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SALOMON SMITH BARNEY
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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 2/00
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.
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Prospectus February 28, 2000
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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 may be 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
1-800-331-1710 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 (the "Commission") in its Public Reference Room in
Washington, D.C. Information about the Public Reference Room may be obtained by
calling the Commission at 1-202-942-8090. Reports and other information about
the fund are available on the EDGAR Database on the Commission's Internet site
at http://www.sec.gov. Copies of this information may be obtained for a
duplicating fee by electronic request at the following E-mail address:
[email protected], or by writing the Commission's Public Reference Section,
Washington, D.C. 20549-0102.
The 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.
SSB CITI FUND MANAGEMENT LLC
Investment Manager and Administrator
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED WHETHER THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY
STATEMENT TO THE CONTRARY IS A CRIME.
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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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Taxation 22
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Description of Common Stock 24
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Certain Provisions of the Articles of Incorporation and
Market Discount 24
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Custodian, Transfer Agent, Dividend-Paying Agent,
Registrar and Plan Agent 26
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Independent Auditors 26
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Further Information 26
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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 Inc. ("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 SSB Citi Fund Management LLC ("SSB Citi" or the
"manager") (successor to SSBC Fund Management, Inc.). The manager selects and
manages the fund's investments in accordance with the fund's investment
objective and policies. SSB Citi is also the fund's administrator and oversees
the fund's non-investment operations and its relations with its service
providers. For these services, SSB Citi 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 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 investments. In
3
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Prospectus Summary (continued)
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addition, the price of the shares is determined by market prices on the NYSE and
elsewhere, so you may receive a price that is less than net asset value when you
sell your shares. The principal risks associated with an investment in the fund
are summarized below.
Municipal Obligations. The fund invests primarily in municipal obligations
and may be affected by any of the following:
o Interest rates rise, causing the value of the fund's portfolio
generally to decline.
o When interest rates are declining, the issuer of a security
exercises its right to prepay principal earlier than scheduled,
forcing the fund to reinvest in lower yielding securities. This is
known as call or prepayment risk.
o The underlying revenue source for a municipal obligation other than
a general obligation bond is insufficient to pay principal or
interest in a timely manner.
o The 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
98% net asset value or 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 PFPC
Global Fund Services ("PFPC") 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(2) ............................................. 0.13%
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Total Annual Operating Expenses ...................................... 0.73%
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(1) See "Management of the Fund" for additional information.
(2) "Other Expenses," as shown above, are based upon expenses for the fiscal
year ended October 31, 1999.
EXAMPLE
An investor would directly pay the following expenses on a $1,000
investment in the fund, assuming(1) a 5% annual return and (2) reinvestment of
all dividends:
One Year Three Years Five Years Ten Years
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$8 $23 $41 $91
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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 five-year period ended October 31, 1999 has
been audited by KPMG LLP, independent auditors, whose report thereon appears in
the fund's annual report dated October 31, 1999. The following information for
the fiscal years ended October 31, 1990 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 1999 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, 1999 1998 1997 1996 1995
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<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $9.77 $9.76 $9.53 $9.51 $8.98
Income (Loss) From Operations:
Net investment income 0.58 0.60 0.61 0.63 0.64
Net realized and unrealized gain (loss) (0.76) 0.03 0.24 -- 0.54
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Total Income (Loss) From Operations (0.18) 0.63 0.85 0.63 1.18
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Less Distributions From:
Net investment income (0.59) (0.61) (0.62) (0.61) (0.65)
In excess of net investment income -- (0.01) -- -- --
Net realized gains -- -- -- -- --
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Total Distributions (0.59) (0.62) (0.62) (0.61) (0.65)
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Net Asset Value, End of Year $9.00 $9.77 $9.76 $9.53 $9.51
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Total Return, Based on Market Value (15.76)% 9.34% 17.22% 10.22% 14.17%
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Total Return, Based on Net Asset Value (1.79)% 6.75% 9.41% 7.39% 14.00%
Net Assets, End of Year (millions) $184 $198 $194 $187 $187
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Ratios to Average Net Assets:
Expenses 0.73% 0.74% 0.74% 0.77% 0.84%
Net investment income 6.08 6.07 6.38 6.65 6.87
