As filed with the Securities and Exchange Commission on April 28, 1997
Securities Act File No. 33-44639
Investment Company Act File No. 811-6506
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________
FORM N-2
REGISTRATION STATEMENT UNDER
THE
SECURITIES ACT OF 1933 x
Pre-Effective Amendment No. o
Post-Effective Amendment No. 2 x
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940 x
Amendment No. 5 x
(Check appropriate box or boxes.)
__________________
Smith Barney Intermediate Municipal Fund, Inc.
(Exact name of registrant as specified in charter)
388 Greenwich Street, New York, New York 10013
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code
(212) 723-9218
Christina T. Sydor, Secretary
Smith Barney Municipal Fund, Inc.
388 Greenwich Street
New York, New York 10013
(Name and address of agent for service)
Copy to:
John E. Baumgardner, Jr., Esq.
Sullivan & Cromwell
125 Broad Street
New York, New York 10004
Approximate date of proposed public offering: As soon as practicable
after the effective date of this Registration Statement.
If any of the securities being registered on this Form N-2 are to be
offered on a delayed or continuous basis pursuant to Rule 415 of the
Securities Act of 1933, as amended (the "1933 Act"), other than securities
offered only in connection with dividend or interest reinvestment plans, check
the following box. x
It is proposed that this filing will become effective:
x when declared effective pursuant to section 8(c).
This Registration Statement relates to the registration of an
indeterminate number of shares solely for market-making transactions. Pursuant
to Rule 429, this Registration Statement relates to shares previously
registered on Form N-2 (Registration No. 33-44639).
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
registration statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933, as amended, or until the
Registration Statement shall become effective on such date as the Commission
acting pursuant to said Section 8(a) may determine.
SMITH BARNEY INTERMEDIATE MUNICIPAL FUND, INC.
Cross-Reference Sheet
Parts A and B of Prospectus*
Items in Part A and B of Form N-2 *
Location
1 Outside Front Cover
Outside Front Cover
2. Inside Front and Outside Back
Cover Page.
Inside Front and Outside Back Cover
Page
3. Fee Table and Synopsis
Prospectus Summary; Fee Table
4. Financial Highlights
Financial Highlights
5. Plan of Distribution
Outside Front Cover
6. Selling Shareholders
Not Applicable
7. Use of Proceeds
Use of Proceeds; Investment
Objective and Management Policies
8. General Description of Registrant
The Fund; Investment Objective and
Management Policies; Investment
Restrictions; Net Asset Value;
Description of Shares
9. Management
Management of the Fund; Custodian,
Transfer, Dividend-Paying and Plan
Agent
10. Capital Stock, Long-Term Debt and
Other Securities
Dividends and Distributions;
Dividend Reinvestment Plan;
Description of Shares; Taxation
11. Defaults and Arrears on Senior
Securities
Not Applicable
12. Legal Proceedings
Not Applicable
13. Table of Contents of Statement of
Additional Information
Not Applicable
14. Cover Page
Not Applicable
15. Table of Contents
Not Applicable
16. General Information and History
The Fund, Investment Objective and
Management Policies
17. Investment Objective and Policies
lnvestment Objective and Management
Policies; Investment Restrictions;
Appendix B
18. Management
Management of the Fund; Custodian,
Transfer, Dividend-Paying and Plan
Agent
19. Control Persons and Principal
Holders of Securities
Description of Shares
20. Investment Advisory and Other
Services
Management of the Fund
21. Brokerage Allocation and Other
Practices
Securities Transactions and
Turnover
22. Tax Status
Dividends and Distributions;
Dividend Reinvestment Plan,
Taxation
23. Financial Statements
Experts
* Pursuant to General Instructions of Form N-2, all information required to
be set forth in Part B:
Statement of Additional Information, has been included in Part A: The
Prospectus.
PART C
Information required to be included in Part C is set forth, under the
appropriate item so numbered, in Part C of this Registration Statement.
<PAGE>
================================================================================
SMITH BARNEY
------------
A Member of TravelersGroup[Logo]
Smith
Barney
Intermediate
Municipal
Fund, Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD01112 4/97
<PAGE>
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Prospectus April 30, 1997
- --------------------------------------------------------------------------------
Smith Barney Intermediate Municipal Fund, Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney Intermediate Municipal Fund, Inc. (the "Fund") is a
diversified, closed-end management investment company. The Fund's investment
objective is to provide common shareholders a high level of current income
exempt from ordinary Federal income taxes consistent with prudent investing. In
normal market conditions, the Fund will invest only in municipal securities
rated investment grade and at least two thirds of its total assets in municipal
securities rated in the category A or better at the time of investment.
Investment grade securities are securities rated BBB or higher by Standard &
Poor's Ratings Group ("S&P") or Baa or higher by Moody's Investors Service, Inc.
("Moody's") or have equivalent ratings by any other nationally recognized
statistical rating organization. The Fund's policy is to invest at least 80% of
its total assets in municipal securities with remaining maturities of less than
fifteen years. There can be no assurance that the Fund will achieve its
investment objective. The Fund may invest an unlimited portion of its assets in
municipal securities that pay interest that is subject to the Federal
alternative minimum tax. See "Investment Objective and Management Policies" and
"Taxation". The shares of closed-end investment companies have in the past
frequently traded at discounts from their net asset values. Investors should
carefully assess the risks associated with an investment in the Fund. See
"Investment Objective and Management Policies--Risk Factors and Special
Considerations."
This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. Additional information about the Fund has been filed with the
Securities and Exchange Commission ("SEC") and is available upon written or oral
request by calling or writing to the Fund at the telephone number or address set
forth above or by contacting a Smith Barney Financial Consultant.
(Continued on page 2)
SMITH BARNEY INC.
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
<PAGE>
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Prospectus (continued) April 30, 1997
- --------------------------------------------------------------------------------
Smith Barney Inc. ("Smith Barney") intends to make a market in the Fund's
Common Stock ("Common Stock"), although it is not obligated to conduct
market-making activities and any such activities may be discontinued at any
time, without notice by Smith Barney. The shares of Common Stock that may be
offered from time to time pursuant to this Prospectus were issued and sold by
the Fund on February 27, 1992 in an initial public offering at a price of $10.00
per share. No assurance can be given as to the liquidity of, or the trading
market for, the Common Stock as a result of any market-making activities
undertaken by Smith Barney. The Fund will not receive any proceeds from the sale
of any Common Stock offered pursuant to this Prospectus. The Fund's shares of
Common Stock have been approved for listing on the American Stock Exchange under
the symbol, "SBI."
All dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a Prospectus.
Investors are advised to read this Prospectus and to retain it for future
reference.
2
<PAGE>
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Table of Contents
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Prospectus Summary 4
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Fund Expenses 9
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Financial Highlights 10
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The Fund 11
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The Offering 11
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Use of Proceeds 11
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Investment Objectives and Management Policies 11
- -------------------------------------------------------------------------------
Investment Restrictions 26
- -------------------------------------------------------------------------------
Share Price Data 28
- -------------------------------------------------------------------------------
Management of the Fund 28
- -------------------------------------------------------------------------------
Securities Transactions and Turnover 34
- -------------------------------------------------------------------------------
Dividends and Distributions, Dividend Reinvestment Plan 35
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Net Asset Value 37
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Taxation 38
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Description of Shares 40
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Certain Provisions of the Articles of Incorporation and
Market Discount 41
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Custodian, Transfer, and Dividend-Paying Agent, Registrar
and Plan Agent 42
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Reports to Shareholders 42
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Experts 43
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Additional Information 43
- -------------------------------------------------------------------------------
Appendix A A-1
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Appendix B B-1
- --------------------------------------------------------------------------------
3
<PAGE>
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Prospectus Summary
- --------------------------------------------------------------------------------
The following summary is qualified in its entirety by the more detailed
information appearing in the body of this Prospectus. Cross-references in this
summary are to headings in the body of the Prospectus.
THE FUND Smith Barney Intermediate Municipal Fund, Inc. (the "Fund") is a
diversified, closed-end management investment company. See "The Fund."
INVESTMENT OBJECTIVE The Fund seeks a high level of current income exempt from
ordinary Federal income tax consistent with prudent investing. See "Investment
Objective and Management Policies."
TAX-EXEMPT INCOME The Fund is intended to operate in such a manner that
dividends paid by the Fund may be excluded by the Fund's shareholders from their
gross incomes for Federal income tax purposes. See "Investment Objective and
Management Policies" and "Taxation."
QUALITY INVESTMENTS The Fund intends to achieve its objective primarily by
investing in a diversified portfolio of municipal securities which the Fund's
investment manager believes does not involve undue risk to income or principal.
Under normal market conditions, the Fund will invest only in municipal
securities rated investment grade and at least two thirds of its total assets in
municipal securities rated in category A or better by S&P or by "Moody's" or
have an equivalent rating by any nationally recognized statistical rating
organization at the time of investment. Investment grade securities are
securities rated BBB or higher by S&P or Baa or higher by Moody's or have
equivalent ratings by any nationally recognized statistical rating organization
(or, if not so rated, which are, in the opinion of the Fund's investment manager
applying standards established by the Fund's Board of Directors, of comparable
credit quality to those so rated). Securities rated BBB by S&P or Baa by Moody's
are considered as medium grade obligations, i.e., they are neither highly
protected nor poorly secured. Such securities lack outstanding investment
characteristics and in fact may have speculative characteristics as well. The
Fund's policy is to invest at least 80% of its total assets in municipal
securities with remaining maturities of less than fifteen years. The Fund may
vary from its investment policies for temporary defensive purposes. See
"Investment Objective and Management Policies" and "Appendix A."
THE OFFERING The Common Stock is listed for trading on the American Stock
Exchange, Inc. ("AMEX"). In addition, Smith Barney intends to make a market in
the Common Stock. Smith Barney, however, is not obligated to conduct
market-making activities and any such activities may be discontinued at any time
without notice, at the sole discretion of Smith Barney.
LISTING AMEX
SYMBOL SBI
4
<PAGE>
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Prospectus Summary (continuted)
- --------------------------------------------------------------------------------
INVESTMENT MANAGER Greenwich Street Advisors, a division of Smith Barney Mutual
Funds Management Inc. ("SBMFM"), serves as the Fund's investment manager (the
"Investment Manager"). The Investment Manager provides investment advisory and
management services to investment companies affiliated with Smith Barney. Smith
Barney is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"),
which is in turn a wholly owned subsidiary of Travelers Group Inc.
("Travelers"), a diversified financial services holding company engaged, through
its subsidiaries, principally in four business segments: Investment Services,
Consumer Finance Services, Life Insurance Services and Property Casualty
Insurance Services. Subject to the supervision and direction of the Fund's Board
of Directors, the Investment Manager manages the securities held by the Fund in
accordance with the Fund's stated investment objective and policies, makes
investment decisions for the Fund, places orders to purchase and sell securities
on behalf of the Fund and employs professional portfolio managers. SBMFM acts as
administrator of the Fund and in that capacity provides certain administrative
services, including overseeing the Fund's non-investment operations and its
relations with other service providers and providing executive and other
officers to the Fund. The Fund pays the Investment Manager a fee ("Management
Fee") for services provided to the Fund that is computed daily and paid monthly
at the annual rate of 0.60% of the value of the Fund's average daily net assets.
The Fund will bear other expenses and costs in connection with its operation in
addition to the costs of investment management services. See "Management of the
Fund -- Investment Manager."
CUSTODIAN PNC Bank, National Association ("PNC Bank") serves as the Fund's
custodian. See "Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and
Plan Agent."
TRANSFER AGENT, DIVIDEND-PAYING AGENT, REGISTRAR AND PLAN AGENT First Data
Investor Services Group, Inc. ("First Data") a subsidiary of First Data
Corporation, serves as the Fund's transfer agent, dividend-paying agent and
registrar. See "Custodian, Transfer Agent, Dividend-Paying Agent, Registrar and
Plan Agent."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income (that is,
income other than net realized capital gains) are paid monthly and distributions
of net realized capital gains, if any, are paid annually. All dividends or
distributions with respect to shares of Common Stock are reinvested
automatically in additional shares through participation in the Fund's Dividend
Reinvestment Plan, unless a shareholder elects to receive cash. When the market
price of the Common Stock is equal to or exceeds net asset value, participants
in the Fund's Dividend Reinvestment Plan will receive distributions through
issuance of additional shares of Common Stock valued at net asset value or, if
the net asset value is less than 95% of the then current market price of the
Common Stock, then at 95% of the market price. Whenever market price is less
than net asset value, participants will receive
5
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continuted)
- --------------------------------------------------------------------------------
distributions through purchases of shares on the open market. See "Dividends and
Distributions; Dividend Reinvestment Plan."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Fund is a diversified, closed-end
investment company, designed primarily for the long-term investor and should not
be considered a vehicle for short-term trading.The Fund may invest an unlimited
portion of its assets in municipal securities that pay interest that is subject
to the Federal alternative minimum tax. See "Taxation."
