Smith Barney
--------------------
MUNICIPAL FUND, INC.
Annual Report
December 31, 1996
<PAGE>
- ---------------------------------
Smith Barney Municipal Fund, Inc.
- ---------------------------------
Dear Shareholder:
We are pleased to provide you with the annual report for the Smith Barney
Municipal Fund, Inc. for the year ended December 31, 1996. During the past
twelve months, the Fund distributed dividends totaling $0.85 per share. The
table below shows the annualized distribution rates and twelve-month total
returns based on the Fund's December 31, 1996 net asset value (NAV) per share
and its American Stock Exchange (AMEX) closing price.
Price Annualized Twelve Month
Per Share Distribution Rate Total Returns
--------- ----------------- -------------
$15.42 (NAV) 5.53% 3.96%
$14.375 (AMEX) 5.93% 11.02%
In comparison, the average total return on NAV for closed-end municipal bond
funds in the long-intermediate category was 4.28% for the same period, according
to Lipper Analytical Services Inc., an independent fund tracking organization.
Market and Economic Overview
Throughout 1996, the U.S. economy has continued to enjoy its healthy recovery
that began over six years ago. The national unemployment rate has fallen from
around 7.5% in 1992, to just over 5.0% in 1996. Consumer price inflation has
remained virtually unchanged since the end of 1991, and producer prices still
appear to be declining on a long-term basis. Although there were little signs of
inflation in 1996, the strength of the U.S. economy, particularly during the
first two quarters of 1996, caused inflation fears to rise among many investors
throughout most of the year. In addition, the debate over whether or not the
Federal Reserve Board ("Fed") would raise interest rates continued to linger
over the U.S. bond markets, which added to bond market volatility throughout
much of the year. However, during the third quarter and throughout much of the
fourth quarter of 1996, U.S. economic growth moderated, fears of inflation
subsided, and interest rates declined from their July and September high of
7.2%. The bond market rally was fueled by expectations that U.S. economic growth
and inflation would be subdued in 1997, as well as investors' perceptions of Fed
policy shifting from a restrictive to a more neutral stance.
1
<PAGE>
Municipal bond yields have also declined recently as many investors became
comforted by the fact that any radical tax reform that could have resulted from
the November elections was purely political rhetoric. Looking ahead into 1997,
we believe that any future tax reform will be moderate at best. Although
municipal bond yields have declined, municipal bonds have recently
underperformed U.S. Treasuries. In our opinion, municipals have lagged U.S.
Treasuries primarily because investors have continued to focus on the high
return potential of the U.S. stock market as opposed to the seemingly modest
yields currently offered by municipal bonds.
In the beginning of December, the fixed income markets experienced a widespread
sell-off, which was triggered primarily by Fed Chairman Alan Greenspan's
comments about "irrational exuberance" in the financial markets. Greenspan's
comments were interpreted as a sign that the Fed may raise interest rates to
help reduce any speculative overtones that may exist in the markets. In our
opinion, current economic fundamentals do not support this scenario.
Fund's Investment Strategy
The Smith Barney Municipal Fund's investment objective is to provide as high a
level of current income exempt from Federal income taxes as is consistent with
prudent investing. In line with this objective, the Fund follows an investment
strategy with emphasis on high quality, high coupon issues. In addition, the
Fund concentrates on maturity and call features - we ladder the maturity and
call structure of our portfolio in order to preserve the Fund's income dividend
distributions to shareholders.
As a long intermediate-term municipal bond fund, the Fund will invest at least
80% of its total assets in municipal bonds that have remaining maturities of
less than 15 years. Over the current reporting period, we modestly lengthened
the Fund's average weighted maturity to 12 years to offset the aging of the
portfolio. In addition, we maintained the Fund's high credit orientation. As of
December 31, 1996, approximately 83% of the Fund's holdings were rated
investment grade (BBB/Baa and higher) by either Standard and Poor's Corporation
or Moody's Investors Services, Inc., with approximately 34% of the Fund's
investments rated triple-A. (Standard & Poor's and Moody's are two major credit
reporting and bond rating agencies.) The majority of the Fund's assets were
allocated among the following types of municipal bond issues as of December 31,
1996: hospital bonds (19.4%), industrial development revenue bonds (17.2%),
multi-family housing bonds (6.6%) and education bonds (6.6%).
2
<PAGE>
Municipal Bond Market Outlook
We expect the U.S. economy's above-trend pace to slow down in 1997. Although
labor markets are likely to remain tight, global competition should help to keep
wages from rising. As a result, inflationary pressures should subside and the
Fed will most likely remain on the sidelines. However, should the economic
numbers indicate that the pace of U.S. economic growth is stronger than
expected, a modest increase in interest rates cannot be ruled out. Nevertheless,
given our expectations for a much more subdued economic picture, we remain
optimistic about the municipal bond market over the course of 1997.
