SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 2
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
__________________
Greenwich Street Municipal Fund Inc.
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 723-9218
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
Greenwich Street Municipal Fund Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
_____________________
Copies to:
Burton M.Leibert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, New York 10022
_______________
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this
Registration Statement.
If any securities being registered on this form will be offered on
a delayed or continuous basis in reliance on Rule 415 under the
Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following
box. [X]
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-
58610).
It is proposed that this fiing will become effective:
[X] when declared effective pursuant to section 8(c).
Registrant amends this Registration Statement under the Securities
Act of 1933, as amended, on such date as may be necessary to delay
its effective date until Registrant files a further amendment that
specifically states that this Registration Statement will
thereafter become effective in accordance with the provisions of
Section 8(a) of the Securities Act of 1933, as amended, or until
the Registration Statement becomes effective on such date as the
Securities and Exchange Commission, acting pursuant to Section
8(a), may determine.
GREENWICH STREET MUNICIPAL FUND INC.
Form N-2
Cross Reference Sheet
Part A
Item No. Prospectus Caption
1. Outside Front Cover Outside Front Cover of
Prospectus
2. Inside Front and Outside Back Cover Page Inside Front and
Outside Back Cover Page of
Prospectus
3. Fee Table and Synopsis Prospectus Summary; Fund
Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Prospectus Summary; The
Offering; Stock Purchases and
Tenders.
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds
8. General Description of the Registrant Prospectus Summary; The
Fund; Investment Objectives
and Policies; Description of
Common Stock; Share Price
Data; Net Asset Value; Certain
Provisions of of the Articles
of Incorporation; Appendix.
9. Management Management of the Fund;
Description of Common Stock;
Custodian and Transfer Agent
10. Capital Stock, Long-Term Debt,
and Other Securities Taxation; Dividend
Reinvestment Plan; Dividends
and Distributions; Description
of Common Stock; Share Price
Data
11. Defaults and Arrears on Senior Securities Not Applicable
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement
of Additional Information Further Information
Part B
Statement of Additional Information
Item No. Information Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and History The Fund; Description of
Common Stock (see Prospectus)
17. Investment Objective and Policies Investment Objective and
Policies; Investment
Restrictions
18. Management Management of the Fund;
Directors and Executive
Officers of the Fund
19. Control Persons and Principal Holders of
Securities Not Applicable
20. Investment Advisory and Other Services Management of the
Fund
21. Brokerage Allocation and Other Practices Fund Transactions
22. Tax Status Taxes; Taxation (see
Prospectus)
23. Financial Statements Financial Statements
PART A
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Prospectus September 26, 1997
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Greenwich Street Municipal Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Greenwich Street Municipal Fund Inc. (the "Fund") is a non-diversified,
closed-end management investment company that seeks as high a level of current
income exempt from Federal income tax as is consistent with the preservation of
principal. Under normal conditions, the Fund will, in seeking its investment
objective, invest substantially all of its assets in long-term, investment-grade
obligations issued by state and local governments, political subdivisions,
agencies and public authorities ("Municipal Obligations"). For a discussion of
the risks associated with certain of the Fund's investments, see "Investment
Objective and Policies."
The Fund seeks to invest substantially all of its assets in Municipal
Obligations and, under normal conditions, at least 80% of the Fund's assets will
be invested in Municipal Obligations rated investment grade by Moody's Investors
Service Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P"), Fitch
Investors Service, Inc. ("Fitch") or another nationally recognized statistical
rating agency (that is, no lower than Baa, MIG or Prime-1 by Moody's, BBB, Sp-2
or A-1 by S&P or BBB or F-1 by Fitch). 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 Policies" and "Taxation."
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. A Statement of Additional Information dated September 26, 1997
(the "SAI") containing additional information about the Fund has been filed with
the Securities and Exchange Commission ("SEC") and is hereby incorporated by
reference in its entirety into this Prospectus. A copy of the SAI may be
obtained without charge 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
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Manager and Administrator
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.
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Prospectus (continued) September 26, 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, at the sole discretion of 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 in a public offering which commenced July 16, 1994,
at a price of $12.00 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.
All dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a Prospectus.
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Table of Contents
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Prospectus Summary 4
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Fund Expenses 7
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Financial Highlights 8
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The Fund 9
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The Offering 9
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Use of Proceeds 9
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Investment Objective and Policies 9
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Share Price Data 17
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Net Asset Value 17
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Taxation 18
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Management of the Fund 19
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Dividends and Distribution; Dividend Reinvestment Plan 21
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Description of Common Stock 23
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Certain Provisions of the Articles of Incorporation
and Market Discount 23
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Custodian and Transfer Agent 25
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Experts 25
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Further Information 25
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Appendix A A-1
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
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Prospectus Summary
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The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus and in the SAI. Cross
references in this summary are to headings in the Prospectus.
THE FUND The Fund is a non-diversified, closed-end management investment
company. See "The Fund."
INVESTMENT OBJECTIVE The Fund seeks as high a level of current income exempt
from Federal income tax as is consistent with the preservation of principal. See
"Investment Objective and 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 income for Federal income tax purposes. See "Investment Objective and
Policies" and "Taxation."
QUALITY INVESTMENTS The Fund will invest substantially all of its assets in
long-term investment-grade Municipal Obligations. At least 80% of the Fund's
total assets will be invested in securities rated investment grade by Moody's,
S&P, Fitch or another nationally-recognized rating agency (that is, rated no
lower than Baa, MIG or Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1
by Fitch). Up to 20% of the Fund's total assets may be invested in unrated
securities that are deemed by the Fund's investment manager to be of a quality
comparable to investment grade. See "Investment Objective and Policies."
THE OFFERING The Common Stock is listed for trading on the New York Stock
Exchange, Inc. ("NYSE"). 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 such activities may be discontinued at any time
without notice, at the sole discretion of Smith Barney. See "The Offering."
LISTING NYSE
SYMBOL GSI
INVESTMENT MANAGER AND ADMINISTRATOR The Greenwich Street Advisors
division of Smith Barney Mutual Funds Management Inc. ("SBMFM"), serves as
the Fund's investment manager and administrator (the "Investment Manager" or
"Administrator"). The Investment Manager provides investment advisory and
management services to investment companies affiliated with Smith Barney. SBMFM
is a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which
is in turn a wholly owned subsidiary of Travelers Group Inc. ("Travelers").
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 fund managers. SBMFM also acts as administrator of
the
4
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Prospectus Summary (continued)
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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 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 pays SBMFM a fee for administrative
services provided to the Fund that is computed daily and paid monthly at the
annual rate of 0.20% 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 and Administrator."
CUSTODIAN PNCBank, National Association ("PNCBank")serves as the Fund's
custodian. See "Custodian and Transfer Agent."
TRANSFER AGENT First Data Investor Services Group, Inc. ("First Data") serves as
the Fund's transfer agent, dividend-paying agent and registrar. See "Custodian
and Transfer Agent."
DIVIDENDS AND DISTRIBUTIONS The Fund expects to pay monthly dividends of net
investment income (income other than net realized capital gains) and to
distribute net realized capital gains, if any, 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. See "Dividends
and Distributions; Dividend Reinvestment Plan."
RISK FACTORS AND SPECIAL CONSIDERATIONS 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. Since the
commencement of the Fund's operations, the Fund's shares have traded in the
market at prices that were at times equal to, but generally were below, net
asset value.
Some closed-end companies have taken certain actions, including the
repurchase of common stock in the market at market prices and the making of one
or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value. The
Fund's Board of Directors has seen no reason to adopt any of the steps, which
some other closed-end funds have used to address the discount. In addition, the
experience of many closed-end funds suggests that the effect of many of these
steps (other than open-
5
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Prospectus Summary (continued)
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ending) on the discount may be temporary or insignificant. Accordingly, there
can be no assurance that any of these actions will be taken or, if undertaken,
will cause the Fund's shares to trade at a price equal to their net asset value.
The Fund will not purchase securities that are rated lower than Baa by
Moody's or BBB by S&P or Fitch at the time of purchase. Although obligations
rated Baa by Moody's or BBB by S&P or Fitch are considered to be investment
grade, they may be subject to greater risks than other higher-rated investment
grade securities.
The Fund may invest up to 20% of its total assets in unrated securities
that the Investment Manager determines to be of comparable quality to the
securities rated investment grade in which the Fund may invest. Dealers may not
maintain daily markets in unrated securities and retail secondary markets for
many of them may not exist; this lack of markets may affect the Fund's ability
to sell these securities when the Investment Manager deems it appropriate. The
Fund has the right to invest without limitation in state and local obligations
that are "private activity bonds," the income from which may be taxable as a
specific preference item for purposes of the Federal alternative minimum tax
(the "AMT"). Thus, the Fund may not be a suitable investment for investors who
are subject to the AMT. See "Investment Objective and Policies" and "Taxation."
Certain of the instruments held by the Fund, and certain of the investment
techniques that the Fund may employ, might expose the Fund to special risks. The
instruments presenting the Fund with risks are municipal leases, zero coupon
securities, custodial receipts, municipal obligation components, floating and
variable rate demand notes and bonds, and participation interests. Entering into
securities transactions on a when-issued or delayed-delivery basis, entering
into repurchase agreements, lending Fund securities and engaging in financial
futures and options transactions are investment techniques involving risks to
the Fund. As a non-diversified fund within the meaning of the Investment Company
Act of 1940, as amended (the "1940 Act"), the Fund may invest a greater
proportion of its assets in the obligations of a smaller number of issuers and,
as a result, may be subject to greater risk than a diversified fund with respect
to its holdings of securities. See "Investment Objective and Policies -- Risk
Factors and Special Considerations."
The combined annual rate of fees paid by the Fund for advisory and
administrative services, 0.90% of the value of the Fund's average daily net
assets, is higher than the rates for similar services paid by other publicly
offered, closed-end management investment companies that have investment
objectives and policies similar to those of the Fund. The Fund will bear, in
addition to the costs of advisory and administrative services, other expenses
and costs in connection with its operation. See "Management of the Fund."
6
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Prospectus Summary (continued)
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The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund and of depriving shareholders of an opportunity to sell their shares
of Common Stock at a premium over prevailing market prices. See "Certain
Provisions of the Articles of Incorporation and Market Discount."
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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 associated with investing in the Fund.
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Annual Expenses
(as a percentage of net assets attributable to Common Stock)
Management Fees.................................................. 0.90%
Other Expenses*.................................................. 0.13%
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Total Annual Operating Expenses........................................ 1.03%
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* "Other Expenses," as shown above, are based upon amounts of expenses for the
fiscal year ended May 31, 1997.
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:
One Year Three Years Five Years Ten Years
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$11 $33 $57 $126
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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.
7
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Financial Highlights
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The following information for the two years ended March 31, 1997 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's annual report dated May 31, 1997. The following
information for the fiscal period ended May 31, 1995 has been audited by other
independent auditors. The information set forth below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report to Shareholders, which is incorporated by reference
into this Prospectus.
For a share of capital stock outstanding throughout each year:
For the year ended May 31, 1997 1996 1995(1)
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Net Asset Value, Beginning of Year $ 12.19 $ 12.84 $ 12.00
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Income From Operations:
Net investment income 0.66 0.66 0.63
Net realized and unrealized gain (loss) (0.26) (0.42) 0.77
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Total Income From Operations 0.40 0.24 1.40
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Offering Costs Charged to Paid-In Capital -- -- (0.02)
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Less Distributions From:
Net investment income (0.66) (0.66) (0.54)
Net realized gains (0.34) (0.23) --
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Total Distributions (1.00) (0.89) (0.54)
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Net Asset Value, End of Year $ 11.59 $ 12.19 $ 12.84
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Total Return, Based on Market Value 8.97% 5.52% 1.65%++
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Total Return, Based on Net Asset Value* 3.61% 2.40% 12.28%++
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Net Assets, End of Year (millions) $ 228 $ 238 $ 251
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Ratios to Average Net Assets:
Expenses 1.03% 1.06% 1.05%+
Net investment income 5.57 5.17 5.63+
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Portfolio Turnover Rate 115% 42% 115%
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Market Value, End of Year $ 11.375 $ 11.375 $ 11.625
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(1) For the period from June 24, 1994 (commencement of operations) to May 31,
1995.
* The total return assumes the purchase and redemption of shares using the
Fund's net asset value rather than the market value. Dividends are
reinvested in accordance with the Fund's Dividend Reinvestment Plan.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
8
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The Fund
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The Fund is a non-diversified, closed-end management investment company
that seeks as high a level of current income exempt from Federal income tax as
is consistent with the preservation of principal. The Fund, which was
incorporated under the laws of the State of Maryland on February 19, 1993, 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 sale.
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Use of Proceeds
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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 Objective and Policies
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The Fund's investment objective is to seek as high a level of current
income exempt from Federal income taxes as is consistent with the preservation
of principal. The Fund's investment objective may not be changed without the
affirmative vote of the holders of a majority (as defined in the 1940 Act) of
the Fund's outstanding shares. In seeking its objective, the Fund will invest in
long-term Municipal Obligations. The Fund will operate subject to a fundamental
investment policy providing that, under normal conditions, the Fund will invest
at least 80% of its net assets in Municipal Obligations. No assurance can be
given that the Fund's investment objective will be achieved.
The Fund normally invests at least 80% of its net assets in Municipal
Obligations rated investment grade, that is, rated no lower than Baa, MIG-3 or
Prime-1 by Moody's, BBB, SP-2 or A-1 by S&P or BBB or F-1 by Fitch. Up to 20% of
the
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Investment Objective and Policies (continued)
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Fund's total assets may be invested in unrated securities that are deemed by the
Investment Manager to be of a quality comparable to investment grade. The Fund
will not invest in Municipal Obligations that are rated lower than Baa by
Moody's or BBB by S&P or Fitch at the time of purchase. A description of the
relevant Moody's, S&P and Fitch ratings is set forth in the Appendix to the SAI.
Although Municipal Obligations rated Baa by Moody's or BBB by S&P or Fitch are
considered to be investment grade, they may be subject to greater risks than
other higher-rated investment-grade securities. Municipal Obligations rated Baa
by Moody's, for example, are considered medium-grade obligations that lack
outstanding investment characteristics and have speculative characteristics as
well. Municipal Obligations rated BBB by S&P are regarded as having an adequate
capacity to pay principal and interest. Municipal Obligations rated BBB by Fitch
are deemed to be subject to a higher likelihood that their rating will fall
below investment grade than higher-rated bonds.
