Registration No. 33-47782
811-6663
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 X
Pre-Effective Amendment No.
Post-Effective Amendment No. 6 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 7 X
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND
(Exact name of Registrant as Specified in Charter)
Two World Trade Center, New York, New York 10048
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(212) 720-9218
Christina T. Sydor
Secretary
Smith Barney Shearson Adjustable Rate Government Income Fund
Two World Trade Center
New York, New York 10048
(Name and Address of Agent for Service)
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment
becomes effective.
It is proposed that this filing will become effective:
X immediately upon filing pursuant to Rule 485(b)
on pursuant to Rule 485(b)
_____ 60 days after filing pursuant to Rule 485(a)
on pursuant to Rule 485(a)
______________________________________________________________________________
______
The Registrant has previously filed a declaration of indefinite registration
of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. Registrant's Rule 24f-2 Notice for the fiscal period ended May
31, 1994 was filed electronically on July 28, 1994.
CALCULATION OF REGISTRATION FEE
UNDER THE SECURITIES ACT OF 1933 (1)
______________________________________________________________________________
_______
Title of Securities
Being Registered
Amount Being
Registered
Proposed
Maximum
Offering
Price Per
Unit (2)
Proposed
Maximum
Aggregate
Offering Price
(3)
Amount of
Registrati
on Fee
Class A Shares of
Beneficial Interest, par
value $.001 per share
3,749,453.85
$9.79
$289,998
$100
(1) The shares being registered as set forth in this table are in addition
to the indefinite number of shares of beneficial interest which Registrant has
registered under the Securities Act of 1933, as amended ("1933 Act"), pursuant
to Rule 24f-2 under the Investment Company Actof 1940, as amended ("1940
Act"). Registrant's Rule 24f-2 Notice for its fiscal year ended May 31, 1994
was filed on July 28, 1994.
(2) Based on the Registrant's closing price of $9.79 on July 18, 1994
pursuant to Rule 457 (d) under the 1933 Act and Rule 24e-2(a) under the 1940
Act.
(3) In response to Rule 24e-2(b) under the 1940 Act: (1) the calculation of
the maximum aggregate offering price is made pursuant to Rule 24e-2; (2)
41,442,947 shares of common stock were redeemed by the Registrant during the
fiscal year ended May 31, 1994, (3) 37,723,115 shares have been used for
reductions pursuant to Rule 24f-2 during the current fiscal year and (4)
3,719,832 shares are being used for reduction in this amendment pursuant to
Rule 24e-2(a).
________________________________
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND
FORM N-1A
CROSS REFERENCE SHEET
PURSUANT TO RULE 495(a)
Part A
Item No.
Prospectus Caption
1. Cover Page
Cover Page
2. Synopsis
Prospectus Summary
3. Condensed Financial
Information
Financial Highlights, The Fund's
Performance
4. General Description of
Registrant
Cover Page; Prospectus Summary;
Variable Pricing System;
Investment Objective and
Management Policies; Distributor;
Additional Information
5. Management of the Fund
Prospectus Summary, Management of
the Fund; Distributor; Additional
Information
6. Capital Stock and Other
Securities
Variable Pricing System;
Dividends, Distributions and
Taxes; Additional Information
7. Purchase of Securities Being
Offered
Variable Pricing System; Purchase
of Shares; Valuation of Shares;
Redemption of Shares; Exchange
Privilege; Additional Information
8 Redemption or Repurchase
Variable Pricing System; Purchase
of Shares; Redemption of Shares
9. Legal Proceedings
Not Applicable
Part B
Item No.
Statement of
Additional Information Caption
10. Cover Page
Cover page
11. Table of Contents
Contents
12. General Information and
History
Management of the Fund;
Distributor; Organization of the
Fund
13. Investment Objectives and
Policies
Investment Objective and
Management Policies;
14. Management of the Fund
Management of the Fund;
Distributor; Custodian and
Transfer Agent
15. Control Persons and Principal
Holders of
Securities
Management of the Fund
16. Investment Advisory and Other
Services
Management of the Fund;
Distributor; Custodian and
Transfer Agent
17. Brokerage Allocation
Investment Objective and
Management Policies
18. Capital Stock and Other
Securities
Purchase of Shares; Taxes
19. Purchase, Redemption and
Pricing of
Securities Being Offered
Purchase of Shares; Redemption of
Shares; Distributor; Valuation of
Shares; Exchange Privilege
20. Tax Status
Taxes
21. Underwriters
Distributor
22. Calculation of Performance
Data
Performance Data
23. Financial Statements
Financial Statements
<PAGE>
JULY 30, 1994
SMITH BARNEY SHEARSON
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
PROSPECTUS BEGINS
ON PAGE ONE.
[LOGO]
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
PROSPECTUS July 30,
1994
Two World Trade Center
New York, New York 10048
(212) 720-9218
Smith Barney Shearson Adjustable Rate Government Income Fund (the "Fund") is
a
mutual fund that seeks to provide high current income and to limit the degree
of
fluctuation of its net asset value resulting from movements in interest rates
by
investing primarily in a portfolio of adjustable rate securities ("Adjustable
Rate Securities") and securities issued or guaranteed by the United States
government, its agencies or instrumentalities ("U.S. government securities").
(continued on p. 2.)
This Prospectus sets forth concisely certain information about the Fund,
including distribution and service fees and expenses, that prospective
investors
will find helpful in making an investment decision. Investors are encouraged
to
read this Prospectus carefully and retain it for future reference.
Additional information about the Fund is contained in a Statement of
Additional Information dated July 30, 1994, as amended or supplemented from
time
to time, that is available upon request and without charge by calling or
writing
the Fund at the telephone number or address set forth above, or by contacting
your Smith Barney Financial Consultant. The Statement of Additional
Information
has been filed with the Securities and Exchange Commission (the "SEC") and is
incorporated by reference into this Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY STRATEGY ADVISERS INC.
Investment Adviser
BLACKROCK FINANCIAL MANAGEMENT, L.P.
Sub-Investment Adviser
SMITH, BARNEY ADVISERS, INC.
Administrator
THE BOSTON COMPANY ADVISORS, INC.
Sub-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.
1
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
PROSPECTUS (CONTINUED)
(continued from page 1)
ALTHOUGH CERTAIN OF THE SECURITIES IN THE FUND'S PORTFOLIO ARE ISSUED OR
GUARANTEED BY THE UNITED STATES GOVERNMENT, AN INVESTMENT IN THE FUND IS
NEITHER
INSURED NOR GUARANTEED BY THE UNITED STATES GOVERNMENT. IN ADDITION, ALTHOUGH
THE FUND'S PORTFOLIO MAY BE EXPECTED TO EXPERIENCE LOW VOLATILITY DUE TO THE
UNIQUE CHARACTERISTICS OF ADJUSTABLE RATE SECURITIES, THE FUND IS NOT A MONEY
MARKET FUND THAT ATTEMPTS TO MAINTAIN A CONSTANT NET ASSET VALUE AND THE
FUND'S
INVESTMENT PORTFOLIO CAN BE EXPECTED TO EXPERIENCE GREATER VOLATILITY THAN
THAT
OF A MONEY MARKET FUND.
2
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
<C>
PROSPECTUS SUMMARY 4
- ----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS 10
- ----------------------------------------------------------------------
VARIABLE PRICING SYSTEM 13
- ----------------------------------------------------------------------
THE FUND'S PERFORMANCE 14
- ----------------------------------------------------------------------
MANAGEMENT OF THE FUND 16
- ----------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES 18
- ----------------------------------------------------------------------
PURCHASE OF SHARES 43
- ----------------------------------------------------------------------
REDEMPTION OF SHARES 48
- ----------------------------------------------------------------------
VALUATION OF SHARES 52
- ----------------------------------------------------------------------
EXCHANGE PRIVILEGE 53
- ----------------------------------------------------------------------
DISTRIBUTOR 59
- ----------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES 60
- ----------------------------------------------------------------------
ADDITIONAL INFORMATION 62
- ----------------------------------------------------------------------
</TABLE>
3
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS AND IN THE STATEMENT OF ADDITIONAL
INFORMATION. CROSS-REFERENCES IN THIS SUMMARY ARE TO HEADINGS IN THE
PROSPECTUS.
SEE "TABLE OF CONTENTS."
BENEFITS TO INVESTORS THE FUND OFFERS INVESTORS SEVERAL IMPORTANT BENEFITS:
- - A professionally managed, diversified portfolio consisting primarily of
Adjustable Rate Securities and U.S. government securities.
- - Investment liquidity through convenient purchase and redemption procedures.
