Smith Barney
----------
MUNICIPAL FUND, INC.
Annual Report
December 31, 1997
<PAGE>
- ---------------------------------
Smith Barney Municipal Fund, Inc.
- ---------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Municipal Fund, Inc. for the year ended December 31, 1997. During the past
twelve months, the Fund distributed income dividends totaling $0.84 per share
and made a capital gain distribution of $0.06. The table below shows the
annualized distribution rate and twelve-month total return based on the Fund's
December 31, 1997 net asset value ("NAV") per share and its American Stock
Exchange ("AMEX") closing price.
Price Annualized Twelve-Month
Per Share Distribution Rate* Total Return
--------- ------------------ ------------
$15.84 (NAV) 5.38% 9.38%
$14.875 (AMEX) 5.73% 10.18%
In comparison, closed-end long-intermediate maturity municipal bond funds posted
an average total return of 8.51% based on NAV for the same period, according to
Lipper Analytical Services, Inc. (Lipper is a major fund-tracking organization.)
Investment Strategy
The Smith Barney Municipal Fund's investment objective is to provide as high a
level of current income exempt from federal income taxes as is consistent with
prudent investment management. We continue to follow an investment strategy that
emphasizes high-quality, high coupon issues. In addition, we ladder the maturity
and call structure of the Fund's portfolio in order to provide a consistent
stream of income.
As a fund investing primarily in intermediate-term municipal bonds, the Fund
must invest at least 80% of its total assets in municipal bonds that have
remaining maturities of less than 15 years. During the reporting period, we
modestly lengthened the Fund's average weighted maturity to roughly 12.7 years.
(The average weighted maturity is the average life of the securities in any
mutual fund portfolio made up of bonds or other debt securities.) In addition,
we maintained the Fund's high credit quality orientation. As of December 31,
1997, approximately 90% of the Fund's holdings were rated investment grade with
about 42% of the Fund's investments rated triple-A. (Investment-grade bonds are
those rated Aaa, Aa, A and Baa by Moody's Investors Service, Inc. or AAA, AA, A
and BBB by Standard & Poor's Ratings Service, or have an equivalent rating by
any nationally recognized statistical rating organization, or
- ----------
* The annualized distribution rate assumes a current monthly dividend rate of
$0.071 per share for twelve months.
1
<PAGE>
determined by the manager to be of equivalent quality.) A major portion of the
Fund's assets were allocated among the following types of municipal bond issues
as of December 31, 1997: education bonds (15.0%), hospital bonds (13.8%) and
industrial development bonds (10.8%).
Municipal Bond Market Update and Outlook
Interest rates continued to decline overall during the course of the reporting
period. However, the bond markets did experience volatility as investors
responded to a conflicting combination of low inflation and falling
unemployment. The persistent strength of the U.S. economy heightened fears among
many investors that the Federal Reserve Board ("Fed") would raise short-term
interest rates. The Fed last raised the federal-funds rate by 0.25% in March
1997, but has since chosen to remain on the sidelines. (The federal-funds rate
is the interest rate banks charge each other for overnight loans and a closely
watched indicator of the direction of interest rates.) Although it did not take
action, the Fed indicated a bias toward tightening monetary policy at each of
its meetings in May, July, August, September and November.
Since the end of October, the dominant theme in the financial markets has been
the Asian financial crisis and the extent of the impact it will have on the U.S.
economy. We expect at least a modest dampening effect on growth in the first
part of the year with inflation continuing to trend lower in spite of wage
pressures resulting from an extremely tight labor market. We also expect the Fed
to hold short-term rates steady over the near term.
In our view, all of these developments have benefited the municipal bond market.
A healthy economy has enabled many municipalities to maintain, or even upgrade,
their credit ratings, while a relatively low rate of inflation has delivered
historically high real yields (i.e., the yield after taking into account the
effects of inflation to investors).
On a more somber note, we are saddened by the loss of an outstanding physician
and Director of the Fund, Dr. Francis P. Martin. His knowledge and wisdom will
be missed.