The Fund is classified as a non-diversified fund under the 1940 Act, which
means that the Fund is not limited by the 1940 Act in the proportion of its
assets that it may invest in the obligations of a single issuer. The Fund
intends to conduct its operations, however, so as to qualify as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"), which will relieve the Fund of any liability for Federal
income tax to the extent that its earnings are distributed to shareholders. To
qualify as a regulated investment company, the Fund will, among other things,
limit its investments so that, at the close of each quarter of its taxable year
(1) not more than 25% of the market value of the Fund's total assets will be
invested in the securities of a single issuer and (2) with respect to 50% of the
market value of its total assets, not more than 5% of the market value of its
total assets will be invested in the securities of a single issuer. See
"Taxation."
The Fund generally will not invest more than 25% of its total assets in any
industry. Governmental issuers of Municipal Obligations are not considered part
of any industry. Municipal Obligations backed only by the assets and revenues of
non-governmental users may be deemed to be issued by the non-governmental users,
and would be subject to the Fund's 25% industry limitation. The Fund may invest
more than 25% of its total assets in a broad segment of the Municipal
Obligations market if the Investment Manager determines that the yields
available from obligations in a particular segment of the market justify the
additional risks associated with a large investment in the segment. The Fund
reserves the right to invest more than 25% of its assets in industrial
development bonds ("IDBs") or in issuers located in the same state, although it
has no current intention of investing 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.
Municipal Obligations are classified as general obligation bonds, revenue
bonds and notes. General obligation bonds are secured by the issuer's pledge of
its
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Investment Objective and Policies (continued)
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full faith, credit and taxing power for the payment of principal and
interest. Revenue bonds are payable from the revenue derived from a particular
facility or class of facilities or, in some cases, from the proceeds of a
special excise tax or other specific revenue source, but not from the general
taxing power. Notes are short-term obligations of issuing municipalities or
agencies and are sold in anticipation of a bond sale, collection of taxes or
receipt of other revenues. Municipal Obligations bear fixed, floating and
variable rates of interest, and variations exist in the security of Municipal
Obligations, both within a particular classification and between
classifications. The types of Municipal Obligations in which the Fund may invest
are described in Appendix A to this Prospectus.
The yields on, and values of, Municipal Obligations depend on a variety of
factors, including general economic and monetary conditions, money market
factors, conditions in the Municipal Obligations markets, size of a particular
offering, maturity of the obligation and rating of the issue. Consequently,
Municipal Obligations with the same maturity, coupon and rating may have
different yields or values, whereas obligations of the same maturity and coupon
with different ratings may have the same yield or value.
Opinions relating to the validity of Municipal Obligations and to the
exemption of interest on them from Federal taxes are rendered by bond counsel to
the respective issuers at the time of issuance. Neither the Fund nor the
Investment Manager will review the procedures relating to the issuance of
Municipal Obligations or the basis for opinions of counsel. Issuers of Municipal
Obligations may be subject to the provisions of bankruptcy, insolvency and other
laws, such as the Federal Bankruptcy Reform Act of 1978, affecting the rights
and remedies of creditors. In addition, the obligations of those issuers may
become subject to laws enacted in the future by Congress, state legislatures or
referenda extending the time for payment of principal and/or interest, or
imposing other constraints upon enforcement of the obligations or upon the
ability of municipalities to levy taxes. The possibility also exists that, as a
result of litigation or other conditions, the power or ability of any issuer to
pay, when due, the principal of, and interest on, its obligations may be
materially affected.
Under normal conditions, the Fund may hold up to 20% of its total assets in
cash or money market instruments, including taxable money market instruments
(collectively, "Taxable Investments"). In addition, the Fund may take a
temporary defensive posture and invest without limitation in short-term
Municipal Obligations and Taxable Investments, upon a determination by the
Investment Manager that market conditions warrant such a posture. To the extent
the Fund holds Taxable Investments, the Fund may not be fully achieving its
investment objective.
Investment Techniques
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
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Investment Objective and Policies (continued)
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When-Issued and Delayed-Delivery Securities. The Fund may purchase
securities on a when-issued basis, or may purchase or sell securities for
delayed delivery. In when-issued or delayed-delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but no payment or
delivery will be made by the Fund prior to the actual delivery or payment by the
other party to the transaction. The Fund will not accrue income with respect to
a when-issued or delayed-delivery security prior to its stated delivery date.
The Fund will establish with PNC Bank a segregated account consisting of cash,
U.S. government securities, or debt obligations of any grade in an amount equal
to or greater than the amount of the Fund's when-issued and delayed-delivery
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 Fund's Directors. Placing securities
rather than cash in the segregated account may have a leveraging effect on the
Fund's net asset value per share; that is, to the extent that the Fund remains
substantially fully invested in securities at the same time that it has
committed to purchase securities on a when-issued or delayed-delivery basis,
greater fluctuations in its net asset value per share may occur than if it had
set aside cash to satisfy its purchase commitments.
Stand-By Commitments. The Fund may acquire "stand-by commitments" with
respect to Municipal Obligations it holds. Under a stand-by commitment, which
resembles a put option, a broker, dealer or bank is obligated to repurchase at
the Fund's option specified securities at a specified price. Each exercise of a
stand-by commitment, therefore, is subject to the ability of the seller to make
payment on demand. The Fund will acquire stand-by commitments solely to
facilitate liquidity and does not intend to exercise the rights afforded by the
commitments for trading purposes.
Financial Futures and Options Transactions. To hedge against a decline in
the value of Municipal Obligations it owns or an increase in the price of
Municipal Obligations it proposes to purchase, the Fund may enter into financial
futures contracts and invest in options on financial futures contracts that are
traded on a U.S. exchange or board of trade. The futures contracts or options on
futures contracts that may be entered into by the Fund will be restricted to
those that are either based on an index of Municipal Obligations or relate to
debt securities the prices of which are anticipated by the Investment Manager to
correlate with the prices of the Municipal Obligations owned or to be purchased
by the Fund. Commodity Futures Trading Commission ("CFTC") regulations
applicable to the Fund require that its transactions in futures and options be
engaged in for "bona fide hedging" purposes or other permitted purposes,
provided that aggregate initial margin deposits and premiums required to
establish positions other than those considered by the CFTC to be "bona fide
hedging" will not exceed 5% of the Fund's net asset value, after taking into
account unrealized profits and unrealized losses on such contracts.
A financial futures contract provides for the future sale by one party and
the purchase by another party of a certain amount of a specified property at a
specified
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
price, date, time and place. Unlike a direct investment in a futures
contract, an option on a financial futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in the financial
futures contract at a specified exercise price at any time prior to the
expiration date of the option. Upon exercise of an option, the delivery of the
futures position by the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the writer's futures
margin account, which represents the amount by which the market price of the
futures contract exceeds, in the case of a call, or is less than, in the case of
a put, the exercise price of the option on the futures contract. The potential
loss related to the purchase of an option on financial futures contracts is
limited to the premium paid for the option (plus transaction costs). The value
of the option may change daily and that change would be reflected in the net
asset value of the Fund.
Lending Securities. The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations, but it will not lend
securities to any affiliate of the Investment Manager unless the Fund applies
for and receives specific authority to do so from the SEC. Loans of the Fund's
securities, if and when made, may not exceed 331 1/43% of the value of the
Fund's total assets taken at value. The Fund's loans of securities will be
collateralized by cash, letters of credit or U.S. government securities that
will be maintained at all times in a segregated account with PNC Bank in an
amount equal to the current market value of the loaned securities.
Repurchase Agreements. The Fund may enter into repurchase agreement
transactions with banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. A repurchase agreement is a contract under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price on an agreed-upon date. Under the terms of a
typical repurchase agreement, the Fund would acquire an underlying debt
obligation for a relatively short period subject to an obligation of the seller
to repurchase, and the Fund to resell, the obligation at an agreed-upon price
and time, thereby determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Fund's holding period. Under each repurchase agreement,
the selling institution will be required to maintain the value of the securities
subject to the repurchase agreement at not less than their repurchase price.
Risk Factors and Special Considerations
Investment in the Fund involves risk factors and special considerations,
such as those described below:
Municipal Obligations. Market rates of interest available with respect to
Municipal Obligations generally may be lower than those available with respect
to taxable securities, although the differences may be wholly or partially
offset by
13
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
the effects of Federal income tax on income derived from taxable securities. The
amount of available information about the financial condition of issuers of
Municipal Obligations may be less extensive than that for corporate issuers with
publicly traded securities, and the market for Municipal Obligations may be less
liquid than the market for corporate debt obligations. Although the Fund's
policy will generally be to hold Municipal Obligations until their maturity, the
relative illiquidity of some of the Fund's securities may adversely affect the
ability of the Fund to dispose of the 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 certain Municipal Obligations may be obligated to redeem
the obligations at face value, redemption could result in capital losses to the
Fund to the extent that the Municipal Obligations were purchased by the Fund at
a premium to face value.
Although the Municipal Obligations in which the Fund may invest will be
rated, at the time of investment, investment grade, municipal securities, like
other debt obligations, are subject to the risk of non-payment by their issuers.
The ability of issuers of Municipal Obligations to make timely payments of
interest and principal may be adversely affected in general economic downturns
and as relative governmental cost burdens are allocated and reallocated among
Federal, state and local governmental units. Non-payment by an issuer would
result in a reduction of income to the Fund, and could result in a reduction in
the value of the Municipal Obligations experiencing non-payment and a potential
decrease in the net asset value of the Fund.
Unrated Securities. The Fund may invest in unrated securities that the
Investment Manager determines to be of comparable quality to the rated
securities in which the Fund may invest. Dealers may not maintain daily markets
in unrated securities, and retail secondary markets for many of them may not
exist. As a result, the Fund's ability to sell these securities when the
Investment Manager deems it appropriate may be diminished.
Municipal Leases. Municipal leases in which the Fund may invest have
special risks not normally associated with Municipal Obligations. Municipal
leases frequently contain non-appropriation clauses that provide that the
governmental issuer of the obligation need not make future payments under the
lease or contract unless money is appropriated for that purpose by a legislative
body annually or on another periodic basis. Moreover, although a municipal lease
typically will be secured by financed equipment or facilities, the disposition
of the equipment or facilities in the event of foreclosure might prove
difficult.
Non-Publicly Traded Securities. As suggested above, the Fund may, from time
to time, invest a portion of its assets in non-publicly traded Municipal
Obligations.
14
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
Non-publicly traded securities may be less liquid than publicly traded
securities. Although non-publicly traded securities may be resold in privately
negotiated transactions, the prices realized from these sales could be less than
those originally paid by the Fund.
When-Issued and Delayed-Delivery Transactions. Securities purchased on a
when-issued or delayed-delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery.
Purchasing securities on a when-issued or delayed-delivery basis can involve the
additional risk that the yield available in the market when the delivery takes
place may be higher than that obtained in the transaction itself.
Lending Securities. The risks associated with lending Fund securities, as
with other extensions of credit, consist of possible loss of rights in the
collateral should the borrower fail financially.
Financial Futures and Options. Although the Fund intends to enter into
financial futures contracts and options on financial futures contracts that are
traded on a U.S. exchange or board of trade only if an active market exists for
those instruments, no assurance can be given that an active market will exist
for them at any particular time. If closing a futures position in anticipation
of adverse price movements is not possible, the Fund would be required to make
daily cash payments of variation margin. In those circumstances, an increase in
the value of the portion of the Fund's investments being hedged, if any, may
offset partially or completely losses on the futures contract. No assurance can
be given, however, that the price of the securities being hedged will correlate
with the price movements in a futures contract and, thus, provide an offset to
losses on the futures contract or option on the futures contract. In addition,
in light of the risk of an imperfect correlation between securities held by the
Fund that are the subject of a hedging transaction and the futures or options
used as a hedging device, the hedge may not be fully effective because, for
example, losses on the securities held by the Fund may be in excess of gains on
the futures contract or losses on the futures contract may be in excess of gains
on the securities held by the Fund that were the subject of the hedge. If the
Fund has hedged against the possibility of an increase in interest rates
adversely affecting the value of securities it holds and rates decrease instead,
the Fund will lose part or all of the benefit of the increased value of
securities that it has hedged because it will have offsetting losses in its
futures or options positions.
Non-Diversified Classification. Investment in the Fund, which is classified
as a non-diversified fund under the 1940 Act, may present greater risks to
investors than an investment in a diversified fund. The investment return on a
non-diversified fund typically is dependent upon the performance of a smaller
number of securities relative to the number of securities held in a diversified
fund. The Fund's assumption of large positions in the obligations of a small
number of issuers will affect the value of the securities it holds to a greater
extent than that of a diversified fund in the event of changes in the financial
condition, or in the market's assessment, of the issuers.
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
Investment Restrictions
The Fund has adopted certain fundamental investment restrictions that may
not be changed without the prior approval of the holders of a majority of the
Fund's outstanding voting securities. A "majority of the Fund's outstanding
voting securities" for this purpose means the lesser of (1) 67% or more of the
shares of the Fund's Common Stock present at a meeting of shareholders, if the
holders of 50% of the outstanding shares are present or represented by proxy at
the meeting or (2) more than 50% of the outstanding shares. Among the investment
restrictions applicable to the Fund is that the Fund is prohibited from
borrowing money, except for temporary or emergency purposes, or for clearance of
transactions, and then only in amounts not exceeding 15% of its total assets
(not including the amount borrowed) and as otherwise described in this
Prospectus. When the Fund's borrowings exceed 5% of the value of its total
assets, the Fund will not make any additional investments. In addition, the Fund
will not invest more than 25% of its total assets in the securities of issuers
in any single industry, except that this limitation will not be applicable to
the purchase of U.S. government securities. Also, the Fund may not purchase
securities other than Municipal Obligations and Taxable Investments. For a
complete listing of the investment restrictions applicable to the Fund, see
"Investment Objective and Policies -- Investment Restrictions" in the SAI. All
percentage limitations included in the investment restrictions apply immediately
after a purchase or initial investment, and any subsequent change in any
applicable percentage resulting from market fluctuations will not require the
Fund to dispose of any security that it holds.
16
<PAGE>
- --------------------------------------------------------------------------------
Share Price Data
- --------------------------------------------------------------------------------
The Fund's Common Stock is listed on the NYSE under the symbol "GSI." Smith
Barney intends to make a market in the Fund's Common Stock.
The following table sets forth the high and low sales prices for the Fund's
Common Stock, the net asset value per share and the discount or premium to net
asset value represented by the quotation for each quarterly period since the
Fund's commencement of operations.