Shares of closed-end investment companies frequently trade at a discount
from net asset value. This characteristic of shares of closed-end funds is a
risk separate and distinct from the risk that the Fund's net asset value will
decrease. It should be noted, however, that in some cases shares of closed-end
funds may trade at a premium. The Fund cannot predict whether its Common Stock
will trade at, above or below net asset value.
The amount of available information about the financial condition of
municipal securities issuers may be less extensive than that for corporate
issuers with publicly-traded securities and the market for municipal securities
may be less liquid than the market for corporate debt obligations. Liquidity
relates to the ability of the Fund to sell a security in a timely manner at a
price which reflects the value of that security. Further, municipal securities
in which the Fund may invest include special obligation bonds, lease
obligations, participation certificates and variable rate instruments. The
market for such securities may be less liquid than the market for general
obligation municipal securities. The relative illiquidity of some of the Fund's
portfolio securities may adversely affect the ability of the Fund to dispose of
such securities in a timely manner and at a fair price. The market for less
liquid securities tends to be more volatile than the market for more liquid
securities and the market values of relatively illiquid securities may be more
susceptible to change as a result of adverse publicity and investor perceptions
than are the market values of more liquid securities. The relative illiquidity
of some securities in the Fund's portfolio may adversely affect the ability of
the Fund to value such securities accurately. Although the issuers of some
municipal securities may be obligated to redeem such securities at face value,
such redemption could result in capital losses to the Fund to the extent that
such municipal securities were purchased by the Fund at a premium to face value.
Lease obligations (including installment purchase contract agreements) in
which the Fund may invest may 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. A risk exists that the municipality will not, or will be unable
to, appropriate money in the future in the event of political changes, changes
in the economic viability of the project, general economic changes or for other
reasons. Although
6
<PAGE>
- --------------------------------------------------------------------------------
Prospectus Summary (continuted)
- --------------------------------------------------------------------------------
such lease obligations generally are secured by a lien on the leased property,
management and/or disposition of the property in the event of foreclosure could
be costly and time consuming and result in unsatisfactory recoupment of the
Fund's original investment. For other considerations concerning the municipal
securities in which the Fund may invest, see "Investment Objectives and
Management Policies -- Risk Factors and Special Considerations."
The Fund may invest in unrated municipal securities believed, at the time
of investment, by the Investment Manager to have credit characteristics
equivalent to, and be of comparable credit quality with, municipal securities
that are rated investment grade. The Fund may be more dependent upon the
Investment Manager's investment analysis of such unrated municipal securities
than is the case with respect to rated municipal securities.
The Fund may also purchase and sell options on municipal securities and may
engage in interest rate and other hedging transactions, such as purchasing and
selling financial futures contracts and related options thereon. The Fund also
may engage in when-issued and delayed delivery transactions. These investment
practices entail risks. See "Investment Techniques" and Appendix B.
The net asset value of the Fund's Common Stock will change with changes in
the value of its portfolio securities. Because the Fund will invest primarily in
fixed-income municipal securities, the net asset value of the Common Stock of
the Fund can be expected to change as general levels of interest rates
fluctuate.
The Fund may invest more than 25% of its assets in the following types of
municipal securities market, such as revenue obligations of: hospital and other
health care facilities obligations, housing agency revenue obligations, airport
revenue obligations, industrial development obligations or in issuers located in
the same state. If the Fund so invests more than 25% of its assets in such
segments, the Fund will be more susceptible to economic, business, political,
regulatory and other developments generally affecting issuers of such segments
of the municipal market.
The Fund is authorized to borrow amounts up to 33 1/3% of its total
assets (including the amount borrowed), although currently the Fund anticipates
that it will not borrow. The use of borrowed funds involves the speculative
factor known as "leverage." While the Fund does not currently expect to do so,
it is also permitted under its Articles of Incorporation to issue preferred
stock which would permit it to assume leverage in an amount up to 50% of its
total assets. If any preferred stock were to be issued, it would have a priority
on the income and assets of the Fund over the Common Stock and would have
certain other rights with respect to voting and the election of directors.
7
<PAGE>
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Prospectus Summary (continuted)
- --------------------------------------------------------------------------------
In certain circumstances, the net asset value of and dividends payable on
shares of Common Stock could be adversely affected by such preferences. The use
of leverage would create an opportunity for increased returns to holders of the
Common Stock, but, at the same time, would create special risks. The Fund will
only utilize leverage when there is an expectation that it will benefit the Fund
or the holders of Common Stock. To the extent the income or other gain derived
from securities purchased with the proceeds of borrowings or preferred stock
issuances exceeds the interest or dividends the Fund would have to pay thereon,
the Fund's net income or other gain would be greater than if leverage had not
been used. Conversely, if the income or other gain from the securities purchased
through leverage is not sufficient to cover the cost of such leverage, the total
return of the Fund would be less than if leverage had not been used. If leverage
is used, in certain circumstances the Fund could be required to liquidate
securities it would not otherwise sell in order to satisfy dividend or interest
obligations. The Fund may also borrow up to an additional 5% of its total assets
for temporary purposes without regard to the foregoing limitations. See
"Investment Objective and Management Policies--Investment Techniques-- Borrowing
and Leverage."
The Fund's Articles of Incorporation provide that all shares of stock are
designated as common stock until designated otherwise by the Board of Directors.
The Board of Directors may classify or reclassify any unissued shares of capital
stock and set or change the preferences or other rights of such stock. See
"Description of Shares."
Certain anti-takeover provisions will make a change in the Fund's business
or management more difficult without the approval of the Fund's Board of
Directors and may have the effect of depriving Shareholders of an opportunity to
sell their Common Stock at a premium above the prevailing market price. See
"Certain Provisions of the Articles of Incorporation and Market Discount --
Anti-Takeover Provisions."
Under the Internal Revenue Code of 1986, as amended (the "Code"), the
interest on certain "private activity" obligations issued after August 7, 1986
is treated as a preference item for the purpose of calculating alternative
minimum taxable income. In addition, for corporations, alternative minimum
taxable income is increased by a percentage of the amount by which a measure of
income that includes interest on tax-exempt obligations exceeds the amounts
otherwise determined to be alternative minimum taxable income. There exists no
specific limitation on the amount of the Fund's assets which may be invested in
municipal securities that pay interest that is subject to the Federal
alternative minimum tax. Accordingly, the Fund's dividends which would otherwise
be tax-exempt may not be completely tax-exempt to an investor who is subject to
the alternative minimum tax or may cause an investor to be subject to such tax.
As such, an investment in the Fund may not be appropriate for investors who are
already subject to the Federal
8
<PAGE>
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Prospectus Summary (continuted)
- --------------------------------------------------------------------------------
alternative minimum tax or who would become subject to the Federal alternative
minimum tax as a result of an investment in the Fund. In addition, investors
should consider the tax implications of certain hedging transactions in which
the Fund may engage. See "Taxation."
- --------------------------------------------------------------------------------
Fund Expenses
- --------------------------------------------------------------------------------
The following tables are intended to assist investors in understanding the
various costs and expenses directly or indirectly associated with investing in
the Fund.
================================================================================
Annual Expenses
(as a percentage of net assets attributable to Common Stock)
Management Fees 0.60%
Other Expenses* 0.17
================================================================================
TOTAL ANNUAL OPERATING EXPENSES* 0.77%
================================================================================
*"Other Expenses", as shown above, is based upon amounts of expenses for the
fiscal period ended December 31, 1996.
EXAMPLE
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect to
a hypothetical investment in the Fund. These amounts are based upon payment by
the Fund of operating expenses at the levels set forth in the table above.
An investor would pay the following expenses on a $1,000 investment,
assuming (1) a 5% annual return and (2) reinvestment of all dividends and
distributions at net asset value:
Smith Barney Intermediate
Municipal Fund, Inc. 1 year 3 years 5 years 10 years
================================================================================
$8 $25 $43 $95
================================================================================
Moreover, while the example assumes a 5% annual return, the Fund's
performance will vary and may result in a return greater or less than 5%. In
addition, while the example assumes reinvestment of all dividends and
distributions at net asset value, participants in the Fund's Dividend
Reinvestment Plan may receive shares purchased or issued at a price or value
different from net asset value. See "Dividends and Distributions; Dividend
Reinvestment Plan." This example should not be considered a representation of
future expenses of the Fund and actual expenses may be greater or less than
those shown.
9
<PAGE>
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Financial Highlights
- --------------------------------------------------------------------------------
The following information has been audited by KPMG Peat Marwick LLP,
independent auditors, whose report thereon appears in the Fund's annual report
dated December 31, 1996. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders.
For a share of capital stock outstanding throughout the year:
<TABLE>
<CAPTION>
Smith Barney Intermediate Municipal Fund, Inc. 1996 1995 1994(a) 1993(a) 1992(a)(b)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 10.66 $ 9.95 $ 10.81 $ 10.36 $ 10.00
- ---------------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.58 0.58 0.58 0.59 0.48*
Net realized and unrealized gain (loss) (0.17) 0.73 (0.84) 0.46 0.34
- ---------------------------------------------------------------------------------------------------------------
Total Income (Loss) from Operations 0.41 1.31 (0.26) 1.05 0.82
- ---------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (0.60) (0.60) (0.57) (0.46)
Net realized gains -- -- -- (0.03) --
- ---------------------------------------------------------------------------------------------------------------
Total Distributions (0.60) (0.60) (0.60) (0.60) (0.46)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 10.47 $ 10.66 $ 9.95 $ 10.81 $ 10.36
- ---------------------------------------------------------------------------------------------------------------
Total Return, Based on Market Value 1.56% 15.93% (9.34)% 16.71% 1.66%++
- ---------------------------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value 4.13% 13.72% (2.33)% 10.30% 8.44%++
- ---------------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 86,815 $ 88,392 $ 82,494 $ 88,966 $ 83,499
- ---------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.77% 0.72% 0.72% 0.73% 0.59%+*
Net investment income 5.56 5.63 5.64 5.56 5.74+
- ---------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 21.39% 12.57% 25.59% 10.46% 23.48%
- ---------------------------------------------------------------------------------------------------------------
Market Price at End of Year $ 9.94 $ 10.38 $ 9.50 $ 11.13 $ 10.13
===============================================================================================================
</TABLE>
(a) Based on the weighted average shares outstanding for period.
(b) For the period from March 2, 1992 (commencement of operations) to December
31, 1992.
* The Investment Manager waived a portion of its fees for the period from
March 2, 1992 to December 31, 1992. If such fees were not waived, the per
share decrease in net investment income would have been $0.01, and the
ratio of expenses to average net assets would have been 0.70%+.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
10
<PAGE>
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The Fund
- --------------------------------------------------------------------------------
The Fund is a diversified, closed-end management investment company that
seeks a high level of current income exempt from Federal income taxes consistent
with prudent investing. The Fund will attempt to achieve this objective
primarily by investing in a diversified portfolio of municipal securities which
the Investment Manager believes does not involve undue risk to income or
principal. The Fund, which was incorporated under the laws of the State of
Maryland on December 19, 1991, is registered under the 1940 Act, and has its
principal office at 388 Greenwich Street, New York, New York 10013. The Fund's
telephone number is (800) 451-2010.
- --------------------------------------------------------------------------------
The Offering
- --------------------------------------------------------------------------------
Smith Barney intends to make a market in the Fund's Common Stock, although
it is not obligated to conduct market-making activities and any such activities
may be discontinued at any time without notice at the sole discretion of Smith
Barney. No assurance can be given as to the liquidity of, or the trading market
for, the Common Stock as a result of any market-making activities undertaken by
Smith Barney. This Prospectus is to be used by Smith Barney in connection with
offers and sales of the Common Stock in market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of the sale.
- --------------------------------------------------------------------------------
Use of Proceeds
- --------------------------------------------------------------------------------
The Fund will not receive any proceeds from the sale of Common Stock
offered pursuant to this Prospectus. Proceeds received by Smith Barney as a
result of its market-making in Common Stock will be utilized by Smith Barney in
connection with its secondary market operations and for general corporate
purposes.