Thank you for investing in the Smith Barney Municipal Fund, Inc. We look forward
to continuing to help you pursue your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Peter M. Coffey
Heath B. McLendon Peter M. Coffey
Chairman Vice President
February 6, 1998
2
<PAGE>
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Schedule of Investments December 31, 1997
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================
======================
<S> <C> <C> <C>
Education -- 15.0%
$1,000,000 Aa2* Arizona Education Loan Corp., 6.625% due 9/1/05(a) $1,077,500
1,000,000 AAA Bastrop, TX Independent School District, Capital Appreciation,
PSFG, zero coupon due 2/15/22 290,000
1,000,000 AAA Keller, TX Independent School District,
PSFG, zero coupon due 8/15/16 390,000
Lago Vista, TX Independent School District,
Capital Appreciation, PSFG:
1,075,000 Aaa* Zero coupon due 8/15/15 440,750
1,075,000 Aaa* Zero coupon due 8/15/21 322,500
500,000 AAA Lake Superior Michigan State University Revenue,
MBIA-Insured, 5.000% due 11/15/12 500,625
1,300,000 AAA Lockhart, TX Independent School District,
PSFG, 5.000% due 8/1/22 1,274,000
1,000,000 AAA Maine Health & Higher Educational Facilities
Authority Revenue, Series B, MBIA-Insured,
5.000% due 7/1/13 991,250
1,000,000 AAA Metropolitan Government Nashville & Davidson
County, TN MeHarry Medical College, AMBAC-Insured,
6.000% due 12/1/19 1,136,250
500,000 AAA Redford, MI School District, Refunding Bonds,
AMBAC-Insured, 5.000% due 5/1/22 498,125
Utah State School District Finance Co-op Revenue
Financing Pool LOC Swiss Bank (Special Mandatory
Redemption 8/15/98 @ 100):
530,000 AAA 8.375% due 2/15/10 542,921
470,000 AA+ 8.375% mandatory tender 2/15/10 480,801
500,000 AA+ 8.375% mandatory tender 2/15/10 511,490
Vermont State Colleges Revenue, Capital Appreciation:
500,000 A Zero coupon due 7/1/12 234,375
515,000 A Zero coupon due 7/1/13 227,244
1,000,000 AAA Vincennes University Industrial University Revenue,
Student Fee, Series E, AMBAC-Insured,
5.000% due 12/1/12 996,250
- -------------------------------------------------------------------------------------------------
9,914,081
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Escrowed to Maturity(b) -- 13.6%
1,180,000 AAA Boston, MA Water & Sewer Community Revenue, Series A,
10.875% due 1/1/09, Sinking Fund Average Life 5/3/05(c) 1,640,200
705,000 AAA Illinois Health Facility Authority Revenue, (Methodist
Medical Center Project), 9.000% due 10/1/10,
Sinking Fund Average Life 4/1/03 871,556
960,000 AAA Jackson, TN Water and Sewer Revenue, 7.200% due 7/1/12,
Sinking Fund Average Life 1/25/06 1,126,800
</TABLE>
See Notes to Financial Statements.
3
<PAGE>
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Schedule of Investments (continued) December 31, 1997
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================
======================
<S> <C> <C> <C>
Escrowed to Maturity(b) -- 13.6% (continued)
$ 475,000 AAA Lake County, OH Hospital Improvement Revenue,
Lake County Memorial Hospital, 8.625% due 11/1/09,
Sinking Fund Average Life 10/31/04 $ 592,563
1,310,000 NR Los Angeles, CA Hollywood Presbyterian Medical Center,
9.625% due 7/1/13, Sinking Fund Average Life 2/28/08(c) 1,760,312
220,000 AAA Louisiana Public Facilities, Southern Baptist Hospital,
8.000% due 5/15/12, Sinking Fund Average Life 6/18/06 269,225
275,000 Aaa* Nacogdoches County, TX Hospital District Revenue,
9.000% due 5/15/04, Sinking Fund Average Life 5/30/01 321,063
380,000 BBB New Haven, CT GO, Refunded Balance, Series B,
9.000% due 12/1/01, Sinking Fund Average Life 5/26/01 445,550
440,000 AAA New Jersey State Turnpike Authority Revenue Refunding Bond,
10.375% due 1/1/03, Sinking Fund Average Life 1/6/00(c) 514,800
740,000 AAA Ohio State Water Development Authority Revenue,
Safe Water Series 2, 9.375% due 12/1/10,
Sinking Fund Average Life 11/26/03 942,575
400,000 AAA Ringwood Borough, NJ Sewer Authority Special Obligation
Refunding, 9.875% due 7/1/13,
Sinking Fund Average Life 2/6/05 534,000
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9,018,644
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Finance -- 4.9%
1,000,000 A Pennsylvania State Finance Authority,
Beaver County Revenue Refunding Bonds,
Municipal Capital Improvement Program,
Series 1993, LOC Societe Generale, 6.600% due 11/1/09 1,098,750
545,000 BB+ Tampa, FL Capital Improvement Program Revenue,
Series B, Den Danske Bank Royal, Trust Canada
and Yasuda Trust, 8.000% due 10/1/02 556,805
500,000 AA Texas State Public Finance Authority, 5.000% due 10/1/12 506,250
1,000,000 Aaa* Orange County, CA Public Financing Authority
Waste Management System Revenue,
AMBAC-Insured, 5.750% due 2/1/11 1,085,000
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3,246,805
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General Obligation -- 3.6%