Quarterly High Price Quarterly Low Price
-------------------- -------------------
Premium Premium
Net Asset NYSE (Discount) Net Asset NYSE (Discount)
Value Price to NAV Value Price to NAV
================================================================================
11/30/95 $13.09 $11.875 (10.23)% $12.73 $11.375 (11.91)%
2/29/96 12.94 12.250 (5.63) 12.80 11.750 (8.94)
5/31/96 12.80 12.000 (6.67) 12.20 11.250 (8.44)
8/31/96 11.98 11.750 (1.96) 12.10 11.250 (7.56)
11/29/96 12.33 11.750 (4.70) 11.98 11.375 (5.05)
2/28/97 12.29 11.750 (4.39) 11.65 11.250 (3.43)
5/30/97 11.62 11.025 (5.12) 11.26 11.125 (1.20)
8/29/97 11.98 12.000 0.17 11.71 11.500 (1.79)
================================================================================
As of September 5, 1997, the price of Common Stock as quoted on the NYSE
was $11.625, representing a 1.32% discount from the Common Stock's net asset
value calculated on that day.
- --------------------------------------------------------------------------------
Net Asset Value
- --------------------------------------------------------------------------------
The Fund's net asset value will be calculated as of the close of regular
trading on the NYSE, currently 4:00 p.m., New York time, on the last day on
which the NYSE is open for trading of each week and month. Net asset value is
calculated by dividing the value of the Fund's net assets (the value of its
assets less its liabilities, exclusive of capital stock and surplus) by the
total number of shares of Common Stock outstanding. Investments in U.S.
government securities having a maturity of 60 days or less are valued at
amortized cost. All other securities and assets are taken at fair value as
determined in good faith by or under the direction of the Board of Directors.
The valuation of the Fund's assets is made by the Investment Manager after
consultation with an independent pricing service (the "Service") approved by the
Board of Directors. When, in the judgment of the Service, quoted bid prices for
investments are readily available and are representative of the bid side of the
market, these investments are valued at the mean between the quoted bid prices
and asked
17
<PAGE>
- --------------------------------------------------------------------------------
Net Asset Value (continued)
- --------------------------------------------------------------------------------
prices. Investments for which, in the judgment of the Service, no readily
obtainable market quotation is available (which may constitute a majority of the
Fund's portfolio securities) are carried at fair value as determined by the
Service. The Service may use electronic data processing techniques and/or a
matrix system to determine valuations. The procedures of the Service are
reviewed periodically by the officers of the Fund under the general supervision
and responsibility of the Board of Directors, which may replace the Service at
any time if it determines it to be in the best interests of the Fund to do so.
- --------------------------------------------------------------------------------
Taxation
- --------------------------------------------------------------------------------
The following is a summary of the material Federal tax considerations
affecting the Fund and Fund shareholders; please refer to the SAI for a further
discussion. In addition to the considerations described below and in the SAI,
there may be other Federal, state, local, or foreign tax applications to
consider. Because taxes are a complex matter, prospective shareholders are urged
to consult their tax advisers for more detailed information with respect to the
consequences of any investment.
The Fund has qualified and intends to qualify, as it has in prior years,
under Subchapter M of 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 but 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 AMT computation. In addition to the AMT,
corporate shareholders must include 75% of the interrest as an adjustment (the
"current earnings adjustment") in computing corporate minimum taxable income.
Exempt-interest dividends derived from the interest earned on private activity
bonds will not be exempt from Federal income tax for those shareholders
who are "substantial users" (or persons related to "substantial users") of the
facilities financed by these bonds.
Shareholders who receive social security or equivalent railroad retirement
benefits should note that exempt-interest dividends are one of the items taken
into consideration in determining the amount of these benefits that may be
subject to Federal income tax.
The interest expense incurred by a shareholder on borrowings made to
purchase or
18
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
carry Fund shares is 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 are
taxable as long-term capital gains, regardless of the length of time a
shareholder has owned Fund shares. The recently enacted Taxpayer Relief Act
of 1997 provides that net capital gain for taxpayers other than corporations
generally will not be subject to Federal income taxes at a rate in excess of
28% for assets held for more than one year but not more than 18 months,
with a reduced maximum rate of 20% for assets held more than 18 months.
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, including their eligibility for the reduced
maximum 20% capital gains tax rate, 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.
- --------------------------------------------------------------------------------
Management of the Fund
- --------------------------------------------------------------------------------
Board of Directors
Overall responsibility for management and supervision of the Fund rests
with the Fund's Board of Directors. The Directors approve all significant
agreements with the Fund's Investment Manager, Administrator, custodian and
transfer agent. The day-to-day operations of the Fund are delegated to the
Fund's Investment Manager. The SAI contains background information regarding
each Director and executive officer of the Fund.
Investment Manager and Administrator
SBMFM, through its Greenwich Street Advisors division, located at 388
Greenwich Street, New York, New York 10013, serves as the Fund's Investment
Manager.
19
<PAGE>
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
SBMFM (through its predecessor entities) has been in the investment counseling
business since 1934 and is a registered investment adviser. SBMFM renders
investment advice to a wide variety of individuals and institutional clients
that had aggregate assets under management as of August 31, 1997 in excess of
$81 billion. SBMFM is wholly owned by Smith Barney Holdings Inc., ("Holdings")
the parent company of Smith Barney. Holdings is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"), a financial services holding company
engaged, through its subsidiaries, principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance Services and
Property & Casualty Insurance Services. SBMFM, Holdings and Smith Barney are
each located at 388 Greenwich Street, New York, New York 10013.
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 managers and securities analysts who provide research
services to the Fund. The Fund pays the Investment Manager a fee for investment
advisory 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.
In addition, SBMFM serves as the Fund's administrator and is paid a fee by the
Fund that is computed daily and paid monthly at a rate of 0.20% of the value of
its average daily net assets.
Transactions on behalf of the Fund are allocated to various dealers by the
Investment Manager in its best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for their research, statistical
or other services to enable the Investment Manager to supplement its own
research and analysis with the views and information of other securities firms.
The Fund may use Smith Barney in connection with the purchase or sale of
securities when the Investment Manager believes that the broker's charge for the
transaction does not exceed usual and customary levels. The same standard
applies to the use of Smith Barney as a broker in connection with entering into
options and futures contracts. The Fund paid no brokerage commissions in the
last fiscal year.
Fund Management
Joseph P. Deane, Vice President and Investment Officer of the Fund, is
primarily responsible for the management of the Fund's assets. Mr. Deane has
served in this capacity since the Fund commenced operations in 1994 and manages
the day-to-day operations of the Fund, including making all investment
decisions. Mr. Deane is an Investment Officer of SBMFM and is the senior asset
manager for a number of investment companies and other accounts investing in
tax-exempt securities.
20
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distribution; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Fund expects to pay monthly dividends of substantially all net
investment income (that is income, including its tax-exempt income and its
accrued original issue discount income, other than net realized capital gains)
to the holders of Common Stock. Under the Fund's current policy, which may be
changed at any time by its 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. Net income available for distribution
will also be reduced by dividends on any preferred stock.
Under the Fund's Dividend Reinvestment Plan (the "Plan"), a shareholder
whose shares of Common Stock are registered in his or her own name will have all
distributions from the Fund reinvested automatically by First Data as agent
under the Plan, unless the shareholder elects to receive cash. Distributions
with respect to shares registered in the name of a broker-dealer or other
nominee ("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-dealer or nominee, or the shareholder elects to receive distributions in
cash. Investors who own Common Stock registered in Street Name should consult
their broker-dealers for details regarding reinvestment. All distributions to
Fund shareholders who do not participate in the Plan will be paid by check
mailed directly to the record holder by or under the direction of First Data as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds the net asset value
per share at the time shares are valued for purposes of determining the number
of shares equivalent to the cash dividend or capital gains distribution, Plan
participants will be issued shares of Common Stock valued at the greater of (1)
the net asset value per share most recently determined as described under "Net
Asset Value" or (2) 95% of the market value. To the extent the Fund issues
shares to participants in the Plan at a discount to net asset value, the
remaining shareholders' interests in the Fund's net assets will be
proportionately diluted.
If the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock, or if the Fund declares a dividend
or capital gains distribution payable only in cash, First Data 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 First Data
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Fund to
21
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distribution; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
issue the remaining dividend or distribution in shares a price equal to the
greater of (a)net asset value or (b) 95% of the then-current market price. In
this case, the number of shares of Common Stock received by a Plan participant
will be based on the weighted average of prices paid for shares purchased in the
open market and the price at which the Fund issues the remaining shares. To the
extent First Data is unable to stop open market purchases and cause the Fund to
issue the remaining shares, the average per share purchase price paid by First
Data 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. First Data
will begin 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 shall such purchases continue later than 30 days after the payment date
thereof, except when necessary to comply with applicable provisions of the
Federal securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of each Plan participant, and
each shareholder'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's fees for handling the reinvestment of
dividends and capital gains distributions will be paid by the Fund. No brokerage
charges apply with respect to shares of Common Stock issued directly by the Fund
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, P.O. Box 5128, Westborough,
Massachusetts 01581-5128 or by telephone at (800) 451-2010.
22
<PAGE>
- --------------------------------------------------------------------------------
Description of Common Stock
- --------------------------------------------------------------------------------
Amount Outstanding
Exclusive of Shares
Amount Held Held by Portfolio for Its
Amount by Portfolio for Own Account as of
Title of Class Authorized Its Own Account September 5, 1997
================================================================================
Common Stock 500,000,000 Shares 0 19,759,732
================================================================================
No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock have equal
non-cumulative voting rights and equal rights with respect to dividends, assets
and liquidation. Shares of Common Stock will be fully paid and non-assessable
when issued and have no preemptive, conversion or exchange rights. A majority of
the votes cast at any meeting of the shareholders is sufficient to take or
authorize action, except for election of Directors or as otherwise provided in
the Fund's Articles of Incorporation as described under "Certain Provisions of
the Articles of Incorporation and Market Discount."
Under the rules of the NYSE applicable to listed companies, the Fund will
be required to hold an annual meeting of shareholders in each year. If the
Fund's shares are no longer listed on the NYSE (or any other national securities
exchange the rules of which require annual meetings of shareholders), the Fund
may decide not to hold annual meetings of shareholders. See "Stock Purchases and
Tenders" in the SAI.
The Fund has no current intention of offering additional shares, except
that additional shares may be issued under the Plan. See "Dividends and
Distributions; Dividend Reinvestment Plan." Other offerings of shares, if made,
will require approval of the Fund's Board of Directors and will be subject to
the requirement of the 1940 Act that shares may not be sold at a price below the
then-current net asset value (exclusive of underwriting discounts and
commissions) except in connection with an offering to existing shareholders or
with the consent of holders of a majority of the Fund's outstanding shares.
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation and Market Discount
- --------------------------------------------------------------------------------
ANTI-TAKEOVER PROVISIONS
The Fund presently has provisions in its Articles of Incorporation and
By-Laws (commonly referred to as "anti-takeover" provisions) which may have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund, to cause it to engage in certain transactions or to modify its
structure.
The Board of Directors is classified into three classes, each with a term
of three years with only one class of Directors standing for election in any
year. Such classification may prevent replacement of a majority of the Directors
for up to a two-year period. The Articles of Incorporation provide that the
maximum number of Directors that may constitute the Fund's entire board is 12.
Directors may be removed from
23
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Certain Provisions of the Articles of Incorporation (continued)
- --------------------------------------------------------------------------------
office, or the maximum number of Directors increased, only by vote of at least
75% of the shares entitled to be voted on the matter. If approved by two-thirds
of the Fund's Directors, a majority of the shares entitled to vote may approve
the conversion of the Fund from a closed-end to an open-end investment company.
If fewer than two-thirds of the Directors approve such conversion, the
affirmative vote of shareholders holding at least two-thirds of the outstanding
shares will be required to approve such action. If approved by three-fourths of
the Fund's Directors, a majority of the shares entitled to vote may approve: (i)
the dissolution or liquidation of the Fund; (ii) the merger, consolidation or
share exchange of the Fund with or into any other person; or (iii) any sale,
lease, exchange or other disposition by the Fund of any assets of the Fund
having an aggregate market value of $1,000,000, except for transactions in
securities in the ordinary course of business. If fewer than three-fourths of
the Directors approve the actions described in (i) through (iii) above, or in
the case of any business combination described above, the affirmative vote of
shareholders holding at least three-fourths of the outstanding shares will be
required. The affirmative vote of at least 75% of the shares will be required to
amend the Articles of Incorporation or By-Laws 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 a
change in the Fund's business or management more difficult 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. Since the commencement of the Fund's
operations, the Fund's shares have traded in the market at prices that were at
times equal to, but generally were below, net asset value.
Some closed-end investment companies have taken certain actions, including
the repurchase of common stock in the market at market prices and the making of
one or more tender offers for common stock at net asset value, in an effort to
reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value.
24
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Certain Provisions of the Articles of Incorporation (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 and Transfer Agent
- --------------------------------------------------------------------------------
PNC Bank, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania
19103, acts as custodian of the Fund's investments.
First Data, located at One Exchange Place, Boston, Massachusetts 02109, serves
as agent in connection with the Plan and serves as the Fund's transfer agent,
dividend-paying agent and registrar.
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Experts
- --------------------------------------------------------------------------------
The audited financial statements have been incorporated by reference in the
SAI in reliance upon the report of KPMG Peat Marwick LLP, independent auditors,
and upon the authority of said firm as experts in accounting and auditing.
- --------------------------------------------------------------------------------
Further Informatioon
- --------------------------------------------------------------------------------
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 make any
representations not contained in this Prospectus and, if given or made, such
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 any offer to buy any security
other than the shares of Common Stock, nor does it constitute an offer to sell
or a solicitation of any 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 shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Fund since the date hereof. If any material change occurs while
this Prospectus is required by law to be delivered, however, this Prospectus
will be supplemented or amended accordingly.
25
<PAGE>
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Appendix A
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TYPES OF MUNICIPAL OBLIGATIONS
The Portfolio may invest in the following types of Municipal Obligations
and in such other types of Municipal Obligations.
Municipal Bonds
Municipal bonds are debt obligations issued to obtain funds for various
public purposes. The two principal classifications of municipal bonds are
"general obligation" and "revenue" bonds. General obligation bonds are secured
by the issuer's pledge of its full faith, credit and taxing power for the
payment of principal and interest. Revenue bonds are payable only from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or from another specific
source, such as the user of the facility being financed. Certain municipal bonds
are "moral obligation" issues, which normally are issued by special purpose
public authorities. In the case of such issues, an express or implied "moral
obligation" of a stated government unit is pledged to the payment of the debt
service but is usually subject to annual budget appropriations.
Industrial Development Bonds and Private Activity Bonds
Industrial development bonds ("IDBs") and private activity bonds ("PABs")
are municipal bonds issued by or on behalf of public authorities to finance
various privately operated facilities, such as airports or pollution control
facilities. IDBs and PABs generally do not carry the pledge of the credit of the
issuing municipality, but are guaranteed by the corporate entity on whose behalf
they are issued. IDBs and PABs are generally revenue bonds and thus are not
payable from the unrestricted revenue of the issuer. The credit quality of IDBs
and PABs is usually directly related to the credit standing of the user of the
facilities being financed.
