As filed with the Securities and Exchange Commission on April 25, 1997
Securities Act File No. 33-48166
Investment Company Act File No. 811-6688
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. 4 x
(Check appropriate box or boxes.)
__________________
Smith Barney 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. 33-48166).
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 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.
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Prospectus April 30, 1997
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Smith Barney Municipal Fund, Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Smith Barney 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
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Prospectus (continued) April 30, 1997
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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 July 31, 1992 in an initial public offering at a price of $15.00 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,
"SBT."
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
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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
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Investment Restrictions 26
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Share Price Data 28
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Management of the Fund 29
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Securities Transactions and Turnover 34
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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 39
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Certain Provisions of the Articles of Incorporation and
Market Discount 40
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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 42
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Additional Information 43
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Appendix A A-1
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Appendix B B-1
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3
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Prospectus Summary
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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 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 trade 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 SBT
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
4
<PAGE>
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Prospectus Summary (continued)
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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
Financial 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 0.70% 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 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
5
<PAGE>
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Prospectus Summary (continued)
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should not be considered a vehicle for short-term trading. All or a portion of
the Fund's dividends may be subject to the 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 municipal
bond closed-end funds may trade at or near net asset value. 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 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."
6
<PAGE>
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Prospectus Summary (continued)
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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. 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.
While the Fund does not concentrate its investments in any one industry as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"), the
Fund may invest more than 25% of its assets in the following types of municipal
securities: hospital and other health care facilities obligations, housing
agency revenue obligations, airport revenue obligations, industrial development
obligations (including pollution control obligations), electric utility
obligations, water and sewer obligations, university and college revenue
obligations, student loan obligations, bridge authority and toll road
obligations, resource recovery obligations, or in issuers located in the same
state. If the Fund so invests more than 25% of its assets in such securities,
the Fund will be more susceptible to economic, business, political, regulatory
and other developments generally affecting issuers of such types of municipal
securities.
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 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. See "Investment Objective and Management Policies --
Investment Techniques -- Borrowing and Leverage."
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
7
<PAGE>
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Prospectus Summary (continued)
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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 amount
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 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."
8
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Fund Expenses
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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 0.70%
Other Expenses* 0.20
================================================================================
TOTAL ANNUAL OPERATING EXPENSES* 0.90%
================================================================================
* "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 Municipal Fund, Inc. 1 year 3 years 5 years 10 years
================================================================================
$9 $29 $50 $111
================================================================================
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
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Financial Highlights
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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 Municipal Fund, Inc. 1996 1995 1994 1993 1992(a)(b)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $ 15.75 $ 14.30 $ 15.85 $ 14.81 $ 15.00
- ------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.84 0.83 0.84 0.84 0.32*
Net realized and unrealized gain (loss)
on investments (0.32) 1.47 (1.54) 1.00 (0.21)
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Total Income (Loss) from Operations 0.52 2.30 (0.70) 1.84 0.11
- ------------------------------------------------------------------------------------------------------
Less Distributions:
Dividends from net investment income (0.85) (0.85) (0.85) (0.80) (0.30)
- ------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 15.42 $ 15.75 $ 14.30 $ 15.85 $ 14.81
- ------------------------------------------------------------------------------------------------------
Total Return, Based on Market Value 11.02% $ 15.83% (12.96)% 14.30% (3.47)%++
- ------------------------------------------------------------------------------------------------------
Total Return, Based on Net Asset Value 3.96% 17.11% (4.09)% 12.82% 0.81%++
- ------------------------------------------------------------------------------------------------------
Net Assets, End of Year (000s) $ 62,012 $ 63,341 $ 57,508 $ 63,724 $ 59,561
- ------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 0.90% 0.86% 0.86% 0.85% 0.56%+*
Net investment income 5.45 5.48+ 5.59 5.42 5.22+
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Fund Turnover Rate 30% 21% 35% 23% 36%
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Market Price at End of Year $ 14.38 $ 13.75 $ 12.63 $ 15.38 $ 14.25
======================================================================================================
</TABLE>
(a) Based on the weighted average shares outstanding for period.
(b) For the period from July 31, 1992 (commencement of operations) to December
31, 1992.
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
* The Investment Manager waived a portion of its fees for the period
from July 31, 1992 to December 31, 1992. If such fees were not waived,
the per share decrease in net investment income would have been $0.014,
and the ratio of expenses to average net assets
would have been 0.79% (annualized).