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Portfolio Turnover Rate 27% 57% 35% 17% 18%
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Market Value, End of Year $8.000 $10.125 $9.875 $9.000 $9.000
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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, 1994 1993 1992 1991 1990
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<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $9.72 $9.49 $9.42 $9.28 $9.52
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Income (Loss) From Operations:
Net investment income 0.65 0.67 0.70 0.74 0.75
Net realized and unrealized gain (loss) (0.72) 0.23 0.06 0.15 (0.23)
Total Income (Loss) From Operations (0.07) 0.90 0.76 0.89 0.52
Less Distributions From:
Net investment income (0.65) (0.67) (0.69) (0.75) (0.76)
In excess of net investment income == == == == ==
Net realized gains (0.02) == == == ==
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Total Distributions (0.67) (0.67) (0.69) (0.75) (0.76)
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Net Asset Value, End of Year $8.98 $9.72 $9.49 $9.42 $9.28
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Total Return, Based on Market Value (10.11)% 17.07% 2.74% 17.88% (1.45)%
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Total Return, Based on Net Asset Value (0.54)% 9.87% 8.47% 10.15% 5.75%
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Net Assets, End of Year (millions) $176 $188 $179 $173 $165
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Ratios to Average Net Assets:
Expenses 0.84% 0.87% 0.87% 0.90% 0.87%
Net investment income 6.98 6.89 7.31 7.90 8.00
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Portfolio Turnover Rate 17% 13% 12% 22% 11%
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Market Value, End of Year $8.250 $9.875 $9.125 $9.50 $9.00
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</TABLE>
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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) 331-1710.
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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.Use of Proceeds
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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 by Moody's, BB, SP-1 or A-1 by S&P, or BB by
Fitch. A
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Investment Objective and Policies (continued)
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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.
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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
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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
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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 Issue As the year 2000 began, there were few problems caused by
the inability of certain computer systems to tell the difference between the
year 2000 and the year 1900 (commonly known as the "Year 2000" issue). It is
still possible that some computer systems could malfunction in the future
because of the Year 2000 issue or as a result of actions taken to address the
Year 2000 issue. Fund management does not anticipate that its services or those
of the Fund's other service providers will be adversely affected, but Fund
management will continue to monitor the situation. If malfunctions related to
the Year 2000 issue do arise, the Fund and its investments could be negatively
affected.
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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 that are rated
below investment grade or are unrated, may be less liquid than for corporate
bonds. Less liquid markets tend to be more volatile and react more negatively to
adverse publicity and investor perception than more liquid markets.
Call or prepayment risk
o Municipal obligations frequently permit their issuers to prepay, call or
repurchase the securities from their holders, such as the fund. As a result of
declining interest rates, the issuer of a municipal obligation may exercise its
prepayment, call or repurchase right on the security, forcing the fund to
replace the security with a lower yielding security. This would decrease the
return to the fund.
14
<PAGE>
- --------------------------------------------------------------------------------
Risk Factors and Special Considerations (continued)
- --------------------------------------------------------------------------------
o If the fund purchased a municipal obligation at a premium, it would
experience a loss of that premium if 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 for 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
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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
================================================================================
1/31/00 9.10 8.1875 (10.03%) 8.64 7.0625 (18.26%)
10/31/99 9.43 8.8750 (5.89%) 8.98 7.6250 (13.11%)
7/31/99 9.64 9.6875 0.49% 9.42 8.8125 (6.45%)
4/30/99 9.75 9.9375 3.85% 9.64 9.4375 (2.10%)
1/31/99 9.76 10.4375 6.94% 9.71 9.375 (3.45%)
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%)
================================================================================
As of January 31, 2000, the price per share of common stock as quoted on
the NYSE was $7.75, representing a 10.00% 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
SSB Citi, located at 388 Greenwich Street, New York, New York 10013,
serves as the fund's investment manager. SSB Citi, through its predecessors, has
been in the investment counseling business since 1968 and is a registered
investment adviser. SSB Citi renders investment advice to a wide variety of
individual, institutional and investment company clients that, as of January 31,
2000, had aggregate assets under management in excess of $127 billion. The
manager and Salomon Smith Barney are subsidiaries of Citigroup Inc
("Citigroup"). 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, SSB Citi
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, SSB Citi 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, SSB Citi 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 SSB
Citi 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 SSB Citi 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 SSB Citi 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.