- - A convenient way to invest without the administrative and recordkeeping
burdens normally associated with the direct ownership of securities.
- - Different methods for purchasing shares that allow investment flexibility
and
a wider range of investment alternatives.
- - Automatic dividend reinvestment feature, plus exchange privilege within the
same class of shares of most other funds in the Smith Barney Shearson Group
of Funds.
INVESTMENT OBJECTIVES The Fund is a diversified, open-end, management
investment
company that seeks to provide high current income and to limit the degree of
fluctuation of its net asset value resulting from movements in interest rates
by
investing primarily in a portfolio of Adjustable Rate Securities and U.S.
government securities. See "Investment Objectives and Management Policies."
VARIABLE PRICING SYSTEM The Fund offers three classes of shares ("Classes")
designed to provide investors with the flexibility of selecting an investment
best suited to their needs. The general public is offered two classes of
shares:
Class A and Class B, which differ principally in terms of the sales charges
and
rate of expenses to which they are subject. A third class of shares--Class D--
is
offered only to plans participating in the Smith Barney 401(k) Program (the
"401(k) Program"). See "Variable Pricing System and Purchase of Shares--Smith
Barney 401(k) Program."
CLASS A SHARES These shares are offered at net asset value per share. The Fund
pays an annual distribution and shareholder servicing fee of .75% of the value
of average daily net assets of this Class. See "Purchase of Shares."
4
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
CLASS B SHARES These shares may be acquired only through exchanges with Class
B
shares of other funds in the Smith Barney Shearson Group of Funds and are
subject to the highest contingent deferred sales charge ("CDSC"), if any, of
the
shares from which the exchange or any preceding exchange was made. The Fund
pays
an annual distribution and shareholder servicing fee of .75% of the value of
average daily net assets of this Class. See "Purchase of Shares."
CLASS B CONVERSION FEATURE Class B shares will convert automatically to Class
A
shares, based on relative net asset value, eight years after the date of
original purchase. The first of these conversions will commence on or about
September 30, 1994. See "Variable Pricing System--Class B Shares."
401(K) PROGRAM Investors may be eligible to participate in the 401(k) Program,
which is generally designed to assist employers of plan sponsors in the
creation
and operation of retirement plans under Section 401(a) of the Internal Revenue
Code of 1986, as amended (the "Code"), as well as other types of participant
directed, tax-qualified employee benefit plans (collectively, "Participating
Plans"). Class A, Class B and Class D shares are available as investment
alternatives for Participating Plans. Class A and Class B shares acquired
through the 401(k) Program are subject to the same service and/or distribution
fee as, but different sales charge and CDSC schedules than, the Class A and
Class B shares acquired by other investors. Class D shares acquired by
Participating Plans are offered at net asset value per share without any sales
charge or CDSC. The Fund pays annual service and distribution fees based on
the
value of the average daily net assets attributable to this Class. See
"Purchase
of Shares--Smith Barney 401(k) Program."
PURCHASE OF SHARES Class A shares may be purchased through the Fund's
distributor, Smith Barney Inc. ("Smith Barney"), or a broker that clears
securities transactions through Smith Barney on a fully disclosed basis (an
"Introducing Broker"). Direct purchases by certain retirement plans may be
made
through the Funds' transfer agent, The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation ("FDC"). Smith Barney
recommends that, in most cases, single investments of $250,000 or more should
be
made in Class A shares. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors are subject to a minimum initial investment
requirement of $2,500 and a minimum subsequent investment
5
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
requirement of $1,000. However, for Individual Retirement Accounts ("IRAs")
and
Self-Employed Retirement Plans, the minimum initial investment requirement is
$250 and the minimum subsequent investment requirement is $100 and for certain
qualified retirement plans, the minimum initial and subsequent investment
requirement is $25. See "Purchase of Shares."
SYSTEMATIC INVESTMENT PLAN The Fund offers shareholders a Systematic
Investment
Plan under which they may authorize the automatic placement of a purchase
order
each month or quarter for Fund shares in an amount not less than $100. See
"Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. Class A and Class D shares are
redeemable at net asset value and Class B shares are redeemable at net asset
value less any applicable CDSC. See "Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Strategy Advisers Inc. ("SBSA") serves as
the Fund's investment adviser. SBSA is a wholly owned subsidiary of Smith,
Barney Advisers, Inc. ("SBA"), which serves as the Fund's administrator. SBA
is
a wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings
is a wholly owned subsidiary of The Travelers Inc. ("Travelers"). Travelers is
a
diversified financial services holding company engaged through its
subsidiaries
principally in the businesses of providing investment services, consumer
financial services and insurance services. BlackRock Financial Management,
L.P.,
("BlackRock"), serves as the Fund's sub-investment adviser.
The Boston Company Advisors, Inc. ("Boston Advisors") serves as the Fund's
sub-administrator. Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc. ("TBC"), which in turn is a wholly owned subsidiary of Mellon
Bank
Corporation ("Mellon"). See "Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares of the same
class of certain other funds in the Smith Barney Shearson Group of Funds.
Certain exchanges may be subject to a sales charge differential. See "Exchange
Privilege."
6
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
VALUATION OF SHARES Net asset value of each Class is quoted daily in the
financial section of most newspapers and is also available from your Smith
Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS The Fund's policy is to declare daily and
distribute
monthly, generally on the 10th calendar day of each calendar month,
distributions that will be calculated in accordance with a monthly target rate
to be determined by the Fund's Board of Trustees from time to time. The final
distribution for each calendar year will include any remaining net investment
income and will be accompanied by the distribution of any remaining short-term
and long-term capital gains deemed, for Federal income tax purposes,
undistributed for the year. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of a
Class
will be reinvested automatically, unless otherwise specified by an investor,
in
additional shares of the same Class at current net asset value. Shares
acquired
by dividend and distribution reinvestment will not be subject to any sales
charge or CDSC. Class B shares acquired through dividend and distribution
reinvestment will become eligible for conversion to Class A shares on a pro-
rata
basis. See "Dividends, Distributions and Taxes" and "Variable Pricing System."
RISK FACTORS AND SPECIAL CONSIDERATIONS No assurance can be given that the
Fund
will achieve its investment objective. Although the Fund will invest
principally
in securities issued or guaranteed by the United States government, its
agencies
or instrumentalities, shares of the Fund, unlike certain bank deposit
accounts,
are not insured or guaranteed by the United States government. Changes in
interest rates generally will result in increases or decreases in the market
value of the obligations held by the Fund and, unlike that of a money market
fund, the Fund's net asset value per share will fluctuate. The Fund's net
asset
value will be subject to greater fluctuation to the extent, if any, that the
Fund invests in zero coupon U.S. Treasury securities.
Certain of the instruments held by the Fund,and certain of the investment
techniques that the Fund may employ, might expose the Fund to certain risks.
The
instruments presenting the Fund with risks are mortgage backed securities
("MBSs") (which include adjustable rate mortgage securities and collateralized
mortgage obligations), asset backed securities ("ABSs") and
7
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
zero coupon securities. MBSs and ABSs are subject to prepayment or early
payout
risks, which are affected by changes in prevailing interest rates and numerous
economic, geographic, social and other factors. The investment techniques
presenting the Fund with risks are entering into futures contracts, options on
futures contracts, repurchase agreements, reverse repurchase agreements and
dollar rolls, engaging in short sales, lending portfolio securities and
entering
into securities transactions on a when-issued or delayed delivery basis. See
"Investment Objectives and Policies--Risk Factors and Special Considerations"
and "--Investment Techniques and Strategies."
THE FUND'S EXPENSES The following expense table lists the costs and expenses
an
investor will incur either directly or indirectly as a shareholder of the
Fund,
based on the maximum CDSC that may be incurred at the time of redemption and
the
Fund's operating expenses for its most recent fiscal period:
<TABLE>
<CAPTION>
CLASS A CLASS B
CLASS D
<S> <C> <C>
<C>
-----------------------------------------------------------------------------
- --------
SHAREHOLDER TRANSACTION EXPENSES
Maximum CDSC*
(as a percentage of redemption proceeds) -- 5.00%
- --
-----------------------------------------------------------------------------
- --------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .60% .60%
.60%
12b-1 fees .75 .75
.75
Other expenses** .18 .22
.20
-----------------------------------------------------------------------------
- --------
TOTAL FUND OPERATING EXPENSES 1.53% 1.57%
1.55%
-----------------------------------------------------------------------------
- --------
<FN>
*Class B shares may be acquired only through exchanges and are subject to
the
highest CDSC, if any,
of the shares from which the exchange or any preceding exchange was made.