10
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The Fund
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The Fund is a diversified, closed-end management investment company that
seeks a high level of current income exempt from ordinary Federal income tax
consistent with prudent investing. The Fund, which was incorporated under the
laws of the State of Maryland on May 19, 1992, 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.
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The Offering
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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.
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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.
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Investment Objectives and Management Policies
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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 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
11
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Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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). The Fund will not
invest in any municipal securities that are rated lower than BBB by S&P or Baa
by Moody's. 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.
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
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Investment Objectives and Management Policies (continued)
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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
participations 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
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Investment Objectives and Management Policies (continued)
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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 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
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Investment Objectives and Management Policies (continued)
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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 remarking 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 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 the
following types of municipal securities: hospital and other health care
facilities obligations, housing agency revenue obligations, airport revenue
obligations, electric utility obligations, water and sewer obligations,
university and college revenue obligations, student loan obligations, bridge
authority and toll road obligations and resource recovery obligations. The Fund
will invest more than 25% of its asset in such types of municipal securities if
the Investment Manager determines the yields available from such obligations
justify the additional risks associated with a large investment in such
obligations. Although such obligations could be supported by the credit of
governmental users, or by the credit of nongovernmental users engaged in a
number of industries, economic, business, political and other developments
generally affecting the revenues of such users (for example proposed legislation
or pending court decisions
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Investment Objectives and Management Policies (continued)
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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. 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. 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 ordinary 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 Fund may: engage in interest rate and other hedging and risk management
transactions; purchase and sell options (including swaps, caps, floors and
collars) on
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Investment Objectives and Management Policies (continued)
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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 in hedging transactions as a
means of providing limited protection against 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
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Investment Objectives and Management Policies (continued)
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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 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
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Investment Objectives and Management Policies (continued)
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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.
Gains, if any, recognized or deemed to be recognized 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
3311/43% 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 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. See "Description of
Shares." The Fund will only utilize leverage when there is an expectation that
will benefit the Fund or the
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Investment Objectives and Management Policies (continued)
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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. Leverage creates an opportunity for increased returns for the
holders of Common Stock, but creates special risks at the same time, including
the likelihood of greater volatility of the net asset value and market value of
the Common Stock, and the risk that fluctuations in the short-term dividend
rates of the preferred stock may affect the yield to the holders of Common
Stock. Similarly, since any decline in the net asset value of the Fund's
investments would be borne entirely by the holders of Common Stock, the effect
of leverage in a declining market would result in a greater decrease in net
asset value to the holders of Common Stock than if the Fund were not leveraged,
which would likely be reflected in a greater decline in the market price of the
Common Stock. See "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. 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.
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
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Investment Objectives and Management Policies (continued)
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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. A large percentage of
the Fund's assets segregated to cover hedging transactions may impair the Fund's
ability to meet current obligations and may limit the Fund's flexibility to
manage its assets.
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
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Investment Objectives and Management Policies (continued)
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of the hedged security, at the same time the use of these contracts could tend
to 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.
Gains, if any, recognized or deemed to be recognized by the Fund from its
hedging activities, will be taxable income of the Fund. See "Taxation" and
"Dividends and Distributions; Dividend Reinvestment Plan."
When-Issued and Delayed Delivery Transactions. The Fund may also purchase
municipal securities on a "when-issued" and "delayed delivery" basis and may
purchase or sell municipal securities on a "delayed delivery" basis in order to
hedge against anticipated changes in interest rates and prices. 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
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
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Investment Objectives and Management Policies (continued)
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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
commitments, 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.
When the Fund is the seller in such a transaction,
it will cover its commitment to deliver the security by maintaining positions in
portfolio securities that would serve to satisfy or offset the risk of such
obligations. 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 comparable quality as, municipal securities that are
rated investment
23
<PAGE>
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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 certain types of municipal securities or in obligations of issuers
located in the same state.
3. Issue senior securities as defined in the 1940 Act, other than
preferred stock, except to the extent such issuance might be involved with
respect to borrowings described below or with respect to transactions
involving futures contracts or the writing of options.
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 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 deposit of initial or variation margin in connection with hedging
and risk management transactions.
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.
26
<PAGE>
- --------------------------------------------------------------------------------
Investment Restrictions (continued)
- --------------------------------------------------------------------------------
8. Act as an underwriter of securities, except to the extent that the Fund
may 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, except to the extent that the municipal
securities the Fund may invest in are considered to be interests in real
estate 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).
13. Purchase or sell commodities or commodity contracts, except that the
Fund may purchase or sell financial futures contracts and related options
thereon.
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 "SBT."
