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. 3
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 6
__________________
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) 816-6474
(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
787 Seventh Avenue
New York, New York 10019-6099
_______________
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).
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
GREENWICH STREET MUNICIPAL FUND INC.
PART A
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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
FD01204 9/98
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Prospectus September 28, 1998
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Greenwich Street Municipal Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 331-1710
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 IBCA,
Inc. ("Fitch") or another nationally recognized statistical rating agency
("NRSRO"). 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 28, 1998
(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 Salomon Smith Barney
Financial Consultant.
(Continued on page 2)
SALOMON SMITH BARNEY INC.
MUTUAL MANAGEMENT CORP.
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 28, 1998
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Salomon Smith Barney Inc. ("Salomon Smith Barney") currently 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 Salomon 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 Salomon
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.
2
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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 18
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Net Asset Value 18
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Taxation 19
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Management of the Fund 20
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Dividends and Distribution; Dividend Reinvestment Plan 22
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Description of Common Stock 24
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Certain Provisions of the Articles of Incorporation
and Market Discount 25
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Custodian and Transfer Agent 26
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Experts 27
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Further Information 27
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Appendix A A-1
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3
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Prospectus Summary
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The following summary is qualified in its entirety by the more detailed
information appearing 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 NRSRO (for example, 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, Salomon Smith Barney currently intends to
make a market in the Common Stock. Salomon 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 Salomon Smith
Barney. See "The Offering."
Listing NYSE
Symbol GSI
Investment Manager and Administrator Mutual Management Corp. (formerly known as
Smith Barney Mutual Funds Management Inc.) ("MMC"), 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 Salomon Smith
Barney. MMC is a wholly owned subsidiary of Salomon 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
4
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Prospectus Summary (continued)
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securities on behalf of the Fund and employs professional fund managers. MMC
also acts as administrator of the Fund and in that capacity provides certain
administrative services, including overseeing the Fund's non-investment
operations and its relations with other service providers and providing
executive and other officers to the Fund. The Fund pays the Investment Manager a
fee 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 MMC 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 PNC Bank, National Association ("PNC Bank") 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 generally traded
in the market at prices 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 mentioned
above, which some other closed-end funds have used to address the discount,
although the Fund
5
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Prospectus Summary (continued)
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may seek to address the discount by reducing fees on a temporary basis in order
to increase the dividend yield. There can be no assurance that any other 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 not rated in one of the
highest four categories by any NRSRO 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** ................................................ 0.10%
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Total Annual Operating Expenses ..................................... 1.00%
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* On September 1, 1998, MMC instituted a voluntary waiver of a portion of
its management fees in order to enable the Fund to increase its dividend
yield. The waiver is a temporary measure and may be terminated at any time
by MMC.
** "Annual Expenses," as shown above, are based upon amounts of expenses for
the fiscal year ended May 31, 1998.
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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$10 $32 $55 $122
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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 three years ended March 31, 1998 has been
audited by KPMG Peat Marwick LLP, independent auditors, whose report thereon
appears in the Fund's annual report dated May 31, 1998. 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 period:
For the year ended May 31, 1998 1997 1996 1995(1)
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Net Asset Value, Beginning of Year $11.59 $12.19 $12.84 $12.00
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Income From Operations:
Net investment income 0.50 0.66 0.66 0.63
Net realized and unrealized gain (loss) 0.66 (0.26) (0.42) 0.77
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Total Income From Operations 1.16 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 (0.60) (0.66) (0.66) (0.54)
In excess of net investment income (0.01) -- -- --
Net realized gains (0.36) (0.34) (0.23) --
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Total Distributions (0.97) (1.00) (0.89) (0.54)
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Net Asset Value, End of Year $11.78 $11.59 $12.19 $12.84
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Total Return, Based on Market Value (0.20)% 8.97% 5.52% 1.65%++
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Total Return, Based on Net Asset Value* 10.53% 3.61% 2.40% 12.28%++
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Net Assets, End of Year (millions) $234 $228 $238 $251
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Ratios to Average Net Assets:
Expenses 1.00% 1.03% 1.06% 1.05%+
Net investment income 4.25 5.57 5.17 5.63+
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Portfolio Turnover Rate 85% 115% 42% 115%
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Market Value, End of Year $10.438 $11.375 $11.375 $11.625
================================================================================
(1) For the period from June 24, 1994 (commencement of operations) to May 31,
1995.