Thank you for investing in the Smith Barney Municipal Fund, Inc. We look forward
to continuing to help you achieve your financial goals.
Sincerely,
/s/ Heath B. McLendon /s/ Peter M. Coffey
Heath B. McLendon Peter M. Coffey
Chairman and Vice President
Chief Executive Officer
January 10, 1997
3
<PAGE>
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Schedule of Investments December 31, 1996
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================
<C> <C> <S> <C>
Education -- 6.6%
$1,000,000 A* Arizona Education Loan Corp., 6.625% due 9/1/05(a) $ 1,042,500
1,000,000 AAA Keller, TX Independent School District, PSFG,
zero coupon due 8/15/16 328,750
1,000,000 AAA Metropolitan Government Nashville & Davidson County,
TN, MeHarry Medical College, AMBAC-Insured,
6.000% due 12/1/19 1,065,000
Utah State School District Co-Op Revenue Financing Pool
LOC Swiss Bank (Special Mandatory Redemption 8/15/98
@ 100):
530,000 AA+ 8.375% due 2/15/10 555,175
470,000 AA+ 8.375% mandatory tender 2/15/07 492,912
500,000 AA+ 8.375% mandatory tender 2/15/09 523,750
- -------------------------------------------------------------------------------------------
4,008,087
- -------------------------------------------------------------------------------------------
Escrowed to Maturity(b) -- 17.8%
1,270,000 AAA Boston, MA Water & Sewer Community Revenue,
Series A, 10.875% due 1/1/09, Sinking Fund Average
Life 5/3/05 1,719,262
500,000 AAA Delaware County, PA Authority Revenue, (Elwyn Inc.
Project), 5.500% due 6/1/20, Sinking
Fund Average Life 6/1/17 489,375
755,000 AAA Illinois Health Facility Authority Revenue, (Methodist
Medical Center Project), 9.000% due 10/1/10, Sinking
Fund Average Life 4/1/03 907,888
1,000,000 AAA Jackson, TN Water and Sewer Revenue,
7.200% due 7/1/12, Sinking Fund Average Life 1/25/06 1,131,250
500,000 AAA Lake County, OH Hospital Improvement Revenue,
Lake County Memorial Hospital, 8.625% due 11/1/09,
Sinking Fund Average Life 10/31/04 608,125
1,310,000 AAA Los Angeles, CA Hollywood Presbyterian Medical Center,
9.625% due 7/1/13, Sinking Fund Average Life 2/28/08 1,673,525
225,000 AAA Louisiana Public Facilities, Southern Baptist Hospital,
8.000% due 5/15/12, Sinking Fund Average Life 6/18/06 263,250
300,000 AAA Nacogdoches County, TX Hospital District Revenue,
9.000% due 5/15/04, Sinking Fund Average Life 5/30/01 348,000
505,000 AAA New Jersey State Turnpike Authority Revenue Refunding
Bond, 10.375% due 1/1/03, Sinking Fund
Average Life 1/6/00(e) 595,900
780,000 AAA Ohio State Water Development Authority Revenue,
Safe Water Series 2, 9.375% due 12/1/10,
Sinking Fund Average Life 11/26/03 963,300
285,000 AAA Piedmont Muni Power Agency, SC Electric Revenue,
FGIC-Insured, 6.500% due 1/1/16 325,612
400,000 AAA Ringwood Borough, NJ Sewer Authority Special
Obligation Refunding, 9.875% due 7/1/13,
Sinking Fund Average Life 2/6/05 517,500
</TABLE>
See Notes to Financial Statements.