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 $14.00 - 12.63 $15.02 - 14.29 $13.50 $15.01 (10.06)%
6/30/95 14.38 - 13.25 15.53 - 14.96 13.50 15.19 (11.13)
9/30/95 14.00 - 13.38 15.54 - 15.12 14.00 15.41 (9.15)
12/31/95 14.50 - 13.75 15.81 - 15.43 13.75 15.75 (12.70)
3/31/96 14.75 - 14.00 15.85 - 15.25 14.38 15.36 (6.38)
6/30/96 14.50 - 13.50 15.37 - 15.06 13.88 15.23 (8.86)
9/30/96 14.38 - 13.50 15.47 - 15.04 14.25 15.30 (6.86)
12/31/96 14.88 - 13.75 15.53 - 15.27 14.38 15.42 (6.74)
================================================================================
As of April 11, 1997, the price per share of Common Stock as quoted on the
AMEX was $14, representing a 7.96% discount from the Common Stock's net asset
value calculated on that day.
Since the Fund's commencement of operations, the Fund's Common Stock has
traded in the market at prices that were at times above, but generally were
below, net asset value.
28
<PAGE>
- --------------------------------------------------------------------------------
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:
Positions Held Principal Occupations
Name and Address with the Fund During Past Five Years and Age
================================================================================
*+Heath B. McLendon Chairman of the Managing Director of Smith
388 Greenwich Street Board of Directors Barney; Director of forty-one
New York, NY 10013 and Chief Executive investment companies
Officer 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.
*+Jessica Bibliowicz Director and Executive Vice President of
388 Greenwich Street President 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 Diector of Citicorp
Securities Co., Inc.; 79.
+Donald R. Foley Director Retired; Director of ten
3668 Freshwater Drive investment companies
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.
29
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Positions Held Principal Occupations
Name and Address with the Fund During Past Five Years and Age
================================================================================
+Francis P. Martin Director Practicing physician; Director
2000 North Village Ave. of ten investment companies
Rockville Centre, NY 11570 associated with Smith Barney.
Formerly President of the
Nassau Physicians' Fund, Inc.;
72.
+Roderick C. Rasmussen Director Investment Counselor; Director
81 Mountain Road of ten investment companies
Verona, NJ 07044 associated with Smith Barney.
Formerly Vice President of
Dresdner and Company Inc.
(Investment counselors); 70.
+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 Managing Director of Smith
388 Greenwich Street President, Chief Barney, Senior Vice President
New York, NY 10013 Financial and and Treasurer of other
Accounting Officer investment companies
and Treasurer 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 Director of Smith Barney in
388 Greenwich Street Assistant Secretary the Asset Management Division
New York, NY 10013 and Controller and Assistant
Secretary of certain other
investment companies
associated with Smith Barney;
37.
30
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
Positions Held Principal Occupations
Name and Address with the Fund During Past Five Years and Age
================================================================================
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 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 761+ 0 58,300 10
Donald R. Foley 761+ 0 58,300 10
Paul Hardin 859 0 73,850 12
Francis P. Martin 761+ 0 58,300 10
Heath B. McLendon* 0 0 0 41
Roderick C. Rasmussen 761 0 58,300 10
John P. Toolan 661+ 0 0 10
C. Richard Youngdahl 761 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: $30, Donald R. Foley: $30, Francis P.
Martin: $761 and John P. Toolan: $661.
++ 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.
31
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
At the close of business on April 11, 1997, 3,866,015 shares of Common
Stock or 96.17% 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 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 .70% 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
32
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
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 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 $421,105, $427,954 and $432,659, 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, shareholder 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. 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. 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 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
35
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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 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
36
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
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'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 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.
37
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value (continued)
- --------------------------------------------------------------------------------
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 of 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.
- --------------------------------------------------------------------------------
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 "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
38
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
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 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 May
19, 1992 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.
39
<PAGE>
- --------------------------------------------------------------------------------
Description of Shares (continued)
- --------------------------------------------------------------------------------
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 4,021,162
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.
- --------------------------------------------------------------------------------
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
40
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
(continued)
- --------------------------------------------------------------------------------
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 required
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
than 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. From March 12, 1993 through April 11, 1997,
the Fund's shares have traded from a premium of 1.22% to a market discount of
12.7%.
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.
41
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
(continued)
- --------------------------------------------------------------------------------
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 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.
- --------------------------------------------------------------------------------
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.
KMPG 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.