Municipal Lease Obligations
Municipal lease obligations are Municipal Obligations that may take the
form of leases, installment purchase contracts or conditional sales contracts,
or certificates of participation with respect to such contracts or leases.
Municipal lease obligations are issued by state and local governments and
authorities to purchase land or various types of equipment and facilities.
Although municipal lease obligations do not constitute general obligations of
the municipality for which the municipality's taxing authority is pledged, they
ordinarily are backed by the municipality's covenant to budget for, appropriate
and make the payments due under the lease obligation. The leases underlying
certain Municipal Obligations, however, provide that lease payments are subject
to partial or full abatement if, because of material damage or destruction of
the leased property, there is substantial interference with the lessee's use or
occupancy of such property. This "abatement risk" may be reduced by the
existence of insurance covering the leased property, the maintenance
A-1
<PAGE>
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Appendix A (continued)
- --------------------------------------------------------------------------------
by the lessee of reserve funds or the provision of credit enhancements such as
letters of credit.
The liquidity of municipal lease obligations varies. Municipal leases held
by the Portfolio will be considered illiquid securities unless the Portfolio's
Board of Directors determines on an on-going basis that the leases are readily
marketable. Certain municipal lease obligations contain "non-appropriation"
clauses which provide that the municipality has no obligation to make lease or
installment purchase payments in future years unless money is appropriated for
such purpose on a yearly basis. In the case of a "non-appropriation" lease, the
Portfolio's ability to recover under the lease in the event of non-appropriation
or default will be limited solely to the repossession of the leased property,
without recourse to the general credit of the lessee, and disposition of the
property in the event of foreclosure might be difficult. The Portfolio will not
invest more than 5% of its assets in such "non-appropriation" municipal lease
obligations.
Zero Coupon Obligations
The Portfolio may invest in zero coupon Municipal Obligations. Such
obligations include "pure zero" obligations, which pay no interest for their
entire life (either because they bear no stated rate of interest or because
their stated rate of interest is not payable until maturity), and "zero/fixed"
obligations, which pay no interest for an initial period and thereafter pay
interest currently. Zero coupon obligations also include securities representing
the principal-only components of Municipal Obligations from which the interest
components have been stripped and sold separately by the holders of the
underlying Municipal Obligations. Zero coupon securities usually trade at a deep
discount from their face or par value and will be subject to greater
fluctuations in market value in response to changing rates than obligations of
comparable maturity that make current distributions of interest. While zero
coupon Municipal Obligations will not contribute to the cash available to the
Portfolio, SBMFM believes that limited investments in such securities may
facilitate the Portfolio's ability to preserve capital while generating
tax-exempt income through the accrual of original interest discount. Zero coupon
Municipal Obligations generally are liquid, although such liquidity may be
reduced from time to time due to interest rate volatility and other factors.
Floating- and Variable-Rate Obligations
The Portfolio may purchase floating- and variable-rate municipal notes and
bonds, which frequently permit the holder to demand payment of principal at any
time, or at specified intervals, and permit the issuer to prepay principal, plus
accrued interest, at its discretion after a specified notice period. The
issuer's obligations under the demand feature of such notes and bonds generally
are secured by bank letters of credit or other credit support arrangements.
There frequently will be
A-2
<PAGE>
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Appendix A (continued)
- --------------------------------------------------------------------------------
no secondary market for variable- and floating-rate obligations held by the
Portfolio, although the Portfolio may be able to obtain payment of principal at
face value by exercising the demand feature of the obligation.
Participation Interests
The Portfolio may invest up to 5% of its total assets in participation
interests in municipal bonds, including IDBs, PABs and floating- and
variable-rate securities. A participation interest gives the Portfolio an
undivided interest in a municipal bond owned by a bank. The Portfolio has the
right to sell the instrument back to the bank. If the participation interest is
unrated, it will be backed by an irrevocable letter of credit or guarantee of a
bank that the Portfolio's Board of Directors has determined meets certain credit
quality standards or the payment obligation will otherwise be collateralized by
U.S. government securities. The Portfolio will have the right, with respect to
certain participation interests, to draw on the letter of credit on demand,
after specified notice for all or any part of the principal amount of the
Portfolio's participation interest, plus accrued interest. Generally, the
Portfolio intends to exercise the demand under the letters of credit or other
guarantees only upon a default under the terms of the underlying bond, or to
maintain the Portfolio's assets in accordance with its investment objective and
policies. The ability of a bank to fulfill its obligations under a letter of
credit or guarantee might be affected by possible financial difficulties of its
borrowers, adverse interest rate or economic conditions, regulatory limitations
or other factors. SBMFM will monitor the pricing, quality and liquidity of the
participation interests held by the Portfolio and the credit standing of the
banks issuing letters of credit or guarantees supporting such participation
interests on the basis of published financial information reports of rating
services and bank analytical services.
Custodial Receipts
The Portfolio may acquire custodial receipts or certificates underwritten
by securities dealers or banks that evidence ownership of future interest
payments, principal payments or both on certain Municipal Obligations. The
underwriter of these certificates or receipts typically purchases Municipal
Obligations and deposits the obligations in an irrevocable trust or custodial
account with a custodian bank, which then issues receipts or certificates that
evidence ownership of the periodic unmatured coupon payments and the final
principal payment on the obligations. Custodial receipts evidencing specific
coupon or principal payments have the same economic attributes as zero coupon
Municipal Obligations described above. Although under the terms of the custodial
receipt the Portfolio would be typically authorized to assert its rights
directly against the issuer of the underlying obligation, the Portfolio could be
required to assert through the custodian bank those rights that may exist
against the underlying issuer. Thus, in the event the underlying issuer
A-3
<PAGE>
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Appendix A (continued)
- --------------------------------------------------------------------------------
fails to pay principal or interest when due, the Portfolio may be subject to
delays, expenses and risks that are greater than those that would have been
involved if the Portfolio had purchased a direct obligation of the issuer. In
addition, in the event that the trust or custodial account in which the
underlying security has been deposited is determined to be an association
taxable as a corporation, instead of a non-taxable entity, the yield on the
underlying security would be reduced in recognition of any taxes paid.
Municipal Obligation Components
The Portfolio may invest in Municipal Obligations, the interest rate on
which has been divided by the issuer into two different and variable component,
which together result in a fixed interest rate. Typically, the first component
(the "Auction Component") pays an interest rate that is reset periodically
through an auction process, whereas the second component (the "Residual
Component") pays a residual interest rate based on the difference between the
total interest paid by the issuer on the Municipal Obligation and the auction
rate paid on the Auction Component. The Portfolio may purchase both Auction and
Residual Components.
Because the interest rate paid to holders of Residual Components is
generally determined by subtracting the interest rate paid to the holders of
Auction Components from a fixed amount, the interest rate paid to Residual
Component holders will decrease as the Auction Component's rate increases and
increase as the Auction Component's rate decreases. Moreover, the extent of the
increases and decreases in market value of Residual Components may be larger
than comparable changes in the market value of an equal principal amount of a
fixed-rate Municipal Obligation having similar credit quality, redemption
provisions and maturity.
A-4
<PAGE>
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- --------------------------------------------------------------------------------
SMITH BARNEY
A Member of TravelersGroup[LOGO]
Greenwich
Street
Municipal
Fund
Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FDO 1204 10/97
PART B
Greenwich Street Municipal Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
STATEMENT OF ADDITIONAL INFORMATION
September 26, 1997
Greenwich Street Municipal Fund Inc. (the "Fund") is a
non-diversified, closed-end management investment company that
seeks as high a level of current income exempt from Federal
income tax as is consistent with the preservation of principal.
Under normal conditions, the Fund will, in seeking its
investment objective, invest substantially all of its assets in
long-term, investment grade obligations issued by state and
local governments, political subdivisions, agencies and public
authorities ("Municipal Obligations"). No assurance can be
given that the Fund will be able to achieve its investment
objective.
This Statement of Additional Information ("SAI") expands
upon and supplements the information contained in the current
Prospectus of the Fund, dated September 26, 1997 as
amended or supplemented from time to time (the "Prospectus"),
and should be read in conjunction with the Prospectus. The
Prospectus may be obtained from any Smith Barney Financial
Consultant or by writing or calling the Fund at the address or
telephone number set forth above. This SAI, although not itself
a prospectus, is incorporated by reference into the Prospectus
in its entirety.
No person has been authorized to give any information or
to make any representations not contained in the Prospectus or
this SAI and, if given or made, such information must not be
relied upon as having been authorized by the Fund or the Fund's
investment manager. The Prospectus and this SAI do not
constitute an offer to sell or a solicitation of any offer to
buy any security other than the shares of the Fund's Common
Stock ("Common Stock"). The Prospectus and this SAI do not
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 such offer or solicitation would be unlawful. Neither the
delivery of the Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that there has
been no change in the affairs of the Fund since the date hereof.
If any material change occurs while the Prospectus is required
by law to be delivered, however, the Prospectus or this SAI will
be supplemented or amended accordingly.
TABLE OF CONTENTS
Page
Investment Objective and Policies (see in the Prospectus
"Investment Objective and Policies" and "Appendix A") 2
Management of the Fund (see in the Prospectus "Management of
the Fund") 12
Taxes (see in Prospectus "Taxation") 17
Stock Purchases and Tenders 20
Certain Provisions of the Articles of Incorporation (see in the
Prospectus
"Certain Provision of the Articles of Incorporation and Market
Discount") 21
Additional Information (see in the Prospectus "Custodian and
Transfer Agent") 23
Appendix-- Description of Moody's, S&P and Fitch Ratings A-1
INVESTMENT OBJECTIVE AND POLICIES
The Prospectus discusses the Fund's investment objective
and the policies it employs to achieve that objective. The
following discussion supplements the description of the Fund's
investment policies in the Prospectus. The Fund's investment
objective is to seek as high a level of current income exempt
from Federal income taxes as is consistent with the preservation
of principal by investing substantially all of its assets in a
variety of Municipal Obligations. The Fund's investment
objective may not be changed without the affirmative vote of the
holders of a majority (as defined in the Investment Company Act
of 1940, as amended (the "1940 Act")) of the Fund's outstanding
voting shares. No assurance can be given that the Fund's
investment objective will be achieved.
Use of Ratings as Investment Criteria
In general, the ratings of Moody's Investors Service, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") and Fitch
Investors Service, Inc. ("Fitch") represent the opinions of
those agencies as to the quality of the Municipal Obligations
and long-term investments which they rate. It should be
emphasized, however, that such ratings are relative and
subjective, are not absolute standards of quality and do not
evaluate the market risk of securities. These ratings will be
used as initial criteria for the selection of securities, but
the Fund also will rely upon the independent advice of its
investment manager, the Greenwich Street Advisors division of
Smith Barney Mutual Funds Management Inc. ("SBMFM" or the
"Investment Manager"). Among the factors that will also be
considered by the Investment Manager in evaluating potential
Municipal Obligations to be held by the Fund are the price,
coupon and yield to maturity of the obligations, the Investment
Manager's assessment of the credit quality of the issuer of the
obligations, the issuer's available cash flow and the related
coverage ratios, the property, if any, securing the obligations,
and the terms of the obligations, including subordination,
default, sinking fund and early redemption provisions. To the
extent the Fund invests in lower-rated and comparable unrated
securities, the Fund's achievement of its investment objective
may be more dependent on the Investment Manager's credit
analysis of such securities than would be the case for a
portfolio consisting entirely of higher-rated securities. The
Appendix to this SAI contains information concerning the ratings
of Moody's, S&P and Fitch and their significance.
Subsequent to its purchase by the Fund, an issue of
Municipal Obligations may cease to be rated or its rating may be
reduced below the rating given at the time the securities were
acquired by the Fund. Neither event will require the sale of
such Municipal Obligations by the Fund, but the Investment
Manager will consider such event in its determination of whether
the Fund should continue to hold the Municipal Obligations. In
addition, to the extent the ratings change as a result of
changes in the rating systems or due to a corporate
restructuring of Moody's, S&P or Fitch, the Fund will attempt to
use comparable ratings as standards for its investments in
accordance with its investment objectives and policies.
The Fund will seek to invest substantially all of its
assets in Municipal Obligations, and under normal conditions at
least 80% of the Fund's total assets will be invested in
investment-grade Municipal Obligations.
The Fund may invest in Municipal Obligations rated as low
as Baa by Moody's or BBB by S&P or Fitch or in unrated Municipal
Obligations deemed by the Investment Manager to be of comparable
quality. Although such securities are considered investment
grade, they may be subject to greater risks than other higher-
rated investment grade securities.
While the market for Municipal Obligations is considered
to be generally adequate, the existence of limited markets for
particular lower-rated and comparable unrated securities may
diminish the Fund's ability to (1) obtain accurate market
quotations for purposes of valuing such securities and
calculating its net asset value and (2) sell the securities at
fair value to respond to changes in the economy or in the
financial markets. The market for certain lower-rated and
comparable unrated securities is relatively new and has not
fully weathered a major economic recession. Any such economic
downturn could adversely affect the ability of the issuers of
such securities to repay principal and pay interest thereon.
Taxable Investments
Under normal conditions, the Fund may hold up to 20% of
its assets in cash or money market instruments, including
taxable money market instruments (collectively, "Taxable
Investments").
Money market instruments in which the Fund may invest
include: U.S. government securities; tax-exempt notes of
municipal issuers rated, at the time of purchase, no lower than
MIG1 by Moody's, SP-1 by S&P or F-1 by Fitch or, if not rated,
by issuers having outstanding unsecured debt then rated within
the three highest rating categories; bank obligations (including
certificates of deposit ("CDs"), time deposits and bankers'
acceptances of domestic banks, domestic savings and loan
associations and similar institutions); commercial paper rated
no lower than P-1 by Moody's, A-1 by S&P or F-l by Fitch or the
equivalent from another nationally recognized rating service or,
if unrated, of an issuer having an outstanding, unsecured debt
issue then rated within the three highest rating categories; and
repurchase agreements. At no time will the Fund's investments
in bank obligations, including time deposits, exceed 25% of the
value of its assets.
U.S. government securities in which the Fund may invest
include direct obligations of the United States and obligations
issued by U.S. government agencies and instrumentalities.
Included among direct obligations of the United States are
Treasury bills, Treasury notes and Treasury bonds, which differ
principally in terms of their maturities. Included among the
securities issued by U.S. government agencies and
instrumentalities are: securities that are supported by the full
faith and credit of the United States (such as Government
National Mortgage Association ("GNMA") certificates); securities
that are supported by the right of the issuer to borrow from the
U.S. Treasury (such as securities of Federal Home Loan Banks);
and securities that are supported by the credit of the
instrumentality (such as Federal National Mortgage Association
and Federal Home Loan Mortgage Corporation bonds).