4
<PAGE>
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Schedule of Investments (continued) December 31, 1996
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================
<C> <C> <S> <C>
Escrowed to Maturity(b) -- 17.8% (continued)
$1,000,000 AAA Riverside, CA Single-Family Mortgage Revenue,
GNMA-Collateralized, 7.800% due 5/1/21,
Sinking Fund Average Life 3/17/16(a)(e) $ 1,266,250
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10,809,237
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General Obligation -- 6.5%
500,000 AAA Anchorage, AK GO, 6.000% due 10/1/14 532,500
1,000,000 AA Metropolitan Government Nashville & Davidson County,
TN GO, 6.000% due 12/1/09 1,083,750
670,000 BBB New Haven, CT GO, Series B, 9.000% due 12/1/01 788,088
New Orleans, LA GO, Certificates of Indebtedness:
1,000,000 BBB- Series A, 6.650% due 8/1/01 1,015,320
500,000 BBB- Series C, 6.650% due 8/1/01 507,660
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3,927,318
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Finance -- 2.7%
1,000,000 A Pennsylvania State Finance Authority, Beaver County,
Revenue Refunding Bonds, Municipal Capital
Improvement Program, Series 1993, LOC Societe
Generale, 6.600% due 11/1/09 1,073,750
545,000 BBB Tampa, FL Capital Improvement Program Revenue,
Series B, Den Danske Bank Royal, Trust Canada
and Yasuda Trust, 8.000% due 10/1/02 566,800
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1,640,550
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Hospital -- 19.4%
700,000 BBB Allentown, PA Area Hospital Authority Revenue Refunding,
Sacred Heart Hospital, Series A, 6.200% due 11/15/03 727,125
650,000 AAA Calcasieu Parish, LA Memorial Hospital Service District
Revenue Refunding, Lake Charles Memorial Hospital,
Series A, CONNIE LEE-Insured, 7.500% due 12/1/05 752,375
1,500,000 A+ California Statewide Community Development Authority
Revenue, COP Refunding Hospital, Triad Healthcare,
6.250% due 8/1/06 1,571,250
1,510,000 Baa1* Fulco, GA Hospital Authority Revenue Anticipation
Certificates Refunding, Georgia Baptist Healthcare,
Series A, 6.400% due 9/1/07 1,557,188
1,300,000 NR Illinois Health Facilities Authority Revenue Friendship,
VLG Hospital, 6.650% due 12/1/06 1,368,250
1,200,000 BBB+ Klamath Falls, OR Intercommunity, Merle Hospital,
8.000% due 9/1/08 1,429,500
1,000,000 Ba* Langhorne Manor Borough, PA Higher Education and
Health Authority Bucks County, Lower Bucks Hospital,
6.750% due 7/1/02 980,000
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
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Schedule of Investments (continued) December 31, 1996
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================
<C> <C> <S> <C>
Hospital -- 19.4% (continued)
$ 860,000 A- Massachusetts State Health and Education Facilities,
Melrose Wakefield Hospital, 6.125% due 7/1/04 $ 904,075
400,000 BBB- McKean County, PA Hospital Authority, Hospital Revenue,
(Bradford Hospital Project), 6.100% due 10/1/20 389,500
2,000,000 AAA Orange County, FL Health Facilities Authority Revenue,
Adventist Health System/Sunbelt, CGIC-Insured,
FLAIRS, 7.350% due 11/15/07(d) 2,100,000
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11,779,263
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Housing: Multi-Family -- 6.6%
1,100,000 A* Dallas, TX Housing Corp. Capital Program Revenue
Refunding, Section 8 Assisted, 7.700% due 8/1/05,
Sinking Fund Average Life 9/2/03 1,150,875
1,470,000 A+ Lynchburg, VA Redevelopment & Housing Authority,
Multi-Family Housing Revenue Refunding,
Princeton Circle Association, 6.250% due 12/1/10,
Sinking Fund Average Life 9/24/07 1,504,913
500,000 BBB+^ Montgomery County, PA Redevelopment Authority,
Multi-Family Housing Revenue, 6.375% due 7/1/12,
Sinking Fund Average Life 1/29/09 495,625
865,000 AAA Nevada Housing Division, Multi-Unit Housing Saratoga
Palms, 6.250% due 10/1/16, Sinking Fund Average Life
8/8/12(a) 877,975
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4,029,388
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Housing: Single-Family -- 2.9%
310,000 A1* Ford County, KS Single-Family Mortgage Revenue
Refunding, Series A, FHA-Insured, 7.900% due 8/1/10 328,600
650,000 AAA Juneau City and Borough, AK Home Mortgage Revenue
Refunding, Mortgage Backed Securities Program,
FNMA-Collateralized, FHA-Insured, 8.000% due 2/1/09 693,875
500,000 A-^ Lees Summit, MO Individual Development Authority Health
Facilities, Refunding and Improvement Revenue,
(John Knox Village Project), 7.125% due 8/15/12,
Sinking Fund Average Life 2/17/08 527,500
200,000 Aa* Montgomery County, MD Housing Opportunities Commission
Mortgage Revenue, Series A, 7.200% due 7/1/04 210,250
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1,760,225
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Industrial Development -- 17.2%
500,000 A* Alaska Industrial Development & Export Authority Revenue,
6.100% due 4/1/06 (a) 530,000
535,000 Ba3* Bourbonnais, IL Industrial Development Revenue Refunding,
(K-Mart Corp. Project), 6.600% due 10/1/06 530,987
1,000,000 Aaa* Cohoes, NY IDA, (Norlite Corp. Project), LOC Dresdner
Bank, 6.750% due 5/1/09, Sinking Fund Average Life
1/8/07(a) 1,108,750
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
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Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================
<C> <C> <S> <C>
Industrial Development -- 17.2% (continued)
$1,500,000 AA Des Moines, IA Industrial Development Refunding
Revenue Bonds,(The Printer Project 1992), LOC
Norwest Bank, 6.375% due 9/1/09 $ 1,518,750
1,500,000 Baa1* Dickinson County, MI Economic Development Corp.