42
<PAGE>
- --------------------------------------------------------------------------------
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
representations 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
<PAGE>
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S, S&P AND FITCH RATINGS
DESCRIPTION OF MOODY'S MUNICIPAL BOND RATINGS:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality,
carry the smallest degree of investment risk and are generally referred to as
`"gilt edge." Interest payments with respect to these bonds are protected by a
large or by an exceptionally stable margin, and principal is secure. Although
the various protective elements applicable to these bonds are likely to change,
those changes are most unlikely to impair the fundamentally strong position of
these bonds.
Aa -- Bonds that are rated Aa are judged to be of high quality by all
standards and together with the Aaa group comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or other elements may be
present that make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds that are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest with respect to these bonds are considered
adequate, but elements may be present that suggest a susceptibility to
impairment sometime in the future.
Baa -- Bonds rated Baa are considered to be medium grade obligations, that
is they are neither highly protected nor poorly secured. Interest payment and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. These bonds lack outstanding investment characteristics and may
have speculative characteristics as well.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B. The modifier 1 indicates that the security
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates that the issue ranks in the
lower end of its generic rating category.
A-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
DESCRIPTION OF MOODY'S MUNICIPAL NOTE RATINGS:
Moody's ratings for state and municipal notes and other short-term loans
are designated Moody's Investment Grade (MIG) and for variable demand
obligations are designated Variable Moody's Investment Grade (VMIG). This
distinction recognizes the differences between short-term credit risk and
long-term risk. Loans bearing the designation MIG 1/VMIG 1 are of the best
quality, enjoying strong protection from established cash flows of funds for
their servicing or from established and broad-based access to the market for
refinancing, or both. Loans bearing the description MIG 2/VMIG 2 are of high
quality, with margins of protection ample, although not as large as the
preceding group. Loans bearing the designation MIG 3/VMIG 3 are of favorable
quality, with all security elements accounted for but lacking the undeniable
strength of the preceding grades. Market access for refinancing, in particular,
is likely to be less well established.
DESCRIPTION OF MOODY'S COMMERCIAL PAPER RATINGS:
The rating Prime-1 is the highest commercial paper rating assigned by
Moody's. Issuers rated Prime-1 (or related supporting institutions) are
considered to have a superior capacity for repayment of short-term promissory
obligations. Issuers rates Prime-2 (or related supporting institutions) are
considered to have a strong capacity for repayment of short-term promissory
obligations, normally evidenced by many of the characteristics of issuers rated
Prime-1 but to a lesser degree. Earnings trends and coverage ratios, while
sound, will be more subject to variation. Capitalization characteristics, while
still appropriate, may be more affected by external conditions. Ample
alternative liquidity is maintained.
DESCRIPTION OF S&P MUNICIPAL BOND RATINGS:
AAA -- These bonds are the obligations of the higher quality and have the
strongest capacity for timely payment of debt service.
General Obligation Bonds rated AAA -- In a period of economic stress, the
issuers of these bonds will suffer the smallest declines in income and will be
least susceptible to autonomous decline. Debt burden is moderate. A strong
revenue structure appears more than adequate to meet future expenditure
requirements. Quality of management appears superior.
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
Revenue Bonds Rated AAA -- Debt service coverage with respect to these
bonds has been, and is expected to remain, substantial. Stability of the pledged
revenues is also exceptionally strong due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic security provisions
(including rate covenant, earnings test for issuance of additional bonds, debt
service reserve requirements) are rigorous. There is evidence of superior
management.
AA -- The investment characteristics of bonds in this group are only
slightly less marked than those of the prime quality issues. Bonds rated AA have
the second strongest capacity for payment of debt service.
A -- Principal and interest payments on bonds in this category are
regarded as safe although the bonds are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than bonds in higher
rated categories. This rating describes the third strongest capacity for payment
of debt service.
General Obligation Bonds Rated A -- There is some weakness, either in the
local economic base, in debt burden, in the balance between revenues and
expenditures, or in quality of management. Under certain adverse circumstances,
any one such weakness might impair the ability of the issuer to meet debt
obligations at some future date.
Revenue Bonds Rated A -- Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could show some variations
because of increased competition or economic influences on revenues. Basic
security provisions, while satisfactory, are less stringent. Management
performance appearance appears adequate.
BBB -- The bonds in this group are regarded as having an adequate capacity
to pay interest and repay principal. Whereas bonds in this group normally
exhibit adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories. Bonds
rated BBB have the fourth strongest capacity or payment of debt service.
S&P's letter ratings may be modified by the addition of a plus or a minus
sign, which is used to show relative standing within the major rating
categories, except in the AAA category.