500,000 AAA Anchorage, AK GO, FGIC-Insured, 6.000% due 10/1/14 565,000
290,000 BBB New Haven, CT GO, Unrefunded Balance,
Series B, 9.000% due 12/1/01 321,900
New Orleans, LA GO, Certificates of Indebtedness:
1,000,000 BBB- Series A, 6.650% due 8/1/01 1,010,920
500,000 BBB- Series C, 6.650% due 8/1/01 505,460
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2,403,280
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</TABLE>
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================
======================
<S> <C> <C> <C>
Hospitals -- 13.8%
$ 615,000 BBB Allentown, PA Area Hospital Authority Revenue Refunding,
Sacred Heart Hospital, Series A, 6.200% due 11/15/03 $ 654,205
650,000 AAA Calcasieu Parish, LA Memorial Hospital Service
District Revenue Refunding, Lake Charles Memorial
Hospital, Series A, CONNIE LEE-Insured,
7.500% due 12/1/05(c) 780,000
1,500,000 A+ California Statewide Community Development
Authority Revenue, COP Refunding Hospital,
Triad Healthcare, 6.250% due 8/1/06 1,621,875
1,300,000 A- Illinois Health Facilities Authority Revenue Friendship,
VLG Hospital, 6.650% due 12/1/06 1,395,875
1,200,000 BBB+ Klamath Falls, OR Intercommunity, Merle Hospital,
8.000% due 9/1/08 1,489,500
1,000,000 NR Langhorne Manor Borough, PA Higher Education
and Health Authority Bucks County, Lower Bucks Hospital,
6.750% due 7/1/02 1,036,250
2,000,000 AAA Orange County, FL Health Facilities Authority Revenue,
Adventist Health System/Sunbelt, FSA-Insured, FLAIRS,
6.340% due 11/15/07 (d) 2,150,000
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9,127,705
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Housing: Multi-Family -- 6.2%
1,100,000 Baa2* Dallas, TX Housing Corp. Capital Program Revenue
Refunding, Section 8 Assisted, 7.700% due 8/1/05,
Sinking Fund Average Life 9/2/03 1,159,125
1,470,000 NR Lynchburg, VA Redevelopment & Housing Authority,
Multi-Family Housing Revenue Refunding,
Princeton Circle Association, 6.250% due 12/1/10,
Sinking Fund Average Life 9/24/07 1,525,125
500,000 BBB+ Montgomery County, PA Redevelopment Authority,
Multi-Family Housing Revenue, Series A, 6.375%
due 7/1/12, Sinking Fund Average Life 1/29/09 519,375
865,000 AAA Nevada Housing Division, Multi-Unit Housing Saratoga Palms,
6.250% due 10/1/16, Sinking Fund Average Life 8/8/12(a) 921,225
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4,124,850
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Housing: Single-Family -- 5.4%
245,000 A1* Ford County, KS Single-Family Mortgage Revenue
Refunding, Series A, FHA-Insured, 7.900% due 8/1/10 265,825
505,000 AAA Juneau City and Borough, AK Home Mortgage
Revenue Refunding, Mortgage Backed Securities
Program, FNMA-Collateralized, FHA-Insured,
8.000% due 2/1/09 546,031
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
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Schedule of Investments (continued) December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================
======================
<S> <C> <C> <C>
Housing: Single-Family -- 5.4% (continued)
$ 500,000 A-++ Lees Summit, MO Individual Development Authority
Health Facilities, Refunding and Improvement Revenue,
(John Knox Village Project), 7.125% due 8/15/12,
Sinking Fund Average Life 8/15/05 $ 536,875
145,000 Aa2* Montgomery County, MD Housing Opportunities Commission
Mortgage Revenue, Series A, 7.200% due 7/1/04 153,338
1,000,000 AAA Pima County, AZ Individual Development Authority,
Single-Family Mortgage Revenue, Series A, GNMA/FNMA-
Collateralized, step bond to yield 6.250% due 11/1/29(a) 1,061,250
960,000 AAA Utah State Housing Finance Agency, Single-Family
Mortgage Revenue, Series C-2, 6.000% due 7/1/17(a) 1,008,000
- -------------------------------------------------------------------------------------------------
3,571,319
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Industrial Development -- 10.8%
500,000 A2* Alaska Industrial Development & Export Authority
Revenue, 6.100% due 4/1/06(a) 545,000
535,000 BB- Bourbonnais, IL Industrial Development Revenue Refunding,
(K-Mart Corp. Project), 6.600% due 10/1/06 566,431
1,500,000 AA Des Moines, IA Industrial Development Refunding
Revenue Bonds, (The Printer Project 1992),
LOC Norwest Bank, 6.375% due 9/1/09 1,563,750
1,500,000 Baa1* Dickinson County, MI Economic Development Corp.,
Solid Waste Disposal Refunding Revenue,
Champion International, 6.550% due 3/1/07 1,599,375
1,000,000 AA- LaCrosse, WI Resource Recovery Revenue,
(Northern States Power Co. Project),
6.000% due 11/1/21(a) 1,117,500
600,000 NR Sussex County, DE Economic Development
Refunding Revenue Bonds, (Rehoboth Mall Project),
Series 1992, 7.250% due 10/15/12 639,000
1,000,000 BBB+ Toole County, UT Hazardous Waste Disposal
Revenue, Laidlaw Incineration, Series A,
6.750% due 8/1/10(a) 1,101,250