* The total return calculation assumes that 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) 331-1710.
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The Offering
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Salomon 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 Salomon 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 Salomon Smith Barney. This Prospectus is to be used by
Salomon 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 Salomon Smith Barney
as a result of its market-making in Common Stock will be utilized by Salomon
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 of the outstanding voting
securities" (as defined in the 1940 Act) of the Fund. 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.
9
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Investment Objective and Policies (continued)
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The Fund normally invests at least 80% of its net assets in Municipal
Obligations rated investment grade, that is, rated within the highest four
ratings categories by any NRSRO. Up to 20% of the 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 not rated investment grade by any NRSRO 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
10
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Investment Objective and Policies (continued)
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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 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 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.
11
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Investment Objective and Policies (continued)
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Investment Techniques
The Fund may employ, among others, the investment techniques described
below, which may give rise to taxable income:
When-Issued and Delayed Delivery Transactions. The Fund may purchase
municipal securities on a "when-issued" and "delayed delivery" basis and may
purchase or sell municipal securities on a "delayed delivery" basis in order to
hedge against anticipated changes in interest rates and prices. No income
accrues to the Fund on municipal securities in connection with such transactions
prior to the date the Fund actually takes delivery of such securities. These
transactions are subject to market fluctuation; the value of the municipal
securities at delivery may be more or less than their purchase price, and yields
generally available on municipal securities when delivery occurs may be higher
than yields on the municipal securities obtained pursuant to such transactions.
Because the Fund relies on the buyer or seller, as the case may be, to
consummate the transaction, failure by the other party to complete the
transaction may result in the Fund missing the opportunity of obtaining a price
or yield considered to be advantageous. When the Fund is the buyer in such a
transaction, however, it will maintain, in a segregated account with its
custodian, cash, debt securities of any grade or equity securities, having a
value equal to or greater than the Fund's purchase commitments, provided such
securities have been determined by the Investment Manager to be liquid and
unencumbered, and are marked to market daily, pursuant to guidelines established
by the Directors. When the Fund is the seller in such a transaction, it will
cover its commitment to deliver the security by maintaining positions in
portfolio securities that would serve to satisfy or offset the risk of such
obligations. The Fund will make commitments to purchase municipal securities on
such basis only with the intention of actually acquiring these securities, but
the Fund may sell such securities prior to the settlement date if such sale is
considered to be advisable.
To the extent that the Fund engages in "when-issued" and "delayed
delivery" transactions, it will do so for the purpose of acquiring securities
for the Fund's portfolio consistent with the Fund's investment objective and
policies. However, although the Fund does not intend to engage in such
transactions for speculative purposes, purchases of securities on such basis may
involve more risk than other types of purchases. For example, if the Fund
determines it is necessary to sell the "when-issued" or "delayed delivery"
securities before delivery, it may incur a gain or a loss because of market
fluctuations since the time the commitment to purchase such securities was made.
Subject to the requirement of maintaining a segregated account, no specified
limitation exists as to the percentage of the Fund's assets which may be used to
acquire securities on a "when-issued" or "delayed delivery" basis. A significant
percentage of the Fund's assets committed to the purchase of securities on a
"when-issued" "delayed delivery" basis may increase the volatility of the Fund's
net asset value and may limit the flexibility to manage the Fund's investments.
12
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 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
13
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
authority to do so from the SEC. Loans of the Fund's securities, if and when
made, may not exceed 33 1/3% 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.