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies
- --------------------------------------------------------------------------------
Set out below is a description of the investment objective and principal
investment policies of the Fund. No assurance can be given that the Fund will be
able to achieve its investment objective, which may be changed only with the
approval of a majority of the Fund's outstanding voting securities as defined in
the 1940 Act. Such a majority is defined in the 1940 Act as the lesser of (i)
more than 50% of the Fund's outstanding Common Stock and of any outstanding
shares of preferred stock, voting by class, or (ii) 67% of the Fund's
outstanding Common
11
<PAGE>
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Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
Stock and of any outstanding shares of preferred stock, voting by class, present
at a meeting at which the holders of more than 50% of the outstanding shares of
each such class are present in person or by proxy. All other investment policies
or practices are considered by the Fund not to be fundamental and accordingly
may be changed without shareholder approval.
GENERAL
The Fund's investment objective is to provide shareholders a high level of
current income exempt from ordinary Federal income tax consistent with prudent
investing. Under normal market conditions, the Fund will invest at least two
thirds of its total assets in municipal securities rated in category A or better
by S&P or by Moody's or have an equivalent rating by any nationally recognized
statistical rating organization (or, if not so rated, which are, in the opinion
of the Investment Manager applying standards established by the Fund's Board of
Directors, of comparable credit quality to those so rated) at the time of
investment. Under normal market conditions, the Fund will also invest only in
municipal securities rated investment grade at the time of investment.
Investment grade securities are securities rated BBB or higher by S&P or Baa or
higher by Moody's or have equivalent ratings by any nationally recognized
statistical rating organization (or, if not so rated, which are, in the opinion
of the Investment Manager applying standards established by the Fund's Board of
Directors, of comparable credit quality to those so rated). Securities rated BBB
by S&P are regarded by S&P as having an adequate capacity to pay interest and
repay principal; whereas such securities normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories. Securities rated Baa by
Moody's are considered by Moody's as medium grade obligations; 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; they lack
outstanding investment characteristics and in fact have speculative
characteristics as well. The Fund may be more dependent upon the Investment
Manager's investment analysis of unrated municipal securities than is the case
with respect to rated municipal securities. See "Investment Objective and
Management Policies -- Risk Factors and Special Considerations" and Appendix A.
The Fund's policy is to invest at least 80% of its total assets in municipal
securities with remaining maturities of less than fifteen years and to maintain
a dollar-weighted average maturity of the entire portfolio of not less than
three, but not more than ten years. For this purpose, any scheduled principal
prepayments will be reflected in the calculation of dollar-weighted average
maturity.
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Investment Objectives and Management Policies (continued)
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The foregoing policies with respect to credit quality of portfolio
investments will apply only at the time of the purchase of a security, and the
Fund will not be required to dispose of securities in the event that S&P or
Moody's or any other relevant rating organization downgrades its assessment of
the credit characteristics of a particular issuer or in the event the Investment
Manager reassesses its view with respect to the credit quality of the issuer
thereof.
Municipal securities are obligations issued by or on behalf of states,
territories and possessions of the United States and the District of Columbia
and their political subdivisions, agencies and instrumentalities, the interest
on which, in the opinion of bond counsel or other counsel to the issuer of such
securities is, at the time of issuance, not includable in gross income for
Federal income tax purposes. Under normal market conditions, at least 80% of the
Fund's total assets will be invested in municipal securities. The policy stated
in the foregoing sentence is a fundamental policy and cannot be changed without
shareholder approval. The Fund has not established any limit on the percentage
of its portfolio that may be invested in municipal securities subject to the
alternative minimum tax provisions of Federal tax law, and a substantial portion
of the income produced by the Fund may be taxable under the alternative minimum
tax. The Fund may not be a suitable investment for investors who are already
subject to the Federal alternative minimum tax or who would become subject to
the Federal alternative minimum tax as a result of an investment in the Fund.
The two principal classifications of municipal bonds are "general
obligation" bonds and "revenue" or "special obligation" bonds, which include
"industrial revenue bonds." General obligation bonds are secured by the issuer's
pledge of its faith, credit and taxing power for the payment of principal and
interest, and accordingly the capacity of the issuer of a general obligation
bond as to the timely payment of interest and the repayment of principal when
due is affected by the issuer's maintenance of its tax base. Revenue or special
obligation 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 tax or other specific revenue source such as from the user of the
facility being financed; accordingly, the timely payment of interest and the
repayment of principal in accordance with the terms of the revenue or special
obligation bond is a function of the economic viability of such facility or such
revenue source. Although the ratings of S&P or Moody's of the municipal
securities in the Fund's portfolio are relative and subjective, and are not
absolute standards of quality, such ratings reflect the assessment of S&P or
Moody's, as the case may be, of the issuer's ability, or the economic viability
of the special revenue source, with respect to the timely payment of interest
and the repayment of principal in accordance with the terms of the obligation.
See Appendix A.
Also included within the general category of municipal securities are
participa-
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Investment Objectives and Management Policies (continued)
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tions in lease obligations or installment purchase contract obligations
(hereinafter collectively called "lease obligations") of municipal authorities
or entities. Although lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing power is pledged, a lease
obligation is ordinarily backed by the municipality's covenant to budget for,
appropriate and make the payments due under the lease obligation. However,
certain 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 addition to the "non-appropriation" risk, these securities
represent a relatively new type of financing that has not yet developed the
depth of marketability associated with more conventional bonds. Although
"non-appropriation" lease obligations are often secured by the underlying
property, disposition of the property in the event of foreclosure might prove
difficult. There is no limitation on the percentage of the Fund's assets that
may be invested in "non-appropriation" lease obligations and in unrated
"non-appropriation" lease obligations believed, at the time of investment, by
the Investment Manager to have credit characteristics equivalent to, and to be
of comparable quality as, securities that are rated investment grade. In
evaluating such unrated lease obligations, the Investment Manager will consider
such factors as it deems appropriate, including (a) whether the lease can be
cancelled, (b) the ability of the lease obligee to direct the sale of the
underlying assets, (c) the general creditworthiness of the lease obligor, (d)
the likelihood that the municipality will discontinue appropriating funding for
the leased property in the event such property is no longer considered essential
by the municipality, (e) the legal recourse of the lease obligee in the event of
such a failure to appropriate funding and (f) any limitations which are imposed
on the lease obligor's ablility to utilize substitute property or services than
those covered by the lease obligations. See "Investment Objective and Management
Policies -- Risk Factors and Special Considerations."
Participation certificates are obligations issued by state and local
governments or authorities to finance the acquisition of equipment and
facilities. They may represent participations in a lease, an installment
purchase contract, or a conditional sales contract. Some municipal leases and
participation certificates may not be readily marketable. See "Investment
Objective and Management Policies -- Risk Factors and Special Considerations."
The "issuer" of municipal securities is generally deemed to be the
governmental agency, authority, instrumentality or other political subdivision,
or the non-governmental user of a revenue bond-financed facility, the assets and
revenues of which will be used to meet the payment obligations, or the guarantee
of such payment obligations, of the municipal securities.
Municipal securities may have fixed or variable interest rates. The Fund
may purchase floating and variable rate demand notes, which are municipal
securities
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Investment Objectives and Management Policies (continued)
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normally having a stated maturity in excess of one year, but which
permit the holder to tender the notes for purchase at the principal amount
thereof. The interest rate on a floating rate demand note is based on a known
lending rate, such as a bank's prime rate, and is adjusted each time such rate
is adjusted. The interest rate on a variable rate demand note is adjusted at
specified intervals. There generally is no secondary market for these notes,
although they may be tendered for redemption or remarketing at face value. See
"Investment Objectives and Management Policies -- Risk Factors and Special
Considerations." Each such note purchased by the Fund will meet the criteria
established for the purchase of municipal securities.
SELECTION OF INVESTMENTS
The Investment Manager will select securities for the Fund's portfolio
which the Investment Manager believes entail reasonable credit risk considered
in relative to the particular investment policies of the Fund. As a result, the
Fund will not necessarily invest in the highest yielding municipal securities
permitted by its investment policies if the Investment Manager determines that
market risks or credit risks associated with such investments would subject the
Fund's portfolio to excessive risk. The potential for realization of capital
gains resulting from possible changes in interest rates will not be a major
consideration. The Fund's policy is to invest at least 80% of its total assets
in municipal securities with remaining maturities of less than fifteen years.
For this purpose, any scheduled principal prepayments on municipal securities
will be reflected in the calculation of dollar-weighted average maturity. The
Investment Manager may adjust the average maturity of the Fund's portfolio from
time to time, depending on its assessment of the relative yields available on
securities of different maturities and its expectations of future changes in
interest rates.
The Fund generally will not invest more than 25% of its total assets in any
industry, nor will the Fund invest more than 5% of its total assets in the
securities of any single issue. Governmental issuers of municipal securities are
not considered part of any "industry". However, municipal securities backed only
by the assets and revenues of nongovernmental users may for this purpose be
deemed to be issued by such nongovernmental users, and the 25% limitation would
apply to the industries of such nongovernmental users. It is nonetheless
possible that the Fund may invest more than 25% of its total assets in a broader
segment of the municipal securities market, such as: hospital and other health
care facilities obligations, housing agency revenue obligations, or airport
revenue obligations. The Fund will invest more than 25% of its assets in such
types of municipal securities if the Investment Manager determines that the
yields available from such obligations in a particular segment justify the
additional risks associated with a large investment in such segment. Although
such obligations could be supported by the credit of governmental users, or by
the credit of nongovernmetal users engaged in a number of industries, economic,
business, political and other developments generally affecting the
15
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Investment Objectives and Management Policies (continued)
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revenues of such users (for example, proposed legislation or pending court
decisions affecting the financing of such projects and market factors affecting
the demand for their services or products) may have a general adverse effect on
all such municipal securities in such a market segment. The Fund reserves the
right to invest more than 25% of its assets in industrial development bonds or
in issuers located in the same state, although it has no present intention to
invest more than 25% of its assets in issuers located in the same state. If the
Fund were to invest more than 25% of its total assets in issuers located in the
same state, it would be more susceptible to adverse economic, business, or
regulatory conditions in that state.
From time to time, the Fund's investments may include securities as to
which the Fund, by itself or together with other funds or accounts managed by
the Investment Manager, holds a major portion or all of an issue of municipal
securities. Because there may be relatively few potential purchasers for such
investments and, in some cases, there may be contractual restrictions on
resales, the Fund may find it more difficult to sell such securities at a time
when the Investment Manager believes it advisable to do so.
TEMPORARY DEFENSIVE STRATEGIES
During times when the Investment Manager believes a temporary defensive
posture in the market is warranted (e.g., times when, in the Investment
Manager's opinion, temporary imbalances of supply and demand or other temporary
dislocations in the municipal securities market adversely affect the price at
which municipal securities are available), and in order to keep cash on hand
fully invested, the Fund may temporarily invest to a substantial degree in high
quality, short-term municipal securities. If these high-quality, short-term
municipal securities are not available or, in the Investment Manager's judgment,
do not afford sufficient protection against adverse market conditions, the Fund
may invest in the following taxable securities: obligations of the U.S.
Government, its agencies or instrumentalities; other debt securities rated
within the four highest grades by S&P or Moody's or any nationally recognized
statistical rating organization; commercial paper rated in the highest grade by
any such rating service; certificates of deposit, time deposits and bankers'
acceptances; or repurchase agreements with respect to any of the foregoing
investments or any other fixed-income securities that the Investment Manager
considers consistent with such strategy. To the extent the Fund invests in
taxable securities, the Fund will not at such times be in a position to achieve
its investment objective of income exempt from Federal income taxes.
INVESTMENT TECHNIQUES
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
In connection with the investment objective and policies described above,
the
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Investment Objectives and Management Policies (continued)
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Fund may: engage in interest rate and other hedging and risk management
transactions; purchase and sell options (including swaps, caps, floors and
collars) on municipal securities and on indices based on municipal securities
and purchase and sell municipal securities on a "when-issued" or "delayed
delivery" basis. These investment practices entail risks. The Investment Manager
may use some or all of the following hedging and risk management practices when
their use appears appropriate. Although the Investment Manager believes that
these investment practices may further the Fund's investment objective, no
assurance can be given that these investment practices will achieve this result.
The Investment Manager may also decide not to engage in any of these investment
practices.
