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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 SSBC Fund Management Corp. (SSBC) (formerly Mutual
Management Corp. and 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.
SSBC
is also the fund's administrator and oversees the fund's non-investment
operations and its relations with its service providers. For these services,
SSBC
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 net asset 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.
* The credit rating of a security owned by the fund is
downgraded or the issuer 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.
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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
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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."
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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.
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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
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$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.
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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
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<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) -- -- -- --
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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%
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Market Value, End of Year $10.125 $9.875 $9.000 $9.000 $8.250
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</TABLE>
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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 -- -- -- -- --
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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 17.76% 3.37% 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%
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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%
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Market Value, End of Year $9.875 $9.125 $9.50 $9.00 $9.50
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</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.
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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 of the
fund. 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 be changed only by the affirmative vote of the
holders of a "majority of the fund's outstanding voting securities," as defined
in the 1940 Act. To achieve this
objective, the fund seeks to invest substantially all of its assets in a
diversified portfolio of long-term municipal obligations. Under normal
conditions, at least 80% of the fund's assets will be invested in municipal
obligations. The fund may invest up to 100% of its assets in 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 rated lower than Ba, MIG 1/VMIG 1 or
P-2
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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, while 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 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 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 counterparty 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 may
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
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Investment Objective and Policies (continued)
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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 SSBC
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. SSBC 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, SSBC 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 SSBC, or any other service provider
will
be successful, or that
13
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Investment Objective and Policies (continued)
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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.
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Risk Factors and Special Considerations
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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 may involve 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 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 the credit rating of its securities.
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
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. This could result in taxable income to shareholders.
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 securities 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 would not normally choose.
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 initial investment. The
fund is not required to sell securities if the limits are exceeded after the
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 9.76 10.4375 6.94% 9.71 9.375 (6.45%)
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 $9.625, representing a 1.18% discount from the common stock's net
asset value calculated on that day.
Since the fund's commencement of operations, the fund's common stock 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
SSBC, located at 388 Greenwich Street, New York, New York 10013, serves as
the fund's investment manager. SSBC, through its predecessors, has been in the
investment counseling business since 1968 and is a registered investment
adviser. SSBC renders investment advice to a wide variety of individual,
institutional and investment company clients that, as of January 31, 1999, had
aggregate assets under management in excess of $115 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.
Subject to the supervision and direction of the fund's Board, SSBC 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, SSBC 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, SSBC 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
SSBC
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 SSBC 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 SSBC 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
Peter Coffey is a Vice President and Investment Officer of the
fund and has served the fund in this capacity since 1999.
He manages the day-to-day investment operations of the fund,
including making all investment decisions. Mr. Coffey 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.
- --------------------------------------------------------------------------------
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, 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 NYSE or elsewhere, for the participants'
accounts. If following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds 98% of the net asset value
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 SSBC 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 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 20,000,000.000
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,
SSBC
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
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. SSBC 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, if 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, if 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
(Investment Company Act
File No. 811-5497)
FD 01257 2/99
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.
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. SSBC Fund Management Inc., formerly known as
Mutual Management Corp. and formerly known as Smith Barney
Mutual Funds Management Inc. ("SSBC") 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, SSBC
will consider factors such as: the price, coupon and yield
to maturity; SSBC'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. SSBC 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. SSBC'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 SSBC, 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. SSBC 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. SSBC, 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
SSBC 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
SSBC 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 SSBC 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 SSBC 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 SSBC 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, SSBC, 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 SSBC,
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 SSBC, 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 SSBC; 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 SSBC
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 SSBC 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 SSBC 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 $2,896.32.
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
12/31/98
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
SSBC 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, SSBC
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. SSBC 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 SSBC'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 SSBC $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, SSBC 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
SSBC 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 SSBC on 90 days' written notice
to the fund. The Advisory Agreement terminates
automatically upon its assignment.
SSBC also serves as administrator to the fund
pursuant to a written agreement dated June 1, 1994 (the
"Administration Agreement"). SSBC 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, SSBC 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. SSBC
bears all expenses in connection with the performance of
its services. As compensation for SSBC'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 SSBC
$373,569, $378,948 and $393,401, respectively, in
administration fees.
Pursuant to the Administration Agreement, SSBC will
exercise its best judgment in rendering the services
listed above. SSBC 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
SSBC's willful misfeasance, bad faith or gross negligence
on its part in the performance of its duties or by reason
of SSBC'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 SSBC.
PORTFOLIO TRANSACTIONS AND TURNOVER
Portfolio Transactions
Portfolio securities transactions for the fund are
placed on behalf of the fund by SSBC. In selecting brokers
or dealers to execute portfolio transactions for the fund,
SSBC seeks the best overall terms available. The Advisory
Agreement provides that, in assessing the best overall
terms available for any transaction, SSBC 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 SSBC, 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 SSBC or an affiliate
exercises investment discretion. SSBC'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
SSBC, 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 SSBC 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 SSBC 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 SSBC.
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 SSBC
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.
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