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7,132,306
- -------------------------------------------------------------------------------------------------
Miscellaneous -- 4.3%
1,000,000 BBB- Clarksville, TN Natural Gas Acquisition Corp. Gas Revenue,
Series A, 7.500% due 11/1/04 1,061,250
1,000,000 A Illinois Development Finance Authority Revenue,
City of East St. Louis, 6.875% due 11/15/05,
Sinking Fund Average Life 11/15/00 1,108,750
645,000 Baa1* Indianapolis, IN Economic Development Refunding
and Improvement Revenue, National Benevolen
Association, (Robin Run Village Project),
6.900% due 10/1/04 708,694
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2,878,694
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</TABLE>
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================
======================
<S> <C> <C> <C>
Pollution Control -- 4.1%
$1,000,000 Aa3* Brazos River, TX Navigation Harbor District,
Brazonia County, PCR, (BASF Corp. Project)
6.750% due 2/1/10 $ 1,200,000
665,000 A Broward County, FL Resource Recovery PCR,
North Project, 7.950% due 12/1/08 724,850
750,000 A- Port Umpqua, OR Pollution Control, (International
Paper Co. Projects), Industrial Revenue, Series B,
5.200% due 6/1/11 761,250
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2,686,100
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Pre-Refunded(e) -- 1.7%
570,000 Aaa* Philadelphia, PA Hospital Revenue (United Hospitals Inc.
Project), 10.875% due 7/1/08, (Call 7/1/05 @ 100),
Sinking Fund Average Life 6/1/02(c) 743,138
300,000 AAA San Leandro, CA Redevelopment Agency Residential Mortgage
Revenue, 11.250% due 4/1/13, (Call 10/1/04 @ 100),
Sinking Fund Average Life 4/13/04(c) 400,125
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1,143,263
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Public Facilities -- 5.9%
500,000 A Dallas, TX Civic Center Convention Complex Revenue,
6.100% due 1/1/08, Sinking Fund Average Life 7/31/03 500,470
1,000,000 A- Dekalb County, IN Redevelopment Authority Revenue,
(Mini-Mill LOC Public Improvement Project),
Series A, 6.250% due 1/15/08 1,096,250
1,364,000 AAA Franklin County, OH Convention Facility Authority
MBIA-Insured, 5.000% due 12/1/11 1,382,755
500,000 AAA Honolulu Hawaii City & County, Tax & Lease Revenue,
Series B, FGIC-Insured, 5.500% due 11/1/10 538,125
2,000,000 AAA Southeast, WI Professional Baseball Park District,
Sales Tax Revenue, MBIA-Insured,
zero coupon due 12/15/29 375,000
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3,892,600
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Public Power Supply -- 2.2%
1,500,000 Aa1* Washington State Public Power Supply Systems Revenue,
(Nuclear Project No. 2), Series A, 5.000% due 7/1/12 1,479,375
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Short-Term(f) -- 0.3%
200,000 VMIG 1* Saint Lucie County, FL PCR, (Florida Power &
Lighting Co. Project), 3.600% due 3/1/27 200,000
- -------------------------------------------------------------------------------------------------
Transportation -- 1.8%
500,000 BBB- Raleigh-Durham, NC Airport Authority Special Facilities
Revenue, (American Airlines Inc. Project),
9.400% due 11/1/00 563,750
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
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Schedule of Investments (continued) December 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================
======================
<S> <C> <C> <C>
Transportation -- 1.8% (continued)
$ 595,000 NR Sanford, FL Airport Authority Industrial Development
Revenue, (Central Florida Terminals Project),
Series B, 7.500% due 5/1/06(a) $ 653,013
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1,216,763
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Utilities -- 1.9%
1,250,000 BB Union City, NJ Utility Authority Solid Waste Revenue,
Series A, 6.850% due 6/15/02(a)(c) 1,257,812
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Water & Sewer -- 4.5%
1,000,000 AAA Maricopa County, AZ Industrial Development Authority
Water System Revenue, Chaparral Water Co.,
Series A, AMBAC-Insured, 5.200% due 12/1/11(a) 1,016,250
1,000,000 AAA Massachusetts State Water Resource Authority,
Series D, MBIA-Insured, 5.000% due 8/1/24 972,500
1,000,000 AAA North Wales, PA Water Authority, FGIC-Insured,
5.000% due 11/1/22 985,000
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2,973,750
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TOTAL INVESTMENTS -- 100%
(Cost -- $62,753,054**) $66,267,347
===========================================================================
======================
</TABLE>
(a) Income from these issues is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Bonds are escrowed to maturity with U.S. government securities and are
considered by the Manager to be triple-A rated even if the issuer has not
applied for new ratings.