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.
19
<PAGE>
- --------------------------------------------------------------------------------
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 PFPC as purchasing agent
under the plan, unless the shareholder elects to receive cash. Distributions
with respect to shares registered in the name of a broker-dealer or other
nominee (that is, in street name) will be reinvested by the broker or nominee in
additional shares under the plan, unless the service is not provided by the
broker or nominee or the shareholder elects to receive distributions in cash.
Investors who own common stock registered in street name should consult their
broker-dealers for details regarding reinvestment. All distributions to
shareholders who do not participate in the plan will be paid by check mailed
directly to the record holder by or under the direction of PFPC as dividend
paying agent.
The number of shares of common stock distributed to participants in the
plan in lieu of a cash dividend is determined in the following manner. When the
market price of the common stock is equal to or exceeds 98% of the net asset
value per share of the common stock on the determination date (generally, the
record date for the distribution), plan participants will be issued shares of
common stock by the fund at a price equal to the greater of 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, PFPC will buy common stock in
the open market, on the NYSE or elsewhere, for the participants' accounts. If
following the commencement of the purchases and before PFPC has completed its
purchases, the market price exceeds 98% of the net asset value of the common
stock as of the valuation time, PFPC will attempt to terminate purchases in the
open market and cause the fund to
20
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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 PFPC is unable to stop open market
purchases and cause the fund to issue the remaining shares, the average per
share purchase price paid by PFPC may exceed 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. PFPC will begin to
purchase common stock on the open market as soon as practicable after the
determination date for the dividend or capital gains distribution, but in no
event shall such purchases continue later than 30 days after the payment date
for such dividend or distribution, or the record date for a succeeding dividend
or distribution, except when necessary to comply with applicable provisions of
the federal securities laws.
PFPC maintains all shareholder accounts in the plan and furnishes written
confirmations of all transactions in each account, including information needed
by a shareholder for personal and tax records. The automatic reinvestment of
dividends and capital gains distributions will not relieve plan participants of
any income tax that may be payable on the dividends or capital gains
distributions. Common stock in the account of each plan participant will be held
by PFPC in uncertificated form in the name of the plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the plan. PFPC's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
fund. No brokerage charges apply with respect to shares of common stock issued
directly by the fund under the plan. Each plan participant will, however, bear a
proportionate share of any brokerage commissions actually incurred with respect
to any open market purchases made under the plan.
Experience under the plan may indicate that changes to it are desirable.
The fund reserves the right to amend or terminate the plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The plan also may be amended or
terminated by PFPC, with the fund's prior written consent, on at least 30 days'
written notice to plan participants. All correspondence concerning the plan
should be directed by mail to PFPC Global Fund Services, One Exchange Place,
Boston, Massachusetts 02266-8209 or by telephone at 1-800-331-1710.
21
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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 SSB Citi 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.
- --------------------------------------------------------------------------------
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 intangible property taxes.
22
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
Exempt-interest dividends attributable to interest received by the fund on
certain private activity bonds will be treated as a specific tax preference item
to be included in a shareholder's Federal AMT computation. 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 dividends paid by the fund will qualify for the corporate dividends
received deduction. The fund will inform shareholders of the source and tax
status of all distributions 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
repurchase proceeds 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.
23
<PAGE>
- --------------------------------------------------------------------------------
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 7, 2000
================================================================================
Common 500,000,000 0 20,455,082.735
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."
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
24
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
(continued)
- --------------------------------------------------------------------------------
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 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
25
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
(continued)
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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. PFPC, 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 Commission.
26
<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.
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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, SSB
Citi believes that limited investments in such securities may facilitate the
fund's ability to preserve capital while generating tax-free income through the
accrual of original issue discount. Zero coupon municipal obligations generally
are liquid, although such liquidity may be reduced from time to time due to
interest rate volatility and other factors.
FLOATING-RATE OBLIGATIONS
The fund also may purchase floating- and variable-rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obligations under the demand feature of such notes and bonds generally
are secured by bank letters of credit or other credit support arrangements.
There frequently will be no secondary market for variable- and floating-rate
obligations held by the fund, although the fund may be able to obtain payment of
principal at face value by exercising the demand feature of the obligation.
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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. SSB Citi 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.
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