Solid Waste Disposal Refunding Revenue,
Champion International, 6.550% due 3/1/07 1,576,875
1,000,000 AA- LaCrosse, WI Resource Recovery Revenue, (Northern
States Power Co. Project), 6.000% due 11/1/21 1,031,250
1,250,000 AA Noblesville, IN Economic Development Revenue Refunding,
(Lions Greek Association Limited Project), Asset
Guaranty-Insured, 6.500% due 11/1/04 1,360,938
1,000,000 AAA Salt Lake City, UT Individual Development Refunding
Revenue, (Plaza 5400 Project), Mass Mutual Life
Insured, Series A, 6.050% due 9/1/07 1,060,000
600,000 AA+ Sussex County, DE Economic Development Refunding
Revenue Bonds, (Rohoboth Mall Project), Series 1992,
7.250% due 10/15/12 659,250
1,000,000 BBB+ Tooele County, UT Hazardous Waste Disposal Revenue,
Laidlaw Incineration, Series A, 6.750% due 8/1/10(a) 1,053,750
- -------------------------------------------------------------------------------------------
10,430,550
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Miscellaneous -- 4.6%
1,000,000 BBB- Clarksville, TN Natural Gas Acquis Corp. Gas Revenue,
Series A, 7.500% due 11/1/04 1,047,500
1,000,000 A- Illinois Development Finance Authority Revenue,
City of East St. Louis, 6.875% due 11/15/05,
Sinking Fund Average Life 11/15/00 1,061,250
645,000 Baa1* Indianapolis, IN Economic Development Refunding and
Improvement Revenue, National Benevolent Association,
(Robin Run Village Project), 6.900% due 10/1/04 671,606
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2,780,356
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Pollution Control -- 3.9%
1,000,000 Aa3* Brazos River, TX Navigation Harbor District, Brazonia
County PCR, (BASF Corp. Project), 6.750% due 2/1/10 1,146,250
Broward County, FL Resource Recovery PCR:
695,000 A North Project, 7.950% due 12/1/08 765,369
440,000 A* South Project, 7.950% due 12/1/08 484,550
- -------------------------------------------------------------------------------------------
2,396,169
- -------------------------------------------------------------------------------------------
Pre-Refunded (c) -- 2.7%
190,000 AAA Gila County, AZ Industrial Development Authority Revenue
Pollution Control, 11.250% due 4/1/01, (Call 4/1/97
@ 100), Sinking Fund Average Life 4/29/97 204,725
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================
<C> <C> <S> <C>
Pre-Refunded (c) -- 2.7% (continued)
$ 595,000 AAA Philadelphia, PA Hospital Revenue, (United Hospitals
Inc. Project), 10.875% due 7/1/08, (Call 7/1/05 @
100), Sinking Fund Average Life 6/1/02(e) $ 774,244
300,000 AAA++ San Leandro, CA Redevelopment Agency Residential
Mortgage Revenue, 11.250% due 4/1/13,
(Call 10/1/04 @ 100), Sinking Fund Average Life
4/13/04 402,000
275,000 AAA Texas National Research Lab Community Finance Corp.,
Lease Revenue, (Superconducting Supercollider
Project), 6.850% due 12/1/05, (Call 12/1/02 @ 102) 307,656
- -------------------------------------------------------------------------------------------
1,688,625
- -------------------------------------------------------------------------------------------
Public Facilities -- 2.5%
500,000 A Dallas, TX Civic Center Convention Complex Revenue,
6.100% due 1/1/08, Sinking Fund Average Life 7/31/03 501,715
1,000,000 A- Dekalb County, IN Redevelopment Authority Revenue,
(Mini-Mill Public Improvement Project),
6.250% due 1/15/08 1,058,750
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1,560,465
- -------------------------------------------------------------------------------------------
Tax Allocation -- 0.4%
250,000 Baa* Lemon Grove, CA Community Development Agency
Tax Allocation Revenue, (Lemon Grove Redevelopment
Project), 6.650% due 8/1/06 263,750
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Transportation -- 4.1%
Denver, CO City and County Airport Revenue:
500,000 BBB Series B, 7.000% due 11/15/03(a) 541,250
1,000,000 BBB Series C, 6.650% due 11/15/05(a) 1,065,000
500,000 Baa3* Raleigh-Durham, NC Airport Authority Special Facilities
Revenue, (American Airlines Inc. Project),
9.400% due 11/1/00 562,500
295,000 NR Sanford, FL Airport Authority Industrial Development
Revenue, (Central Florida Terminals Project),
Series B, 7.500% due 5/1/06(a) 304,587
- -------------------------------------------------------------------------------------------
2,473,337
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</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
===========================================================================================
<C> <C> <S> <C>
Utilities -- 2.1%
$1,250,000 BB Union City, NJ Utility Authority Solid Waste Revenue,
Series A, 6.850% due 6/15/02(a) $ 1,268,750
- -------------------------------------------------------------------------------------------
TOTAL INVESTMENTS -- 100%
(Cost -- $58,582,939**) $60,816,070
===========================================================================================
</TABLE>
(a) Income from these issues is considered a preference item for purposes of
calculating the alternative minimum tax.