Securities Options Transactions. The Fund may invest in options on
municipal securities. Such options are traded over-the-counter, although if
options on municipal securities were to be listed for trading on a national
securities exchange, the Fund may trade in exchange-listed options. In general,
the Fund may purchase and sell (write) options on up to 20% of its assets. The
SEC requires that obligations of investment companies such as the Fund, in
connection with options sold, must comply with certain segregation or cover
requirements which are more fully described in Appendix B. There is no
limitation on the amount of the Fund's assets which can be used to comply with
such segregation or cover requirements.
A call option gives the purchaser the right to buy, and the writer the
obligation to sell, the underlying security at the agreed-upon exercise (or
"strike") price during the option period. A put option gives the purchaser the
right to sell, and the writer the obligation to buy, the underlying security at
the strike price during the option period. Purchasers of options pay an amount,
known as a premium, to the option writer in exchange for the right under the
option contract. Option contracts may be written with terms which would permit
the holder of the option to purchase or sell the underlying security only upon
the expiration date of the option.
The Fund may purchase put and call options in hedging transactions to
protect against a decline in the market value of municipal securities in the
Fund's portfolio (e.g., by the purchase of a put option) and to protect against
an increase in the cost of fixed income securities that the Fund may seek to
purchase in the future (e.g., by the purchase of a call option). In the event
the Fund purchases put and call options, paying premiums therefor, and price
movements in the underlying securities are such that exercise of the options
would not be profitable for the Fund, to the extent such underlying securities
correlate in value to the Fund's portfolio securities, losses of the premiums
paid may be offset by an increase in the value of the Fund's portfolio
securities (in the case of a purchase of put options) or by a decrease in the
cost of acquisition of securities by the Fund (in the case of a purchase of call
options).
The Fund may also sell put and call options as a means of increasing the
yield on the Fund's portfolio and also as a means of providing limited
protection against
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Investment Objectives and Management Policies (continued)
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decreases in market value of the Fund's portfolio. When the Fund sells an
option, if the underlying securities do not increase (in the case of a call
option) or decrease (in the case of a put option) to a price level that would
make the exercise of the option profitable to the holder of the option, the
option generally will expire without being exercised and the Fund will realize
as profit the premium received for such option. When a call option written by
the Fund is exercised, the option holder purchases the underlying security at
the strike price and the Fund does not participate in any increase in the price
of such securities above the strike price. When a put option written by the Fund
is exercised, the Fund will be required to purchase the underlying securities at
the strike price, which may be in excess of the market value of such securities.
OTC Options. Over-the-counter options ("OTC options") differ from
exchange-traded options in several respects. They are transacted directly with
dealers and not with a clearing corporation, and there is a risk of
non-performance by the dealer. OTC options are available for a greater variety
of securities and for a wider range of expiration dates and exercise prices than
are exchange-traded options. Because OTC options are not traded on an exchange,
pricing is normally done by reference to information from a market maker, which
information is carefully monitored by the Investment Manager and verified in
appropriate cases. The Fund may be required to treat certain of its OTC options
transactions as illiquid securities. See Appendix B.
It will generally be the Fund's policy, in order to avoid the exercise of
an option sold by it, to cancel its obligation under the option by entering into
a closing purchase transaction, if available, unless it is determined to be in
the Fund's interest to sell (in the case of a call option) or to purchase (in
the case of a put option) the underlying securities. A closing purchase
transaction consists of the Fund purchasing an option having the same terms as
the option sold by the Fund and has the effect of cancelling the Fund's position
as a seller. The premium which the Fund will pay in executing a closing purchase
transaction may be higher than the premium received when the option was sold,
depending in large part upon the relative price of the underlying security at
the time of each transaction. To the extent options sold by the Fund are
exercised and the Fund either delivers portfolio securities to the holder of a
call option or liquidates securities in its portfolio as a source of funds to
purchase securities put to the Fund, the Fund's portfolio turnover rate will
increase, which would cause the Fund to incur additional brokerage expenses.
During the option period, the Fund, as a covered call writer, gives up the
potential appreciation above the exercise price should the underlying security
rise in value, and the Fund, as a secured put writer, retains the risk of loss
should the underlying security decline in value. For the covered call writer,
substantial appreciation in the value of the underlying security would result in
the security being "called away" at the strike price of the option which may be
substantially
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Investment Objectives and Management Policies (continued)
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below the fair market value of such security. For the secured put writer,
substantial depreciation in the value of the underlying security would result in
the security being "put to" the writer at the strike price of the option which
may be substantially in excess of the fair market value of such security. If a
covered call option or a secured put option expires unexercised, the writer
realizes a gain, and the buyer a loss, in the amount of the premium.
To the extent that an active market exists or develops, whether on a
national securities exchange or over-the-counter, in options on indices based
upon municipal securities, the Fund may purchase and sell options on such
indices, subject to the limitation that the Fund may purchase and sell options
on up to 20% of its assets. Through the writing or purchase of index options the
Fund can achieve many of the same objectives as through the use of options on
individual securities. Options on securities indices are similar to options on
securities except that, rather than the right to take or make delivery of a
security at a specified price, an option on a securities index gives the holder
the right to receive, upon exercise of the option, an amount of cash if the
closing level of the securities index upon which the option is based is greater
than, in the case of a call, or less than, in the case of a put, the strike
price of the option.
Price movements in securities which the Fund owns or intends to purchase
will not correlate perfectly with movements in the level of an index and,
therefore, the Fund bears the risk of a loss on an index option which is not
completely offset by movements in the price of such securities. Because index
options are settled in cash, a call writer cannot determine the amount of its
settlement obligations in advance and, unlike call writing on specific
securities, cannot provide in advance for, or cover, its potential settlement
obligations by acquiring and holding the underlying securities.
Income earned or deemed to be earned, if any, by the Fund from transactions
in securities options will be taxable income of the Fund. Under a revenue ruling
issued by the Internal Revenue Service, the Fund is required to allocate net
capital gains and other taxable income, if any, among Common Stock on a pro rata
basis for the year in which such net capital gains or other taxable income are
realized. See "Taxation" and "Dividends and Distributions; Dividend Reinvestment
Plan." For a further discussion of certain characteristics of options and risks
associated with options transactions, see Appendix B.
Borrowing and Leverage. The Fund is authorized to borrow amounts up to
33 1/3% of its total assets (including the amount borrowed), although currently
the Fund anticipates that it will not borrow. The use of borrowed funds involves
the speculative factor known as "leverage." While the Fund does not currently
expect to do so, it is also permitted under its Articles of Incorporation to
issue preferred stock which would permit it to assume leverage in an amount up
to 50% of its total
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Investment Objectives and Management Policies (continued)
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assets. If any preferred stock were to be issued, it would have a priority on
the income and assets of the Fund over the Common Stock and would have certain
other rights with respect to voting and the election of directors. In certain
circumstances, the net asset value of and dividends payable on shares of Common
Stock could be adversely affected by such preferences. The use of leverage would
create an opportunity for increased returns to holders of the Common Stock, but,
at the same time, would create special risks. The Fund will only utilize
leverage when there is an expectation that it will benefit the Fund or the
holders of Common Stock. To the extent the income or other gain derived from
securities purchased with the proceeds of borrowings or preferred stock
issuances exceeds the interest or dividends the Fund would have to pay thereon,
the Fund's net income or other gain would be greater than if leverage had not
been used. Conversely, if the income or other gain from the securities purchased
through leverage is not sufficient to cover the cost of such leverage the total
return of the Fund would be less than if leverage had not been used. If leverage
is used, in certain circumstances the Fund could be required to liquidate
securities it would not otherwise sell in order to satisfy dividend or interest
obligations. The Fund may also borrow up to an additional 5% of its total assets
for temporary purposes without regard to the foregoing limitations. See
"Investment Objective and Management Policies" and "Description of Shares."
Interest Rate and Other Hedging Transactions. In order to seek to protect
the value of its portfolio securities against declines resulting from changes in
interest rates or other market changes, the Fund may enter into the following
hedging transactions: financial futures contracts and related options contracts.
The Fund may enter into various interest rate hedging transactions using
financial instruments with a high degree of correlation to the municipal
securities which the Fund may purchase for its portfolio, including interest
rate futures contracts (e.g., futures contracts on U.S. Treasury securities) and
futures contracts on interest rate related indices (e.g., municipal bond
indices). The Fund may also purchase and write put and call options on such
futures contracts and on the underlying instruments. The Fund may enter into
these transactions in an attempt to "lock in" a return or spread on a particular
investment or portion of its portfolio, to protect against any increase in the
price of securities the Fund anticipates purchasing at a later date, or for
other risk management strategies such as managing the effective dollar-weighted
average duration of the Fund's portfolio. Financial futures and options
contracts and the risks attendant to the Fund's use thereof, are more completely
described in Appendix B. The successful utilization of hedging and risk
management transactions requires skills different from those needed in the
selection of the Fund's portfolio securities. The Fund believes that the
Investment Manager possesses the skills necessary for the successful utilization
of hedging and risk management transactions.
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Investment Objectives and Management Policies (continued)
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The Fund will not engage in the foregoing transactions for speculative
purposes, but only in limited circumstances as a means to hedge risks associated
with management of the Fund's portfolio. Typically, investments in futures
contracts and sales of futures options contracts require the Fund to deposit in
a custodial account a good faith deposit, known as "initial margin," in
connection with its obligations in an amount of cash or specified debt
securities which generally is equal to 1%-15% of the face amount of the
contract, which initial margin requirement may be revised periodically by the
applicable exchange as the volatility of the contract fluctuates. Thereafter,
the Fund must make additional deposits with the applicable financial
intermediary equal to any net losses due to unfavorable price movements of the
contract, and will be credited with an amount equal to any net gains due to
favorable price movements. These additional deposits or credits are calculated
and required daily and are known as "variation margin."
The SEC generally requires that when investment companies, such as the
Fund, effect transactions of the foregoing nature, such funds must either
segregate cash or high quality, readily marketable portfolio securities with its
custodian or financial intermediary in the amount of its obligations under the
foregoing transactions, or cover such obligations by maintaining positions in
portfolio securities, futures contracts or options that would serve to satisfy
or offset the risk of such obligations. When effecting transactions of the
foregoing nature, the Fund will comply with such segregation or cover
requirements. There is no limitation on the percentage of the Fund's assets
which may be segregated with respect to such transactions.
The Fund will not enter into a futures contract or related option if,
immediately after such investment, the sum of the amount of its initial margin
deposits and premiums on open contracts and options would exceed 5% of the fair
market value of the Fund's total assets after taking into account unrealized
profits and unrealized losses on any such contracts. The Fund may, however,
invest more than such amount in the future if it obtains authority to do so from
the appropriate regulatory agencies without requiring the Fund to register as a
commodity pool operator or adversely affecting its status as an investment
company for Federal securities law or income tax purposes.
All of the foregoing transactions present certain risks. In particular, the
variable degree of correlation between price movements of futures contracts and
price movements in the securities being hedged creates the possibility that
losses on the hedge may be greater than gains in the value of the Fund's
securities. In addition, these instruments may not be liquid in all
circumstances and generally are closed out by entering into offsetting
transactions rather than by delivery or cash settlement at maturity. As a
result, in volatile markets, the Fund may not be able to close out a transaction
on favorable terms or at all. Although the contemplated use of those contracts
should tend to reduce the risk of loss due to a decline in the value of the
hedged security, at the same time the use of these contracts could tend to
21
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Investment Objectives and Management Policies (continued)
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limit any potential gain which might result from an increase in the value of
such security. Finally, the daily deposit requirements for futures contracts and
sales of futures options contracts create an ongoing greater potential financial
risk than do option purchase transactions, where the exposure is limited to the
cost of the premium for the option.
Successful use of futures contracts and options thereon by the Fund is
subject to the ability of the Investment Manager to predict correctly movements
in the direction of interest rates and other factors affecting markets
securities. If the Investment Manager's expectations are not met, the Fund would
be in a worse position than if a hedging strategy had not been pursued. For
example, if the Fund has hedged against the possibility of an increase in
interest rates which would adversely affect the price of securities in its
portfolio and the price of such securities increases instead, the Fund will lose
part or all of the benefit of the increased value of its securities because it
will have offsetting losses in its futures positions. In addition, in such
situations, if the Fund has insufficient cash to meet daily variation margin
requirements, it may have to sell securities to meet such requirements. Such
sales of securities may be, but will not necessarily be, at increased prices
which reflect the rising market. The Fund may have to sell securities at a time
when it is disadvantageous to do so.