**All expenses are based on data for the fiscal period ended May 31, 1994.
</TABLE>
The CDSC set forth in the above table is the maximum CDSC imposed by any of
the funds participating in the Smith Barney Shearson Group of Funds exchange
program. Investors may pay actual charges of less than 5% depending on the
CDSC
of the shares from which the exchange was made and the length of time the
shares
are held and whether the shares are held through the 401(k) Program. See
"Purchase of Shares" and "Redemption of Shares." Management fees payable by
the
Fund include investment advisory
8
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PROSPECTUS SUMMARY (CONTINUED)
fees computed daily and payable monthly to SBSA at the annual rate of .40% of
the value of the Fund's average daily net assets, and administration fees
computed daily and payable monthly to SBA in an amount equal to .20% of the
value of the Fund's average daily net assets. The Fund pays no direct fee to
BlackRock or Boston Advisors. The nature of the services for which the Fund
pays
management fees is described under "Management of the Fund." Smith Barney also
receives with respect to each of the Classes an annual 12b-1 distribution and
shareholder servicing fee of .75% of the value of average daily net assets of
the respective Classes, of which .50% is used by Smith Barney to cover
expenses
that are primarily intended to result in, or that are primarily attributable
to,
the sale of shares, and of which .25% is used by Smith Barney to provide
compensation for ongoing servicing and/ or maintenance of shareholder
accounts.
"Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration
fees.
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 $1,000 investment in the Fund assuming a 5% total return. THE
EXAMPLE ASSUMES PAYMENT BY THE FUND OF OPERATING EXPENSES AT THE LEVELS SET
FORTH IN THE TABLE ABOVE. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION
OF PAST OR FUTURE EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN
THOSE
SHOWN. MOREOVER, WHILE THIS EXAMPLE ASSUMES A 5% ANNUAL RETURN, THE FUND'S
ACTUAL PERFORMANCE WILL VARY AND MAY RESULT IN AN ACTUAL RETURN GREATER OR
LESS
THAN 5%.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS
10 YEARS*
<S> <C> <C> <C>
<C>
-----------------------------------------------------------------------------
- --------
Class A shares $16 $48 $83
$182
Class B shares:
Assumes complete redemption at end of each
time period** $66 $80 $96
$187
Assumes no redemption $16 $50 $86
$187
Class D shares $16 $49 $84
$185
-----------------------------------------------------------------------------
- --------
<FN>
*Ten-year figures assume conversion of Class B shares to Class A shares at
the end of
the eighth year following the date of purchase.
**Assumes deduction at the time of redemption of the maximum CDSC applicable
for that
time period.
</TABLE>
9
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
THE FOLLOWING INFORMATION HAS BEEN AUDITED BY COOPERS & LYBRAND, INDEPENDENT
ACCOUNTANTS, WHOSE REPORT THEREON APPEARS IN THE FUND'S ANNUAL REPORT DATED
MAY
31, 1994. THE INFORMATION SHOULD BE READ IN CONJUNCTION WITH THE FINANCIAL
STATEMENTS AND RELATED NOTES THAT ALSO APPEAR IN THE FUND'S ANNUAL REPORT,
WHICH
IS INCORPORATED BY REFERENCE INTO THE STATEMENT OF ADDITIONAL INFORMATION.
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
5/31/94 5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $ 10.00
- ------------------------------------------------------------------------------
- --
Income from investment operations:
Net investment income 0.37 0.44#
Net realized and unrealized loss on investments (0.17) (0.05)
- ------------------------------------------------------------------------------
- --
Total from investment operations 0.20 0.39
Less distributions:
Distributions from net investment income (0.37) (0.43)
Distributions in excess of net investment income (0.01) --
- ------------------------------------------------------------------------------
- --
Total distributions (0.38) (0.43)
- ------------------------------------------------------------------------------
- --
Net Asset Value, end of period $ 9.78 $ 9.96
- ------------------------------------------------------------------------------
- --
Total return++ 2.05% 3.89%
- ------------------------------------------------------------------------------
- --
Ratios to average net assets/Supplemental Data
(annualized):
Net assets, end of period (in 000's) $283,618 $313,184
Ratio of operating expenses to average net assets+ 1.53%
1.50%**
Ratio of net investment income to average net assets 3.72%
4.36%**
Portfolio turnover rate 525% 236%
- ------------------------------------------------------------------------------
- --
<FN>
*The Fund commenced operations on June 22, 1992. Any shares in existence
prior
to November 6, 1992 were designated as Class A shares.
**Annualized.
+The annualized operating expense ratio excludes interest expense. The ratio
including interest expense for the year ended May 31, 1994 and the period
ended May 31, 1993 was 2.31% and 1.92%, respectively. Annualized expense
ratio
before voluntary waiver of fees by investment adviser, sub-investment
adviser
and administrator (including interest expense) for the period ended May 31,
1993 was 2.03%.
++Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
#Net investment income before voluntary waiver of fees by investment adviser,
sub-investment adviser and administrator for the period ended May 31, 1993
was
$0.43.
</TABLE>
10
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
5/31/94
5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $ 9.96
- ------------------------------------------------------------------------------
- --
Income from investment operations:
Net investment income 0.37 0.25#
Net realized and unrealized loss on investments (0.17) --
- ------------------------------------------------------------------------------
- --
Total from investment operations 0.20 0.25
Less distributions:
Distributions from net investment income (0.37) (0.25)
Distributions in excess of net investment income (0.01) --
- ------------------------------------------------------------------------------
- --
Total distributions (0.38) (0.25)
- ------------------------------------------------------------------------------
- --
Net Asset Value, end of period $ 9.78 $ 9.96
- ------------------------------------------------------------------------------
- --
Total return++ 2.05% 2.56%
- ------------------------------------------------------------------------------
- --
Ratios to average net assets/Supplemental Data
(annualized):
Net assets, end of period (in 000's) $8,421 $3,569
Ratio of operating expenses to average net assets+ 1.57%
1.50%**
Ratio of net investment income to average net assets 3.68%
4.36%**
Portfolio turnover rate 525% 236%
- ------------------------------------------------------------------------------
- --
<FN>
*On November 6, 1992 the Fund commenced selling Class B shares.
**Annualized.
+The annualized operating expense ratio excludes interest expense. The ratio
including interest expense for the year ended May 31, 1994 and the period
ended May 31, 1993 was 2.35% and 1.92%, respectively. Annualized expense
ratio
before voluntary waiver of fees by investment adviser, sub-investment
adviser
and administrator (including interest expense) for the period ended May 31,
1993 was 2.03%.
++Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
#Net investment income before voluntary waiver of fees by investment adviser,
sub-investment adviser and administrator for the period ended May 31, 1993
was
$0.24.
</TABLE>
11
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
FINANCIAL HIGHLIGHTS (CONTINUED)
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
5/31/94*
<S> <C>
Net Asset Value, beginning of period $ 9.98
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.37
Net realized and unrealized loss on investments (0.19)
- ----------------------------------------------------------------------------
Total from investment operations 0.18
Less distributions:
Distributions from net investment income (0.37)
Distributions in excess of net investment income (0.01)
- ----------------------------------------------------------------------------
Total distributions (0.38)
- ----------------------------------------------------------------------------
Net Asset Value, end of period $ 9.78
- ----------------------------------------------------------------------------
Total return++ 1.83%
- ----------------------------------------------------------------------------
Ratios to average net assets/Supplemental Data (annualized):
Net assets, end of period (in 000's) $ 113
Ratio of operating expenses to average net assets+ 1.55%
Ratio of net investment income to average net assets 3.69%
Portfolio turnover rate 525%
- ----------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class D shares on June 2, 1993.
+ The annualized operating expense ratio excludes interest expense. The
ratio
including interest expense for the period ended May 31, 1994 was 2.34%.
++ Total return represents the aggregate total return for the period
indicated.
</TABLE>
12
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
VARIABLE PRICING SYSTEM
The Fund offers individual investors two methods of purchasing shares, thus
enabling investors to choose the Class that best suits their needs, given the
amount of purchase and intended length of investment. A third class-- Class
D--is offered only to Participating Plans.
CLASS A SHARES. Class A shares are sold at net asset value per share and are
subject to an annual distribution and shareholder servicing fee of .75% of the
value of the Fund's average daily net assets attributable to the Class. The
distribution and shareholder servicing fee paid with respect to Class A shares
is used by Smith Barney to compensate its Financial Consultants for ongoing
services provided to shareholders and compensates Smith Barney for expenses
incurred in selling the shares, including expenses such as sales commissions,
Smith Barney branch office overhead expenses and marketing costs associated
with
Class A shares such as preparation of sales literature, advertising and
printing
and distributing prospectuses, statements of additional information and other
materials to prospective investors in Class A shares. See "Purchase of
Shares."
