporations.
Dividends and other distributions by the fund are generally
treated under the Code as received by the shareholders at the time the
dividend or distribution is made. However, any dividends or other
distributions declared by the fund in October, November or December and
made payable to shareholders of record in such a month would be treated
under the Code as if received by shareholders on December 31 of the year
in which they are declared if they are paid in the following January.
If a shareholder purchases shares of common stock at a cost that
reflects an anticipated taxable dividend or distribution, such dividend
or distribution will be taxable even though it represents economically
in whole or in part a return of the purchase price. Investors should
consider the tax implications of buying shares shortly prior to a
dividend distribution (other than an exempt-interest dividend).
Any allowable loss recognized by a shareholder on the sale of
shares held six months or less will be treated as long-term capital loss
to the extent of any capital gain dividends received by the shareholder
with respect to the shares that are sold. Certain losses may be
disallowed to the extent of exempt-interest dividends received, as
described below. In addition, any loss realized on a sale of shares of
common stock may be disallowed under "wash sale" rules to the extent the
shares disposed of are replaced with shares of the fund within a 61-day
period beginning 30 days before and ending 30 days after the disposition
of the shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any gain or loss realized upon
a sale of shares (other than to the fund, which sales are discussed
below) by a shareholder who is not a dealer in securities will be
treated as capital gain or loss.
An amount received by a shareholder from the fund in exchange for
shares of the fund (pursuant to a repurchase of shares or a tender offer or
otherwise) may be treated as a payment in exchange for the shares tendered,
which would result in taxable gain or loss as described above. However, if
the amount received by a shareholder from the fund exceeds the fair market
value of the shares tendered, or if a shareholder does not sell to the fund
all of the shares of the fund owned or deemed to be owned by the
shareholder, all or a portion of the amount received may be treated as a
dividend taxable as ordinary income or as a return of capital. In
addition, if a tender offer is made, any shareholders who do not tender
their shares could be deemed, under certain circumstances, to have received
a taxable distribution of shares of the fund as a result of their increased
proportionate interest in the fund.
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 to the extent it is deemed related to exempt-interest dividends.
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 the Federal
"excess net passive income" tax liability of a shareholder of an S
corporation. 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 purchased in the open market pursuant to the dividend
reinvestment 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. With
respect to distributions issued in shares of the fund the amount of the
distribution for tax purposes is the fair market value of the issued shares
on the payment date, and the difference between such fair market value and
the amount of cash the shareholder would otherwise have received may be
treated as a return of capital. In the case of shares issued by the fund,
the shareholder's tax basis in each share received is its fair market value
on the payment date, adjusted by any amount treated as a return of capital
to the shareholder.
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, of long-term capital gains distributions eligible for the
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.
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 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, 1999.
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, 1998 are incorporated by reference into this SAI from the fund's 1998
Annual Report. Copies of the Annual Report may be obtained from any
Salomon 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.
1
u:\legal\funds\#mhf\1999\secdocs\sai0299e.doc
31
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, 1998 and Report of Independent Accountants
dated December 8, 1998 are incorporated by reference to the
Definitive 30(b)2-1 filed on January 14, 1999, Accession
#0000091155-99-000021.
(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 (filed herewith).
(f) Not Applicable.
(g)(i) Form of Investment Advisory Agreement between
Registrant and Greenwich Street Advisors (Mutual
Management Corp.)
(h) Form of Distribution Agreement between Registrant and
Smith Barney Shearson.
(i) Not Applicable.
(j) Form of Custody Agreement between Registrant and PNC
Bank, National Association 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) Subscription 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,
1998 (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 $9000
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 January 6, 1999
Shares of Common Stock,
par value $0.01 per share 1,631
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
Citigroup 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.
Item33. 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 15th day of
January, 1999.
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 1/15/99
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer) 1/15/99
/s/ Allan J. Bloostein*
Allan J. Bloostein Director 1/15/99
/s/ Martin Brody*
Martin Brody Director 1/15/99
/s/ Dwight B. Crane*
Dwight B. Crane Director 1/15/99
/s/ Robert A. Frankel*
Robert A. Frankel Director 1/15/99
/s/ William R. Hutchinson*
William Hutchinson Director 1/15/99
*Signed by Heath B. McLendon, their duly authorized attorney-in-
fact, pursuant to power-of-attorney dated December 3, 1996.