Year 2000. The investment management services provided to the Fund by MMC
and the services provided to shareholders by Salomon Smith Barney depend on the
smooth functioning of their computer systems. Many computer software systems in
use today cannot recognize the year 2000, but revert to 1900 or some other date,
due to the manner in which dates were encoded and calculated. That failure could
have a negative impact on the Fund's operations, including the handling of
securities trades, pricing and account services. MMC and Salomon Smith Barney
have advised the Fund that they have been reviewing all of their computer
systems and actively working on necessary changes to their systems to prepare
for the year 2000 and expect that their systems will be compliant before that
date. In addition, MMC has been advised by the Fund's custodian, transfer agent
and accounting service agent that they are also in the process of modifying
their systems with the same goal. There can, however, be no assurance that MMC,
Salomon Smith Barney or any other service provider will be successful, or that
interaction with other non-complying computer systems will not impair Fund or
shareholder services at that time.
In addition, the ability of issuers to make timely payments of interest
and principal or to continue their operations or services may be impaired by the
inadequate preparation of their computer systems for the year 2000. This may
adversely affect the market values of securities of specific issuers or of
securities generally if the inadequacy of preparation is perceived as widespread
or as affecting trading markets.
14
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 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
15
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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. 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.
16
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Investment Objective and Policies (continued)
- --------------------------------------------------------------------------------
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 may assume large positions in the obligations of a
small number of issuers, which would 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 those issuers.
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
outstanding voting securities of the Fund," within the meaning of the 1940 Act.
A "majority of the 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 at the time of an investment by the Fund, 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.
17
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Share Price Data
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The Fund's Common Stock is listed on the NYSE under the symbol "GSI."
Salomon Smith Barney currently 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 during
the last two fiscal years and for the first quarter of 1998.
Quarterly High Price Quarterly Low Price
-------------------- -------------------
Premium Premium
Net Asset NYSE (Discount) Net Asset NYSE (Discount)
Value Price to NAV Value Price to NAV
================================================================================
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)
11/30/97 11.94 11.688 (2.11) 11.76 11.063 (5.92)
2/28/98 12.08 11.813 (2.21) 11.74 11.063 (5.76)
5/31/98 11.81 11.500 (2.62) 11.62 10.438 (10.17)
8/31/98 11.84 10.813 (8.67) 11.72 10.063 (14.13)
================================================================================
As of September 11, 1998, the price of Common Stock as quoted on the NYSE
was $10.375, representing a 11.69% discount from the Common Stock's net asset
value calculated on that day.
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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
18
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Net Asset Value (continued)
- --------------------------------------------------------------------------------
market, these investments are valued at the mean between the quoted bid prices
and asked 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.
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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 interest 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.
19
<PAGE>
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Taxation (continued)
- --------------------------------------------------------------------------------
The interest expense incurred by a shareholder on borrowings made to
purchase or 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.
Shareholders are required to pay tax on all taxable distributions even if
those distributions are automatically reinvested in additional Fund shares. None
of the dividends paid by the Fund will qualify for the corporate dividends
received deduction. The Fund will inform shareholders of the source and tax
status of all distributions promptly after the close of each calendar year.
The Fund is required to withhold ("backup withholding") 31% of all taxable
dividends, capital gain distributions, and the proceeds of any redemption,
regardless of whether gain or loss is realized upon the redemption, for
shareholders who do not provide the Fund with a correct taxpayer identification
number (social security or employer identification number). Withholding from
taxable dividends and capital gain distributions also is required for
shareholders who otherwise are subject to backup withholding. Any tax withheld
as a result of backup withholding does not constitute an additional tax, and may
be claimed as a credit on the shareholders' Federal income tax return.