A-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
DESCRIPTION OF S&P MUNICIPAL NOTE RATINGS:
Municipal notes with maturities of three years or less are usually given
note ratings (designated SP1, -2 or -3) to distinguish more clearly the credit
quality of notes as compared to bonds. Notes rated SP-1 have a very strong or
strong capacity to pay principal and interest. Those issues determined to
possess overwhelming safety characteristics are given the designation of SP-1+.
Notes rated SP-2 have a satisfactory capacity to pay principal and interest.
DESCRIPTION OF S&P COMMERCIAL PAPER RATINGS:
Commercial paper rated A-1 by S&P indicates that the degree of safety
regarding timely payment is either overwhelming or very strong. Those issues
determined to possess overwhelming safety characteristics are denoted A-1+.
Capacity for timely payment on commercial paper rated A-2 is strong, but the
relative degree of safety is not as high as for issues designated A-1.
DESCRIPTION OF FITCH MUNICIPAL BOND RATINGS:
AAA -- Bonds rated AAA by Fitch are considered to be investment grade and
of the highest credit quality. The obligor has an exceptionally strong ability
to pay interest and repay principal, which is unlikely to be affected by
reasonably foreseeable events.
AA -- Bonds rated AA by Fitch are considered to be investment grade and of
very high credit quality. The obligor's ability to pay interest and repay
principal is very strong, although not quite as strong as bonds rated AAA.
Because bonds rated in the AAA and AA categories are not significantly
vulnerable to foreseeable future developments, short-term debt of these issues
is generally rated F-1 + by Fitch.
A -- Bonds rated A by Fitch are considered to be investment grade and of
high credit quality. The obligor's ability to pay interest and repay principal
is considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings.
BBB -- Bonds rated BBB by Fitch are considered to be investment grade and
of satisfactory credit quality. The obligor's ability to pay interest and repay
principal is considered to be adequate. Adverse changes in economic conditions
and circumstances, however, are more likely to have adverse consequences on
these bonds, and therefore impair timely payment. The likelihood that the
ratings of these bonds will fall below investment grade is higher than for bonds
with higher ratings.
A-4
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
Plus and minus signs are used by Fitch to indicate the relative position
of a credit within a rating category. Plus and minus signs, however, are not
used in the AAA category.
DESCRIPTION OF FITCH SHORT-TERM RATINGS:
Fitch's short-term ratings apply to debt obligations that are payable on
demand or have original maturities of generally up to three years, including
commercial paper, certificates of deposit, medium-term notes, and municipal and
investment notes.
The short-term rating places greater emphasis than a long-term rating on
the existence of liquidity necessary to meet the issuer's obligations in a
timely manner.
Fitch's short-term ratings are as follows:
F-1+ -- Issues assigned this rating are regarded as having the strongest
degree of assurance for timely payment.
F-1 -- Issues assigned this rating reflect an assurance of timely payment
only slightly less in degree than issues rated F-1+.
F-2 -- Issues assigned this rating have a satisfactory degree of assurance
for timely payment but the margin of safety is not as great as for issues
assigned F-1 + and F-1 ratings.
F-3 -- Issues assigned this rating have characteristics suggesting that
degree of assurance for timely payment is adequate, although near-term adverse
changes could cause these securities to be rated below investment grade.
LOC -- The symbol LOC indicates that the rating is based on a letter of
credit issued by a commercial bank.
A-5
<PAGE>
- --------------------------------------------------------------------------------
Appendix B
- --------------------------------------------------------------------------------
OPTIONS AND FUTURES
General. The Fund may engage in futures and options transactions in
accordance with its investment objective and policies. The Fund may engage in
such transactions if it appears advantageous to the Investment Manager to do so
in order to pursue its investment objective, to hedge against the effects of
market conditions and to stabilize the value of its assets. The Investment
Manager may also decide not to engage in any of these investment practices. The
use of futures and options, and the possible benefits and attendant risks are
discussed below, along with information concerning certain other investment
policies and techniques.
Financial Futures Contracts. The Fund may enter into financial futures
contracts for the future delivery of a financial instrument, such as a security,
or the cash value of a securities index. This investment technique is designed
primarily to hedge (i.e., protect) against anticipated future changes in market
conditions which otherwise might adversely affect the value of securities which
the Fund holds or intends to purchase. A "sale" of a futures contract means the
undertaking of a contractual obligation to deliver the securities, or the cash
value of an index, called for by the contract at a specified price during a
specified delivery period. A "purchase" of a futures contract means the
undertaking of a contractual obligation to acquire the securities, or cash value
of an index, at a specified price during a specified delivery period. At the
time of delivery, in the case of fixed income securities pursuant to the
contract, adjustments are made to recognize differences in value arising from
the delivery of securities with a different interest rate than that specified in
the contract. In some cases, securities called for by a futures contract may not
have been issued at the time the contract was written.