(b) Bonds are escrowed to maturity with U.S. Government securities and are
considered by the Manager to be triple-A rated even if the issuer has not
applied for new ratings
(c) Bonds are escrowed with U.S. Government securities and are considered by
the Manager to be triple-A rated even if the issuer has not applied for
new ratings.
(d) Inverse floating rate security-coupon varies inversely with level of
short-term tax-exempt interest rates.
(e) Security segregated by custodian for open purchase committment.
+ Duff & Phelps Credit Rating Co.
^ Fitch Investor Services, Inc.
+++ Equivalent rating as determined by the Manager -- issue not rated.
** Aggregate cost for Federal income tax purposes is substantially the same.
See pages 10 and 11 for definition of ratings and certain security
descriptions.
See Notes to Financial Statements.
9
<PAGE>
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Bond Ratings
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All ratings are by Standard & Poor's Ratings Service ("Standard & Poor's"),
except that those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "AA" to "BB" may be modified by the addition
of a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
AAA -- Debt rated "AAA"' has the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Debt rated "AA" has a very strong capacity to pay interest and repay
principal and differs from the highest rated issue only in small
degree.
A -- Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
debt in higher rated categories.
BBB -- Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in
higher rated categories.
BB -- Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial or economic
conditions which could lead to inadequate capacity to meet timely
interest and principal payments.
Moody's -- Numerical modifiers 1, 2, and 3 may be applied to each generic rating
from "Aa" to "Ba," where 1 is the highest and 3 the lowest rating within its
generic category.
Aaa -- Bonds that are rated "Aaa" are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective elements are likely to change, such
changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues.
Aa -- Bonds that are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than the
best bonds because margins of protection may not be as large as in
Aaa securities or fluctuation of protective elements may be of
greater amplitude or there may be other elements present which make
the long-term risks appear somewhat larger than in Aaa securities.
A -- Bonds that are rated "A" possess many favorable investment
attributes and are to be considered as upper medium grade
obligations. Factors giving security to principal and interest are
considered adequate but elements may be present which suggest a
susceptibility to impairment some time in the future.
Baa -- Bonds that are rated "Baa" are considered as medium grade
obligations, i.e., they are neither highly protected nor poorly
secured. Interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of time.
Such bonds lack outstanding investment characteristics and in fact
have speculative characteristics as well.
Ba -- Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times over
the future. Uncertainty of position characterizes bonds in this
class.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
10
<PAGE>
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Short-Term Securities Ratings
- --------------------------------------------------------------------------------
SP-1 -- Standard & Poor's highest rate rating indicating very strong or
strong capacity to pay principal and interest; those issues
determined to possess overwhelming safety characteristics are
denoted with a plus (+) sign.
VMIG 1 -- Moody's highest rating for issues having demand feature --
variable-rate demand obligation (VRDO).