- --------------------------------------------------------------------------------
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
MMC, located at 388 Greenwich Street, New York, New York 10013, serves as
the Fund's Investment Manager. MMC (through its predecessor entities) has been
in the investment counseling business since 1968 and is a registered invest-
20
<PAGE>
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
ment adviser. MMC renders investment advice to a wide variety of individuals and
institutional clients that had aggregate assets under management as of August
31, 1998 in excess of $106 billion. MMC is wholly owned by Holdings, the parent
company of Salomon Smith Barney. Holdings is a wholly owned subsidiary of
Travelers, a financial services holding company engaged, through its
subsidiaries, principally in four business segments: Investment Services
including Asset Management, Consumer Finance Services, Life Insurance Services
and Property & Casualty Insurance Services. MMC, Holdings and Salomon 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, MMC serves as the Fund's administrator and is paid a fee by the
Fund that is computed daily and paid monthly at an annual 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 Salomon 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 Salomon 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, because transactions in fixed income
securities are executed as principal transactions by the various dealers.
On April 6, 1998, Travelers announced that it had entered into a Merger
Agreement with Citicorp. The transaction, which was originally expected to be
completed during the third quarter of 1998, is subject to various regulatory
approvals, including approval by the Federal Reserve Board. The transaction has
been approved by the stockholders of each of Travelers and Citicorp. Travelers
has filed an application to become a bank holding company so that, upon
consummation of the merger, the surviving corporation would be a bank holding
company subject to regulation under the Bank Holding Company Act of 1956 (the
"BHCA"). The requirements of
21
<PAGE>
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Management of the Fund (continued)
- --------------------------------------------------------------------------------
the BHCA, the Glass-Steagall Act and certain other laws and regulations will
then be applicable to Travelers and its subsidiaries.
The Manager does not believe that its compliance with applicable law
following the merger of Travelers and Citicorp will have a material adverse
effect on its ability to continue to provide the Fund with the same level of
investment advisory services that it currently receives. Salomon Smith Barney
and the Manager believe that the Manager's services under the Management
Agreement and the market-making activities performed by Salomon Smith Barney are
not underwriting and would be consistent with the Glass-Steagall Act and other
relevant federal and state laws. However, there is little controlling precedent
regarding the performance of the combination of investment advisory and
administrative activities by subsidiaries of bank holding companies. If Salomon
Smith Barney and the Manager, or their affiliates, were to be prevented from
acting as the manager or administrator, the Fund would seek alternative means
for obtaining these services. The Fund does not expect that shareholders would
suffer any adverse financial consequences as a result of any such occurrence.
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 MMC and is the senior portfolio
manager for a number of investment companies and other accounts investing in
tax-exempt securities.
- --------------------------------------------------------------------------------
Dividends and Distribution; Dividend Reinvestment Plan
- --------------------------------------------------------------------------------
The Fund generally 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. From time to time, when the Fund makes
a substantial capital gains distribution, it may do so in lieu of paying its
regular monthly dividend. 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 (the "Plan"), unless a
shareholder elects to receive cash.
Under the Fund's Dividend Reinvestment 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 purchasing 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
(that is, in "street
22
<PAGE>
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Dividends and Distribution; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
name") will be reinvested by the broker or nominee in additional shares under
the Plan, unless the service is not provided by the broker or nominee or the
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 on the date of valuation, Plan participants will be issued shares of
Common Stock at a price equal to 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 price.
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 issue the remaining portion of the dividend or
distribution by issuing shares at 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
payment date of the dividend or capital gains distribution, but in no event
shall such purchases continue later than 30 days after that date, 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.
23
<PAGE>
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Dividends and Distribution; Dividend Reinvestment Plan (continued)
- --------------------------------------------------------------------------------
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. 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 under the Plan. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, P.O. Box
8030, Boston, Massachusetts 02266-8030 or by telephone at 1-800-331-1710.
- --------------------------------------------------------------------------------
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 11, 1998
================================================================================
Common Stock 500,000,000 Shares 0 19,882,055
================================================================================
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 is
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;
24
<PAGE>
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Description of Common Stock (continued)
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan." Such 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 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
25
<PAGE>
- --------------------------------------------------------------------------------
Certain Provisions of the Articles of Incorporation (continued)
- --------------------------------------------------------------------------------
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.