CLASS B SHARES. Class B shares may be acquired only through exchanges with
Class B shares of certain other funds in the Smith Barney Shearson Group of
Funds and are subject to the CDSC, if any, of the shares from which the
exchange
was made. Class B shares are subject to an annual distribution and shareholder
servicing fee of .75% of the value of the Fund's average daily net assets
attributable to the Class. See "Purchase of Shares," "Redemption of Shares"
and
"Exchange Privilege."
The distribution and shareholder servicing fees applicable to Class B and
Class D shares are used for the same purposes as the service and distribution
fees applicable to Class A shares. See "Class A Shares" above. A Financial
Consultant may receive different levels of compensation for selling different
Classes of shares. Class B and Class D shares are subject to a higher transfer
agency fee than Class A shares which, in turn, will cause Class B and Class D
shares to have a higher expense ratio and pay lower dividends than Class A
shares.
Eight years after the date of purchase, Class B shares will convert
automatically to Class A shares, based on the relative net asset values for
shares of each Class. In addition, a certain portion of Class B shares that
have
been acquired through the reinvestment of dividends and distributions ("Class
B
Dividend Shares") will be converted at that time. That portion will
13
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
VARIABLE PRICING SYSTEM (CONTINUED)
be a percentage of the total number of outstanding Class B Dividend Shares,
which percentage will be determined by the ratio of the total number of Class
B
shares converting at the time to the total number of outstanding Class B
shares
(other than Class B Dividend Shares). Class B shares will first be convertible
into Class A shares on or about September 30, 1994. The conversion of Class B
Shares into Class A Shares is subject to the continuing availability of an
opinion of counsel to the effect that such conversions will not constitute
taxable events for Federal tax purposes.
CLASS D SHARES. Class D shares of the Fund are sold to Participating Plans
at
net asset value per share and are not subject to an initial sales charge or
CDSC. This Class of shares is subject to an annual service fee of .25% and an
annual distribution fee of .50% of the value of the Fund's average daily net
assets attributable to Class D shares. The distribution fee is used by Smith
Barney for expenses incurred in selling Class D shares, and the service fee is
used to compensate Smith Barney Financial Consultants for ongoing services
provided to Class D shareholders.
- --------------------------------------------------------------------
THE FUND'S PERFORMANCE
TOTAL RETURN
From time to time, the Fund may advertise its "average annual total return"
over various periods of time for each Class. Total return figures show the
average percentage change in the value of an investment in the Class from the
beginning date of the measuring period to the end of the measuring period.
These
figures reflect changes in the price of the shares and assume that any income,
dividends and/or capital gains distributions made by the Fund during the
period
were reinvested in shares of the same Class. These figures also take into
account the distribution and shareholder servicing fees payable with respect
to
the Classes.
Total return figures will be given for recent one-, five-and 10-year
periods,
or for the life of a Class to the extent it has not been in existence for any
such periods, and may be given for other periods as well, such as on a year-
by-year basis. When considering average annual total return figures for
periods
longer than one year, investors should note that a Class' average annual total
return for any one year in the period might have been greater
14
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
THE FUND'S PERFORMANCE (CONTINUED)
or less than the average for the entire period. "Aggregate total return"
figures
may be used for various periods, representing the cumulative change in value
of
an investment in a Class for the specific period (again reflecting changes in
share prices and assuming reinvestment of dividends and distributions).
Aggregate total returns for Class B shares may be calculated either with or
without the effect of the maximum applicable CDSC of 5% and may be shown by
means of schedules, charts or graphs, and may indicate subtotals of the
various
components of total return (that is, the change in value of initial
investment,
income dividends and capital gains distributions). Because of the differences
in
sales charges, the performance for each Class will differ.
YIELD
The Fund may advertise its 30-day "yield," which refers to the income
generated by an investment in the Class over the 30-day period identified in
the
advertisement and is computed by dividing the net investment income per share
earned by the Class during the period by the net asset value per share on the
last day of the period. This income is "annualized" by assuming that the
amount
of income is generated each month over a one-year period and is compounded
semi-annually. The annualized income is then shown as a percentage of the net
asset value.
In reports or other communications to shareholders or in advertising
material,
performance of the respective Classes may be compared with that of other
mutual
funds or classes of shares of other funds as listed in the rankings prepared
by
Lipper Analytical Services, Inc. or similar independent services that monitor
the performance of mutual funds, or other industry or financial publications
such as BARRON'S, BUSINESS WEEK, CDA INVESTMENT TECHNOLOGIES, INC., FORBES,
FORTUNE, INSTITUTIONAL INVESTOR, INVESTORS DAILY, KIPLINGER'S PERSONAL
FINANCE,
MORNINGSTAR MUTUAL FUND VALUES, MONEY, THE NEW YORK TIMES, THE WALL STREET
JOURNAL and USA TODAY. It is important to note that total return figures are
based on historical earnings and are not intended to indicate future
performance. To the extent any advertisement or sales literature of the Fund
describes the expenses or performance of a Class, it will also disclose such
information for the other Class. The Statement of Additional Information
contains a description of the methods used to determine performance.
Performance
figures may be obtained from your Smith Barney Financial Consultant.
15
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Trustees. The Trustees approve all significant agreements
between the Fund and the companies that furnish services to the Fund,
including
agreements with the Fund's investment manager, sub-investment adviser,
administrator, sub-administrator, distributor, custodian and transfer agent.
The
day-to-day operations of the Fund have been delegated to SBSA, BlackRock, SBA
and Boston Advisors. The Statement of Additional Information contains
background
information regarding each Trustee and executive officer of the Fund.
INVESTMENT ADVISER--SBSA
SBSA, located at Two World Trade Center, New York, New York 10048, serves as
the Fund's investment adviser. In this capacity, SBSA, subject to the
supervision and direction of the Fund's Board of Trustees, is generally
responsible for furnishing, or causing to be furnished to the Fund, investment
management services. Included among the specific services provided by SBSA as
investment adviser are: the selection and compensation of a sub-investment
adviser to the Fund; the review of all purchases and sales of portfolio
instruments made by the Fund to assess compliance with its stated investment
objectives and policies; the monitoring of the selection of brokers and
dealers
effecting investment transactions on behalf of the Fund; and the payment of
reasonable salaries and expenses of those of the Fund's officers and
employees,
and the fees and expenses of those members of the Fund's Board of Trustees,
who
are directors, officers or employees of SBSA. SBSA provides investment
management, investment advisory and/or administrative services to individual,
institutional and investment company clients that had aggregate assets under
management, as of June 30, 1994, in excess of $2.9 billion. For the fiscal
year
ended May 31, 1994, SBSA received a fee in an amount equal to .40% of the
value
of the Fund's average daily net assets.
SUB-INVESTMENT ADVISER--BLACKROCK
Under the terms of the sub-investment advisory agreement among SBSA, the
Fund
and BlackRock, SBSA employs BlackRock as the Fund's sub-investment adviser.
BlackRock is a Delaware limited partnership organized in
16
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
MANAGEMENT OF THE FUND (CONTINUED)
April 1988 by Laurence D. Fink, Ralph L. Schlosstein and The Blackstone Group
(a
private investment bank) that maintains its principal offices at 345 Park
Avenue, New York, New York 10154. BlackRock's general partner is BFM
Management
Partners L.P. ("BFM Management"), a Delaware limited partnership. The general
partner of BFM Management is BFM Management Corp., a Delaware corporation
whose
stock is owned by Messrs. Fink and Schlosstein. BlackRock serves as investment
adviser to fixed income investors in the United States and overseas through
several funds that as of June 30, 1994 had combined total assets in excess of
$22 billion.
As the Fund's sub-investment adviser, BlackRock, subject to the supervision
and direction of the Fund's Board of Trustees, and subject to review by SBSA,
manages the Fund's portfolio in accordance with the investment objectives and
stated policies of the Fund, makes investment decisions for the Fund, selects
the brokers and dealers through which the Fund's investment transactions are
effected and places purchase and sale orders for the Fund's portfolio
transactions. BlackRock also pays the salaries of all officers and employees
of
the Fund who are employed by both it and the Fund, provides the Fund with
investment officers who are authorized by the Board of Trustees to execute
purchases and sales of securities and other financial instruments on behalf of
the Fund and employs a professional staff of portfolio managers who draw upon
a
variety of sources for research information for the Fund. SBSA pays BlackRock
a
fee for services provided by BlackRock to the Fund that is accrued daily and
paid monthly at the annual rate of .20% of the value of the Fund's average
daily
net assets. The Fund pays no direct fee to BlackRock.