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Security Descriptions
- --------------------------------------------------------------------------------
AMBAC -- AMBAC Indemnity Corporation
CGIC -- Capital Guaranty Insurance Company
CONNIE LEE -- College Construction Loan Insurance Association
COP -- Certificate of Participation
FGIC -- Financial Guaranty Insurance Company
FHA -- Federal Housing Administration
FLAIRS -- Floating Adjustable Interest Rate Securities
FNMA -- Federal National Mortgage Association
FSA -- Financial Security Assurance
GNMA -- Government National Mortgage Association
GO -- General Obligation
IDA -- Industrial Development Agency
IDR -- Industrial Development Revenue
LOC -- Letter of Credit
MBIA -- Municipal Bond Investors Assurance Corporation
NBA -- National Benevolent Association
PCR -- Pollution Control Revenue
PSFG -- Permanent School Fund Guaranty
RIBS -- Residual Interest Bonds
11
<PAGE>
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Statement of Assets and Liabilities December 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $58,582,939) $ 60,816,070
Cash 69,328
Interest receivable 1,153,890
Receivable for securities sold 95,667
- --------------------------------------------------------------------------------
Total Assets 62,134,955
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LIABILITIES:
Dividends payable 38,341
Management fees payable 36,659
Accrued expenses 47,931
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Total Liabilities 122,931
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Total Net Assets $ 62,012,024
================================================================================
NET ASSETS:
Par value of capital shares $ 4,021
Capital paid in excess of par value 60,192,643
Undistributed net investment income 74,715
Accumulated net realized loss on security transactions (492,486)
Net unrealized appreciation of investments 2,233,131
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $15.42 a share on 4,021,162 shares of $0.001
par value outstanding; 100,000,000 shares authorized) $ 62,012,024
================================================================================
See Notes to Financial Statements.
12
<PAGE>
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Statement of Operations For the Year Ended December 31, 1996
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 3,922,628
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 3) 432,659
Shareholder and system servicing fees 43,283
Shareholder communications 31,945
Audit and legal 16,807
Pricing service fees 10,506
Directors' fees 4,965
Listing fees 3,461
Custody 3,286
Other 10,310
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Total Expenses 557,222
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Net Investment Income 3,365,406
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REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 4):
Realized Gain From Security Transactions
(excluding short-term securities):
Proceeds from sales 18,409,387
Cost of securities sold 18,387,998
- --------------------------------------------------------------------------------
Net Realized Gain 21,389
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of year 3,522,570
End of year 2,233,131
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Decrease in Net Unrealized Appreciation (1,289,439)
- --------------------------------------------------------------------------------
Net Loss on Investments (1,268,050)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 2,097,356
================================================================================
See Notes to Financial Statements.
13
<PAGE>
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Statements of Changes in Net Assets For the Years Ended December 31,
- --------------------------------------------------------------------------------
1996 1995
================================================================================
OPERATIONS:
Net investment income $ 3,365,406 $ 3,347,408
Net realized gain 21,389 178,170
Increase (decrease) in net unrealized appreciation (1,289,439) 5,732,678
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 2,097,356 9,258,256
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS
FROM (NOTE 2):
Net investment income (3,426,030) (3,426,030)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (3,426,030) (3,426,030)
- --------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (1,328,674) 5,832,226
NET ASSETS:
Beginning of year 63,340,698 57,508,472
- --------------------------------------------------------------------------------
End of year* $62,012,024 $63,340,698
================================================================================
* Includes undistributed net investment income of: $ 74,715 $ 135,339
================================================================================
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The Smith Barney Municipal Fund, Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund
are:(a) security transactions are accounted for on the trade date; (b)
securities are valued at the mean between bid and ask prices provided by an
independent pricing service that are based on transactions in municipal
obligations, quotations from municipal bond dealers, market transactions in
comparable securities and various relationships between securities; (c)
securities maturing within 60 days are valued at cost plus accreted discount or
minus amortized premium, which approximates market value; (d) gains or losses on
the sale of securities are calculated by using the specific identification
method; (e) interest income, adjusted for amortization of premium and accretion
of original issue discount, is recorded on the accrual basis; market discount is
recognized upon the disposition of the security; (f) dividends and distributions
to shareholders are recorded on the ex-dividend date; (g) the Fund intends to
comply with the applicable provisions of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; (h) the character of income and gains to be distributed are
determined in accordance with income tax regulations which may differ from
generally accepted accounting principles; and (i) estimates and assumptions are
required to be made regarding assets, liabilities and changes in net assets
resulting from operations when financial statements are prepared. Changes in the
economic environment, financial markets and any other parameters used in
determining these estimates could cause actual results to differ.
2. EXEMPT-INTEREST DIVIDENDS AND OTHER DISTRIBUTIONS
The Fund intends to satisfy conditions that will enable interest from
municipal securities, which is exempt from regular Federal income tax and from
designated state income taxes, to retain such tax-exempt status when distributed
to the shareholders of the Fund.
Capital gains distributions, if any, are taxable to shareholders, and are
declared and paid at least annually.
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
3. MANAGEMENT AGREEMENT AND TRANSACTIONS WITH AFFILIATED PERSONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc., acts as investment manager to the Fund. As compensation
for its services, the Fund pays SBMFM a fee calculated at the annual rate of
0.70% of the Fund's average daily net assets. This fee is calculated daily and
paid monthly.