The Fund's Board of Directors has seen no reason to adopt any of the steps
specified above, which some other closed-end funds have used to address the
discount. 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. The Fund's Investment Manager may
involuntarily waive its fees from time to time in order to increase the Fund's
dividend yield in an effort to reduce the discount. Any such waiver may be
terminated at any time, and there can be no assurance that such actions would be
successful at reducing the discount.
- --------------------------------------------------------------------------------
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.
26
<PAGE>
- --------------------------------------------------------------------------------
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 Salomon 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.
27
<PAGE>
- --------------------------------------------------------------------------------
Appendix A
- --------------------------------------------------------------------------------
Types of Municipal Obligations
The Fund may invest in the following types of Municipal Obligations and in
such other types of Municipal Obligations as may be described in the Prospectus.
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>
- --------------------------------------------------------------------------------
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 Fund will be considered illiquid securities unless the Fund'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
Fund'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 Fund will not
invest more than 5% of its assets in such "non-appropriation" municipal lease
obligations.
Zero Coupon Obligations
The Fund 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
Fund, MMC believes that limited investments in such securities may facilitate
the Fund'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 Fund 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 no secondary
A-2
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
market for variable-and floating-rate obligations held by the Fund, although the
Fund may be able to obtain payment of principal at face value by exercising the
demand feature of the obligation.
Participation Interests
The Fund 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 Fund an undivided
interest in a municipal bond owned by a bank. The Fund 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
Fund'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 Fund 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 Fund's participation interest,
plus accrued interest. Generally, the Fund 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 Fund'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. MMC will monitor the
pricing, quality and liquidity of the participation interests held by the Fund
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 Fund 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 Fund would be typically authorized to assert its rights directly against the
issuer of the underlying obligation, the Fund 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 fails to pay principal or
interest when due, the Fund may be subject to delays, expenses and risks that
are
A-3
<PAGE>
- --------------------------------------------------------------------------------
Appendix A (continued)
- --------------------------------------------------------------------------------
greater than those that would have been involved if the Fund 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 Fund 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 Fund 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.
GREENWICH STREET MUNICIPAL FUND INC.
PART B
Greenwich Street Municipal Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 331-1710
STATEMENT OF ADDITIONAL INFORMATION
September 28, 1998
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 28, 1998 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 Salomon 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")
13
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 24
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 IBCA,
Inc. ("Fitch") and other nationally recognized statistical rating
organizations ("NRSROs") represent the opinions of the NRSROs as to the
quality of the Municipal Obligations and other debt securities 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, Mutual
Management Corp. (formerly known as Smith Barney Mutual Funds Management
Inc.) ("MMC" 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
Salomon Smith Barney Inc. ("Salomon Smith Barney") or its affiliates are
members except to the extent permitted by the Securities and Exchange
Commission (the "SEC") including under Rule 10f-3 under the 1940 Act.
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, 1997 and 1998 the
Fund's portfolio turnover rate was 115% and 85%, 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
MMC Investment Manager and
Administrator
Salomon Smith Barney Market Maker
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 MMC, 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 65
388 Greenwich Street
New York NY 10013
Chairman of the
Board,
Chief Executive
Officer
And President
Managing Director of Salomon
Smith Barney Inc.; Chairman
of Salomon Smith Barney
Strategy Advisers Inc.;
President of MMC 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 77
c/o HMK Associates
30 Columbia Turnpike
Florham Park, NJ
07932
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;
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
60
Harvard Business
School
Soldiers Field Road
Boston, MA 02163
Director
Professor, Harvard Business
School.
Robert A. Frankel,
age 71
102 Grand Street
Croton-on-Hudson,
New York, NY 10520
Director
Managing Partner of Robert A.
Frankel Management
Consultants; formerly
Corporate Vice President of
The Reader's Digest
Association, Inc.