(c) Security segregated by custodian for open purchase commitment.
(d) Inverse floating rate security-coupon varies inversely with level of
short-term tax-exempt interest rates.
(e) Bonds are escrowed with U.S. government securities and are considered by
the Manager to be triple-A rated even if the issuer has not applied for
new ratings.
(f) Variable rate obligation payable at par on demand at any time on no more
than seven day notice.
++ Fitch Investor Services, Inc.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 9 and 10 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
8
<PAGE>
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Bond Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except those which are identified by an asterisk (*) are rated by Moody's
Investors Service, Inc. ("Moody's") and those identified by a double dagger (++)
are rated by Fitch Investor Services, Inc. ("Fitch"). The definitions of the
applicable rating symbols are set forth below:
Standard & Poor's -- Ratings from "AA" to "BB" may be modified by the addition
of a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
AAA -- Debt rated "AAA" has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issue only in
small degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than debt
in higher rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits 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.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
Moody's -- Numerical modifiers 1, 2, and 3 may be applied to each generic rating
from "Aa" to "Ba," where 1 is the highest and 3 the lowest rating within its
generic category.
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to change,
such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they 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 there may be other elements present which 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 are considered
adequate but elements may be present which suggest a susceptibility to
impairment some time in the future.
Baa -- Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments 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. Such
bonds lack outstanding investment characteristics and in fact have
speculative characteristics as well.
Ba -- Bonds that 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.
9
<PAGE>
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Bond Ratings (continued)
- --------------------------------------------------------------------------------
Fitch -- Ratings may be modified by the addition of a plus (+) or minus (-) sign
to show relative standings within the major ratings categories.
A -- Bonds which are rated "A" are considered to be investment grade and
of high credit quality. The obligor's ability to pay interest and/or
dividends and repay principal is considered to be strong, but may be
more vulnerable to adverse changes in economic conditions and
circumstances than debt or preferred securities with higher ratings.
NR -- Indicates that the bond is not rated by Standard & Poor's, Moody's
or Fitch.
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Short-Term Securities Ratings
- --------------------------------------------------------------------------------
VMIG 1 -- Moody's highest rating for issues having a demand feature--VRDO.
- --------------------------------------------------------------------------------
Security Descriptions
- --------------------------------------------------------------------------------
AMBAC -- AMBAC Indemnity Corporation
CGIC -- Capital Guaranty Insurance Company
CONNIE LEE -- College Construction Loan Insurance Association
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FLAIRS -- Floating Adjustable Interest Rate Securities
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
GO -- General Obligation
IDA -- Industrial Development Agency
IDR -- Industrial Development Revenue
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
NBA -- National Benevolent Association
PCR -- Pollution Control Revenue
PSFG -- Permanent School Fund Guaranty
RIBS -- Residual Interest Bonds
10
<PAGE>
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Statement of Assets and Liabilities December 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $62,753,054) $ 66,267,347
Cash 276,569
Interest receivable 1,100,257
Receivable for securities sold 65,000
- --------------------------------------------------------------------------------
Total Assets 67,709,173
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LIABILITIES:
Payable for securities purchased 3,795,493
Dividends payable 155,188
Management fees payable 36,496
Accrued expenses 43,764
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Total Liabilities 4,030,941
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Total Net Assets $ 63,678,232
===========================================================================
=====
NET ASSETS:
Par value of capital shares $ 4,021
Capital paid in excess of par value 60,162,924
Overdistributed net investment income (2,350)
Overdistributed net realized gains (656)
Net unrealized appreciation of investments 3,514,293
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $15.84 a share on 4,021,162 shares of
$0.001 par value outstanding; 100,000,000 shares authorized) $ 63,678,232
===========================================================================
=====
See Notes to Financial Statements.