PORTFOLIO MANAGEMENT
Since the Fund's commencement of operations, June 22, 1992, Keith T.
Anderson,
Scott M. Amero and Robert S. Kapito, each a limited partner of BlackRock and
Investment Officers of the Fund, have been responsible for managing the
day-to-day operations of the Fund, including the making of investment
decisions.
ADMINISTRATOR--SBA
SBA, located at 1345 Avenue of the Americas, New York, New York, 10105,
serves
as the Fund's administrator, effective as of June 1, 1994. SBA
17
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
MANAGEMENT OF THE FUND (CONTINUED)
provides investment management and investment administration services to
investment companies which had aggregate assets under management as of June
30,
1994 of $9.1 billion.
SBA generally assists in all aspects of the Fund's administration and
operation. The Fund pays SBA a fee for services provided to the Fund that is
accrued daily and paid monthly at the annual rate of .20% of the value of the
Fund's average daily net assets. Because SBA did not act as the Fund's
administrator prior to June 1, 1994, the Fund paid SBA no administration fees
for the fiscal year ended May 31, 1994.
SUB-ADMINISTRATOR--BOSTON ADVISORS
Boston Advisors, located at One Boston Place, Boston, Massachusetts 02108,
serves as the Fund's sub-administrator. Boston Advisors provides investment
management, investment advisory, administrative and/or sub-administrative
services to investment companies that had aggregate assets under management,
as
of June 30, 1994, in excess of $87.7 billion.
Boston Advisors calculates the net asset value of the Fund's shares and
generally assists SBA in all aspects of the Fund's administration and
operation.
For the fiscal year ended May 31, 1994, the Fund paid administration fees to
Boston Advisors, the Fund's prior administrator, in an amount equal to .20% of
the value of the Fund's average daily net assets.
- --------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
INVESTMENT OBJECTIVES
The investment objectives of the Fund are to seek to provide high current
income and to limit the degree of fluctuation of its net asset value resulting
from movements in interest rates. These investment objectives may not be
changed
without the approval of the holders of a majority of the Fund's outstanding
shares. No assurance can be given that the Fund will be able to achieve its
investment objectives.
18
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
INVESTMENT POLICIES
In seeking to achieve its investment objectives, the Fund will invest
principally in a portfolio of Adjustable Rate Securities and U.S. government
securities. Under normal market conditions, the Fund will invest at least 65%
of
its net assets in U.S. government securities. The Fund will also invest at
least
65% of its net assets in Adjustable Rate Securities, many of which will also
be
U.S. government securities. The Fund's assets not invested in U.S. government
securities may be invested in, among other privately issued instruments, fixed
rate and adjustable rate MBSs, ABSs and corporate debt securities rated Aa by
Moody's Investors Service, Inc. ("Moody's") or AA by Standard & Poor's
Corporation ("S&P") and money market instruments of a comparable short-term
rating. Up to 20% of the Fund's total assets may be invested in securities
that
are unrated but deemed to be of comparable credit quality by BlackRock, and up
to 10% of the Fund's total assets may be invested in U.S. dollar-denominated
foreign securities, including MBSs and ABSs issued by foreign entities that
are
of comparable credit quality. The Fund's policies as to ratings of portfolio
securities will be applicable at the time particular securities are purchased
by
the Fund; if portfolio securities of the Fund are subsequently assigned lower
ratings, if they cease to be rated or if they cease to be deemed to be
comparable to securities rated Aa by Moody's or AA by S&P, BlackRock will
reassess whether the Fund should continue to hold the securities.
The Fund may invest up to 5% of its total assets in municipal obligations
and
in zero coupon securities, including zero coupon U.S. Treasury securities. In
addition, the Fund may engage in various hedging strategies to increase
investment return and/or protect against interest rate changes in an effort to
maintain the stability of its net asset value.
The Fund seeks to achieve low volatility of net asset value by investing in
a
diversified portfolio of securities that BlackRock believes will, in the
aggregate, be resistant to significant fluctuations in market value. In
selecting securities for the Fund, BlackRock will take into account various
factors that will affect the volatility of the Fund's assets, such as the time
to the next coupon reset date for the securities, the payment characteristics
of
the securities and the dollar weighted average life of the securities. The
Fund
19
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
expects that under normal circumstances the dollar weighted average life (or
period until the next reset date) of its portfolio securities will be
approximately two years.
ADJUSTABLE RATE SECURITIES
Adjustable Rate Securities are instruments that bear interest at rates that
adjust at periodic intervals at a fixed amount (typically referred to as a
"spread") over the market levels of interest rates as reflected in specified
indexes. The Adjustable Rate Securities in which the Fund will invest will
consist primarily of MBSs and ABSs. MBSs are securities that directly or
indirectly represent an interest in, or are backed by and are payable from,
mortgage loans secured by real property. ABSs are similar in structure to
MBSs,
except that the underlying asset pools consist of credit card, automobile or
other types of receivables, or of commercial loans. MBSs and ABSs are issued
in
structured financings through which a sponsor securitizes the underlying
mortgage loans or financial assets to provide the underlying assets with
greater
liquidity or to achieve certain other financial goals.
The interest paid on Adjustable Rate Securities and, therefore, the current
income earned by the Fund by investing in them, will be a function primarily
of
the indexes upon which adjustments are based and the applicable spread
relating
to the securities. Examples of indexes that may be used are (a) one-, three-
and
five-year U.S. Treasury securities adjusted to a constant maturity index, (b)
U.S. Treasury bills of three or six months, (c) the daily Bank Prime Loan Rate
made available by the Federal Reserve Board, (d) the cost of funds for member
institutions of the Federal Home Loan Bank of San Francisco and (e) the
offered
quotations to leading banks in the London interbank market for Eurodollar
deposits of a specified duration ("LIBOR").
The interest rates paid on Adjustable Rate Securities are generally
readjusted
periodically to an increment over the chosen interest rate index. Such
readjustments occur at intervals ranging from one to 36 months. The degree of
volatility in the market value of the Adjustable Rate Securities in the Fund's
portfolio will be a function of the frequency of the adjustment period, the
applicable index and the degree of volatility in the applicable index. It will
also be a function of the maximum increase or decrease of the interest rate
adjustment on any one adjustment date, in any one year and
20
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
over the life of the securities. These maximum increases and decreases are
typically referred to as "caps" and "floors," respectively. The Fund will not
seek to maintain an overall average cap or floor, although BlackRock will
consider caps or floors in selecting Adjustable Rate Securities for the Fund.
The adjustable interest rate feature underlying the Adjustable Rate
Securities
in which the Fund invests generally will act as a buffer to reduce sharp
changes
in the Fund's net asset value in response to normal interest rate
fluctuations.
As the interest rates on the mortgages underlying the Fund's MBSs are reset
periodically, yields of portfolio securities will gradually align themselves
to
reflect changes in market rates and should cause the net asset value of the
Fund
to fluctuate less dramatically than it would if the Fund invested in more
traditional long-term, fixed rate debt securities. During periods of rapidly
rising interest rates, however, changes in the coupon rate may temporarily lag
behind changes in the market rate, possibly resulting in a lower net asset
value
until the coupon resets to market rates. Thus, investors could suffer some
principal loss if they sell their shares of the Fund before the interest rates
on the underlying mortgages are adjusted to reflect current market rates.
Unlike fixed rate mortgages, which generally decline in value during periods
of rising interest rates, the Fund's MBSs will allow the Fund to participate
in
increases in interest rates through periodic adjustments in the coupons of the
underlying mortgages, resulting in both higher current yields and lower price
fluctuations. In addition, if prepayments of principal are made on the
underlying mortgages during periods of rising interest rates, the Fund
generally
will be able to reinvest those amounts in securities with a higher current
rate
of return. The Fund will not benefit from increases in interest rates to the
extent that interest rates rise to the point at which they cause the current
coupon of Adjustable Rate Securities to exceed the maximum allowable caps. The
Fund's net asset value could vary to the extent that current yields on
Adjustable Rate Securities are different from market yields during interim
periods between the coupon reset dates.