William R.
Hutchinson, age 55
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
50
388 Greenwich Street
New York, NY 10013
Vice President and
Investment Officer
Managing Director of Salomon
Smith Barney and Investment
Officer of MMC. Prior to July
1993, Senior Vice President
and Managing Director of
Shearson Lehman Advisors.
David Fare, age 36
388 Greenwich Street
New York, NY 10013
Investment Officer
Investment Officer of MMC.
Prior to July 1993, Vice
President of Shearson Lehman
Advisors.
Lewis E. Daidone,
age 41
388 Greenwich Street
New York, NY 10013
Senior Vice
President
and Treasurer
Managing Director of Salomon
Smith Barney; Chief Financial
Officer, Director and Senior
Vice President of MMC and
TIA.
Christina T. Sydor,
age 47
388 Greenwich Street
New York, NY 10013
Secretary
Managing Director of Salomon
Smith Barney; General Counsel
and Secretary of MMC 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 Salomon Smith Barney is affiliated.
The Fund pays each of its Directors who is not a director, officer
or employee of MMC, 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,
1998, such fees totaled $3,677.53.
Director
Aggregate
Compensation from
Fund
Pension or
Retirement
Benefits
Accrued as
part of
Fund
Expenses
Total
Compensa-
tion from
Fund and
Fund
Complex
Total
Number of
Funds for
which
Director
Serves
Within Fund
Complex
Martin Brody
5,600
0
119,814
19
Dwight Crane
6,100
0
133,850
22
Allan Bloostein
6,600
0
85,850
8
Robert Frankel
6,500
0
65,900
8
William R.
Hutchinson
6,100
0
35,750
6
Heath B. McLendon*
- -----
0
- -----
58
* Designates an "interested person" of 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. During the Fund's last fiscal year, aggregate
compensation paid by the Fund to Directors Emeritus totaled $3,100..
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 11, 1998:
Percent
of
Amount of Common
Name and Address Record Stock
of Record Owner Ownership
Outstanding
Cede & Co., as Nominee for
19,516,042 98.16%
The Depository Trust Company
P.O. Box 20
Bowling Green Station
New York, New York 10004
As of September 11, 1998, 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 19, 1998. 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 Salomon 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, 1997 and 1998, such fees amounted to
$1,635,172 and $1,628,298, respectively. Effective September 1, 1998,
the Investment Manager instituted a voluntary fee waiver whereby its
advisory Fees were received at an annual rate of 0.08% of average daily
net assets. This voluntary waiver may be terminated at any time by the
Investment Manager without notice.
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.
MMC 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, 1997 and 1998, the Administrator received
$467,191 and $465,228, respectively, in administration fees.
Pursuant to the Administration Agreement, MMC will exercise its
best judgment in rendering its services to the Fund. MMC 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 MMC'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 MMC; taxes, interest, brokerage fees and
commissions, if any; fees of Directors who are not officers, directors,
shareholders or employees of Salomon 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; and (3) 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. 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. Investments in both Section 1256 Contracts and offsetting
positions in those contracts, may result in the Fund not being able to
receive the benefit of certain realized losses for an indeterminate
period of time.
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.
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. 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.
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.
The market prices of the Fund's shares may, 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. Any
acquisition of Common Stock by the Fund 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.
If a tender offer for Common Stock of the Fund is authorized to be
made by the Fund 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. 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, 1999.
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, 1998
are incorporated into this SAI by reference in their entirety. A copy of
these reports may be obtained from any Salomon 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 have the lowest expectation of credit
risk. The obligor has an exceptionally strong ability for timely payment
of financial commitments, which is highly unlikely to be adversely
affected by foreseeable events.
AA - Bonds rated AA by Fitch have a very low expectation of credit risk.
They indicate very strong capacity for timely payment of financial
commitments. This capacity is not significantly vulnerable to
foreseeable events.