11
<PAGE>
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Statement Operations For the Year Ended December 31, 1997
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 3,853,823
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 3) 436,257
Shareholder and system servicing fees 35,705
Shareholder communications 30,972
Audit and legal 12,004
Pricing service fees 8,510
Director's fees 3,509
Custody 2,510
Registration fees 2,101
Other 1,135
- --------------------------------------------------------------------------------
Total Expenses 532,703
- --------------------------------------------------------------------------------
Net Investment Income 3,321,120
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON
INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 35,864,516
Cost of securities sold 35,121,223
- --------------------------------------------------------------------------------
Net Realized Gain 743,293
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of Year 2,233,131
End of Year 3,514,293
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 1,281,162
- --------------------------------------------------------------------------------
Net Gain on Investments 2,024,455
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 5,345,575
===========================================================================
=====
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Changes in Net Assets For the Year Ended December 31,
- --------------------------------------------------------------------------------
1997 1996
===========================================================================
=====
OPERATIONS:
Net investment income $ 3,321,120 $ 3,365,406
Net realized gain 743,293 21,389
Increase (decrease) in net unrealized
appreciation 1,281,162 (1,289,439)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 5,345,575 2,097,356
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income (3,398,185) (3,426,030)
In excess of net investment income (29,719) --
Net realized gains (251,463) --
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,679,367) (3,426,030)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 1,666,208 (1,328,674)
NET ASSETS:
Beginning of year 62,012,024 63,340,698
- --------------------------------------------------------------------------------
End of year* $ 63,678,232 $ 62,012,024
===========================================================================
=====
* Includes undistributed (overdistributed)
net investment income of: $ (2,350) $ 74,715
===========================================================================
=====
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Municipal Fund, Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund
are: (a) security transactions are accounted for on the trade date; (b)
securities are valued at the mean between bid and ask prices provided by an
independent pricing service that are based on transactions in municipal
obligations, quotations from municipal bond dealers, market transactions in
comparable securities and various relationships between securities; (c)
securities maturing within 60 days are valued at cost plus accreted discount or
minus amortized premium, which approximates value; (d) gains or losses on the
sale of securities are calculated by using the specific identification method;
(e) interest income, adjusted for amortization of premium and accretion of
original issue discount, is recorded on the accrual basis; market discount is
recognized upon the disposition of the security; (f) dividends and distributions
to shareholders are recorded on the ex-dividend date; (g) the Fund intends to
comply with the applicable provisions of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (h) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. At December 31, 1997,
reclassifications were made to the Fund's capital accounts to reflect permanent
book/tax differences and income and gains available for distributions under
income tax regulations. Accordingly, a portion of overdistributions net
investment income and overdistributed net realized gains amounting to $27,849
and $1,870, respectively, was reclassified to paid in capital. Net investment
income, net realized gains and net assets were not affected by this change; and
(i) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
2. EXEMPT-INTEREST DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from regular Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
3. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Mutual Management Corp. ("MMC"), formerly Smith Barney Mutual Funds
Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc., acts as
investment manager to the Fund. As compensation for its services, the Fund pays
MMC a fee calculated at the annual rate of 0.70% of the Fund's average daily net
assets. This fee is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of Smith Barney
Inc.
4. INVESTMENTS
For the year ended December 31, 1997, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
===========================================================================
=====
Purchases $39,208,493
- --------------------------------------------------------------------------------
Sales 35,864,516
===========================================================================
=====
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
===========================================================================
=====
Gross unrealized appreciation $ 3,633,577
Gross unrealized depreciation (119,284)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 3,514,293
===========================================================================
=====
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
5. FUTURES CONTRACTS
Initial margin deposits made upon entering into futures contracts are
recognized as assets. The initial margin is segregated by the custodian and is
noted in the schedule of investments. During the period the futures contract is
open, changes in the value of the contract are recognized as unrealized gains or
losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to broker,
depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transactions and
the Fund's basis in the contract. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts).
At December 31, 1997, there were no open futures contracts.
6. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund represent
investments, which are marked-to-market daily. When a purchased option expires,
the Fund will realize a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the premium originally
paid. When the Fund exercises a call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally paid.
At December 31, 1997, there were no open purchased call or put options
contracts.
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
When a Fund writes a covered call or put option, an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss than the premium
originally received without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a written call option is exercised, the cost of the security sold will be
decreased by the premium originally received. When a put option is exercised,
the amount of the premium originally received will reduce the cost of the
security which the Fund purchased upon exercise. When written index options are
exercised, settlement is made in cash.