MBSs. Three basic types of MBSs are currently available for investments: (a)
those issued or guaranteed by the United States Government or one of its
agencies or instrumentalities, primarily consisting of securities either
guaranteed by the Government National Mortgage Association ("GNMA") or issued
by
the Federal National Mortgage Association ("FNMA") or the
21
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
Federal Home Loan Mortgage Corporation ("FHLMC"); (b) those issued by private
issuers that represent an interest in or are collateralized by MBSs issued or
guaranteed by the United States government or one of its agencies or
instrumentalities; and (c) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or MBSs without a
United States government guarantee but usually having some form of private
credit enhancement.
GNMA, FNMA and FHLMC are agencies or instrumentalities of the United States
government, and MBSs issued or guaranteed by them are generally considered to
be
of higher quality than privately issued securities rated Aa by Moody's or AA
by
S&P. GNMA MBSs are guaranteed by GNMA and consist of pass-through interests in
pools of mortgage loans guaranteed or insured by agencies or instrumentalities
of the United States. FNMA and FHLMC MBSs are issued by FNMA and FHLMC,
respectively, and most often represent pass-through interests in pools of
similarly insured or guaranteed mortgage loans or pools of conventional
mortgage
loans or participations in the pools. GNMA, FNMA and FHLMC "pass-through" MBSs
are so named because they represent undivided interests in the underlying
mortgage pools and a proportionate share of both regular interest and
principal
payments (net of fees assessed by GNMA, FNMA and FHLMC and any applicable loan
servicing fees), as well as unscheduled early prepayments on the underlying
mortgage pool, are passed through monthly to the holders of the MBSs.
Timely payment of principal and interest on GNMA MBSs is guaranteed by GNMA,
a
wholly owned corporate instrumentality of the United States government within
the Department of Housing and Urban Development, which guarantee is backed by
the full faith and credit of the United States government. FNMA, a federally
chartered and privately owned corporation organized and existing under the
Federal National Mortgage Association Charter Act, guarantees timely payment
of
principal and interest on FNMA MBSs. FHLMC, a corporate instrumentality of the
United States, guarantees (a) the timely payment of interest on all FHLMC
MBSs,
(b) the ultimate collection of principal with respect to some FHLMC MBSs and
(c)
the timely payment of principal with respect to other FHLMC MBSs. Neither the
obligations of FNMA nor those of FHLMC are backed by the full faith and credit
of the United States. Nevertheless, because of the
22
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
relationship of each of these entities to the United States, MBSs issued by
them
are generally considered to be high quality securities with minimal credit
risk.
Certain of the MBSs, as well as certain of the ABSs, in which the Fund may
invest will be issued by private issuers. Privately issued MBSs and ABSs may
take a form similar to the pass-through MBSs issued by agencies or
instrumentalities of the United States described above, or may be structured
in
a manner similar to the other types of MBSs or ABSs described below. Private
issuers include originators of or investors in mortgage loans and receivables
such as savings and loan associations, savings banks, commercial banks,
investment banks, finance companies and special purpose finance subsidiaries
of
these types of institutions.
The credit enhancement provided for certain privately issued MBSs and ABSs
typically takes one of two forms (a) liquidity protection or (b) protection
against losses resulting from ultimate default by an obligor on the underlying
assets. Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from default ensures ultimate payment of the obligations on
at
least a portion of the assets in the pool. This protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of these approaches. The degree of credit
support provided for each issue is generally based on historical information
with respect to the level of credit risk associated with the underlying
assets.
Delinquencies or losses in excess of those anticipated could adversely affect
the return on an investment in a security. The Fund will not pay any
additional
fees for credit support, although the existence of credit support may increase
the price of a security. BlackRock will monitor, on an ongoing basis, the
creditworthiness of the providers of credit enhancement for privately issued
MBSs and ABSs held by the Fund.
Among the specific types of MBSs in which the Fund may invest are ARMs,
which
are pass-through mortgage securities collateralized by mortgages with
adjustable
rather than fixed rates. ARMs eligible for inclusion in a mortgage pool
generally provide for a fixed initial mortgage interest rate
23
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
for either the first three, six, 12, 13, 36 or 60 scheduled monthly payments.
Thereafter, the interest rates are subject to periodic adjustment based on
changes to a designated benchmark index.
The Fund may invest in MBSs taking the form of collateralized mortgage
obligations ("CMOs"), which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized
by
GNMA, FNMA or FHLMC certificates, but also may be collateralized by whole
loans
or private mortgage pass-through securities (this collateral being referred to
collectively in this Prospectus as "Mortgage Assets"). Multi-class pass-
through
securities are equity interests in a trust composed of Mortgage Assets.
Payments
of principal of and interest on the Mortgage Assets, and any reinvestment
income
on the Mortgage Assets, provide the funds to pay debt service on the CMOs or
make scheduled distributions on the multi-class pass-through securities. CMOs
may be issued by agencies or instrumentalities of the United States
government,
or by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of these types of institutions.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final
distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal of and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number
of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As
a
general rule, the more predictable the cash flow is on a CMO tranche, the
lower
the anticipated yield will be on that tranche at the time of issuance relative
to prevailing market yields on MBSs.
The Fund may invest in, among other things, parallel pay CMOs and Planned
Amortization Class CMOs ("PAC Bonds"). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more
24
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
than one class. These simultaneous payments are taken into account in
calculating the stated maturity date or final distribution date of each class,
which, like other CMO structures, must be retired by its stated maturity date
or
final distribution date but may be retired earlier. PAC Bonds are parallel pay
CMOs that generally require payments of a specified amount of principal on
each
payment date; the required principal payments on PAC Bonds have the highest
priority after interest has been paid to all classes.
ABSs. The Fund will invest in various types of Adjustable Rate Securities in
the form of ABSs. The securitization techniques used in the context of ABSs
are
similar to those used for MBSs; through the use of trusts and special purpose
corporations, various types of receivables, primarily home equity loans and
automobile and credit card receivables, are securitized in pass-through
structures similar to the mortgage pass-through structures described above or
in
a pay-through structure similar to the CMO structure. ABSs are typically
bought
or sold from or to the same entities that act as primary dealers in U.S.
government securities.
Certain of the ABSs in which the Fund will invest will be guaranteed by the
Small Business Administration ("SBA"). The SBA is an independent agency of the
United States, and ABSs guaranteed by the SBA carry a guarantee of both
principal and interest. The guarantee given by the SBA is backed by the full
faith and credit of the United States. These ABSs may include pass-through
securities collateralized by SBA guaranteed loans whose interest rates adjust
in
much the same fashion as described above with respect to ARMs. These loans
generally include commercial loans such as working capital loans and equipment
loans. The underlying loans are originally made by private lenders and are
guaranteed in part by the SBA, the guaranteed portion of the loans
constituting
the underlying financial assets in these ABSs.
In general, the collateral supporting ABSs is of shorter maturity than
mortgage loans and may be less likely to experience substantial prepayments.
Like MBSs, ABSs are often backed by a pool of assets representing the
obligations of a number of different parties. Currently, pass-through
securities
collateralized by SBA guaranteed loans and home equity loans are the most
prevalent ABSs that are Adjustable Rate Securities.
ABSs are relatively new and untested instruments and may be subject to
greater
risk of default during periods of economic downturn than other
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INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
securities, including MBSs, satisfying the quality standards of the Fund,
which
characteristics of ABSs could result in possible losses to the Fund. In
addition, the secondary market for ABSs may not be as liquid as the market for
other securities, including MBSs, which may result in the Fund experiencing
difficulty in valuing ABSs.
U.S. GOVERNMENT SECURITIES
The Fund may invest in, in addition to the U.S. government securities
guaranteed by GNMA and issued by FNMA and FHLMC described above, other U.S.
government securities such as bills, certificates of indebtedness and notes
and
bonds issued by the United States Treasury. These instruments are direct
obligations of the United States government and, as such, are backed by the
full
faith and credit of the United States. They differ primarily in their interest
rates, the lengths of their maturities and the dates of their issuance.
OTHER INVESTMENTS OF THE FUND
FIXED RATE MBSs. Fixed rate MBSs in which the Fund may invest consist
primarily of fixed rate pass-through securities and fixed rate CMOs. Like
Adjustable Rate Securities, these fixed rate securities may be issued either
by
agencies or instrumentalities of the United States government or by the types
of
private issuers described above. The basic structures of fixed rate MBSs are
the
same as those described above with respect to Adjustable Rate Securities. The
principal difference between fixed rate securities and Adjustable Rate
Securities is that the interest rate on the former type of securities is set
at
a predetermined amount and does not vary according to changes in any index.