EXHIBIT INDEX
2(e) Dividend Reinvestment Plan
2(n) Auditors' Consent
2(r) Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000830487
<NAME> MUNICIPAL HIGH INCOME FUND INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> OCT-31-1998
<INVESTMENTS-AT-COST> 188,226,807
<INVESTMENTS-AT-VALUE> 199,950,818
<RECEIVABLES> 4,623,457
<ASSETS-OTHER> 97,825
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 204,672,100
<PAYABLE-FOR-SECURITIES> 6,456,817
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 271,209
<TOTAL-LIABILITIES> 6,728,026
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 188,107,418
<SHARES-COMMON-STOCK> 20,258,640
<SHARES-COMMON-PRIOR> 19,885,306
<ACCUMULATED-NII-CURRENT> (16,922)
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2,073,019)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 11,724,011
<NET-ASSETS> 197,944,074
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 13,432,644
<OTHER-INCOME> 0
<EXPENSES-NET> 1,457,387
<NET-INVESTMENT-INCOME> 11,975,257
<REALIZED-GAINS-CURRENT> 1,469,162
<APPREC-INCREASE-CURRENT> (807,512)
<NET-CHANGE-FROM-OPS> 12,636,907
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 12,128,877
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 287,412
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 373,333
<NET-CHANGE-IN-ASSETS> 3,810,781
<ACCUMULATED-NII-PRIOR> 136,698
<ACCUMULATED-GAINS-PRIOR> (3,542,181)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 1,180,203
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,457,387
<AVERAGE-NET-ASSETS> 197,253,156
<PER-SHARE-NAV-BEGIN> 9.76
<PER-SHARE-NII> 0.60
<PER-SHARE-GAIN-APPREC> 0.03
<PER-SHARE-DIVIDEND> 0.61
<PER-SHARE-DISTRIBUTIONS> 0.01
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.77
<EXPENSE-RATIO> 0.74
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
MUNICIPAL HIGH INCOME FUND INC.
ZENIX INCOME FUND INC.
RESTATED TERMS AND CONDITIONS OF DIVIDEND REINVESTMENT PLAN
1. You, First Data Investor Services Group, Inc., will
act as agent ("Agent") for the participating stockholders (the
"Participants") of each fund referenced above (each, the "Fund"), and
will open an account for each of the Participants under the Dividend
Reinvestment Plan (the "Plan") in the name of the record owner in which
shares of the Fund's common stock, par value $.001 per share ("Common
Stock") are registered, and put into effect for the Participants the
distribution reinvestment provisions of the Plan.
2. If the Fund declares a distribution payable either in
Common Stock or in cash, non-participants in the Plan will receive cash,
and Participants will receive the equivalent amount in Common Stock
valued in the following manner: if the market price of the Common Stock
on the determination date is equal to or exceeds 98% of the net asset
value per share of the Common Stock, you will acquire shares directly
from the Fund at a price equal to the greater of (1) 98% of the net
asset value per share at the valuation time or (2) 95% of the market
price per share of the Common Stock on the determination date. If 98%
of the net asset value of the Common Stock exceeds the market price of
the Common Stock on the determination date, you will buy Common Stock in
the open market, on the New York Stock Exchange or elsewhere, for the
Participants' accounts as soon as practicable commencing on the trading
day following the determination date and terminating no later than the
earlier of (a) 30 days after the dividend or distribution payment date,
or (b) the record date for the next succeeding dividend or distribution
to be made to the holders of the Common Stock; except when necessary to
comply with applicable provisions of the federal securities laws. If
the market price equals or exceeds 98% of the net asset value per share
of the Common Stock at the valuation time before you have completed the
open market purchases or if you are unable to invest the full amount
eligible to be reinvested hereunder in open market purchases during the
time period referred to in the previous sentence, you shall cease
purchasing shares in the open market and the Fund shall issue the
remaining shares of Common Stock at a price per share equal to the
greater of (a) 98% of the net asset value per share at the valuation
time or (b) 95% of the then current market price per share.
3. For all purposes of the Plan: (a) the valuation time
will be the close of trading on the New York Stock Exchange on the
determination date for the relevant dividend or distribution; (b) the
determination date will be the record date for determining shareholders
eligible to receive the relevant dividend or distribution, except that
if such day is not a New York Stock Exchange trading day, it will be the
immediately preceding trading day; (c) the market price of the Fund's
Common Stock on a particular date shall be the mean between the highest
and lowest sales prices on the New York Stock Exchange on that date, or,
if there is no sale on such Exchange on that date, then the mean between
the closing bid and asked quotations for such stock on such Exchange on
such date; (d) the net asset value per share of the Fund's Common Stock
as of the valuation time on a particular date shall be as determined by
or on behalf of the Fund; and (e) all distributions and other payments
shall be made net of any applicable withholding tax.