All officers and two Directors of the Fund are employees of Smith Barney
Inc.
4. INVESTMENTS
For the year ended December 31, 1996, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $18,516,008
- --------------------------------------------------------------------------------
Sales 18,409,387
================================================================================
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $ 2,423,095*
Gross unrealized depreciation (189,964)*
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 2,233,131*
================================================================================
* Substantially the same for Federal income tax purposes.
5. CAPITAL LOSS CARRYFORWARD
At December 31, 1996, the Fund had, for Federal income tax purposes,
approximately $492,000 of capital loss carryforwards available to offset future
realized capital gains through 2002. To the extent that these carryforward
losses can be used to offset net realized capital gains, such gains, if any,
will not be distributed.
16
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year:
<TABLE>
<CAPTION>
1996 1995 1994 1993 1992(1)(2)
=================================================================================================
<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) (0.32) 1.47 (1.54) 1.00 (0.21)
- -------------------------------------------------------------------------------------------------
Total Income (Loss) From Operations 0.52 2.30 (0.70) 1.84 0.11
- -------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.85) (0.85) (0.85) (0.80) (0.30)
- -------------------------------------------------------------------------------------------------
Total Distributions (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+
- -------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 30% 21% 35% 23% 36%
- -------------------------------------------------------------------------------------------------
Market Price at End of Year $ 14.38 $ 13.75 $ 12.63 $ 15.38 $ 14.25
=================================================================================================
</TABLE>
(1) Based on the weighted average shares outstanding for the period.
(2) For the period from July 31, 1992 (commencement of operations) to December
31, 1992.
* The 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).
^ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
17
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors
of the Smith Barney Municipal Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of the Smith Barney Municipal Fund, Inc.
as of December 31, 1996, the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and the financial highlights for each of the years in
the four-year period then ended and for the period from July 31, 1992
(commencement of operations) to December 31, 1992. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1996, by correspondence with the custodian. As to securities sold
but not delivered, we performed other appropriate auditing procedures. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Smith Barney Municipal Fund, Inc. as of December 31, 1996, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years in the four-year period then ended and for the period from
July 31, 1992 to December 31, 1992, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Markwick LLP
New York, New York
February 7, 1997
18
<PAGE>
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
AMEX Net Asset Income Reinvestment
Period Closing Price* Value* Declared Price
================================================================================
1995
January $13.13 $14.64 $0.071 $13.29
February 13.75 14.91 0.071 13.83
March 13.50 15.01 0.071 13.58
April 13.38 14.97 0.071 13.40
May 13.75 15.35 0.071 13.65
June 13.50 15.19 0.071 13.90
July 14.00 15.27 0.071 13.98
August 13.50 15.36 0.071 13.65
September 14.00 15.41 0.071 14.02
October 14.38 15.53 0.071 14.40
November 14.00 15.70 0.071 14.45
December 13.75 15.75 0.071 14.12
1996
January 14.75 15.72 0.071 14.55
February 14.63 15.57 0.071 14.59
March 14.38 15.35 0.071 14.46
April 14.25 15.24 0.071 14.13
May 14.25 15.18 0.071 14.24
June 13.88 15.22 0.071 13.82
July 13.75 15.25 0.071 13.76
August 14.00 15.19 0.071 14.02
September 14.25 15.30 0.071 14.32
October 13.75 15.37 0.071 13.89
November 14.50 15.53 0.071 14.51
December 14.38 15.42 0.071 14.38
================================================================================
* On the last business day of the month.
19
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On April 25, 1996, the annual meeting of the shareholders of the Fund was
held for the purpose of voting on the following matters:
1. To approve or disapprove for the Fund the election of Jessica M.
Bibliowicz and Donald R. Foley as Directors; and
2. To approve or disapprove the selection of KPMG Peat Marwick LLP as the
independent auditors for the current fiscal year of the Fund.
The results of the vote on Proposal 1 were as follows:
% of Votes % of
Directors Votes For Shares Voted Against Shares Voted
================================================================================
Jessica M. Bibliowicz 3,727,244.561 99.08% 34,476.000 0.92%
Donald R. Foley 3,733,470.561 99.25 28,250.000 0.75
================================================================================
The results of the vote on Proposal 2 were as follows:
% of Votes % of Votes % of
Votes For Shares Voted Against Shares Voted Abstained* Shares Voted
================================================================================
3,712,805.561 98.70% 5,981.000 0.16% 302,358.732 1.14%
================================================================================
* There are approximately 259,425 broker non-votes included in the amount
abstaining.