In addition to engaging in transactions utilizing options on futures
contracts, the Fund may purchase put and call options on securities and, as
developed from time to time, on interest indices and other instruments.
Purchasing options may increase investment flexibility and improve total return,
but also risks loss of the option premium if an asset the Fund has the option to
buy declines in value or if an asset the Fund has the option to sell increases
in value.
New options and future contracts and other financial products and various
combinations thereof, continue to be developed and the Fund may invest in any
such options, contracts and products as may be developed to the extent
consistent with its investment objective and the regulatory requriements
applicable to investment companies.
Income earned or deemed to be earned, if any, by the Fund from its hedging
activities, will be taxable income of the Fund. See "Taxation" and "Dividends
and Distributions; Dividend Reinvestment Plan."
When-lssued and Delayed Delivery Transactions. The Fund may also purchase
municipal securities on a "when-issued" and "delayed delivery" basis. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market fluctuation; the value of the municipal
securities at delivery may be more or less than their purchase price, and yields
generally available on municipal securities when delivery occurs may be higher
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Investment Objectives and Management Policies (continued)
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than yields on the municipal securities obtained pursuant to such transactions.
Because the Fund relies on the buyer or seller, as the case may be, to
consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Fund's purchase committments, provided such
securities have been determined by the Investment Manager to be liquid and
unencumbered, and are marked to market daily, pursuant to guidelines established
by the Directors. The Fund will make commitments to purchase municipal
securities on such basis only with the intention of actually acquiring these
securities, but the Fund may sell such securities prior to the settlement date
if such sale is considered to be advisable.
To the extent that the Fund engages in "when-issued" and "delayed delivery"
transactions, it will do so for the purpose of acquiring securities for the
Fund's portfolio consistent with the Fund's investment objective and policies.
However, although the Fund does not intend to engage in such transactions for
speculative purposes, purchases of securities on such basis may involve more
risk than other types of purchases. For example, if the Fund determines it is
necessary to sell the "when-issued" or "delayed delivery" securities before
delivery, it may incur a gain or a loss because of market fluctuations since the
time the commitment to purchase such securities was made. Subject to the
requirement of maintaining a segregated account, no specified limitation exists
as to the percentage of the Fund's assets which may be used to acquire
securities on a "when-issued" or "delayed delivery" basis. A significant
percentage of the Fund's assets committed to the purchase of securities on a
"when-issued" "delayed delivery" basis may increase the volatility of the Fund's
net asset value and may limit the flexibility to manage the Fund's investments.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Investment in the Fund involves risk factors and special considerations,
such as those described below:
The Fund is a closed-end investment company. Shares of closed-end
investment companies frequently trade at a discount from net asset value; but in
some cases trade at a premium. The Fund cannot predict whether its Common Stock
will trade at, above or below net asset value.
In normal market conditions, substantially all of the Fund's total assets
will be invested in municipal securities rated investment grade at the time of
investment. The Fund may invest in unrated municipal securities believed, at the
time of investment, by the Investment Manager to have credit characteristics
equivalent to, and to be of
23
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
comparable quality as, municipal securities that are rated investment grade. The
amount of available information about the financial condition of municipal
securities issuers may be less extensive than that for corporate issuers with
publicly traded securities, and the market for municipal securities may be less
liquid than the market for corporate debt obligations. Liquidity relates to the
ability of the Fund to sell a security in a timely manner at a price which
reflects the value of that security. The market for unrated municipal securities
is considered generally to be less liquid than the market for rated municipal
securities. Further, municipal securities in which the Fund may invest include
special obligation bonds, lease obligations, participation certificates and
variable rate instruments. The market for such securities may be less liquid
than the market for general obligation municipal securities. The relative
illiquidity of some of the Fund's portfolio securities may adversely affect the
ability of the Fund to dispose of such securities in a timely manner and at a
fair price. The market for less liquid securities tends to be more volatile than
the market for more liquid securities and market values of relatively illiquid
securities may be more susceptible to change as a result of adverse publicity
and investor perceptions than are the market values of more liquid securities.
Although the issuer of some municipal securities may be obligated to redeem such
securities at face value, such redemption could result in capital losses to the
Fund to the extent that such municipal securities were purchased by the Fund at
a premium to face value.
Although the municipal securities in which the Fund may invest will be, at
the time of investment, rated investment grade or believed by the Investment
Manager to be of comparable quality, municipal securities, like other debt
obligations, are subject to the risk of non-payment. Such non-payment would
result in a reduction of income to the Fund, and could result in a reduction in
the value of the municipal security experiencing non-payment and a potential
decrease in the net asset value of the Fund. Issuers of municipal securities
might seek protection under the bankruptcy laws. In the event of bankruptcy of
such an issuer, the Fund could experience delays and limitations with respect to
the collection of principal and interest on such municipal securities, and the
Fund may not, in all circumstances, be able to collect all principal and
interest to which it is entitled. To enforce its rights in the event of a
default in the payment of interest or repayment of principal or both, the Fund
may take possession of and manage the assets securing the issuer's obligations
on such securities, which may increase the Fund's operating expenses and
adversely affect the net asset value of the Fund. Any income derived from the
Fund's ownership or operation of such assets may not be tax-exempt. In addition,
the Fund's intention to qualify as a "regulated investment company" under the
Code, may limit the extent to which the Fund may exercise its rights by taking
possession of such assets, because as a regulated investment company the Fund is
subject to certain limitations on its investments and on the nature of its
income. See "Taxation."
24
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
Lease obligations in which the Fund may invest may 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. A risk exists that the
municipality will not, or will be unable to, appropriate money in the future in
the event of political changes, changes in the economic viability of the
project, general economic changes or for other reasons. Although such lease
obligations generally are secured by a lien on the leased property, disposition
of the property in the event of foreclosure could be costly, time consuming and
result in unsatisfactory recoupment of the Fund's original investment.
The Investment Manager values the Fund's investment on the basis of bid
prices provided by a pricing service when the Fund believes such prices reflect
fair market value. To the extent that there is no established retail market for
some of the securities in which the Fund may invest, there may be relatively
inactive trading in such securities and the ability of a pricing service or the
Investment Manager to accurately value such securities may be adversely
affected. During periods of reduced market liquidity and in the absence of
readily available market quotations for municipal securities held in the Fund's
portfolio, the responsibility of the Investment Manager to value the Fund's
securities becomes more difficult and the Investment Manager's judgment may play
a greater role in the valuation of the Fund's securities due to the reduced
availability of reliable objective data. To the extent that the Fund invests in
illiquid securities and securities which are restricted as to resale, the Fund
may incur additional risks and costs. Illiquid and restricted securities are
particularly difficult to dispose of.
The net asset value of the Fund's Common Stock will change with changes in
the value of its portfolio securities. Because the Fund will invest primarily in
fixed-income municipal securities, the net asset value of the Common Stock of
the Fund can be expected to change as general levels of interest rates
fluctuate. All of the foregoing risks affecting net asset value will be
magnified if the Fund issues preferred stock or borrows money. Volatility may be
greater during periods of general economic uncertainty.
The Fund has not established any limit on the percentage of its portfolio
that may be invested in municipal securities subject to the alternative minimum
tax provision of Federal tax law, and a substantial portion of the income
produced by the Fund may be taxable under the alternative minimum tax. The Fund
may not be a suitable investment for investors who are already subject to the
Federal alternative minimum tax or who would become subject to the Federal
alternative minimum tax as a result of an investment in the Fund. In addition,
income earned or deemed to be earned with respect to the Fund's hedging
transactions, if any, will be taxable. See "Taxation."
25
<PAGE>
- --------------------------------------------------------------------------------
Investment Restrictions
- --------------------------------------------------------------------------------
The following investment restrictions of the Fund are fundamental and
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities as defined in the 1940 Act. If a percentage
restriction on investment or use of assets set forth below is adhered to at the
time a transaction is effected, later changes in percentage resulting from
changing market values will not be considered a deviation from policy. The Fund
may not:
1. Purchase securities (other than obligations issued or guaranteed by the
United States Government or by its agencies or instrumentalities) of any
issuer if as a result of the purchase more than 5% of the value of the
Fund's total assets would be invested in the securities of the issuer,
except that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation.
2. Invest more than 25% of its total assets in a single industry; however,
as described above under "Investment Objective and Management Policies,"
the Fund may from time to time invest more than 25% of its total assets in
a particular segment of the municipal securities market or in obligations
of issuers located in the same state.
3. Issue senior securities if such issuance is specifically prohibited by
the 1940 Act or the rules and regulations thereunder.
4. Borrow money in excess of 33 1/3% of its total assets (including the
amount of money borrowed but excluding any liabilities and indebtedness
not constituting senior securities) except that the Fund may borrow up to
an additional 5% of its total assets for temporary purposes; pledge its
assets other than to secure such borrowings or in connection with
when-issued and forward commitment transactions and similar investment
strategies.
5. Make loans of money or property to any person, except to the extent
that the securities in which the Fund may invest are considered to be
loans and except that the Fund may lend money or property in connection
with the maintenance of the value of or the Fund's interest with respect
to the municipal securities owned by the Fund.
6. Buy any securities "on margin." Neither the deposit of initial or
variation margin in connection with hedging and risk management
transactions nor short-term credits as may be necessary for the clearance
of transactions is considered the purchase of a security on margin.
7. Sell any securities "short," write, purchase or sell puts, calls or
combinations thereof, or purchase or sell financial futures or options,
except as described under the heading "Investment Objective and Management
Policies -- Investment Techniques" and in Appendix B to this Prospectus.
8. Act as an underwriter of securities, except to the extent that the Fund
may
26
<PAGE>
- --------------------------------------------------------------------------------
Investment Restrictions (continued)
- --------------------------------------------------------------------------------
be deemed to be an underwriter in connection with the sale of securities
held in its portfolio.
9. Make investments for the purpose of exercising control or participation
in management, except to the extent that exercise by the Fund of its
rights under agreements related to municipal securities would be deemed to
constitute such control or participation.
10. Invest in securities of other investment companies in an amount
exceeding the limitation set forth in the 1940 Act and the rules
thereunder, except as part of a merger, consolidation or other
acquisition.
11. Invest in equity interests in oil, gas or other mineral exploration or
development programs except pursuant to the exercise by the Fund of its
rights under agreements relating to municipal securities.
12. Purchase or sell real estate, commodities or commodity contracts,
except to the extent that the municipal securities the Fund may invest in
are considered to be interests in real estate, commodities or commodity
contracts, or to the extent that the Fund exercises its rights under
agreements relating to such municipal securities (in which case the Fund
may liquidate real estate acquired as a result of default on a mortgage).
The Fund generally will not engage in the trading of securities for the
purpose of realizing short-term profits, but it will adjust its portfolio as it
deems advisable in view of prevailing or anticipated market conditions to
accomplish the Fund's investment objective. For example, the Fund may sell
portfolio securities in anticipation of a movement in interest rates. Other than
for tax purposes, frequency of portfolio turnover will not be a limiting factor
if the Fund considers it advantageous to purchase or sell securities, which must
be borne by the Fund and its shareholders. High portfolio turnover may also
result in the realization of substantial net short-term capital gains, and any
distributions resulting from such gains will be taxable at ordinary income rates
for federal income tax purposes.
27
<PAGE>
- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------
The Fund's Common Stock is listed on the AMEX under the symbol "SBI." Smith
Barney also intends to make a market in the Common Stock.
The following table sets forth for the Fund's Common Stock the following
information for each quarterly period during the last two fiscal years: high and
low sales prices and net asset values; sales price and net asset value at
quarter-end; and the premium (discount) of the sales price to net asset value at
quarter-end.
AMEX
AMEX NAV Price at NAV at
Price Price Quarter- Quarter- Premium
Three Months Ended Range Range End End (Discount)
===============================================================================
3/31/95 9.88 - 9.38 10.31 - 9.95 9.63 10.31 (6.64)
6/30/95 10.25 - 9.50 10.60 - 10.28 9.88 10.39 (4.96)
9/30/95 10.25 - 9.75 10.59 - 10.35 10.00 10.50 (4.76)
12/31/95 10.38 - 10.00 10.71 - 10.52 10.38 10.66 (2.67)
3/31/96 10.13 - 10.63 10.73 - 10.40 10.25 10.46 (2.01)
6/30/96 9.75 - 10.50 10.47 - 10.29 10.00 10.37 (3.57)
9/30/96 9.81 - 10.63 10.51 - 10.28 10.25 10.40 (1.44)
12/31/96 9.94 - 10.38 10.54 - 10.39 9.94 10.47 (5.06)
===============================================================================
As of April 11, 1997, the price per share of Common Stock as quoted on the
AMEX was $9.88, representing a 4.50% discount to 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 at times above, but generally were
below, net asset value.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
DIRECTORS AND OFFICERS
The business and affairs of the Fund, including the general supervision of
the duties performed by the Investment Manager under the Investment Management
Agreement, are the responsibility of the Fund's Board of Directors. The
Directors and officers of the Fund, their addresses and their principal
occupations for at least the past five years are set forth below.