Lending Securities
By lending its securities, the Fund can increase its
income by continuing to receive interest on the loaned
securities, by investing the cash collateral in short-term
instruments or by obtaining yield in the form of interest paid
by the borrower when U.S. government securities are used as
collateral. The Fund will adhere to the following conditions
whenever it lends its securities: (1) the Fund must receive at
least 100% cash collateral or equivalent securities from the
borrower, which will be maintained by daily marking-to-market;
(2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of
the collateral; (3) the Fund must be able to terminate the loan
at any time; (4) the Fund must receive reasonable interest on
the loan, as well as any dividends, interest or other
distributions on the loaned securities, and any increase in
market value; (5) the Fund may pay only reasonable custodian
fees in connection with the loan; and (6) voting rights on the
loaned securities may pass to the borrower, except that, if a
material event adversely affecting the investment in the loaned
securities occurs, the Fund's Board of Directors must terminate
the loan and regain the Fund's right to vote the securities.
From time to time, the Fund may pay a part of the interest
earned from the investment of collateral received for securities
loaned to the borrower and/or a third party that is unaffiliated
with the Fund and that is acting as a "finder."
Repurchase Agreements
The Fund may enter into repurchase agreements with certain
member banks of the Federal Reserve System and certain dealers
on the Federal Reserve Bank of New York's list of reporting
dealers. Under the terms of a typical repurchase agreement, the
Fund would acquire an underlying debt obligation for a
relatively short period (usually not more than one week) subject
to an obligation of the seller to repurchase and the Fund to
resell the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. Under
each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price.
The Investment Manager, acting under the supervision of the
Fund's Board of Directors, reviews on an ongoing basis the value
of the collateral and the creditworthiness of those banks and
dealers with which the Fund enters into such transactions. The
Fund will bear a risk of loss in the event that the other party
to the transaction defaults on its obligations and the Fund is
delayed or prevented from exercising its rights to dispose of
the underlying securities, including the risk of a possible
decline in the value of the underlying securities during the
period in which the Fund seeks to assert its rights to them, the
risk of incurring expenses associated with asserting those
rights and the risk of losing all or a part of the income from
the agreement.
Investments in Municipal Obligation Index and Interest Rate
Futures Contracts and Options on Interest Rate Futures Contracts
The Fund may invest in Municipal Obligation index and
interest rate futures contracts and options on interest rate
futures contracts that are traded on a domestic exchange or
board of trade. Such investments may be made by the Fund solely
for the purpose of hedging against changes in the value of its
portfolio securities due to anticipated changes in interest
rates and market conditions, and not for purposes of
speculation. Further, such investments will be made only in
unusual circumstances, such as when the Investment Manager
anticipates an extreme change in interest rates or market
conditions.
Municipal Obligation Index and Interest Rate Futures
Contracts. A Municipal Obligation index futures contract is an
agreement to take or make delivery of an amount of cash equal to
a specific dollar amount times the difference between the value
of the index at the close of the last trading day of the
contract and the price at which the index contract is originally
written. No physical delivery of the underlying Municipal
Obligations in the index is made. Interest rate futures
contracts are contracts for the future purchase or sale of
specified interest rate-sensitive debt securities of the U.S.
Treasury, such as Treasury bills, bonds and notes, obligations
of the GNMA and bank CDs. Although most interest rate futures
contracts require the delivery of the underlying securities,
some settle in cash. Each contract designates the price, date,
time and place of delivery.
The purpose of the Fund's entering into a Municipal
Obligation index or interest rate futures contract, as the
holder of long-term Municipal Obligations, is to protect the
Fund from fluctuation in interest rates on tax-exempt securities
without actually buying or selling Municipal Obligations. The
Fund will, with respect to its purchases of financial futures
contracts establish a segregated account consisting of cash,
U.S. government securities, equity securities or debt securities
of any grade equal in an amount equal to or greater than the
total market value of the futures contracts less the amount of
initial margin on deposit for the contracts.
Unlike the purchase or sale of a Municipal Obligation, no
consideration is paid or received by the Fund upon the purchase
or sale of a futures contract. Initially, the Fund will be
required to deposit with the futures commission merchant an
amount of cash or cash equivalents equal to approximately 5% of
the contract amount (this amount is subject to change by the
board of trade on which the contract is traded and members of
such board of trade may charge a higher amount). This amount is
known as "initial margin" and is in the nature of a performance
bond or good faith deposit on the contract which is returned to
the Fund upon termination of the futures contract, assuming that
all contractual obligations have been satisfied. Subsequent
payments known as "variation margin," to and from the futures
commission merchant, will be made on a daily basis as the price
of the index or securities fluctuates, making the long and short
positions in the futures contract more or less valuable, a
process known as marking-to-market. At any time prior to the
expiration of the contract, the Fund may elect to close the
position by taking an opposite position, which will operate to
terminate the Fund's existing position in the futures contract.
There are several risks in connection with the use of
Municipal Obligation index and interest rate futures contracts
as hedging devices. Successful use of these futures contracts
by the Fund is subject to the Investment Manager's ability to
predict correctly movements in the direction of interest rates.
Such predictions involve skills and techniques which may be
different from those involved in the management of a long-term
Municipal Obligation portfolio. In addition, there can be no
assurance that a correlation would exist between movements in
the price of the Municipal Obligation index or the debt security
underlying the futures contract and movement in the price of the
Municipal Obligations which are the subject of the hedge. The
degree of correlation depends upon various circumstances, such
as variations in speculative market demand for futures contracts
and Municipal Obligations and technical influences on futures
trading. The Fund's Municipal Obligations and the Municipal
Obligations in the index may also differ with respect to
interest rate levels, maturities and creditworthiness of
issuers. A decision of whether, when and how to hedge involves
the exercise of skill and judgment and even a well-conceived
hedge may be unsuccessful to some degree because of market
behavior or unexpected trends in interest rates.
Although the Fund intends to enter into futures contracts
only if an active market exists for such contracts, there can be
no assurance that an active market will exist for a contract at
any particular time. Most domestic futures exchanges and boards
of trade limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit
establishes the maximum amount the price of a futures contract
may vary either up or down from the previous day's settlement
price at the end of a trading session. Once the daily limit has
been reached in a particular contract, no trades may be made
that day at a price beyond that limit. The daily limit governs
only price movement during a particular trading day and
therefore does not limit potential losses because the limit may
prevent the liquidation of unfavorable positions. It is
possible that futures contract prices could move to the daily
limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures
positions and subjecting some futures traders to substantial
losses. In such event it will not be possible to close a
futures position and in the event of adverse price movements,
the Fund would be required to make daily cash payments of
variation margin. In such circumstances, an increase in the
value of the portion of the Fund being hedged, if any, may
partially or completely offset losses on the futures contract.
As described above, however, there is no guarantee that the
price of Municipal Obligations will, in fact, correlate with the
price movements in a futures contract and thus provide an offset
to losses on a futures contract.
If the Fund has hedged against the possibility of an
increase in interest rates adversely affecting the value of
Municipal Obligations it holds and rates decrease instead, the
Fund will lose part or all of the benefit of the increased value
of the Municipal Obligations it has hedged because it will have
offsetting losses in its futures positions. In addition, in
such situations, if the Fund has insufficient cash, it may have
to sell securities to meet daily variation margin requirements.
Such sales of securities may, but will not necessarily, be at
increased prices which reflect the decline in interest rates.
The Fund may have to sell securities at a time when it may be
disadvantageous to do so.
Options on Interest Rate Futures Contracts. The Fund may
purchase put and call options on interest rate futures contracts
which are traded on a domestic exchange or board of trade as a
hedge against changes in interest rates, and may enter into
closing transactions with respect to such options to terminate
existing positions. The Fund will sell put and call options on
interest rate futures contracts only as part of closing sale
transactions to terminate its options positions. There is no
guarantee such closing transactions can be effected.
Options on interest rate futures contracts, as contrasted
with the direct investment in such contracts, give the purchaser
the right, in return for the premium paid, to assume a position
in interest rate futures contracts at a specified exercise price
at any time prior to the expiration date of the options. Upon
exercise of an option, the delivery of the futures position by
the writer of the option to the holder of the option will be
accompanied by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The
potential loss related to the purchase of an option on interest
rate futures contracts is limited to the premium paid for the
option (plus transaction costs). Because the value of the
option is fixed at the point of sale, there are no daily cash
payments to reflect changes in the value of the underlying
contract; however, the value of the option does change daily and
that change would be reflected in the net asset value of the
Fund.
There are several risks relating to options on interest
rate futures contracts. The ability to establish and close out
positions on such options will be subject to the existence of a
liquid market. In addition, the Fund's purchase of put or call
options will be based upon predictions as to anticipated
interest rate trends by the Investment Manager, which could
prove to be inaccurate. Even if the Investment Manager's
expectations are correct, there may be an imperfect correlation
between the change in the value of the options and of the Fund's
securities.
Municipal Obligations
General Information. Municipal Obligations generally are
understood to include debt obligations issued to obtain funds
for various public purposes, including the construction of a
wide range of public facilities, refunding of outstanding
obligations, payment of general operating expenses and
extensions of loans to public institutions and facilities.
Private activity bonds that are issued by or on behalf of public
authorities to obtain funds to provide privately operated
facilities are included within the term Municipal Obligations if
the interest paid thereon qualifies as excludable from gross
income (but not necessarily from alternative minimum taxable
income) for Federal income tax purposes in the opinion of bond
counsel to the issuer.
The yields on Municipal Obligations are dependent upon a
variety of factors, including general economic and monetary
conditions, general money market conditions, general conditions
of the Municipal Obligations market, the financial condition of
the issuer, the size of a particular offering, the maturity of
the obligation offered and the rating of the issue. Municipal
Obligations are also subject to the provisions of bankruptcy,
insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Code, and laws, if
any, that may be enacted by Congress or state legislatures
extending the time for payment of principal or interest, or
both, or imposing other constraints upon enforcement of the
obligations or upon the ability of municipalities to levy taxes.
There is also the possibility that as a result of litigation or
other conditions the power or ability of any one or more issuers
to pay, when due, principal of and interest on its, or their,
Municipal Obligations may be materially affected.
The net asset value of the Common Stock will change with
changes in the value of the Fund's portfolio securities.
Because the Fund will invest primarily in fixed-income
securities, the net asset value of the Common Stock can be
expected to change as levels of interest rates fluctuate;
generally, when prevailing interest rates increase, the value of
fixed-income securities held by the Fund can be expected to
decrease and when prevailing interest rates decrease, the value
of the fixed-income securities held by the Fund can be expected
to increase. The value of the fixed-income securities held by
the Fund and thus the Fund's net asset value, may also be
affected by other economic, market and credit factors.
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 Obligations.
Because relatively few potential purchasers may be available for
these investments and, in some cases, contractual restrictions
may apply on resales, the Fund may find it more difficult to
sell these securities at a time when the Investment Manager
believes it is advisable to do so.
When-Issued Securities. The Fund may purchase Municipal
Obligations on a "when-issued" basis (i.e., for delivery beyond
the normal settlement date at a stated price and yield). The
payment obligation and the interest rate that will be received
on the Municipal Obligations purchased on a when-issued basis
are each fixed at the time the buyer enters into the commitment.
Although the Fund will purchase Municipal Obligations on a when-
issued basis only with the intention of actually acquiring the
securities, the Fund may sell these securities before the
settlement date if it is deemed advisable as a matter of
investment strategy.
Municipal Obligations are subject to changes in value
based upon the public's perception of the creditworthiness of
the issuers and changes, real or anticipated, in the level of
interest rates. In general, Municipal Obligations tend to
appreciate when interest rates decline and depreciate when
interest rates rise. Purchasing Municipal Obligations on a
when-issued basis, therefore, can involve the risk that the
yields available in the market when the delivery takes place
actually may be higher than those obtained in the transaction
itself. To account for this risk, a separate account of the
Fund consisting of cash, U.S. government securities, equity
securities or debt securities of any grade equal to or greater
than the amount of the when-issued 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 Fund's Directors, will be
established at the Fund's custodian bank. For the purpose of
determining the adequacy of the securities in the account, the
deposited securities will be valued at market or fair value. If
the market or fair value of such securities declines, additional
cash or securities will be placed in the account on a daily
basis so that the value of the account will at least equal the
amount of such commitments by the Fund. Placing securities
rather than cash in the segregated account may have a leveraging
effect on the Fund's net assets. That is, to the extent the
Fund remains substantially fully invested in securities at the
same time it has committed to purchase securities on a when-
issued basis, there will be greater fluctuations in its net
assets than if it had set aside cash to satisfy its purchase
commitment. Upon the settlement date of the when-issued
securities, the Fund will meet its obligations from then-
available cash flow, sale of securities held in the segregated
account, sale of other securities or, although it would not
normally expect to do so, from the sale of the when-issued
securities themselves (which may have a value greater or less
than the Fund's payment obligations). Sales of securities to
meet such obligations may involve the realization of capital
gains, which are not exempt from Federal income taxes.
When the Fund engages in when-issued transactions, it
relies on the seller to consummate the trade. Failure of the
seller to do so may result in the Fund's incurring a loss or
missing an opportunity to obtain a price considered to be
advantageous.
Municipal Leases. Municipal leases may take the form of a
lease or an installment purchase contract issued by state and
local government authorities to obtain funds to acquire a wide
variety of equipment and facilities such as fire and sanitation
vehicles, computer equipment and other capital assets. These
obligations have evolved to make it possible for state and local
government authorities to acquire property and equipment without
meeting constitutional and statutory requirements for the
issuance of debt. Thus, municipal leases have special risks not
normally associated with Municipal Obligations. These
obligations frequently contain "non-appropriation" clauses
providing that the governmental issuer of the obligation has no
obligation to make future payments under the lease or contract
unless money is appropriated for such purposes by the
legislative body on a yearly or other periodic basis. In
addition to the non-appropriation risk, municipal leases
represent a type of financing that has not yet developed the
depth of marketability associated with Municipal Obligations;
moreover, although the obligations will be secured by the leased
equipment, the disposition of the equipment in the event of
foreclosure might prove difficult.
To limit the risks associated with municipal leases, the
Fund will invest no more than 5% of its total assets in lease
obligations that contain non-appropriation clauses and will only
purchase a non-appropriation lease obligation with respect to
which (1) the nature of the leased equipment or other property
is such that its ownership or use is reasonably essential to a
governmental function of the issuing municipality; (2) the lease
payments will begin to amortize the principal balance due at an
early date, resulting in an average life of five years or less
for the lease obligation; (3) appropriate covenants will be
obtained from the municipal obligor prohibiting the substitution
or purchase of similar equipment or other property if lease
payments are not appropriated; (4) the lease obligor has
maintained good market acceptability in the past; (5) the
investment is of a size that will be attractive to institutional
investors and (6) the underlying leased equipment or other
property has elements of portability and/or use that enhance its
marketability in the event that foreclosure on the underlying
equipment or other property were ever required.