Although some financial futures contracts by their terms call for the
actual delivery or acquisition of securities, in most cases the contractual
commitment is closed out before delivery without having to make or take delivery
of the security. The offsetting of a contractual obligation is accomplished by
purchasing (or selling, as the case may be) on a commodities exchange an
identical futures contract calling for delivery in the same period. Such a
transaction cancels the obligation to make or take delivery of the securities.
All transactions in the futures market are made, offset or fullfilled through a
clearing house associated with the exchange on which the contracts are traded.
The Fund will incur brokerage fees when it purchases or sells contracts, and
will be required to maintain margin deposits. Futures contracts entail risk. If
the Investment Manager's judgment about the general direction of securities
markets or interest rates is wrong, the Fund's overall performance may be poorer
than if the Fund had not entered into such contracts.
There may be an imperfect correlation between movements in prices of
futures contracts and portfolio securities being hedged. In addition, the market
prices of
B-1
<PAGE>
- --------------------------------------------------------------------------------
Appendix B (continued)
- --------------------------------------------------------------------------------
futures contracts may be affected by certain factors. If participants in the
futures market elect to close out their contracts through offsetting
transactions rather than meet margin requirements, distortions in the normal
relationship between the securities and futures markets could result. Price
distortions could also result if investors in futures contracts decide to make
or take delivery of underlying securities rather than engage in closing
transactions due to the resultant reduction in the liquidity of the futures
market. In addition, because from the point of view of speculators, the margin
requirements in the futures market may be less onerous than margin requirements
in the cash market, increased participation by speculators in the futures market
could cause temporary price distortions. Due to the possibility of price
distortions in the futures market and because of the imperfect correlation
between movements in the prices of securities and movements in the prices of
futures contracts, a correct forecast of market trends by the Investment Manager
may still not result in a successful hedging transaction. If this should occur,
the Fund could lose money on the financial futures contracts and also on the
value of its portfolio securities.
Options on Financial Futures Contracts. The Fund may purchase and write
call and put options on financial futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time during the period specified in the terms of the option. Upon exercise, the
writer of the option delivers the futures contract to the holder at the exercise
price. The Fund would be required to deposit with its custodian initial margin
and maintenance margin with respect to put and call options on futures contracts
written by it. Options on futures contracts involve risks similar to those risks
relating to transactions in financial futures contracts described above. Also,
an option purchased by the Fund may expire worthless, in which case the Fund
would lose the premium paid therefor.
Options on Securities. The Fund may write covered call options so long as
it owns securities which are acceptable for escrow purposes and may write
secured put options, which means that so long as the Fund is obligated as a
writer of a put option, it will invest an amount, not less than the exercise
price of the put option, in securities consistent with the Fund's investment
objective and policies and restrictions on investment. See "Investment Objective
and Management Policies" and "Investment Restrictions." A call option gives the
purchaser the right to buy, and the writer the obligation to sell, the
underlying security at the exercise price during the period specified in the
terms of the option. A put option gives the purchaser the right to sell, and the
writer the obligation to buy, the underlying security at the exercise price
during the period specified in the terms of the option. The premium received for
writing an option will reflect, among other things, the current market price of
the underlying security, the relationship of the exercise price to the market
price, the price volatility of the underlying security, the option period,
B-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix B (continued)
- --------------------------------------------------------------------------------
supply and demand and interest rates. The Fund may write or purchase spread
options, which are options for which the exercise price may be a fixed dollar
spread or yield spread between the security underlying the option and another
security that is used as a benchmark. The exercise price of an option may be
below, equal to or above the current market value of the underlying security at
the time the option is written. The buyer of a put who also owns the related
security is protected by ownership of a put option against any decline in that
security's price below the exercise price, less the amount paid for the option.
At times the Fund may wish to establish a position in a security upon which call
options are available. By purchasing a call option on such security the Fund
would be able to fix the cost of acquiring the security, this being the cost of
the call plus the exercise price of the option. This procedure also provides
some protection from an unexpected downturn in the market, because the Fund is
only at risk for the amount of the premium paid for the call option which it
can, if it chooses, permit to expire.