The risk associated with purchasing options is limited to the premium
originally paid. The Fund enters into options for hedging purposes. The risk in
writing a call option is that the Fund gives up the opportunity to participate
in any increase in the price of the underlying security beyond the exercise
price. The risk in writing a put option is that the Fund is exposed to the risk
of a loss if the market price of the underlying security declines.
At December 31, 1997, the Fund had no open written options contracts.
17
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
===========================================================================
========================
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 15.42 $ 15.75 $ 14.30 $ 15.85 $ 14.81
- ---------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.83 0.84 0.83 0.84 0.84
Net realized and unrealized gain (loss) 0.50 (0.32) 1.47 (1.54) 1.00
- ---------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 1.33 0.52 2.30 (0.70) 1.84
- ---------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.84) (0.85) (0.85) (0.85) (0.80)
In excess of net
investment income (0.01) -- -- -- --
Net realized gains (0.06) -- -- -- --
- ---------------------------------------------------------------------------------------------------
Total Distributions (0.91) (0.85) (0.85) (0.85) (0.80)
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.84 $ 15.42 $ 15.75 $ 14.30 $ 15.85
- ---------------------------------------------------------------------------------------------------
Total Return, Based on Market Value 10.18% 11.02% 15.83% (12.96)% 14.30%
- ---------------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value 9.38% 3.96% 17.11% (4.09)% 12.82%
- ---------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 63,678 $ 62,012 $ 63,341 $ 57,508 $ 63,724
- ---------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.85% 0.90% 0.86% 0.86% 0.85%
Net investment income 5.31 5.45 5.48 5.59 5.42
- ---------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 58% 30% 21% 35% 23%
- ---------------------------------------------------------------------------------------------------
Market Price, End of Year $ 14.875 $ 14.375 $ 13.750 $ 12.625 $ 15.375
===========================================================================
========================
</TABLE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes, the Fund hereby designated for the fiscal year
ended December 31, 1997:
o 100% of the dividends paid by the Fund from net investment income as
tax-exempt for regular Federal income tax purposes.
o The Taxpayer Relief Act of 1997 enacted differing rates of tax on
various long-term capital gain transactions. As a result, the Fund
designates:
o Total long-term capital gain distributions paid of $251,463
are considered "20 percent rate gains".
18
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of the Smith Barney Municipal Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Barney Municipal Fund, Inc.
as of December 31, 1997, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the five-year period then ended. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1997, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney Municipal Fund, Inc. as of December 31, 1997, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years in the five-year period then ended, in conformity with
generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
February 10, 1998
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year:
AMEX Net Asset Dividends Reinvestment
Year Closing Price* Value* Paid Price
===========================================================================
=====
1996
January $14.75 $15.72 $0.071 $14.55
February 14.63 15.57 0.071 14.59
March 14.38 15.35 0.071 14.46
April 14.25 15.24 0.071 14.13
May 14.25 15.18 0.071 14.24
June 13.88 15.22 0.071 13.82
July 13.75 15.25 0.071 13.76
August 14.00 15.19 0.071 14.02
September 14.25 15.30 0.071 14.32
October 13.75 15.37 0.071 13.89
November 14.50 15.53 0.071 14.51
December 14.38 15.42 0.071 14.38
1997
January 14.25 15.39 0.071 14.18
February 14.25 15.46 0.071 14.25
March 14.13 15.22 0.071 14.22
April 14.25 15.28 0.071 14.22
May 14.13 15.40 0.071 14.17
June 14.75 15.47 0.071 14.88
July 15.00 15.78 0.071 14.78
August 14.50 15.58 0.071 14.65
September 14.75 15.71 0.071 14.70
October 14.44 15.71 0.071 14.43
November 14.56 15.74 0.071 14.78
December 14.88 15.84 0.071 14.96
December+ 14.88 15.84 0.063 15.09
===========================================================================
=====
* On the last business day of the month.
+ Capital gain distribution.
20
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On April 25, 1997, the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matters:
1. To vote on the election of Joseph H. Fleiss and Heath B. McLendon as
Directors; and
2. To approve or disapprove the selection of KPMG Peat Marwick LLP as
the independent auditors for the current fiscal year of the Fund.
The results of the vote on Proposal 1 were as follows:
% of Votes % of
Directors* Votes For Shares Voted Against Shares Voted
===========================================================================
=====
Joseph H. Fleiss 3,637,015 98.94% 38,848 1.06%
Heath B. McLendon 3,638,415 98.98 37,448 1.02
===========================================================================
=====
The results of the vote on Proposal 2 were as follows:
% of Votes % of Votes % of
Votes For Shares Voted Against Shares Voted Abstained Shares Voted
===========================================================================
=====
3,641,760 99.08% 6,392 0.17% 27,711 0.75%
===========================================================================
=====
* The following Directors, representing the balance of the Board of
Directors, continue to serve: Donald R. Foley, Paul Hardin, Roderick C.