Municipal leases that the Fund may acquire will be both
rated and unrated. Rated leases that may be held by the Fund
include those rated investment grade at the time of investment
(that is, rated no lower than Baa by Moody's or BBB by S&P or
Fitch). The Fund may acquire unrated issues that the Investment
Manager deems to be comparable in quality to rated issues in
which the Fund is authorized to invest. A determination by the
Investment Manager that an unrated lease obligation is
comparable in quality to a rated lease obligation will be made
on the basis of, among other things, consideration of whether
the nature of the leased equipment or other property is such
that its ownership or use is reasonably essential to a
governmental function of the issuing municipality. In addition,
all such determinations made by the Investment Manager will be
subject to oversight and approval by the Fund's Board of
Directors.
Municipal leases held by the Fund will be considered
illiquid securities unless the Fund's Board of Directors
determines on an ongoing basis that the leases are readily
marketable. An unrated municipal lease with a non-appropriation
risk that is backed by an irrevocable bank letter of credit or
an insurance policy issued by a bank or insurer deemed by the
Investment Manager to be of high quality and minimal credit risk
will not be deemed illiquid solely because the underlying
municipal lease is unrated, if the Investment Manager determines
that the lease is readily marketable because it is backed by the
letter of credit or insurance policy.
Investment Restrictions
The Fund has adopted certain fundamental investment
restrictions that may not be changed without the prior approval
of the holders of a majority of the Fund's outstanding voting
securities. A "majority of the Fund's outstanding voting
securities" for this purpose means the lesser of (1) 67% or more
of the shares of the Fund's Common Stock present at a meeting of
shareholders, if the holders of 50% of the outstanding shares
are present or represented by proxy at the meeting or (2) more
than 50% of the outstanding shares. For purposes of the
restrictions listed below, all percentage limitations apply
immediately after a purchase or initial investment, and any
subsequent change in applicable percentage resulting from market
fluctuations will not require elimination of any security from
the Fund's portfolio. Under its fundamental restrictions, the
Fund may not:
1. Purchase securities other than Municipal Obligations and
Taxable Investments as those terms are described in the
Prospectus and this SAI.
2. Borrow money, except for temporary or emergency purposes, or
for clearance of transactions, and then only in amounts not
exceeding 15% of its total assets (not including the amount
borrowed) and as otherwise described in the Prospectus and
this SAI. When the Fund's borrowings exceed 5% of the value
of its total assets, the Fund will not make any additional
investments.
3. Sell securities short or purchase securities on margin,
except for such short-term credits as are necessary for the
clearance of transactions, but the Fund may make margin
deposits in connection with transactions in futures and
options on futures.
4. Underwrite any issue of securities, except to the extent
that the purchase of Municipal Obligations may be deemed to
be an underwriting.
5. Purchase, hold or deal in real estate or oil and gas
interests, except that the Fund may invest in Municipal
Obligations secured by real estate or interests in real
estate.
6. Invest in commodities, except that the Fund may enter into
futures contracts, including those relating to indexes and
options on futures contracts or indexes described in the
Prospectus and this SAI.
7. Lend any funds or other assets except through purchasing
Municipal Obligations or Taxable Investments, lending
portfolio securities and entering into repurchase agreements
consistent with the Fund's investment objective.
8. Issue senior securities.
9. Invest more than 25% of its total assets in the securities
of issuers in any single industry, except that this
limitation will not be applicable to the purchase of
Municipal Obligations and U.S. government securities.
10. Make any investments for the purpose of exercising control
or management of any company.
Portfolio Transactions
Newly issued securities normally are purchased directly
from the issuer or from an underwriter acting as principal.
Other purchases and sales usually are placed with those dealers
from which it appears the best price or execution will be
obtained; those dealers may be acting as either agents or
principals. The purchase price paid by the Fund to underwriters
of newly issued securities usually includes a concession paid by
the issuer to the underwriter, and purchases of after-market
securities from dealers normally are executed at a price between
the bid and asked prices. The Fund has paid no brokerage
commissions since its commencement of operations.
Allocation of transactions, including their frequency, to
various dealers is determined by the Investment Manager in its
best judgment and in a manner deemed fair and reasonable to
shareholders. The primary considerations are availability of
the desired security and the prompt execution of orders in an
effective manner at the most favorable prices. Subject to these
considerations, dealers that provide supplemental investment
research and statistical or other services to the Investment
Manager may receive orders for portfolio transactions by the
Fund. Information so received is in addition to, and not in
lieu of, services required to be performed by the Investment
Manager, and the fees of the Investment Manager are not reduced
as a consequence of their receipt of such supplemental
information. Such information may be useful to the Investment
Manager in serving both the Fund and other clients and,
conversely, supplemental information obtained by the placement
of business of other clients may be useful to the Investment
Manager in carrying out its obligations to the Fund.
The Fund will not purchase Municipal Obligations during
the existence of any underwriting or selling group relating
thereto of which Smith Barney Inc. ("Smith Barney") or its
affiliates are members except to the extent permitted by the
Securities and Exchange Commission (the "SEC"). Under certain
circumstances, the Fund may be at a disadvantage because of this
limitation in comparison with other investment companies which
have a similar investment objective but which are not subject to
such limitation.
While investment decisions for the Fund are made
independently from those of the other accounts managed by the
Investment Manager, investments of the type the Fund may make
also may be made by those other accounts. When the Fund and one
or more other accounts managed by the Investment Manager are
prepared to invest in, or desire to dispose of, the same
security, available investments or opportunities for sales will
be allocated in a manner believed by the Investment Manager to
be equitable to each. In some cases, this procedure may
adversely affect the price paid or received by the Fund or the
size of the position obtained or disposed of by the Fund.
The Fund's Board of Directors will review periodically the
commissions paid by the Fund to determine if the commissions
paid over representative periods of time were reasonable in
relation to the benefits inured to the Fund.
Portfolio Turnover
The Fund's portfolio turnover rate (the lesser of
purchases or sales of portfolio securities during the last
fiscal year, excluding purchases or sales of short-term
securities, divided by the monthly average value of portfolio
securities) generally is not expected to exceed 100%, but the
portfolio turnover rate will not be a limiting factor whenever
the Fund deems it desirable to sell or purchase securities.
Securities may be sold in anticipation of a rise in interest
rates (market decline) or purchased in anticipation of a decline
in interest rates (market rise) and later sold. In addition, a
security may be sold and another security of comparable quality
may be purchased at approximately the same time in order to take
advantage of what the Fund believes to be a temporary disparity
in the normal yield relationship between the two securities.
These yield disparities may occur for reasons not directly
related to the investment quality of particular issues or the
general movement of interest rates, such as changes in the
overall demand for or supply of various types of tax-exempt
securities. For the fiscal years ended May 31, 1996 and 1997
the Fund's portfolio turnover rate was 42% and 115%,
respectively.
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of
certain of the organizations that provide services to the Fund.
These organizations are as follows:
Name Service
SBMFM Investment
Manager and
Administrator
Smith Barney Distributor
(Sponsor)
PNC Bank, National Association ("PNC Bank") Custodian
First Data Investor Services Group, Inc. ("First Data")
Transfer
Agent
These organizations and the functions they perform for the
Fund are discussed in the Prospectus and this SAI.
Directors and Executive Officers of the Fund
The overall management of the business and affairs of the
Fund is vested in its Board of Directors. The Board of Directors
approves all significant agreements between the Fund and persons
or companies furnishing services to it, including the Fund's
agreements with the Investment Manager, Administrator, Custodian
and Transfer Agent, dividend paying agent, registrar and plan
agent. The day-to-day operations of the Fund are delegated to
its officers, the Investment Manager and SBMFM, subject always
to the investment objective and policies of the Fund and to
general supervision by the Fund's Board of Directors.
The Directors and executive officers of the Fund, their
addresses, together with information as to their principal
business occupations during the past five years, are shown
below:
Name and Address
Positions Held
With the Fund
Principal Occupations
During Past 5 Years
*+Heath B. McLendon, age 64
388 Greenwich Street
New York NY 10013
Chairman of the Board, Chief Executive Officer and Director
Managing Director of Smith Barney Inc.; Chairman of Smith Barney
Strategy Advisers Inc.; President and Director of SBMFM and
Travelers Investment Adviser, Inc. ("TIA"). Prior to July 1993,
Senior Executive Vice President of Shearson Lehman Brothers
Inc.; Vice Chairman of Shearson Asset Management.
+Martin Brody, age 76
c/o HMK Associates
30 Columbia Turnpike
Florham Park, NJ 07952
Director
Consultant, HMK Associates; Retired Vice Chairman of the Board
of Restaurant Associates Corp.; Director of Jaclyn, Inc.
+Allan J. Bloostein, age 68
717 Fifth Avenue
21st Floor
New York, NY 10022
Director
President of Allan J. Bloostein Associates, a consulting firm;
Consultant and retired Vice Chairman and Director of the Board
of May Department Stores Company; Director of CVS Corporation
and Taubman Centers Inc.
+Dwight B. Crane, age 59
Harvard Business School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business School.
+Robert A. Frankel, age 70
102 Grand Street
Croton-on-Hudson,
New York, NY 10520
Director
Consultant, Robert A. Frankel Management Consultants; formerly
Corporate Vice President of The Reader's Digest Association,
Inc.
+William R. Hutchinson, age 54
Amoco Corp.
200 East Randolph Drive
Chicago, IL 60601
Director
Vice President-Financial Operations of Amoco Corp.; Director of
Associated Banks and Associated Banc-Corp.
Joseph P. Deane, age 49
388 Greenwich Street
New York, NY 10013
Vice President and Investment Officer
Managing Director of Smith Barney and Investment Officer of
SBMFM. Prior to July 1993, Senior Vice President and Managing
Director of Shearson Lehman Advisors.
David Fare, age 35
388 Greenwich Street
New York, NY 10013
Investment Officer
Vice President of Smith Barney. Prior to July 1993, Vice
President of Shearson Lehman Advisors.
Lewis E. Daidone, age 40
388 Greenwich Street
New York, NY 10105
Senior Vice President and Treasurer
Managing Director of Smith Barney; Chief Financial Officer,
Director and Senior Vice President of SBMFM and TIA.
Christina T. Sydor, age 46
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Smith Barney Inc.; General Counsel and
Secretary of SBMFM and TIA.
________________________________
* Directors who are "interested persons" of the Fund (as defined
in the 1940 Act).
+ Director and/or trustee of other registered investment
companies with which Smith Barney is affiliated.
The Fund pays each of its Directors who is not a director,
officer or employee of SBMFM, or any of its affiliates, an
annual fee of $5,000 plus $500 for each in-person Board meeting
and $100 for each telephonic Board meeting attended. In
addition, the Fund will reimburse these Directors for travel and
out-of-pocket expenses incurred in connection with Board of
Directors meetings. For the fiscal year ended May 31, 1997,
such fees totaled $45,532.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Total
Number
Pension or of Funds
Retirement Total for which
Benefits Compen Director
Accrued sation Serves
Aggregate as part from Fund Within
Compensation of Fund and Fund Fund
Director from Fund Expenses Complex Complex
Charles Barber*$ $7,000 $0 $38,700 6
Martin Brody 6,500 0 124,286 19
Dwight Crane 7,200 0 141,375 22
Allan Bloostein 7,000 0 83,150 8
Robert Frankel 7,000 0 66,100 8
William R. Hutchinson 7,000 0 38,600 6
Heath B. McLendon ----- 0 ----- 41
</TABLE>
* Pursuant to the Fund's deferred compensation plan, Mr. Barber
elected, effective January 2, 1996, to defer the payment of
some or all of the compensation due to him from the Fund.
$ Upon attainment of age 80, Fund Directors are required to
change to emeritus status. 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 Fund Directors, together
with reasonable out-of-pocket expenses for each meeting
attended. Effective February 26, 1997, Mr. Barber became a
Director Emeritus.
Principal Stockholders
There are no persons known to the Fund to be "control
persons" of the Fund, as such term is defined in Section 2(a)(9)
of the 1940 Act. There is no person known to the Fund to hold
beneficially more than 5% of the outstanding shares of Common
Stock. The following person is the only person holding more than
5% of the Fund's outstanding shares of Common Stock as of
September 5, 1997:
<TABLE>
<CAPTION>
<S> <C> <C>
Name and Address Amount of Percentage of Common
of Record Owner Record Ownership Stock Outstanding
Cede & Co., as Nominee for 19,293,130 97.64%
The Depository Trust Company
P.O. Box 20
Bowling Green Station
New York, New York 10004
</TABLE>
17,017,789 of the shares held of record by Cede & Co.,
representing 86.12% of the outstanding shares of Common Stock,
were held by The Depository Trust Company as nominee for Smith
Barney, representing accounts for which Smith Barney has
discretionary and non-discretionary authority.
As of September 5, 1997, the Directors and officers of the
Fund, as a group, beneficially owned less than 1% of the Fund's
outstanding shares of Common Stock.
Investment Manager and Administrator
The Investment Manager serves as investment adviser to the
Fund pursuant to a written agreement dated July 30, 1993 (the
"Advisory Agreement"), a form of which was most recently
approved by the Board of Directors, including a majority of
those Directors who are not "interested persons" of the Fund or
the Investment Manager ("Non-Interested Directors") on August
20, 1997. Unless terminated sooner, the Advisory Agreement will
continue for successive annual periods provided that such
continuance is specifically approved at least annually by: (1) a
majority vote of the Non-Interested Directors cast in person at
a meeting called for the purpose of voting on such approval and
(2) the Board of Directors or by a vote of a majority of the
outstanding shares of Common Stock. The Investment Manager is a
wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of
Travelers Group Inc.("Travelers"). The Investment Manager pays
the salary of any officer or employee who is employed by both it
and the Fund. The Investment Manager bears all expenses in
connection with the performance of its services as investment
adviser.
For services rendered to the Fund, the Investment Manager
receives a fee from the Fund, computed and paid monthly at the
annual rate of 0.70% of the value of the Fund's average daily
net assets. For the fiscal years ended May 31, 1996 and 1997,
such fees amounted to $1,737,608 and $1,635,172, respectively.
Under the Advisory Agreement, the Investment Manager will
not be liable for any error of judgment, mistake of law or any
loss suffered by the Fund in connection with the Advisory
Agreement, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Investment Manager
in the performance of its duties or from reckless disregard of
its duties and obligations under the Advisory Agreement. The
Advisory Agreement is terminable by a vote of the Board of
Directors or by the holders of a majority of the Common Stock,
at any time without penalty on 60 days' written notice to the
Investment Manager. The Advisory Agreement may also be
terminated by the Investment Manager on 90 days' written notice
to the Fund. The Advisory Agreement terminates automatically
upon its assignment.