*+Heath B. McLendon Chairman of the Board of Managing Director of Smith
388 Greenwich Street Directors and Chief Barney; Director of forty-one
New York, NY 10013 Executive Officer investment companies
associated with Smith Barney;
Chairman of the Board of
Smith Barney Strategy
Advisers Inc. and President
of SBMFM. Formerly, Senior
Executive Vice President of
Shearson Lehman Brothers
Inc.; Vice Chairman of
Shearson Asset Management;
63.
28
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Positions Held Principal Occupations
Name and Address with the Fund During Past Five Years and Age
================================================================================
*+Jessica Bibliowicz Director and President Executive Vice President of
388 Greenwich Street Smith Barney; Director of
New York, NY 10013 twelve investment companies
associated with Smith Barney;
President of forty-one
investment companies
associated with Smith Barney.
Formerly Director of Sales
and Marketing for Prudential
Mutual Funds; 37.
+Joseph H. Fleiss Director Retired; Director of ten
3849 Torrey Pines Blvd. investment companies
Sarasota, FL 34238 associated with Smith Barney.
Formerly Senior Vice
President of Citibank;
Manager of Citibank's Bond
Investment Fund and Money
Management Desk and a
Director of Citicorp
Securities Co., Inc.; 79.
+Donald R. Foley Director Retired; Director of ten
3668 Freshwater investment companies
Drive Jupiter, FL 33477 associated with Smith Barney.
Formerly Vice President of
Edwin Bird Wilson,
Incorporated (advertising);
74.
+Paul Hardin Director Interim President of
60134 Davie Street University of Alabama at
Chapel Hill, NC 27599 Birmingham; Professor of Law
at the University of North
Carolina at Chapel Hill;
Director of twelve investment
companies associated with
Smith Barney and a Director
of The Summit Bancorporation.
Formerly, Chancellor of the
University of North Carolina
at Chapel Hill; 65.
+Francis P. Martin Director Practicing physician;
2000 North Village Ave. Director of ten investment
Rockville Centre, NY companies associated with
11570 Smith Barney. Formerly
President of the Nassau
Physicians' Fund, Inc.; 72.
+Roderick C. Rasmussen Director Investment Counselor;
81 Mountain Road Director of ten in vestment
Verona, NJ 07044 companies associated with
Smith Barney. Formerly Vice
Presi dent of Dresdner and
Company Inc. (Investment
counselors); 70.*
29
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Positions Held Principal Occupations
Name and Address with the Fund During Past Five Years and Age
================================================================================
+John P. Toolan Director Retired; Director of ten
82 Druid Road investment companies
Summit, NJ 07901 associated with Smith Barney;
Director of John Hancock
Funds. Formerly, Director and
Chairman of Smith Barney
Trust Company, Director of
Smith Barney and SBMFM and
Senior Executive Vice
President, Director and
Member of the Executive
Committee of Smith Barney;
66.
+C. Richard Youngdahl Director Emeritus Retired; Director of ten
339 River Drive investment companies
Tequesta, FL 33469 associated with Smith Barney
Member of the Board of
Directors of D.W. Rich &
Company, Inc. Formerly
Chairman of the Board of
Pensions of the Lutheran
Church in America; Chairman
of the Board and Chief
Executive Officer of Aubrey
G. Lanston & Co. (dealers in
U.S. Government securities)
and President of the
Association of Primary
Dealers in U.S. Government
Securities; 81.
Lewis E. Daidone Senior Vice President, Managing Director of Smith
388 Greenwich Street Chief Financial and Barney, Senior Vice President
New York, NY 10013 Accounting Officer and and Treasurer of other
Treasurer investment companies
associated with Smith Barney;
Director and Senior Vice
President of SBMFM; 39.
Peter Coffey Vice President and Vice President of SBMFM and
388 Greenwich Street Investment Officer certain other investment
New York, NY 10013 companies associated with
Smith Barney; Managing
Director of Smith Barney; 49.
Thomas M. Reynolds Controller and Assistant Director of Smith Barney in
388 Greenwich Street Secretary the Asset Management Division
New York, NY 10013 and Controller and Assistant
Secretary of certain other
investment companies
associated with Smith Barney;
37.
Christina T. Sydor Secretary Managing Director of Smith
388 Greenwich Street Barney and Secretary of the
New York, NY 10013 other investment companies
associated with Smith Barney;
Secretary and General Counsel
of SBMFM; 46.
================================================================================
* "Interested person" of the Fund as defined in the 1940 Act.
+ Director, trustee and/or general partner of other investment companies
registered under the 1940 Act with which Smith Barney is affiliated.
Fees for Directors who are not "interested persons" of the Fund and who are
30
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
directors of a group of funds sponsored by Smith Barney are set at $42,000 per
annum and are allocated based on relative net assets of each fund in the group.
In addition, these Directors receive $100 per fund or portfolio for each day of
Board meetings attended plus travel and out-of-pocket expenses incurred in
connection with Board meetings. The Board meeting fees and out-of-pocket
expenses are borne equally by each individual fund or portfolio in the group.
The following table shows the compensation paid by the Fund to each
incumbent Director during the Fund's most recent fiscal year (from January 1,
1996 to December 31, 1996).
COMPENSATION TABLE
<TABLE>
<CAPTION>
Total
Pension or Compensation Number of
Retirement from Fund Funds for
Aggregate Benefits Accrued and Fund Which Director
Compensation as part of Complex Serves Within
Name of Person from Fund Fund Expenses Paid to Directors Fund Complex
-------------- ------------ ---------------- ----------------- -------------
<S> <C> <C> <C> <C>
Jessica Bibliowicz* $ 0 $0 $ 0 12
Joseph H. Fleiss 786+ 0 58,300 10
Donald R. Foley 786+ 0 58,300 10
Paul Hardin 783 0 73,850 12
Francis P. Martin 786+ 0 58,300 10
Heath B. McLendon* 0 0 0 41
Roderick C. Rasmussen 786 0 58,300 10
John P. Toolan 786+ 0 0 10
C. Richard Youngdahl++ 786 0 58,300 10
</TABLE>
- ----------
* Designates an "interested director".
+ Pursuant to the Fund's deferred compensation plan, the indicated Directors
have elected to defer the following payment of some or all of their
compensation: Joseph H. Fleiss: $43, Donald R. Foley: $43, Francis P.
Martin: $786 and John P. Toolan: $786.
++ Effective January 1, 1997, Mr Youngdahl elected to become a Director
Emeritus. Upon attainment of age 72 the Fund's current Directors may elect
to change to emeritus status. Any directors elected or appointed to the
Board in the future will be required to change to emeritus status upon
attainment of age 80. Directors Emeritus are entitled to serve in emeritus
status for a maximum of 10 years during which time they are paid 50% of the
annual retainer fee and meeting fees otherwise applicable to the Fund
Directors, together with reasonable out-of-pocket expenses for each meeting
attended.
At the close of business on April 11, 1997, 7,974,780 shares of Common
Stock or 96.21% of the Fund's total shares outstanding on that date were held in
accounts, but not beneficially owned by, CEDE & Co., P.O. Box 20, Bowling Green
Station, NY, NY 10004. As of that date, the officers and Board members of the
Fund beneficially owned less than 1% of the outstanding shares of the Fund.
INVESTMENT MANAGER
Greenwich Street Advisors, a division of SBMFM serves as the Fund's
investment manager. SBMFM (through its predecessors) has been in the investment
31
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
counseling business since 1934 and is a registered investment adviser. SBMFM was
incorporated in 1968 and currently manages investment companies that had total
assets in excess of $83 billion as of March 31, 1997, of which approximately
$6.7 billion consisted of municipal bond portfolios.
Pursuant to the Investment Management Agreement (the "Management
Agreement"), the Fund has retained the Investment Manager to manage the
investment of the Fund's assets and to provide such investment research, advice
and supervision, in conformity with the Fund's investment objective and
policies, as may be necessary for the investment activities of the Fund. The
Investment Manager also administers the Fund's corporate affairs subject to the
supervision of the Fund's Board of Directors and in connection therewith
furnishes the Fund with office facilities together with such ordinary clerical
and bookkeeping services (e.g., preparation of annual and other reports to
shareholders and the SEC and filing of Federal, state and local income tax
returns) as are not being furnished by the Fund's custodian.
The Management Agreement provides, among other things, that the Investment
Manager will bear all expenses of its employees and overhead incurred in
connection with its duties under the Management Agreement, other than those
assumed by the Fund, as described below, and will pay all director's fees and
salaries of the Fund's directors and officers who are affiliated persons (as
such term is defined in the 1940 Act) of the Investment Manager.
The Management Agreement provides that the Fund shall pay to the Investment
Manager a monthly fee in arrears equal to .60% per annum of the Fund's average
daily net assets during the month.
Although the Investment Manager intends to devote such time and effort to
the business of the Fund as reasonably necessary to perform its duties to the
Fund, the services of the Investment Manager are not exclusive and the
Investment Manager provides similar services to other investment companies and
may engage in other activities.
The Management Agreement also provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard of its
obligations thereunder, the Investment Manager is not liable to the Fund or any
of the Fund's shareholders for any act or omission by the Investment Manager in
the supervision or management of its investment activities or for any loss
sustained by the Fund or the Fund's shareholders.
The Management Agreement will continue in effect for successive periods of
12 months, provided that each continuance is specifically approved at least
annually by both (1) the vote of a majority of the Fund's Board of Directors or
the vote of a majority of the outstanding voting securities of the Fund (as such
term is defined in the 1940 Act) and (2) by the vote of a majority of the
directors who are not parties to such Agreement or interested persons (as such
term is defined in
32
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
the 1940 Act) of any such party, cast in person at a meeting
called for the purpose of voting on such approval. The Management Agreement may
be terminated as a whole at any time by the Fund, without the payment of any
penalty, upon the vote of a majority of the Fund's Board of Directors or a
majority of the outstanding voting securities of the Fund or by the Investment
Manager, on 60 days' written notice by either party to the other. The Management
Agreement will terminate automatically in the event of its assignment (as such
term is defined in the 1940 Act and the rules thereunder).
For each of the years ended December 31, 1994, December 31, 1995 and
December 31, 1996, the Fund paid $510,106, $517,473 and $519,991, respectively,
in management fees to SBMFM.
Peter Coffey, Vice President and Investment Officer of the Fund, is
primarily responsible for management of the Fund's assets. Mr. Coffey is a Vice
President of the Investment Manager and is the senior asset manager for eight
other investment companies and other accounts investing in tax-exempt securities
with aggregate assets of approximately $1.5 billion as of February 28, 1997.
Except as indicated above, the Fund will pay all of its expenses, including
fees of the directors not affiliated with the Investment Manager and Board
meeting expenses; fees of the Investment Manager; interest charges; taxes;
charges and expenses of the Fund's legal counsel and independent accountants,
and of the transfer agent, registrar and dividend disbursing agent of the Fund;
expenses of repurchasing shares; expenses of printing and mailing share
certificates, share holder reports, notices, proxy statements and reports to
governmental offices; brokerage and other expenses connected with the execution,
recording and settlement of portfolio security transactions; expenses connected
with negotiating of, effecting purchase or sale of, or registering privately
issued portfolio securities; fees and expenses of the Fund's custodian for all
services to the Fund, including safekeeping of funds and securities and
maintaining required books and accounts; expenses of calculating and publishing
the net asset value of the Fund's Common Stock; expenses of membership in
investment company associations; expenses of fidelity bonding and other
insurance premiums; expenses of shareholders' meetings; SEC and state blue sky
registration fees; American Stock Exchange listing fees; and its other business
and operating expenses.