Options on Securities Indices. The Fund also may purchase and write call
and put options on securities indices. 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 a security 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 exercise price of the option. This amount of cash is equal to the
difference between the closing price of the index and the exercise price of the
option. The writer of the option is obligated, in return for the premium
received, to make delivery of this amount. Unlike options on securities (which
require, upon exercise, delivery of the underlying security), settlements of
options on securities indices, upon exercise thereof, are in cash, and the gain
or loss of an option on an index depends on price movements in the market
generally (or in a particular industry or segment of the market on which the
underlying index base) rather than price movements in individual securities, as
is the case with respect to options on securities.
When the Fund writes an option on a securities index, it will be required
to deposit with its custodian eligible securities equal in value to 100% of the
exercise price in the case of a put, or the contract's value in the case of a
call. In addition, where the Fund writes a call option on a securities index at
a time when the contract value exceeds the exercise price, the Fund will
segregate, until the option expires or is closed out, cash or cash equivalents
equal in value to such excess.
Options on securities and index options involve risks similar to those
risks relating to transactions in financial futures described above. Also, an
option
B-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix B (continued)
- --------------------------------------------------------------------------------
purchased by the Fund may expire worthless, in which case the Fund would lose
the premium paid therefor.
Over-the-Counter Options. As previously indicated in this Prospectus (see
"Investment Objectives and Management Policies -- Investment Techniques"), the
Fund may deal in OTC options. The Fund understands the position of the staff of
the SEC to be that purchased OTC options and the assets used as "cover" for
written OTC options are illiquid securities. The Fund and the Investment Manager
disagree with this position and have found the dealers with which they engage in
OTC options transactions generally agreeable to and capable of entering into
closing transactions. The Fund has adopted procedures for engaging in OTC
options for the purpose of reducing any potential adverse impact of such
transactions upon the liquidity of the Fund's portfolio.
As part of these procedures the Fund will only engage in OTC options
transactions with respect to U.S. government securities with primary dealers
that have been specifically approved by the Board of Directors of the Fund. The
Fund will engage in OTC options transactions with respect to municipal
securities only with dealers that have been specifically approved by the Board
of Directors. The Fund and its Investment Manager believe that the approved
dealers should be agreeable and able to enter into closing transactions as
necessary and, therefore, present minimal credit risks to the Fund. The Fund
anticipates entering into written agreements with those dealers to whom the Fund
may sell OTC options, pursuant to which the Fund would have the absolute right
to repurchase the OTC options from such dealers at any time at a price with
respect to U.S. Government securities determined pursuant to a formula set forth
in certain no action letters published by the SEC staff. The Fund will not
engage in OTC options transactions if the amount invested by the Fund in OTC
options, plus, with respect to OTC options written by the Fund, the amounts
required to be treated as illiquid pursuant to the terms of such letters (and
the value of the assets used as cover with respect to OTC option sales which are
not within the scope of such letters), plus the amount invested by the Fund in
illiquid securities, would exceed 25% of the Fund's total assets. OTC options on
securities other than U.S. Government securities, including options on municipal
securities, may not be within the scope of such letters and, accordingly, the
amount invested by the Fund in OTC options on such other securities and the
value of the assets used as cover with respect to OTC options sales regarding
such non-U.S. Government securities will be treated as illiquid and subject to
the 25% limitation on the Fund's assets which may be invested in illiquid
securities.
Regulatory Restrictions. To the extent required to comply with applicable
SEC releases and staff positions, when purchasing a futures contract or writing
a put option, the Fund will maintain, in a segregated account, cash or liquid
high-grade securities equal to the value of such contracts.
B-4
<PAGE>
- --------------------------------------------------------------------------------
Appendix B (continued)
- --------------------------------------------------------------------------------
The Fund will not enter into a futures contract or purchase an option
thereon if immediately thereafter the initial margin deposits for futures
contracts held by the Fund plus premiums paid by it for open options on futures
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 will not engage in transactions in financial futures contracts or options
thereon for speculation, but only to attempt to hedge against changes in market
conditions affecting the values of securities which the Fund holds or intends to
purchase.
Accounting and Tax Considerations. When the Fund writes an option, an
amount equal to the premium received by it is included in the Fund's Statement
of Assets and Liabilities as a liability. The amount of the liability is
subsequently marked to market to reflect the current market value of the option
written. When the Fund purchases an option, the premium paid by the Fund is
recorded as an asset and is subsequently adjusted to the current market value of
the option.