SBMFM serves as administrator (the "Administrator") to the
Fund pursuant to a written agreement dated June 1, 1994 (the
"Administration Agreement"), a form of which was most recently
approved by the Board of Directors, including a majority of Non-
Interested Directors, on August 20, 1997. The
Administration Agreement will continue automatically for
successive annual periods provided that such continuance is
approved at least annually by the Board of Directors of the Fund
including a majority of the Non-Interested Directors by a vote
cast in person at a meeting called for the purpose of voting
such approval. The Agreement is terminable, without penalty,
upon 60 days' written notice, by the Board of Directors of the
Fund or by vote of holders of a majority of the Fund's shares of
Common Stock, or upon 90 days' written notice, by the
Administrator. The services provided by the Administrator under
the Administration Agreement are described in the Prospectus
under "Management of the Fund."
For services rendered to the Fund, the Administrator
receives from the Fund an administration fee computed and paid
monthly at the annual rate of 0.20% of the value of the Fund's
average daily assets. For the fiscal years ended May 31, 1996
and 1997, the Administrator received $496,459 and $467,191,
respectively, in administration fees.
Pursuant to the Administration Agreement, SBMFM will
exercise its best judgment in rendering its services to the
Fund. SBMFM will not be liable for any error of judgment,
mistake of law or any loss suffered by the Fund in connection
with the matters to which the Administration Agreement relates,
except by reason of SBMFM's reckless disregard of its
obligations and duties under the Administration Agreement.
The Fund bears expenses incurred in its operation
including: fees of the Investment Manager and SBMFM; taxes,
interest, brokerage fees and commissions, if any; fees of
Directors who are not officers, directors, shareholders or
employees of Smith Barney; SEC fees and state Blue Sky
qualification fees; charges of the custodian; transfer and
dividend disbursing agent's fees; certain insurance premiums;
outside auditing and legal expenses; costs of any independent
pricing service; costs of maintaining corporate existence; costs
attributable to investor services (including allocated telephone
and personnel expenses); costs of preparing and printing
prospectuses and statements of additional information for
regulatory purposes and for distribution to shareholders; and
costs of shareholders' reports and corporate meetings of the
officers, Board of Directors and shareholders of the Fund.
TAXES
As described above and in the Prospectus, the Fund is
designed to provide investors with current income which is
excluded from gross income for Federal income tax purposes. The
Fund is not intended to constitute a balanced investment program
and is not designed for investors seeking capital gains or
maximum tax-exempt income irrespective of fluctuations in
principal. Investment in the Fund would not be suitable for tax-
exempt institutions, qualified retirement plans, H.R. 10 plans
and individual retirement accounts because such investors would
not gain any additional tax benefit from the receipt of tax-
exempt income.
The following is a summary of selected Federal income tax
considerations that may affect the Fund and its shareholders.
The summary is not intended as a substitute for individual tax
advice and investors are urged to consult their own tax advisors
as to the tax consequences of an investment in the Fund.
Taxation of the Fund and its Investments
The Fund has qualified and intends to qualify as a
"regulated investment company" under Subchapter M of the
Internal Revenue Code of 1986, as amended (the "Code"). In
addition, the Fund intends to satisfy conditions contained in
the Code that will enable interest from Municipal Obligations,
excluded from gross income for Federal income tax purposes with
respect to the Fund, to retain that tax-exempt status when
distributed to the shareholders of the Fund (that is, to be
classified as "exempt interest" dividends of the Fund).
If it qualifies as a regulated investment company the Fund
will pay no Federal income taxes on its taxable net investment
income (that is, taxable income other than net realized capital
gains) and its net realized capital gains that are distributed
to shareholders. To qualify under Subchapter M of the Code, the
Fund must among other things: (1) distribute to its shareholders
at least 90% of its taxable net investment income (for this
purpose consisting of taxable net investment income and net
realized short-term capital gains) and 90% of its tax-exempt net
investment income (reduced by certain expenses); (2) derive at
least 90% of its gross income from dividends, interest, payments
with respect to loans of securities, gains from the sale or
other disposition of securities, or other income (including, but
not limited to, gains from options, futures, and forward
contracts) derived with respect to the Fund's business of
investing in securities; (3) derive less than 30% of its annual
gross income from the sale or other disposition of securities,
options, futures or forward contracts held for less than three
months (the "short-short rule"); and (4) diversify its holdings
so that at the end of each fiscal quarter of the Fund (a) at
least 50% of the market value of the Fund's assets is
represented by cash, U.S. government securities and other
securities, with those other securities limited with respect to
any one issuer, to an amount no greater than 5% of the Fund's
assets and (b) not more than 25% of the market value of the
Fund's assets is invested in the securities of any one issuer
(other than U.S. government securities or securities of other
regulated investment companies) or of two or more issuers that
the Fund controls and that are determined to be in the same or
similar trades or businesses or related trades or businesses. In
meeting these requirements, the Fund may be restricted by the
short-short rule in the selling of securities held by the Fund
for less than three months and in the utilization of certain of
the investment techniques described above under "Investment
Objective and Policies." However, the Taxpayer Relief Act of
1997 repeals the short-short rule effective for the Fund's
taxable year beginning June 1, 1998. As a regulated investment
company, the Fund will be subject to a 4% non-deductible excise
tax measured with respect to certain undistributed amounts of
ordinary income and capital gain. The Fund expects to pay
dividends and distributions necessary to avoid the application
of this excise tax.
As described above in this SAI and in the Prospectus, the
Fund may invest in financial futures contracts and options on
financial futures contracts that are traded on a U.S. exchange
or board of trade. The Fund anticipates that these investment
activities will not prevent the Fund from qualifying as a
regulated investment company. As a general rule, these
investment activities will increase or decrease the amount of
long-term and short-term capital gains or losses realized by the
Fund and, thus, will affect the amount of capital gains
distributed to the Fund shareholders.
For Federal income tax purposes, gain or loss on the
futures and options described above (collectively referred to as
"Section 1256 Contracts") would, as a general rule, be taxed
pursuant to a special "mark-to-market system." Under the mark-
to-market system, the Fund may be treated as realizing a greater
or lesser amount of gains or losses than actually realized. As a
general rule gain or loss on Section 1256 Contracts is treated
as 60% long term capital gain or loss and 40% short-term capital
gain or loss, and as a result, the mark-to-market system will
generally affect the amount of capital gains or losses taxable
to the Fund and the amount of distributions taxable to a
shareholder. The portion of the gain on Section 1256 Contracts
treated as long-term capital gains may not qualify for the 20%
reduced maximum rate on long-term capital gains and may instead
be taxable at a maximum rate of 28%.
If the Fund invests in both Section 1256 Contracts and
offsetting positions in those contracts, then the Fund might not
be able to receive the benefit of certain realized losses for an
indeterminate period of time. The Fund expects that its
activities with respect to Section 1256 Contracts and offsetting
positions in those Contracts (1) will not cause the Fund or its
shareholders to be treated as receiving a materially greater
amount of capital gains or distributions than actually realized
or received and (2) will permit the Fund to use substantially
all of its losses for the fiscal years in which the losses
actually occur.
Taxation of the Fund's Shareholders
The Fund anticipates that all dividends it pays, other
than dividends from Taxable Investments and from income or gain
derived from securities transactions and from the use of certain
of the investment techniques described under "Investment
Objective and Policies" will be derived from interest on
Municipal Obligations and thus will be exempt-interest dividends
that may be excluded by shareholders from their gross income for
Federal income tax purposes if the Fund satisfies certain asset
percentage requirements. Dividends paid from the Fund's net
investment income and distributions of the Fund's net realized
short-term capital gains are taxable to shareholders of the Fund
as ordinary income, regardless of the length of time
shareholders have held shares of Common Stock and whether the
dividends or distributions are received in cash or reinvested in
additional shares. As a general rule, a shareholder's gain or
loss on a sale of his or her shares of Common Stock will be a
long-term gain or loss if he or she has held his or her shares
for more than one year and will be a short-term capital gain or
loss if he or she has held his or her shares for one year or
less. Gain on shares held for more than 18 months will be
eligible for the reduced 20% maximum capital gains tax rate.
Dividends and distributions paid by the Fund will not qualify
for the Federal dividends-received deduction for corporations.
Exempt-Interest Dividends
Interest on indebtedness incurred by a shareholder to
purchase or carry shares of Common Stock is not deductible for
Federal income tax purposes. If a shareholder receives exempt-
interest dividends with respect to any share of Common Stock and
if the share is held by the shareholder for six months or less,
then any loss on the sale of the share may, to the extent of the
exempt-interest dividends, be disallowed. The Code may also
require a shareholder, if he or she receives exempt-interest
dividends, to treat as taxable income a portion of certain
otherwise non-taxable social security and railroad retirement
benefit payments. In addition, the portion of any exempt-
interest dividend paid by the Fund that represents income
derived from private activity bonds held by the Fund may not
retain its tax-exempt status in the hands of a shareholder who
is a "substantial user" of a facility financed by the bonds, or
a "related person" of the substantial user. Although the Fund's
exempt-interest dividends may be excluded by shareholders from
their gross income for Federal income tax purposes (1) some or
all of the Fund's exempt-interest dividends may be a specific
preference item, or a component of an adjustment item, for
purposes of the Federal individual and corporate alternative
minimum taxes and (2) the receipt of dividends and distributions
from the Fund may affect a corporate shareholder's Federal
"environmental" tax liability. The receipt of dividends and
distributions from the Fund may affect a foreign corporate
shareholder's Federal "branch profits" tax liability and a
corporate shareholder's Federal "excess net passive income" tax
liability. Shareholders should consult their own tax advisors to
determine whether they are (1) "substantial users" with respect
to a facility or "related" to those users within the meaning of
the Code or (2) subject to a Federal alternative minimum tax,
the Federal "environmental" tax, the Federal "branch profits"
tax, or the Federal "excess net passive income" tax.
Dividend Reinvestment Plan
A shareholder of the Fund receiving dividends or
distributions in additional shares pursuant to the Plan should
be treated for Federal income tax purposes as receiving a
distribution in an amount equal to the amount of money that a
shareholder receiving cash dividends or distributions receives
and should have a cost basis in the shares received equal to
that amount.
Statements and Notices
Statements as to the tax status of the dividends and
distributions received by shareholders of the Fund are mailed
annually. These statements show the dollar amount of income
excluded from Federal income taxes and the dollar amount, if
any, subject to Federal income taxes. The statements will also
designate the amount of exempt interest dividends that are a
specific preference item for purposes of the Federal individual
and corporate alternative minimum taxes and will indicate the
shareholder's share of the investment expenses of the Fund. The
Fund will notify shareholders annually as to the interest
excluded from Federal income taxes earned by the Fund with
respect to those states and possessions in which the Fund has or
had investments. The dollar amount of dividends paid by the Fund
that is excluded from Federal income taxation and the dollar
amount of dividends paid by the Fund that is subject to Federal
income taxation, if any, will vary for each shareholder
depending upon the size and duration of the shareholder's
investment in the Fund. To the extent that the Fund earns
taxable net investment income, it intends to designate as
taxable dividends the same percentage of each day's dividend as
its taxable net investment income bears to its total net
investment income earned on that day. Therefore, the percentage
of each day's dividend designated as taxable, if any, may vary
from day to day.
Backup Withholding
If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or
interest income, or fails to certify that he has provided a
correct taxpayer identification number and that he is not
subject to "backup withholding," the shareholder may be subject
to a 31% "backup withholding" tax with respect to (1) taxable
dividends and distributions and (2) the proceeds of any sales or
repurchases of shares of Common Stock. An individual's taxpayer
identification number is his or her social security number. The
31% backup withholding tax is not an additional tax and may be
credited against a taxpayer's Federal income tax liability
STOCK PURCHASES AND TENDERS
The Fund may repurchase shares of its Common Stock in the
open market or in privately negotiated transactions when the
Fund can do so at prices below their then current net asset
value per share on terms that the Fund's Board of Directors
believes represent a favorable investment opportunity. In
addition, the Board of Directors currently intends to consider,
at least once a year, making an offer to each shareholder of
record to purchase at net asset value shares of Common Stock
owned by the shareholder.
No assurance can be given that repurchases and/or tenders
will result in the Fund's shares trading at a price that is
equal to their net asset value. The market prices of the Fund's
shares will, among other things, be determined by the relative
demand for and supply of the shares in the market, the Fund's
investment performance, the Fund's dividends and yield and
investor perception of the Fund's overall attractiveness as an
investment as compared with other investment alternatives. The
Fund's acquisition of Common Stock will decrease the total
assets of the Fund and therefore have the effect of increasing
the Fund's expense ratio. The Fund may borrow money to finance
the repurchase of shares subject to the limitations described in
the Prospectus. Any interest on the borrowings will reduce the
Fund's net income. Because of the nature of the Fund's
investment objective, policies and securities holdings, the
Investment Manager does not anticipate that repurchases and
tenders will have an adverse effect on the Fund's investment
performance and does not anticipate any material difficulty in
disposing of securities to consummate Common Stock repurchases
and tenders.
When a tender offer is authorized to be made by the Fund's
Board of Directors, it will be an offer to purchase at a price
equal to the net asset value of all (but not less than all) of
the shares owned by the shareholder (or attributed to him or her
for Federal income tax purposes under Section 38 of the Code). A
shareholder who tenders all shares owned or considered owned by
him or her, as required, will realize a taxable gain or loss
depending upon his or her basis in his or her shares.
If the Fund liquidates securities in order to repurchase
shares of Common Stock, the Fund may realize gains and losses.
These gains, if any, may be realized on securities held for less
than three months. Because the Fund must derive less than 30% of
its gross income for any taxable year from the sale or
disposition of stock and securities held less than three months
(in order to retain the Fund's regulated investment company
status under the Code), gains realized by the Fund due to a
liquidation of securities held for less than three months would
reduce the amount of gain on sale of other securities held for
less than three months that the Fund could realize in the
ordinary course of its portfolio management, which may adversely
affect the Fund's performance. The portfolio turnover rate of
the Fund may or may not be affected by the Fund's repurchases of
shares of Common Stock pursuant to a tender offer.
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions
that could have the effect of limiting the ability of other
entities or persons to acquire control of the Fund or to change
the composition of its Board of Directors and could have the
effective of depriving shareholders of an opportunity to sell
their shares of Common Stock at a premium over the prevailing
market prices by discouraging a third party from seeking to
obtain control of the Fund. The Board of Directors is divided
into three classes. At each annual meeting of shareholders, the
term of one class will expire and each Director elected to the
class will hold office for a term of three years. The
classification of the Board of Directors in this manner could
delay for up to two years the replacement of majority of the
Board. The Articles of Incorporation provide that the maximum
number of Directors that may constitute the Fund's entire board
is 12. A Director may be removed from office, or the maximum
number of Directors increased, only by vote of the holders of at
least 75% of shares of Common Stock entitled to be voted on the
matter.