33
<PAGE>
- --------------------------------------------------------------------------------
Securities Transactions and Turnover
- --------------------------------------------------------------------------------
General
Subject to the general supervision of the Board of Directors, the
Investment Manager is responsible for decisions to buy and sell securities and
the selection of brokers and dealers to effect the transactions. The Fund
invests primarily in the over-the counter market. Securities are generally
traded in the over-the-counter market on a "net" basis with dealers acting as
principal for their own accounts without charging a stated commission, although
the price of the security usually includes a profit to the dealer. The Fund also
purchases securities at times in underwritten offerings, where the price
includes a fixed amount of compensation, generally referred to as the
underwriter's concession or discount. On occasion, the Fund may also purchase
certain money market instruments directly from an issuer, in which case no
commissions or discounts are paid. The Fund will not engage in any principal
transactions with Smith Barney.
The Investment Manager currently serves as investment adviser to other
investment companies, some of which invest principally in municipal securities.
In the future it may act as investment adviser to other investment companies or
accounts that invest in municipal securities. Although each investment company
is individually managed, from time to time the Investment Manager may, to the
extent permitted by law, allocate purchase or sale transactions among various
investment companies and other accounts. In making such allocations the
Investment Manager will consider, among other things, the respective investment
objectives, the relative size of portfolio holdings of the same or comparable
securities and the liquidity of the portfolio.
The policy of the Fund regarding purchases and sales of securities for its
portfolio is that primary consideration will be given to obtaining the most
favorable prices consistent with efficient execution of transactions in seeking
to implement the Fund's policies. The Investment Manager will effect
transactions with those dealers who the Investment Manager believes provide the
most favorable prices and who are capable of providing efficient executions.
Those factors that the Investment Manager believes contribute to efficient
execution include size of the order, difficulty of execution, operational
capabilities and facilities of the dealer involved, whether that dealer has
risked its own capital in positioning a block of securities and the dealer's
prior experience in effecting transactions of this type. If the Investment
Manager believes such price and execution are obtainable from more than one
dealer, it may give consideration to placing portfolio transactions with those
dealers who also furnish research and other services to the Investment Manager.
Such services may include, but are not limited to, any one or more of the
following: information as to the availability of securities for purchase or
sale; statistical or factual information or opinions pertaining to investment;
economic analysis; and appraisals or evaluations of portfolio securities.
34
<PAGE>
- --------------------------------------------------------------------------------
Securities Transactions and Turnover (continued)
- --------------------------------------------------------------------------------
The information and services so received by the Investment Manager may be
of benefit to the Investment Manager in the management of other accounts and may
not in all cases benefit the Fund directly. While the receipt of such
information and services is useful in varying degrees and would generally reduce
the amount of research or services otherwise performed by the Investment Manager
and thus may reduce its expenses, it is of indeterminable value and the advisory
fee paid to the Investment Manager is not reduced by any amount that may be
attributable to the value of such services.
TURNOVER
The Fund cannot accurately predict its turnover rate, but anticipates that
its annual turnover rate will not exceed 100%. The Fund's turnover rate is
calculated by dividing the lesser of the Fund's sales or purchases of securities
during a year (excluding any security the maturity of which at the time of
acquisition is one year or less) by the average monthly value of the Fund's
securities for the year. Higher turnover rates can result in corresponding
increases in the Fund's transaction costs, which must be borne by the Fund and
its shareholders. High portfolio turnover may also result in the realization of
substantial net short-term capital gains, and any distributions resulting from
such gains will be taxable at ordinary income rates for Federal income tax
purposes. The Fund will not consider turnover rate a limiting factor in making
investment decisions consistent with its investment objective and policies.
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Fund expects to pay monthly dividends of net investment income (income
other than net realized capital gains) to the holders of the Common Stock. Under
the Fund's current policy, which may be changed at any time by the Board of
Directors, the Fund's monthly dividends will be made 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. 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 a year.
Under the Fund's Dividend Reinvestment Plan (the "Plan"), a stockholder
whose shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by First Data as agent
under the Plan, unless the stockholder 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
35
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
stockholder 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 Fund stockholders who do not
participate in the Plan will be paid by check mailed directly to the record
holder by or under the direction of First Data as dividend-paying agent.
If the Fund declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, stockholders who are not Plan
participants will receive cash, and Plan participants will receive the
equivalent amount in shares of Common Stock. When the market price of the Common
Stock is equal to or exceeds the net asset value per share of the Common Stock
on the Valuation Date (as defined below), Plan participants will be issued
shares of Common Stock valued at the net asset value most recently determined.
See"Net Asset Value" or, if net asset value is less than 95% of the then current
market price of the Common Stock, then at 95% of the market value. The Valuation
Date is the dividend or capital gains distribution payment date or, if that date
is not a NYSE trading day, the immediately preceding trading day.
If the market price of the Common Stock is less than the net asset value of
the Common Stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with Smith
Barney, as purchasing agent for Plan participants (the "Purchasing Agent"), 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 the Purchasing Agent has completed its purchases, the market price
exceeds the net asset value of the Common Stock, the average per share purchase
price paid by the Purchasing Agent may exceed the net asset value of the Common
Stock, 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
net asset value. Additionally, if the market price exceeds the net asset value
of shares before the Purchasing Agent has completed its purchases, the
Purchasing Agent is permitted to cease purchasing shares and the Fund may issue
the remaining shares 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 Purchasing 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 prices paid
for shares purchased in the open market and the price at which the Fund issues
the remaining shares. First Data will apply all cash received as a dividend or
capital gains distribution to purchase Common Stock on the open market as soon
as practicable after the record date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.
First Data maintains all stockholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a
36
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
stockholder for personal and tax records. The automatic reinvestment of
dividends and capital gains will not relieve Plan participants of any income tax
that may be payable on the dividends or capital gains distributions. Common
Stock in the account of each Plan participant will be held by First Data on
behalf of the Plan participant, and each stockholder's proxy will include those
shares purchased pursuant to the Plan.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. First Data 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
as a result of dividends or capital gains distributions payable either in Common
Stock or in cash. Each Plan participant will, however, bear a proportionate
share of brokerage commissions incurred with respect to open market purchases
made in connection with the reinvestment of dividends or capital gains
distributions.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, Inc.,
P.O. Box 1376, Boston, Massachusetts 02104.
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
The net asset value per share of the Fund's Common Stock is determined by
calculating the total value of the Fund's assets, deducting its total
liabilities and dividing the result by the number of shares of Common Stock
outstanding. The net asset value will be computed as of the close of regular
trading on the New York Stock Exchange ("NYSE") on each day that the NYSE is
open. The Fund reserves the right to calculate the net asset value more
frequently if deemed desirable.
The Fund's securities will be valued on the basis of bid prices provided by
a pricing service when the Fund believes such prices reflect fair market value.
Pricing services generally determine value by reference to transactions in
municipal securities, quotations from municipal bond dealers, market
transactions in comparable securities and various relationships between
securities. If a pricing service is not used, municipal securities will be
valued at the quoted bid prices provided by municipal bond dealers. Short-term
instruments maturing within 60 days will be valued at cost plus amortized
discount, if any, when the Board of Directors
37
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value (continued)
- --------------------------------------------------------------------------------
has determined that amortized cost equals fair value. Securities and other
assets that are not priced by a pricing service and for which market quotations
are not available will be valued in good faith at fair value by or under the
direction of the Board of Directors.
If any securities held by the Fund are restricted as to resale, the
Investment Manager will determine their fair value following procedures approved
by the directors. The directors will periodically review such valuations and
procedures. The fair value of such securities generally will be determined as
the amount which the Fund could reasonably expect to realize from an orderly
disposition of such securities over a reasonable period of time. The valuation
procedures applied in any specific instance are likely to vary from case to
case. However, consideration will be generally given to the financial position
of the issuer and other fundamental analytical data relating to the investment
and to the nature of the restrictions on disposition of securities (including
any registration expenses that might be borne by the Fund in connection with
such disposition). In addition, specific factors also generally will be
considered, such as the cost the investment, the market value of any
unrestricted securities of the same class (both at the time of purchase and at
the time of valuation), the size of the holding, the prices of any recent
transactions or offers with respect to such securities, and any available
analysts' reports regarding the issuer. Shares of closed-end investment
companies frequently trade at a discount from net asset value, but in some cases
trade at a premium. Since the market price of the Fund's shares will be
determined by such factors as trading volume of the shares, general market and
economic conditions and other factors beyond the control of the Fund, the Fund
cannot predict whether its shares will trade at, below or above its computed net
asset value.
- --------------------------------------------------------------------------------
Taxation
- --------------------------------------------------------------------------------
The following is a summary of the material federal tax considerations
affecting the Fund and Fund shareholders. In addition to the considerations
described below, there may be other federal, state, local, or foreign tax
applications to consider. Because taxes are a complex matter, prospective
shareholders are urged to consult their tax advisors for more detailed
information with respect to the tax consequences of any investment.
The Fund intends to qualify, as it has in prior years, 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, so long as
such qualification is in the best interests of its shareholders, the Fund will
pay no federal income tax on its net investment income and long-term capital
gain that is distributed to shareholders. The Fund also intends to satisfy
conditions that will enable it to pay
38
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
"exempt-interest dividends" to shareholders. Exempt-interest dividends are
generally not subject to regular federal income taxes, although, may be
considered taxable for state and local income (or intangible) tax purposes.
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 alternative minimum tax computation. In
addition to the alternative minimum tax, corporate shareholders must include
this percentage as a component in the corporate environmental tax computation.
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 expense incurred by a shareholder on borrowing made to
purchase, or carry Fund shares, are not deductible for federal income tax
purposes to the extent related to the exempt-interest dividends received on such
shares.
Dividends paid by the Fund from interest income on taxable investments, net
realized short-term securities gains, and, all, or a portion of, any gains
realized from the sale or other disposition of certain market discount bonds are
subject to federal income tax as ordinary income.
Distributions, if any, from net realized long-term securities gains,
derived from the sale of bonds held by the Fund for more than one year, are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Fund shares. The Code provides that the net capital gain,
for taxpayers other than corporations, generally will not be subject to federal
income taxes at a rate in excess of 28%.
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 redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject
39
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
to backup withholding. Any tax withheld as a result of backup withholding does
not constitute an additional tax, and may be claimed as a credit on the
shareholders' federal income tax return.
- --------------------------------------------------------------------------------
Description of Shares
- --------------------------------------------------------------------------------
The Fund was incorporated under the laws of the State of Maryland on
December 19, 1991 by the Articles of Incorporation. The Articles of
Incorporation authorize issuance of the Common Stock. The Articles of
Incorporation provide that the Fund shall continue without limitation of time.
COMMON STOCK
Amount
Outstanding
Exclusive of Shares
Held by Fund for Its
Amount Held Own Account as of
Shares by Fund for Its April 11,
Title of Class Authorized Own Account 1997
================================================================================
Common Stock 100,000,000 0 8,288,885
No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus.
The Fund has authorized capital of 100 million shares, all of which are
currently designated as Common Stock, par value $.001 per share. Unissued shares
of capital stock may be reclassified by the Board of Directors without a
shareholder vote into one or more classes of preferred or other stock with no
restrictions on the rights and preferences of any such classes except as may be
imposed by the 1940 Act or Maryland law.
Shares of Common Stock, when issued, are fully paid and nonassessable.
Shareholders are entitled to one vote for each share of Common Stock held for
the election of directors and other matters submitted to shareholders. There are
no preemptive rights. Each share of Common Stock is entitled to participate
equally in the net distributable assets of the Fund upon liquidation or
termination.
The Fund has no present intention of offering additional Common Stock or
any preferred stock. Other offerings of its Common Stock, if made, will require
approval of the Fund's Board of Directors. Any additional offering will be
subject to the requirements of the 1940 Act that such Common Stock may not be
issued 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 the holders of a majority of the
Fund's outstanding voting securities.
40
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
- --------------------------------------------------------------------------------
ANTI-TAKEOVER PROVISIONS
The Fund presently has provisions in its Articles of Incorporation and
Bylaws (commonly referred to as "anti-takeover" provisions) which may have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund, to cause it to engage in certain transactions or to modify its
structure.
The Board of Directors is classified into three classes, each with a term
of three years with only one class of directors standing for election in any
year. Such classification may prevent replacement of a majority of the directors
for up to a two year period. Directors may be removed from office only for cause
by vote of at least 75% of the shares entitled to be voted on the matter. In
addition, unless 70% of the Board of Directors approves the transaction, the
affirmative vote of the holders of at least 75% of the shares will be required
to authorize the Fund's conversion from a closed-end to an open-end investment
company, or generally to authorize any of the following transactions: (i)
merger, consolidation or share exchange of the Fund with or into any other
corporation; (ii) dissolution or liquidation of the Fund; (iii) sale, lease,
exchange or other disposition of all or substantially all of the assets of the
Fund; (iv) change in the nature of the business of the Fund so that it would
cease to be an investment company registered under the 1940 Act; or (v) sale,
lease or exchange to the Fund, in exchange for securities of the Fund, of any
assets of any entity or person (except assets having an aggregate fair market
value of less than $1,000,000). The affirmative vote of at least 75% of the
shares will be require to amend the Articles of Incorporation or Bylaws to
change any of the foregoing provisions.