STRIPPED MBSs. The Fund may invest in stripped MBSs ("SMBSs"), which are
derivative multi-class mortgage-backed securities typically issued by the same
types of issuers that issue MBSs. Unlike MBSs, SMBSs commonly involve two
classes of securities that receive different proportions of the interest and
principal distributions on a pool of mortgage assets. A common variety of SMBs
contemplates one class (the principal-only or "PO" class) receiving some of
the
interest and most of the principal from the underlying assets, and the other
class (the interest-only or "IO" class) receiving most of the interest and the
remainder of the principal. In the most extreme case, the
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INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
IO class receives all of the interest, while the PO class receives all of the
principal. Although the Fund may purchase securities of a PO class, it is more
likely to purchase the securities of an IO class.
Although IO class SMBSs individually have greater market volatility than
Adjustable Rate Securities, the Fund will seek to combine investments in IOs
with other investments that have offsetting price patterns. The value of IOs
varies with a direct correlation to changes in interest rates, whereas the
value
of fixed rate MBSs, like that of other fixed rate debt securities, varies
inversely with interest rate fluctuations. Therefore, active management of IOs
in combination with fixed rate MBSs is intended to add incremental yield from
changes in market rates while not materially increasing the volatility of the
Fund's net asset value.
The yield to maturity of an IO class is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying assets,
and
a rapid rate of principal payments in excess of that considered in pricing the
securities will have a material adverse effect on an IO security's yield to
maturity. If the underlying mortgage assets experience greater than
anticipated
payments of principal, the Fund may fail to recoup fully its initial
investment
in IOs. The sensitivity of an IO that represents the interest portion of a
particular class as opposed to the interest portion of an entire pool to
interest rate fluctuations may be increased because of the characteristics of
the principal portion to which they relate.
CORPORATE DEBT SECURITIES. The Fund may purchase corporate debt securities
rated Aa by Moody's or AA by S&P, or, if unrated, deemed to be of comparable
credit quality by BlackRock. These debt securities may have adjustable or
fixed
rates of interest and in certain instances may be secured by assets of the
issuer. Adjustable rate corporate debt securities may have features similar to
those of adjustable rate MBSs, but corporate debt securities, unlike MBSs, are
not subject to prepayment risk other than through contractual call provisions
that generally impose a penalty for prepayment. Fixed rate debt securities may
also be subject to call provisions.
FOREIGN SECURITIES. The Fund may invest up to 10% of its total assets in
U.S.
dollar-denominated foreign securities, including MBSs and ABSs issued by
foreign
entities, although under current market conditions the Fund does not expect to
invest in foreign securities.
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Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers. These risks
include fluctuations in foreign exchange rates, future political and economic
developments, and the possible imposition of exchange controls or other
foreign
governmental laws or restrictions.
MUNICIPAL OBLIGATIONS. The Fund may invest up to 5% of its total assets in
obligations issued by state and local governments, political subdivisions,
agencies and public authorities ("Municipal Obligations"). Any Municipal
Obligation that depends directly or indirectly on the credit of the United
States government will be considered by BlackRock to have the highest rating
by
Moody's and S&P.
ZERO COUPON SECURITIES. The Fund may purchase zero coupon securities when
yields on those securities are attractive, to enhance portfolio liquidity or
for
a combination of both of these purposes. Zero coupon securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security
will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the
securities
at the time of issuance or purchase. Zero coupon securities, which do not
require the periodic payment of interest, benefit the issuer by mitigating its
need for cash to meet debt service, but also require a higher rate of return
to
attract investors who are willing to defer receipt of cash. These investments
may experience greater volatility in market value than fixed income securities
that make regular payments of interest. The Fund may invest in zero coupon
securities issued by the United States Treasury as component parts of Treasury
Bonds that represent scheduled interest and principal payments on the bonds.
The
Fund will accrue income on zero coupon securities it holds for tax and
accounting purposes, which income is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the
liquidation
of portfolio securities to satisfy the Fund's distribution obligations.
MONEY MARKET INSTRUMENTS. Money market instruments in which the Fund may
invest are limited to: U.S. government securities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and other banking
institutions having total assets in excess of $500 million);
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commercial paper rated no lower than Prime-1 by Moody's or A-1 by S&P or the
equivalent from another nationally-recognized rating agency, or, if unrated,
of
an issuer having an outstanding, unsecured debt issue then rated within the
highest rating category; and repurchase agreements, as more fully described
below. U.S. government securities in which the Fund may invest include: direct
obligations of the United States Treasury and obligations issued or guaranteed
by U.S. agencies and instrumentalities, including instruments that are
supported
by the full faith and credit of the United States; instruments that are
supported by the right of the issuer to borrow from the United States
Treasury;
and instruments that are supported solely by the credit of the
instrumentality.
At no time will the Fund's investments in bank obligations, including time
deposits, exceed 25% of its assets.
The Fund will invest in an obligation of a foreign bank or foreign branch of
a
U.S. bank only if BlackRock determines that the obligation presents minimal
credit risks. The obligations of foreign banks or foreign branches of U.S.
banks
in which the Fund will invest may be traded in or outside the United States,
but
will be denominated in U.S. dollars. Obligations of a foreign bank or foreign
branch of a U.S. bank entail risks that include foreign economic and political
developments, foreign governmental restrictions that may adversely affect the
payment of principal and interest on the obligations, foreign exchange
controls
and foreign withholding or other taxes on income. Foreign branches of domestic
banks are not necessarily subject to the same or similar regulatory
requirements
that apply to domestic banks, such as mandatory reserve requirements, loan
limitations, and accounting, auditing and financial record keeping
requirements.
In addition, less information may be publicly available about a foreign branch
of a domestic bank than about a domestic bank.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in the
aggregate in securities subject to legal or contractual restrictions on resale
and securities for which no readily available market exists or other illiquid
securities, including repurchase agreements having maturities of more than
seven
days, interest rate swaps and ABSs that cannot be disposed of promptly within
seven days and in the usual course of business without the Fund's receiving a
reduced price. In the absence of a change in the position of the staff of the
SEC, the Fund will treat over-the-counter ("OTC") options as illiquid
securities. The Fund will also treat POs and IOs as illiquid
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securities except for POs and IOs issued by U.S. government agencies and
instrumentalities, whose liquidity is monitored by BlackRock subject to the
supervision of SBSA and the Fund's Board of Trustees.
INVESTMENT TECHNIQUES AND STRATEGIES
The Fund may use at any time any of the techniques and strategies described
below. The Fund is under no obligation to use any of the listed practices at
any
given time or under any particular economic condition. In addition, no
assurance
can be given that the use of any practice will have its intended result.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreement
transactions with member banks of the Federal Reserve System or with certain
dealers listed 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. Although the
amount of the Fund's assets that may be invested in repurchase agreements
terminable in less than seven days is not limited, as noted above, repurchase
agreements maturing in more than seven days, together with other securities
lacking readily available markets held by the Fund, will not exceed 15% of the
Fund's net assets.
The value of the securities underlying a repurchase agreement of a Fund will
be monitored on an ongoing basis by BlackRock or Boston Advisors to ensure
that
the value is at least equal at all times to the total amount of the repurchase
obligation, including interest. BlackRock or Boston Advisors will also
monitor,
on an ongoing basis to evaluate potential risks, the creditworthiness of the
banks and dealers with which the Fund enters into repurchase agreements.
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REVERSE REPURCHASE AGREEMENTS. The Fund may enter into reverse repurchase
agreement transactions with member banks on the Federal Reserve Bank of New
York's list of reporting dealers. A reverse repurchase agreement, which is
considered a borrowing by the Fund, involves a sale by the Fund of securities
that it holds concurrently with an agreement by the Fund to repurchase the
same
securities at an agreed-upon price and date. The Fund typically will invest
the
proceeds of a reverse repurchase agreement in money market instruments or
repurchase agreements maturing not later than the expiration of the reverse
repurchase agreement. This use of the proceeds is known as leverage. The Fund
will enter into a reverse repurchase agreement for leverage purposes only when
the interest income to be earned from the investment of the proceeds is
greater
than the interest expense of the transaction. The Fund may also use the
proceeds
of reverse repurchase agreements to provide liquidity to meet redemption
requests when the sale of the Fund's securities is considered to be
disadvantageous.
The Fund will establish a segregated account with its custodian, Boston Safe
Deposit and Trust Company, in which the Fund will maintain cash, U.S.
government
securities or other liquid high grade debt obligations equal in value to its
obligations with respect to reverse repurchase agreements.