In the case of a regulated futures contract purchased or sold by the Fund,
an amount equal to the initial margin deposit is recorded as an asset. The
amount of the asset is subsequently adjusted to reflect changes in the amount of
the deposit as well as changes in the value of the contract.
Certain listed options and futures contracts are considered "section 1256
contracts" for Federal income tax purposes. In general, gain or loss realized by
the Fund on section 1256 contracts will be considered 60% long term and 40%
short term capital gain or loss. Also, section 1256 contracts held by the Fund
at the end of each taxable year (and at October 31 for purposes of calculating
the excise tax) will be "marked to market", that is, treated for Federal income
tax purposes as though sold for fair market value on the last business day of
such taxable year. The Fund can elect to exempt its section 1256 contracts which
are part of a "mixed straddle" (as described below) from the application of
section 1256.
Gain or loss realized by the Fund upon the expiration or sale of certain
over-the-counter put and call options held by the Fund will be either long term
or short term capital gain or loss depending upon the Fund's holding period with
respect to such option. However, gain or loss realized upon the expiration or
closing out of such options that are written by the Fund will be treated as
short term capital gain or loss. In general, if the Fund exercises an option, or
an option that the Fund has written is exercised, gain or loss on the option
will not be separately recognized, but the premium received or paid will be
included in the calculation of gain or loss upon disposition of the property
underlying the option.
Any security, option or futures contract, delayed delivery transaction, or
other position entered into or held by the Fund in conjunction with any other
position held by the Fund may constitute a "straddle" for Federal income tax
purposes. A straddle of which at least one, but not all, the positions are
section 1256 contracts
B-5
<PAGE>
- --------------------------------------------------------------------------------
Appendix B (continued)
- --------------------------------------------------------------------------------
will constitute a "mixed straddle". In general, straddles are subject to certain
rules that may affect the character and timing of the Funds' gains and losses
with respect to straddle positions by requiring, among other things, that loss
realized on disposition of one position of a straddle be deferred to the extent
of any unrealized gain in an offsetting position until such position is disposed
of; that the Fund's holding period in certain straddle positions not begin until
the straddle is terminated (possibly resulting in gain being treated as short
term capital gain rather than long term capital gain); and that losses
recognized with respect to certain straddle positions, that otherwise constitute
short term capital losses, be treated as long term capital losses. Different
elections are available to the Fund which may mitigate the effects of the
straddle rules, particularly with respect to mixed straddles.
B-6
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SMITH BARNEY
------------
A Member of TravelersGroup [LOGO]
Smith
Barney
Municipal
Fund, Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD0620 4/97
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.
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 91155-97-000139.
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. 33-48166) on May 27, 1992
** Previously filed by Registrant with Pre-Effective Amendment
No. 2 to its Registration
Statement (No. 33-48166) on July 30, 1992
*** Previously filed by Registrant with Post-Effective
Amendment No. 1 to its Registration
Statement (No. 33-48166) on March 21, 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
97
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 25th day of April, 1997.
SMITH BARNEY 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 25,
1997
/s/ Jessica Bibliowicz President and Director April
25, 1997
Jessica Bibliowicz
/s/ Joseph H. Fleiss* Director April
25, 1997
Joseph H. Fleiss
/s/ Donald R. Foley* Director April
25, 1997
Donald R. Foley
____________________ Director April
25, 1997
Paul Hardin
/s/ Francis P. Martin* Director April
25, 1997
Francis P. Martin
/s/ Roderick C. Rasmussen* Director April
25, 1997
Roderick C. Rasmussen
/s/ John P. Toolan* Director
April 25, 1997
John P. Toolan
/s/ Lewis E. Daidone Senior Vice President and
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer) April 25,
1997
*By: /s/Lewis E. Daidone
Lewis E. Daidone
Pursuant to Power of Attorney.
SMITH BARNEY 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
the Smith Barney Municipal Fund, Inc.:
We consent to the use of our report dated February 7, 1997 with respect to
the Smith Barney Municipal Fund, Inc. incorporated herein by reference and
to the reference to our Firm under the heading "Financial Highlights" in the
Prospectus.
KPMG Peat Marwick LLP
New York, New York
April 23, 1997
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
Auditors' Consent
To the Shareholders and Board of Directors of
the Smith Barney Municipal Fund, Inc.:
We consent to the use of our report dated February 7, 1997 with respect to
the Smith Barney Municipal Fund, Inc. incorporated herein by reference and
to the reference to our Firm under the heading "Financial Highlights" in the
Prospectus.
KPMG Peat Marwick LLP
New York, New York
April 23, 1997
</TABLE>