The Fund's Articles of Incorporation require the favorable
vote of the holders of at least two-thirds of the shares of
Common Stock then entitled to be voted to authorize the
conversion of the Fund from a closed-end to an open-end
investment company, as defined in the 1940 Act, unless two-
thirds of the Continuing Directors (as defined below) approve
such a conversion. In the latter case, the affirmative vote of
a majority of the shares outstanding will be required to approve
the amendment to the Fund's Articles of Incorporation providing
for the conversion of the Fund.
The affirmative votes of a least 75% of the Directors and
the holders of at least 75% of the shares of the Fund are
required to authorize any of the following transactions
(referred to individually as a "Business Combination"): (1) a
merger, consolidation or share exchange of the Fund with or into
any other person (referred to individually as a "Reorganization
Transaction"); (2) the issuance or transfer by the Fund (in one
or a series of transactions in any 12-month period) of any
securities of the portfolio to any other person or entity for
cash, securities or other property (or combinations thereof)
having an aggregate fair market value of $1 million or more,
excluding sales of securities of the Fund in connection with a
public offering, issuance of securities of the Fund pursuant to
a dividend reinvestment plan adopted by the Fund and issuance of
securities of the Fund upon the exercise of any stock
subscriptions rights distributed by the Fund; or (3) a sale,
lease, exchange, mortgage, pledge, transfer or other disposition
by the Fund (in one or a series of transactions in any 12-month
period) to or with any person of any assets of the Fund having
an aggregate fair market value of $1 million or more, except for
transactions in securities effected by the Fund in the ordinary
course of its business (each such sale, lease, exchange,
mortgage, pledge, transfer or other disposition being referred
to individually as a "Transfer Transaction"). The same
affirmative votes are required with respect to any proposal as
to the voluntary liquidation or dissolution of the Fund or any
amendment to the Fund's Articles of Incorporation to terminate
its existence (referred to individually as a "Termination
Transaction") and any shareholder proposal as to specific
investment decisions made or to be made with respect to the
Fund's assets.
A 75% shareholder vote will not be required with respect
to a Business Combination if the transaction is approved by a
vote of a least 75% of the Continuing Directors (as defined
below) or if certain conditions regarding the consideration paid
by the person entering into, or proposing to enter into, a
Business Combination with the Fund and various other
requirements are satisfied. In such case, a majority of the
votes entitled to be cast by shareholders of the Fund will be
required to approve the transaction if it is a Reorganization
Transaction or a Transfer Transaction that involves
substantially all of the Fund's assets and no shareholder vote
will be required to approve the transaction if it is any other
Business Combination. In addition, a 75% shareholder vote will
not be required with respect to a Termination Transaction if it
is approved by a vote of at least 75% of the Continuing
Directors, in which case a majority of the votes entitled to be
cast by shareholders of the Fund will be required to approve the
transaction.
The voting provisions described above could have the
effect of depriving shareholders of the Fund of an opportunity
to sell their Common Stock 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.
In the view of the Fund's Board of Directors, however, these
provisions offer several possible advantages including: (1)
requiring persons seeking control of the Fund to negotiate with
its management regarding the price to be paid for the amount of
Common Stock required to obtain control; (2) promoting
continuity and stability; and (3) enhancing the Fund's ability
to pursue long-term strategies that are consistent with its
investment objective and management policies. The Board of
Directors has determined that the voting requirements under
Maryland law and the 1940 Act are in the best interests of
shareholders generally.
A "Continuing Director," as used in the discussion above,
is any member of the Fund's Board of Directors (1) who is not
person or affiliate of a person who enters or proposes to enter
into a Business Combination with the Fund (such person or
affiliate being referred to individually as an "Interested
Party") and (2) who has been a member of the Board of Directors
for a period of least 12 months, or is a successor of a
Continuing Director who is unaffiliated with an Interested Party
and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors.
ADDITIONAL INFORMATION
Legal Matters
Willkie Farr & Gallagher serves as legal counsel to the
Fund. The Directors who are not "interested persons" of the Fund
have selected Stroock & Stroock & Lavan LLP as their counsel.
Independent Public Accountants
KPMG Peat Marwick, LLP, 345 Park Avenue, New York, NY
10154, 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 May 31, 1998.
Custodian and Transfer Agent
PNC Bank, National Association is located at 17th and
Chestnut Streets, Philadelphia, Pennsylvania 19103, and serves
as the Fund's custodian pursuant to a custody agreement. Under
the custody agreement, PNC Bank holds the Fund's securities and
keeps all necessary accounts and records. The assets of the
Fund are held under bank custodianship in compliance with the
1940 Act. First Data is located at One Exchange Place, Boston,
Massachusetts 02109, and pursuant to a transfer agency agreement
serves as the Fund's transfer agent. Under the transfer agency
agreement, First Data maintains the shareholder account records
for the Fund, handles certain communications between
shareholders and the Fund, and distributes dividends and
distributions payable by the Fund.
FINANCIAL STATEMENTS
The Fund sends unaudited semi-annual and audited annual
financial statements of the Fund to shareholders, including a
list of the investments held by the Fund.
The Fund's Annual Report for the fiscal year ended May 31,
1997 and its semi-annual report for the six- month period ended
November 30, 1996 are incorporated into this SAI by reference in
their entirety. A copy of these reports may be obtained from any
Smith Barney Financial Consultant or by calling or writing to
the Fund at the telephone number or address set forth on the
cover page of this SAI.
APPENDIX
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 fixture.
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.
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- and long-term credit risk. Loans
bearing the designation MIG1/VMIG1 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
designation MIG2/VMIG2 are of high quality, with margins of
protection ample, although not as large as the preceding group.
Loans bearing the designation MIG3/VMIG3 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 rated 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 highest 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.
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 high-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 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
for 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.
Description of S&P Municipal Note Ratings:
Municipal notes with maturities of three years or less are
usually given note ratings (designated SP-1, -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-l 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 of commercial paper rated A-2 is stronger but the
relative degree of safety is not as high as 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 high credit quality. The obligor's ability to pay
interest and repay principal, while very strong, is somewhat
less than for AAA-rated securities or more subject to possible
change over the term of the issue.
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.
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 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-l + - 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 the 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.
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) Financial Statements:
- - Included in Part A:
* Financial Highlights
- - Included in Part B:
* The Registrant's Annual Report for the fiscal year
ended May 31, 1997 and Report of Independent
Accountants dated July 14, 1997 are incorporated by
reference to the Definitive 30(b)2-1 filed on July 30,
1997, Accession #0000091155-97-000342.
(2) Exhibits:
(a) (i) Articles of Incorporation of Registrant are
incorporated by reference to the Registrant's initial
Registration Statement filed with the Securities and
Exchange Commission (the "SEC") on February 19, 1993
("Initial Registration Statement").
(ii) Articles of Amendment to Articles of
Incorporation are incorporated by reference to Pre-
Effective Amendment No. 1 to the Initial Registration
Statement filed with the SEC on April 19, 1994 ("Pre-
Effective Amendment No. 1").
(b) Bylaws of Registrant are incorporated by reference to
Registrant's Initial Registration Statement.
(c) Not Applicable.
(d) Form of Specimen certificate representing shares of
Common Stock, par value $0.001 per share, is
incorporated by reference to Pre-Effective Amendment
No. 3. to Registrant's Registration Statement filed
with the SEC on June 16, 1994 ("Pre-Effective
Amendment No. 3").
(e) Dividend Reinvestment Plan is incorporated by
reference to Pre-Effective Amendment No. 2. to the
Initial Registration Statement filed with the SEC on
May 19, 1994 ("Pre-Effective Amendment No. 2").
(f) Not Applicable.
(g) Form of Investment Management Agreement is
incorporated by reference to Pre-Effective Amendment
No. 3.
(h) (i) Form of Purchase Agreement is incorporated by
reference to Pre-Effective Amendment No. 2.
(ii) Form of Underwriting Agreement is incorporated
by reference to Pre-Effective Amendment No. 3.
(i) Not Applicable.
(j) (i) Form of Custody Agreement is incorporated by
reference to Post-Effective Amendment No. 1.
(ii) Form of Transfer Agency and Registrar Agreement
is incorporated by reference to Pre-Effective
Amendment No. 2.
(k) Not Applicable.
(l) (i) Opinion and Consent of Willkie Farr & Gallagher
is incorporated by reference to Pre-Effective No. 3.
(ii) Opinion and Consent of Venable, Baetjer & Howard
is incorporated by reference to Pre-Effective No. 3.
(m) Not Applicable.
(n) Consent of KPMG Peat Marwick LLP, independent auditors
for the Fund (filed herewith).
(o) Not Applicable.
(p) Not Applicable.
(q) Not Applicable
(r) Not Applicable
Item 25. Marketing Arrangements
See Forms of Purchase Agreement and Underwriting Agreement
filed as Exhibits (h)(i) and (ii).
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the expenses to be incurred in
connection with the offering described in this Registration
Statement:
SEC registration fees $0
Printing (other than stock certificates) and
related delivery expenses $119,673
Engraving and printing stock certificates $0
Fees and expenses of qualification under state
securities laws (including fees of counsel) $0
Legal fees and expenses $0
Accounting expenses $0
Miscellaneous expenses $0
Total $119,673
Item 27. Persons Controlled by or Under Common Control
None
Item 28. Number of Holders of Securities
Number of
Record
Stockholders
Title of Class as of September 5, 1997
Shares of Common Stock,
par value $0.001 per share 410
Item 29. Indemnification
Under Article Seventh of Registrant's Articles of
Incorporation, any past or present director or officer of
Registrant is indemnified to the fullest extent permitted by
the Maryland General Corporation Law ("MGCL") against liability
and all expenses reasonably incurred by him in connection with
any action, suite or proceeding to which he may be a party or
otherwise involved by reason of his being or having been a
Director or officer of Registrant. This provision does not
authorize indemnification when it is determined that the
Director or officer would otherwise be liable to Registrant or
its shareholders by reason of willful misfeasance, bad faith,
gross negligence or reckless disregard of his duties. Expenses
may be paid by Registrant to is currently acting and its former
Directors and officers, to the fullest extent that
indemnification of directors is permitted by the MGCL, the 1933
Act and the 1940 Act, in advance of the final disposition of
any action, suit or proceeding. The Board may be bylaw,
resolution or agreement make further provision for
indemnification of Directors, officers, employees and agents to
the fullest extent permitted by the MGCL.
Insofar as indemnification for liabilities arising under the
1933 Act may be permitted to directors, officers and
controlling person of Registrant pursuant to the foregoing
provisions, or otherwise, Registrant has been advised that, in
the opinion of the SEC, such indemnification is against public
policy as expressed in the 1933 Act and is, therefore,
unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by Registrant
of expenses incurred or paid by a director, officer or
controlling person of Registrant in the successful defense of
any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities
being registered, 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 the 1933 Act and will be governed by the final
adjudication of such issue.
Item 30. Business and Other Connections of Investment Adviser
See "Management of the Portfolio" in the Prospectus.
Smith Barney Mutual Funds Management Inc., ("SBMFM") a New York
corporation, is a registered investment adviser and is wholly
owned by Smith Barney Holdings Inc., which in turn is wholly
owned by The Travelers Group Inc. SBMFM is primarily engaged
in the investment advisory business. Information as to
executive officers and directors of SBMFM is included in its
Form ADV filed with the Securities and Exchange Commission (SEC
File No. 801-8314) and is incorporated herein by reference.
Item 31. Location of Accounts and Records
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
PNC Bank, N.A.
17th & Chestnut Streets
Philadelphia, Pennsylvania 19103
Item 32. Management Services
Not Applicable.
Item33. Undertakings
1. Registrant undertakes to suspend offering shares of Common
Stock covered by this Registration Statement until it amends
the Prospectus contained in this Registration Statement if
(i) subsequent to the effective date of this Registration
Statement, its net asset value per share declines more than
10 percent from its net asset value per share as of the
effective date of this Registration Statement or (ii) its
net asset value increases to an amount greater than its net
proceeds as stated in the Prospectus contained in this
Registration Statement.
2. Registrant undertakes to file a post-effective amendment
with certified financial statements showing the initial
capital received before it accepts subscriptions from more
than 25 persons if Registrant proposes to raise its initial
capital under Section 14(a)(3) of the 1940 Act.
3. Not Applicable
4. Not Applicable
5. Registrant undertakes that:
(a) For purposes of determining any liability under the
1933 Act, the information omitted from the form of
Prospectus filed as part of this Registration Statement
in reliance upon Rule 430A under the 1933 Act and
contained in the form of Prospectus filed by Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the
1933 Act shall be deemed to part of this Registration
Statement as of the time it was declared effective.
(b) For the purpose of determine any liability under the
1933 Act, each post-effective amendment that contains the
form of Prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of the securities at that time
will be deemed to be the initial bone fide offering
thereof.
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, GREENWICH STREET MUNICIPAL FUND INC., has duly
caused this Amendment to the Registration Statement on Form N-2 to
be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, State of New York on the
12th day of September, 1997.
GREENWICH STREET MUNICIPAL FUND INC.
By:
___________________________________
Heath B. McLendon
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933,
as amended, this Amendment to the Registration Statement
has been signed below by the following persons in the
capacities and on the dates indicated.
Signature Title Date
/s/Heath B. McLendon
Heath B. McLendon Chairman of the Board
(Chief Executive Officer) 9/12/97
/s/Lewis E. Daidone
Lewis E. Daidone Treasurer (Chief Financial
and Accounting Officer) 9/12/97
*/s/Allan J. Bloostein
Allan J. Bloostein Director 9/12/97
*/s/Martin Brody
Martin Brody Director 9/12/97
*/s/Dwight B. Crane
Dwight B. Crane Director 9/12/97
*/s/Robert A. Frankel
Robert A. Frankel Director 9/12/97
*/s/William R. Hutchinson
William R. Hutchinson Director 9/12/97
* By: /s/ Christina T. Sydor
Christina T. Sydor
Pursuant to a Power of Attorney dated 9/27/96
Independent Auditors' Consent
To the Shareholders and Board of Directors of
Greenwich Street Municipal Fund Inc.:
We consent to the use of our report dated July 14, 1997 for the
Greenwich Street Municipal Fund Inc. incorporated herein by
reference and to the references to our Firm under the headings
"Financial Highlights" and "Experts" in the Prospectus and
"Independent Public Accountants" in the Statement of Additional
Information.
KPMG Peat Marwick
LLP
New York, New York
September 12, 1997
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