A - Bonds rated A by Fitch are considered to have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be strong, but may be more vulnerable to changes in
economic conditions and circumstances than bonds with higher ratings.
BBB - Bonds rated BBB by Fitch currently have a low expectation of
credit risk. The capacity for timely payment of financial commitments is
considered to be adequate. Adverse changes in economic conditions and
circumstances, however, are more likely to impair this capacity. This is
the lowest investment grade category assigned by Fitch.
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 financial
commitments in a timely manner.
Fitch's short-term ratings are as follows:
F-l + - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments. The "+" denotes an
exceptionally strong credit feature.
F-1 - Issues assigned this rating are regarded as having the strongest
capacity for timely payment of financial commitments.
F-2 - Issues assigned this rating have a satisfactory capacity for
timely payment of financial commitments, but the margin of safety is not
as great as in the case of the higher ratings.
F-3 - The capacity for the timely payment of financial commitments is
adequate; however, near-term adverse changes could result in a reduction
to non-investment grade.
1
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, 1998 and Report of Independent Accountants dated
July 15, 1998 are incorporated by reference to the
Definitive 30(b)2-1 filed on August 26, 1998, Accession
#0000091155-98-000520.
(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"), as modified by the
description set forth in Part A of this Post-Effective
Amendment.
(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 $8,000
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 $8,000
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 11, 1998
Shares of Common Stock,
par value $0.001 per share 375
Item 29. Indemnification
Under Article Seven 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.
Mutual Management Corp. (formerly known as Smith Barney Mutual
Funds Management Inc.) ("MMC") a New York corporation, is a
registered investment adviser and is wholly owned by Salomon Smith
Barney Holdings Inc., which in turn is wholly owned by The
Travelers Group Inc. MMC is primarily engaged in the investment
advisory business. Information as to executive officers and
directors of MMC 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
Mutual Management Corp.
388 Greenwich Street
New York, New York 10013
First Data Investor Services Group, Inc.
53 State Street
Boston, Massachusetts 02109
PNC Bank, N.A.
17th & Chestnut Streets
Philadelphia, Pennsylvania 19103
Item 32. Management Services
Not Applicable.
Item33. Undertakings
1. Not Applicable.
2. Not Applicable.
3. Not Applicable
4. The registrant hereby undertakes:
(a) To file, during any period in which offers or sales are
being made, a post-effective
Amendment to this Registrant Statement:
(1) to include any prospectus required by Section 10(a)(3)
of the Securities Act
of 1933 (the "Act");
(2) to reflect in the Prospectus any facts or events
arising after the effective date
of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in
the information set forth in the Registration
Statement; and
(3) to include any material information with respect to
the plan of distribution
not previously disclosed in the Registration Statement
or any material change to such information in the
Registration Statement.
(b) For the purpose of determining any liability under the Act,
each post-effective
Amendment shall be deemed to be a new Registration Statement
relating to the
Securities offered therein, and the offering of such
securities at that time shall be
deemed to be the initial bona fide offering thereof.
(c) Not Applicable.
5. Not Applicable.
6. The registrant undertakes to send by first class mail or other
means designed to ensure equally prompt delivery, within two
business days of receipt of a written or oral request, any
Statement of Additional Information.
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 21st day of September,
1998.
GREENWICH STREET MUNICIPAL FUND INC.
By: /s/Heath B. McLendon_____
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, 9/21/98
and President
/s/Lewis E. Daidone_____
Lewis E. Daidone Senior Vice President
and Treasurer 9/21/98
*/s/Allan J. Bloostein
Allan J. Bloostein Director 9/21/98
*/s/Martin Brody
Martin Brody Director 9/21/98
*/s/Dwight B. Crane
Dwight B. Crane Director 9/21/98
*/s/Robert A. Frankel
Robert A. Frankel Director 9/21/98
*/s/William R. Hutchinson
William R. Hutchinson Director 9/21/98
* 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 15, 1998 for 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 21, 1998
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