The following Directors, representing the balance of the Board of
Directors, continue to serve as Directors: Joseph H. Fleiss, Paul Hardin,
Francis P. Martin, Heath B. McLendon, Roderick C. Rasmussen and John P. Toolan.
20
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)
- --------------------------------------------------------------------------------
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
distributions are automatically reinvested by First Data Investor Services
Group, Inc. (formerly known as "The Shareholder Services Group, Inc."), as plan
agent (the "Plan Agent"), in additional shares of its Common Stock (the "Common
Shares") as provided below unless a shareholder elects to receive cash.
Distributions with respect to Common Shares registered in the name of a
broker-dealer or other nominee (i.e., in "street name") are reinvested by the
broker or nominee in additional Common Shares under the Plan, unless the service
is not provided by the broker or nominee. Investors who own Common Shares
registered in street name should consult their broker-dealer for details. All
distributions to shareholders who do not participate in the Plan are paid by
check mailed directly to the record holder by First Data Investor Services
Group, Inc., as dividend disbursing agent.
If the Fund declares a distribution payable either in Common Shares or in
cash, nonparticipants in the Plan receive cash, and Plan participants receive
the equivalent in Common Shares valued in the following manner: whenever the
market price is equal to or exceeds the net asset value per share at the time
Common Shares are valued for the purpose of determining the number of Common
Shares equivalent to the cash distribution, participants are issued Common
Shares valued at the greater of (1) the net asset value most recently determined
or (2) 95% of the then current market price of the Common Shares.
If the net asset value of the Common Shares at the time of valuation
exceeds the market price of the Common Shares, or if the Fund declares a
distribution payable only in cash, the Plan Agent buys Common Shares in the open
market, on the American Stock Exchange or elsewhere, for the participants'
accounts. If, following the commencement of purchases and before the Plan Agent
has completed its purchases the market price exceeds the net asset value of the
Common Shares, the average per Common Share purchase price paid by the Plan
Agent may exceed the net asset value of the Common Shares, resulting in the
acquisition of fewer Common Shares than if the distribution had been paid in
Common Shares issued by the Fund at net asset value. The Plan Agent applies all
cash received as a distribution to purchase Common Shares on the open market as
soon as practicable after the record date of the distribution, but in no event
later than 30 days after such date, except when necessary to comply with
applicable provisions of the Federal securities laws.
21
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
Participants in the Plan may withdraw from the Plan upon written notice to
the Plan Agent which must be received at least ten business days prior to the
distribution record date to become effective for that distribution. Shares in
the account of each Plan participant are held by the Plan Agent in
non-certificated form in the name of the Plan Agent or participant. When a
participant withdraws from the Plan or upon termination of the Plan as provided
below, certificates for whole Fund shares credited to his or her account under
the Plan are issued and a cash payment is made for any fraction of a Fund share
credited to such account.
The automatic reinvestment of distributions does not relieve participants
to any Federal income tax that may be payable on such distributions.
The Fund does not charge participants for reinvesting distributions. Any
Plan Agent's fees for the handling of reinvestment of distributions under the
Plan are paid by the Fund. There are no brokerage charges with respect to Common
Shares issued directly by the Fund as a result of distributions payable either
in stock or in cash. However, each participant pays a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of distributions.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund and the Plan Agent reserve the right to amend the Plan as
applied to any distribution paid subsequent to written notice of the change sent
to all shareholders of the Fund at least 90 days before the record date for the
distribution. The Plan also may be terminated by the Fund or the Plan Agent by
at least 30 days' written notice to all shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at First
Data Investor Services Group, Inc., P.O. Box 1376, Boston, Massachussetts 02104.
22
<PAGE>
- --------------------------------------------------------------------------------
Tax Information (unaudited)
- --------------------------------------------------------------------------------
99.80% of the dividends from net investment income for the year ended
December 31, 1996, are tax-exempt for regular Federal income tax purposes.
23
<PAGE>
(This page intentionally left blank.)
<PAGE>
- --------------------------------------------------------------------------------
Smith Barney
- -------------------- [Artwork]
MUNICIPAL FUND, INC.
- --------------------------------------------------------------------------------
DIRECTORS
Jessica M. Bibliowicz
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President and Treasurer
Peter M. Coffey
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
Smith Barney Mutual Funds
Management Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, MA 02104
This report is submitted for the
general information of the
shareholders of Smith Barney
Municipal Fund, Inc. It is not
authorized for distribution to
prospective investors unless
accompanied or preceded by a
current Prospectus for the Fund,
which contains information
concerning the Fund's investment
policies and expenses as well as
other pertinent information.
SMITH BARNEY
MUNICIPAL FUND, INC.
388 Greenwich Street
New York, New York 10013
FD2253 2/97