Rasmussen and John P. Toolan. C. Richard Youngdahl will continue to serve
as a Director Emeritus. In addition, as of January 1, 1998, Joseph H.
Fleiss became a Director Emeritus.
21
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)
- --------------------------------------------------------------------------------
Pursuant to the Fund's Dividend Reinvestment Plan ("Plan"), all
distributions are automatically reinvested by First Data Investor Services
Group, Inc. as plan agent ("Plan Agent"), in additional shares of its Common
Stock ("Common Shares") as provided below unless a shareholder elects to receive
cash.
Distributions with respect to Common Shares registered in the name of a
broker-dealer or other nominee (i.e., in "street name") are reinvested by the
broker or nominee in additional Common Shares under the Plan, unless the service
is not provided by the broker or nominee. Investors who own Common Shares
registered in street name should consult their broker-dealer for details. All
distributions to shareholders who do not participate in the Plan are paid by
check mailed directly to the record holder by First Data Investor Services
Group, Inc., as dividend disbursing agent.
If the Fund declares a distribution payable either in Common Shares or in
cash, nonparticipants in the Plan receive cash, and Plan participants receive
the equivalent in Common Shares valued in the following manner: whenever the
market price is equal to or exceeds the net asset value per share at the time
Common Shares are valued for the purpose of determining the number of Common
Shares equivalent to the cash distribution, participants are issued Common
Shares valued at the greater of (1) the net asset value most recently determined
or (2) 95% of the then current market price of the Common Shares.
If the net asset value of the Common Shares at the time of valuation
exceeds the market price of the Common Shares, or if the Fund declares a
distribution payable only in cash, the Plan Agent buys Common Shares in the open
market, on the American Stock Exchange or elsewhere, for the participants'
accounts. If, following the commencement of purchases and before the Plan Agent
has completed its purchases the market price exceeds the net asset value of the
Common Shares, the Plan Agent is permitted to cease purchasing shares on the
open market and the Fund may issue the remaining share at a price equal to the
greater of (a) net asset value or (b) 95% of the then current market price. In a
case where the Plan Agent has terminated open market purchases and the Fund has
issued the remaining shares, the number of shares received by the participant in
respect of the cash dividend or distribution will be based on the weighted
average of price paid for shares purchased in the open market and the price at
which the Fund issued the remaining shares. The Plan Agent applies all cash
received as a distribution to purchase Common Shares on the open market as soon
as practicable after the record date of the
22
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
distribution, but in no event later than 30 days after such date, except when
necessary to comply with applicable provisions of the Federal securities laws.
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent which must be received at least ten business days prior to the
distribution record date to become effective for that distribution. Shares in
the account of each Plan participant are held by the Plan Agent in
non-certificated form in the name of the Plan Agent or participant. When a
participant withdraws from the Plan or upon termination of the Plan as provided
below, certificates for whole Fund shares credited to his or her account under
the Plan are issued and a cash payment is made for any fraction of a Fund share
credited to such account.
The automatic reinvestment of distributions does not relieve participants
to any Federal income tax that may be payable on such distributions.
The Fund does not charge participants for reinvesting distributions. Any
Plan Agent's fees for the handling of reinvestment of distributions under the
Plan are paid by the Fund. There are no brokerage charges with respect to Common
Shares issued directly by the Fund as a result of distributions payable either
in stock or in cash. However, each participant pays a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to amend the Plan as
applied to any distribution paid subsequent to written notice of the change sent
to all shareholders of the Fund at least 90 days before the record date for the
distribution. The Plan also may be terminated by the Fund or the Plan Agent by
at least 30 days' written notice to all shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at First
Data Investor Services Group, Inc., P.O. Box 8030, Boston, Massachusetts
02266-8030.
23
<PAGE>
(This page intentionally left blank.)
<PAGE>
Smith Barney
- ----------
MUNICIPAL FUND, INC.
DIRECTORS
Donald R. Foley
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
Joseph H. Fleiss, Emeritus
C. Richard Youngdahl, Emeritus
OFFICERS
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
Peter M. Coffey
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
Mutual Management Corp.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, MA 02266-8030
This report is submitted for the general information of the shareholders of
Smith Barney Municipal Fund, Inc. It is not authorized for distribution to
prospective investors unless accompanied or preceded by a current Prospectus for
the Fund, which contains information concerning the Fund's investment policies
and expenses as well as other pertinent information.
SMITH BARNEY
MUNICIPAL FUND, INC.
388 Greenwich Street
New York, New York 10013
FD2253 2/98