The percentage votes required under these provisions, which are greater the
the minimum requirements under Maryland law or the 1940 Act, will make more
difficult a change in the Fund's business or management and may have the effect
of depriving shareholders of an opportunity to sell shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. The Fund's Board
of Directors, however, has considered these anti-takeover provisions and
believes they are in the best interests of shareholders.
MARKET DISCOUNT
Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium. Shares
of closed-end investment companies investing primarily in fixed income
securities tend to trade on the basis of income yield on the market price of the
shares and the market price may also be affected by trading volume, general
market conditions and economic conditions and other factors beyond the control
of the Fund. As a result, the market price of the Fund's shares may be greater
or less than the net asset value.
41
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation
and Market Discount (continued)
- --------------------------------------------------------------------------------
From March 12, 1993 through April 11, 1997, the Fund's shares have traded from a
premium of 4.66% to a market discount of 10.44%.
Some closed-end 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,
which some other closed end funds have used to address the discount. In
addition, 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.
- --------------------------------------------------------------------------------
Custodian, Transfer, and Dividend-Paying Agent, Registrar and Plan Agent
- --------------------------------------------------------------------------------
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, acts as custodian of the Fund's and has custody of all securities and
cash of the Fund. The custodian, among other things, attends to the collection
of principal and income, and payment for any collection of proceeds of
securities bought and sold by the Fund. First Data, located at One Exchange
Place, Boston, Massachusetts 02109, serves as the Fund's transfer agent,
dividend-paying agent and registrar. First Data also serves as agent in
connection with the Plan.
- --------------------------------------------------------------------------------
Reports to Shareholders
- --------------------------------------------------------------------------------
The Fund sends unaudited quarterly and audited annual reports to the
holders of its securities, including a list of investments held.
42
<PAGE>
- --------------------------------------------------------------------------------
Experts
- --------------------------------------------------------------------------------
The audited financial statements incorporated into this Prospectus have
been so included in reliance on the report of KPMG Peat Marwick LLP, independent
auditors, given on the authority of said firm as experts in auditing and
accounting.
KPMG Peat Marwick LLP, has been selected as the Fund's independent auditor
to examine and report on the Fund's financial statements and highlights for the
fiscal year ending December 31, 1997.
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
This Prospectus does not contain all of the information set forth in the
Registration Statement filed with the SEC. The complete Registration Statement
may be obtained from the SEC upon payment of the fee prescribed by its Rules and
Regulations.
----------------------
No person has been authorized to give any information or to make any
represensations not contained in this Prospectus and, if given or made, the
information or representations must not be relied upon as having been authorized
by the Fund, the Investment Manager or Smith Barney. This Prospectus does not
constitute an offer to sell or a solicitation of an offer to buy any security
other than the shares of Common Stock offered by this Prospectus, nor does it
constitute an offer to sell or a solicitation of an offer to buy the shares of
Common Stock by anyone in any jurisdiction in which the offer or solicitation
would be unlawful. Neither the delivery of this Prospectus nor any sale made
hereunder will, under any circumstances, create any implication that there has
been no change in the affairs of the Fund since the date of this Prospectus. If
any material change occurs while this Prospectus is required by law to be
delivered, however, this Prospectus will be supplemented or amended accordingly.
43
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(1) Financial Statements
Parts A and B
(a) Financial Highlights
(b) The Registrant's Annual Report for the period ended December
31, 1996 and the Independent Auditors' Report are incorporated by
reference to the definitive 30b-2 filed on March 10, 1997 as accession
number 91155-97-000138
Part C
None
(2) Exhibits:
Exhibit
Number Description
(a)(1) Articles of Incorporation of Registrant*
(2) Amended Articles of Incorporation of
Registrant*
(b) By-Laws.*
(c) Not Applicable.
(d) Form of Specimen Certificate representing shares
of
Common Stock, par value $.001 per share**
(e) Registrant's Dividend Reinvestment Plan***
(f) Not Applicable
(g)(1) Form of Investment Management Agreement.**
(2) Form of Transfer and Assumption of
Investment
Management Agreement between Registrant, Mutual
Management Corp and Smith Barney Mutual Funds
Management Inc.***
(h) Form of Underwriting Agreement.**
(i) Not Applicable.
(j) Form of Custodian Services Agreement.**
(k) Form of Transfer Agency and Registrar
Agreement***
(l)(1) Opinion and consent of Sullivan &
Cromwell.**
(2) Opinion and consent of Sullivan &
Cromwell.**
(m) Not Applicable
(n) Consent of KPMG Peat Marwick LLP (filed
herewith)
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable.
(r) Financial Data Schedule (filed herewith)
* Previously filed. by Registrant with its initial Registration
Statement (No. 33-44639) on December 19, 1991
** Previously filed by Registrant with Pre-Effective Amendment No. 3
to its Registration
Statement (No. 33-44639) on February 27, 1992
*** Previously filed by Registrant with Post-Effective Amendment
No. 1 to its Registration
Statement (No. 33-44639) on March 22, 1996
Item 25. Marketing Arrangements.
Reference is made to the Underwriting Agreement, filed as Exhibit (h)
by Registrant with Pre-Effective Amendment No. 3 to its Registration Statement
.
Item 26. Other Expense of Issuance and Distribution.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
Securities and Exchange Commission registration fees
$ 0
National Association of Securities Dealers, Inc. fee
0
American Stock Exchange listing fee
0
Blue Sky fees and expenses
0
Costs of Stock Certificates
0
Printing
6,000
Legal fees and expenses
0
Independent Auditors' fees and expenses
0
Miscellaneous
0_
Total
$6,000
Item 27. Persons Controlled by or Under Common Control.
None
Item 28. Number of Holders of Securities.
The number of record holders of Registrant as of April 11, 1997 is as
follows:
(1) (2)
Title of Class
Number of Record Holders
Shares of Common Stock, par value
$.001 per share
157
Item 29. Indemnification.
Under Registrant's Articles of Incorporation, the directors and officers
of Registrant will be indemnified to the fullest extent allowed and in the
manner provided by Maryland law and applicable provisions of the Investment
Company Act of 1940, as amended (the "1940 Act"), including advancing of
expenses incurred in connection therewith. Indemnification shall not be
provided however to any officer or director against any liability to the
Registrant or its security holders to which he or she would otherwise be
subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his or her office.
Article 2, Section 405.2 of the Maryland General Corporation Law
provides that the Articles of Incorporation of a Maryland corporation may
limit the extent to which directors or officers may be personally liable to
the Corporation or its shareholders for money damages in certain instances.
The Registrant's Articles of Incorporation provide that, to the fullest extent
permitted by Maryland law, as it may be amended or interpreted from time to
time, no director or officer of the Registrant shall be personally liable to
the Registrant or its shareholders. The Registrant's Articles of Incorporation
also provide that no amendment of the Registrant's Articles of Incorporation
or repeal of any of its provisions shall limit or eliminate any of the
benefits provided to directors and officers in respect of any act or omission
that occurred prior to such amendment or repeal.
Insofar as indemnification for liabilities under the 1933 Act may be
permitted to the directors and officers, the Registrant has been advised that
in the opinion of the Securities and Exchange Commission such indemnification
is against public policy as expressed in such Act and is therefore
unenforceable. If a claim for indemnification against such liabilities under
the 1933 Act (other than for expenses incurred in a successful defense) is
asserted against the Fund by the directors or officers in connection with the
Common Shares, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question of whether such indemnification by it is
against public policy as expressed in such Act and will be governed by the
final adjudication of such issue.
Item 30. Business and other Connections of Investment Manager.
Smith Barney Mutual Funds Management Inc. ("SBMFM") was incorporated in
1968 and is a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Travelers Group
Inc. ("Travelers"). For additional information, see "Management of the Fund"
in the Prospectus.
The list required by this Item 30 of officers and directors of SBMFM,
together with information as to any other business, profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during the past five fiscal years, is incorporated by reference to Schedules A
and D of FORM ADV filed by SBMFM pursuant to the Advisers Act (SEC File No.
801-8314).
Item 31. Location of Accounts and Records.
Each Person maintaining physical possession of accounts, books and other
documents of the Registrant required to be maintained pursuant to Section
31(a) of the 1940 Act, is listed below:
(1) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(2) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania 19103.
(3) First Data Investor Services Group, Inc.
Exchange Place
Boston, Massachusetts 02109
Item 32. Management Services.
Not Applicable.
Item 33. Undertakings.
(1) Not Applicable.
(2) Not Applicable.
(3) Not Applicable.
(4)(a) The Registrant undertakes to file, during any period in
which offers or sales are being made, a Post-Effective Amendment to the
Registration Statement:
(1) to include any prospectus required by Section 10(a)(3) of
the 1933 Act;
(2) to reflect in the prospectus any facts or events after the
effective date of the Registration Statement (or the most recent Post-
Effective Amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the formation set forth in the Registration
Statement; and
(3) to include any material information with respect to the plan
of distribution not previously disclosed in this Registration Statement or any
material change to such information in this Registration Statement.
(4)(b) Registrant undertakes that, for the purpose of determining
any liability under the 1933 Act, each subsequent Post-Effective Amendment
shall be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of those securities at that time shall be
deemed to be the initial bona fide offering thereof.
(4)(c) Not Applicable.
(5) Not Applicable.
(6) Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
and the Investment Company Act of 1940, as amended, the Registrant has duly
caused this Post-Effective Amendment No. 2 to its Registration Statement on
Form N-2 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 28th day of
April, 1997.
SMITH BARNEY INTERMEDIATE MUNICIPAL FUND, INC.
By /s/ HEATH B. MCLENDON
Heath B. McLendon
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Post-Effective Amendment No. 2 to the Registration Statement has been
signed by the following persons in the capacities and on the dates indicated:
signature Title Date
/s/ Heath B. McLendon Chairman of the Board and
Heath B. McLendon Chief Executive Officer April 28, 1997
/s/ Jessica Bibliowicz President and Director April 28,
1997
Jessica Bibliowicz
/s/ Joseph H. Fleiss* Director April 28,
1997
Joseph H. Fleiss
/s/ Donald R. Foley* Director April 28,
1997
Donald R. Foley
____________________ Director April 28,
1997
Paul Hardin
/s/ Francis P. Martin* Director April 28,
1997
Francis P. Martin
/s/ Roderick C. Rasmussen* Director April 28,
1997
Roderick C. Rasmussen
/s/ John P. Toolan* Director April
28, 1997
John P. Toolan
/s/ Lewis E. Daidone Senior Vice President and
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer) April 28, 1997
*By: /s/Lewis E. Daidone
Lewis E. Daidone
Pursuant to Power of Attorney.
SMITH BARNEY INTERMEDIATE MUNICIPAL FUND, INC.
EXHIBIT INDEX
Exhibit
Number Description of
Exhibit
(n) Consent of KPMG Peat Marwick LLP
(r) Financial Data Schedule
Cover Letter
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Smith Barney Intermediate Municipal Fund, Inc.:
We consent to the use of our report dated February 5, 1997 with respect to
Smith Barney Intermediate Municipal Fund, Inc. incorporated herein by
reference and to the references to our Firm under the headings "Financial
Highlights" in the Prospectus and "Counsel and Auditors" in the Statement of
Additional Information.
KPMG Peat Marwick LLP
New York, New York
April 25, 1997
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000882300
<NAME> SMITH BARNEY INTERMEDIATE MUNICIPAL FUND, INC.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 81,268,539
<INVESTMENTS-AT-VALUE> 85,889,675
<RECEIVABLES> 1,501,595
<ASSETS-OTHER> 34,117
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 87,425,387
<PAYABLE-FOR-SECURITIES> 456,626
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 154,186
<TOTAL-LIABILITIES> 610,812
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 82,899,402
<SHARES-COMMON-STOCK> 8,288,885
<SHARES-COMMON-PRIOR> 8,288,885
<ACCUMULATED-NII-CURRENT> 3,109
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (709,072)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 4,621,136
<NET-ASSETS> 86,814,575
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 5,488,940
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</TABLE>