4. The open market purchases provided for above may be
made on any securities exchange where the Fund's Common Stock is traded,
in the over-the-counter market or in negotiated transactions, and may be
on such terms as to price, delivery and otherwise as you shall
determine. Participant funds held by you pending investment will not
bear interest, and it is understood that, in any event, you shall have
no liability in connection with any inability to purchase shares within
the time period for open market purchases, as herein provided, or with
respect to the timing of any purchases effected. You shall have no
responsibility as to the value of the Common Stock of the Fund acquired
for a Participant's account. In connection with open market purchases,
you may commingle a Participant's funds with those of other Participants
and the average price (including brokerage commissions) of all shares
purchased by you as Agent shall be the price per share allocable to each
Participant in connection therewith.
5. You may hold shares acquired pursuant to the Plan,
together with the shares of other Participants acquired pursuant to the
Plan, in noncertificated form in your name or that of your nominee. You
will forward to Participants any proxy solicitation material and will
vote any shares so held for any Participant only in accordance with
instructions given through a proxy executed by the Participant. Upon a
Participant's written request, you will deliver to him, without charge,
a certificate or certificates for the full shares.
6. You will confirm to each Participant each acquisition
made for his account as soon as practicable but not later than 60 days
after the date thereof. Although Participants may from time to time
have an undivided fractional interest (computed to three decimal places)
in a share of Common Stock, no certificates for a fractional share will
need to be issued. However, distributions on fractional shares will be
credited to Participant accounts. In the event the of termination of a
Participant's account under the Plan, you will adjust for any such
undivided fractional interest in cash at the market value of the Fund's
shares at the time of termination less the pro rata expense of any sale
required to make such an adjustment.
7. Any stock dividends or split shares distributed by the
Fund on shares held by you for a Participant will be credited to his
account. In the event that the Fund makes available to its stockholders
rights to purchase additional shares or other securities, the shares
held for a Participant under the Plan will be added to other shares held
by such Participant in calculating the number of rights to be issued to
him.
8. No service fee for handling the reinvestment of
capital gains distributions or income dividends will be charged to
Participants or their accounts. Participants will be charged a pro rata
share of any brokerage commissions actually incurred on open market
purchases.
9. A Participant may terminate his account under the Plan
by notifying you in writing or by calling you at 1-800-331-1710. Such
termination will be effective immediately if notice is received by you
not less than ten business days prior to any dividend or distribution
record date; otherwise such termination will be effective as soon as
practicable after your investment of the most recently declared dividend
or distribution on the Common Stock. The Plan may be terminated by the
Fund upon notice in writing mailed to all Participants at least 30 days
prior to the record date for the payment of any dividend or distribution
by the Fund for which the termination is to be effective. Upon any
termination you will cause a certificate or certificates for the full
shares held for each Participant under the Plan and cash adjustment for
any fractional shares to be delivered to each Participant without
charge. If a Participant elects by notice to you in writing in advance
of such termination to have you sell part or all of his shares and remit
the proceeds to him, you are authorized to deduct a $5.00 fee plus
brokerage commissions actually incurred for this transaction from the
proceeds.
10. These terms and conditions may be amended or
supplemented by you or the Fund at any time or times but, except when
necessary or appropriate to comply with applicable law or the rules or
policies of the Securities and Exchange Commission or any other
regulatory authority, only by mailing to Participants appropriate
written notice at least 30 days prior to the record date for the first
distribution or dividend to which such amendment or supplement is to be
effective, if by the Fund or, if to be amended or supplemented by you,
30 days prior to the effective date of such amendment or supplement and
only upon your receipt of the written consent of the Fund's Board of
Directors. The amendment or supplement shall be deemed to be accepted
by Participants unless, prior to the effective date thereof, you receive
written notice of the termination of a Participant's account under the
Plan. Any such amendment may include an appointment by you in your
place and stead of a successor agent under these terms and conditions,
with full power and authority to perform all or any of the acts to be
performed by the Agent under these terms and conditions. Upon any such
appointment of an agent for the purpose of receiving distributions, the
Fund will be authorized to pay such successor agent, for a Participant's
account, all distributions payable on Common Stock of the Fund held in
his name under the Plan for retention or application by such successor
agent as provided in these terms and conditions.
11. You shall at all times act in good faith and agree to
use your best efforts within reasonable limits to insure the accuracy of
all services performed under this Agreement and to comply with
applicable law, but assume no responsibility and shall not be liable for
loss or damage due to errors unless such error is caused by your
negligence, bad faith or willful misconduct or that of your employees.
12. These terms and conditions shall be governed by the
laws of the State of New York.
Adopted: November 12, 1998
- -6-
U:\legal\funds\#mhf\agreements\drip
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, 1998, with
respect to 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
LLP
New York, New York
January 14, 1999