DOLLAR ROLL TRANSACTIONS. To take advantage of attractive financing
opportunities in the mortgage market and to enhance current income, the Fund
may
enter into dollar roll transactions. A dollar roll transaction, which is
considered a borrowing by the Fund, involves a sale by the Fund of a security
to
a financial institution, such as a bank or broker-dealer, concurrently with an
agreement by the Fund to repurchase a similar security from the institution at
a
later date at an agreed-upon price. The securities that are repurchased will
bear the same interest rate as those sold, but generally will be
collateralized
by different pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, the Fund will not be
entitled to receive interest and principal payments on the securities sold.
Proceeds of the sale will be invested in additional instruments for the Fund,
and the income from these investments, together with any additional fee income
received on the sale, will generate income for the Fund exceeding the yield on
the securities sold. Dollar roll transactions involve the risk that the market
value of the securities sold by the Fund may decline below the repurchase
price
of those securities. At the time that the Fund enters into a dollar roll
transaction, it
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will place in a segregated account maintained with Boston Safe cash, U.S.
government securities or other liquid high grade debt obligations having a
value
equal to the repurchase price (including accrued interest) and will
subsequently
monitor the account to insure that its value is maintained.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES. The Fund may purchase
securities
on a when-issued basis, or may purchase or sell securities for delayed
delivery.
In when-issued or delayed delivery transactions, delivery of the securities
occurs beyond normal settlement periods, but no payment or delivery will be
made
by the Fund prior to the actual delivery or payment by the other party to the
transaction. The Fund will not accrue income with respect to a when-issued or
delayed delivery security prior to its stated delivery date. The Fund will
establish with Boston Safe a segregated account consisting of cash, U.S.
government securities or other liquid high grade debt obligations in an amount
equal to the amount of the Fund's when-issued and delayed-delivery purchase
commitments.
SHORT SALES. The Fund may make short sales of securities. A short sale is a
transaction in which the Fund sells a security it does not own in anticipation
that the market price of that security will decline. The Fund expects to make
short sales both as a form of hedging to offset potential declines in
securities
positions it holds in similar securities and in order to maintain portfolio
flexibility.
To complete a short sale, the Fund must arrange through a broker to borrow
the
securities to be delivered to the buyer. The proceeds received by the Fund
from
the short sale are retained by the broker until the Fund replaces the borrowed
securities. In borrowing the securities to be delivered to the buyer, the Fund
becomes obligated to replace the securities borrowed at their market price at
the time of replacement, whatever that price may be. The Fund may have to pay
a
premium to borrow the securities and must pay any dividends or interest
payable
on the securities until they are replaced.
The Fund's obligation to replace the securities borrowed in connection with
a
short sale will be secured by collateral deposited with the broker, which
collateral consists of cash or U.S. government securities. In addition, the
Fund
will place in a segregated account with Boston Safe an amount of cash, U.S.
government securities or other liquid high grade debt obligations equal to the
difference, if any, between (a) the market value of the securities
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sold at the time they were sold short and (b) any cash or U.S. government
securities deposited as collateral with the broker in connection with the
short
sale (not including the proceeds of the short sale). Until it replaces the
borrowed securities, the Fund will maintain the segregated account daily at a
level such that the amount deposited in the account plus the amount deposited
with the broker (not including the proceeds from the short sale) will equal
the
current market value of the securities sold short and will not be less than
the
market value of the securities at the time they were sold short.
The Fund will not enter into a short sale of securities if, as a result of
the
sale, the total market value of all securities sold short by the Fund would
exceed 25% of the value of the Fund's assets. In addition, the Fund may not
(a)
sell short the securities of any single issuer listed on a national securities
exchange to the extent of more than 2% of the value of the Fund's net assets
or
(b) sell short the securities of any class of an issuer to the extent of more
than 2% of the outstanding securities of the class at the time of the
transaction. The extent to which the Fund may engage in short sales may be
further limited by the Fund's meeting the requirements for qualification as a
regulated investment company imposed under the Code, which requirements are
described below under, "Dividends, Distributions and Taxes."
The Fund may make short sales "against the box" without complying with the
limitations described above. In a short sale against the box transaction, the
Fund, at the time of the sale, owns or has the immediate and unconditional
right
to acquire at no additional cost the identical security sold.
LENDING OF PORTFOLIO SECURITIES. To generate income, the Fund may lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made, may not exceed 30% of the Fund's assets taken
at
value. The Fund's loans of securities will be collateralized by cash, letters
of
credit or U.S. government securities. The cash or instruments collateralizing
the Fund's loans of securities will be maintained at all times in a segregated
account with Boston Safe in an amount at least equal to the current market
value
of the loaned securities.
OPTIONS TRANSACTIONS. The Fund is authorized to engage in transactions
involving put and call options. The Fund may purchase a put option, for
example,
in an effort to protect the value of a security that it owns against a
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substantial decline in market value, if BlackRock believes that a defensive
posture is warranted for a portion of the Fund's portfolio. In addition, in
seeking to protect certain portfolio securities against a decline in market
value at a time when put options on those particular securities are not
available for purchase, the Fund may purchase a put option on securities it
does
not hold. Although changes in the value of the put option should generally
offset changes in the value of the securities being hedged, the correlation
between the two values may not be as close in the latter type of transaction
as
in a transaction in which the Fund purchases a put option on an underlying
security it owns.
The Fund may purchase call options on securities it intends to acquire to
hedge against an anticipated market appreciation in the price of the
underlying
securities. If the market price does rise as anticipated in such a situation,
the Fund will benefit from that rise only to the extent that the rise exceeds
the premiums paid. If the anticipated rise does not occur or if it does not
exceed the premium, the Fund will bear the expense of the option premiums and
transaction costs without gaining an offsetting benefit. The Fund's ability to
purchase put and call options may be limited by the Code's requirements for
qualification as a regulated investment company.
The Fund is authorized to engage in transactions involving OTC options and
options traded on a U.S. securities exchange. Whereas exchange-traded options
are in effect guaranteed by The Options Clearing Corporation, the Fund relies
on
the dealer from which it purchases an OTC option to perform if the option is
exercised. BlackRock will monitor the creditworthiness of dealers with which
the
Fund enters into OTC option transactions under the general supervision of SBSA
and the Fund's Board of Trustees.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS. The Fund may enter into
interest rate futures contracts on U.S. government securities and MBSs. A
futures contract on securities, other than GNMAs which are cash settled, is an
agreement to purchase or sell an agreed amount of securities at a set price
for
delivery on an agreed future date. The Fund may purchase a futures contract as
a
hedge against an anticipated decline in interest rates, and resulting increase
in market price, of securities the Fund intends to acquire. The Fund may sell
a
futures contract as a hedge against an anticipated increase in interest rates,
and resulting decline in market price, of securities the Fund owns.
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The Fund may purchase call and put options on futures contracts on U.S.
government securities and MBSs that are traded on U.S. commodity exchanges. An
option on a futures contract gives the purchaser the right, in return for the
premium paid, to assume a position in a futures contract (a long position if
the
option is a call and short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The writer of
the
option is required upon exercise to assume an offsetting futures position (a
short position if the option is a call and a long position if the option is a
put). Upon the exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be accompanied by
delivery
of the accumulated cash balance in the writer's futures margin account that
represents the amount by which the market price of the futures contract at
exercise, 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 Fund's ability to enter into transactions in futures contracts and
options
on futures contracts may be limited by the Code's requirements for
qualification
as a regulated investment company. The Fund will not purchase an option if, as
a
result of the purchase, more than 20% of its total assets would be invested in
premiums for options and options on futures. In addition, the Fund may not
sell
futures contracts or purchase related options if immediately after the sale
the
sum of the amount of initial margin deposits on the Fund's existing futures
and
options on futures and for premiums paid for the related options would exceed
5%
of the market value of the Fund's total assets, after taking into account
unrealized profits and unrealized losses on any such contracts the Fund has
entered into, except that, in the case of an option that is in-the-money at
the
time of purchase, the in-the-money amount may be excluded in computing the 5%
limitation. The Fund is subject to no overall limitation on the percentage of
its assets that may be subject to a hedge position.
The Fund will purchase put options on futures contracts primarily to hedge
its
portfolio of U.S. government securities and MBSs against the risk of rising
interest rates, and the consequential decline in the prices of U.S. government
securities and MBSs it owns. The Fund will purchase call options on futures
contracts to hedge the Fund's portfolio against a possible market advance at a
time when the Fund is not fully invested in U.S. government securities and
MBSs
(other than U.S. Treasury Bills).
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INTEREST RATE TRANSACTIONS. The Fund may enter into interest rate swaps,
which
involve the exchange by the Fund with another party of their respective
commitments to pay or receive interest, such as, for example, an exchange of
floating rate payments for fixed rate payments. The Fund expects to enter into
these transactions primarily to preserve a return or spread on a particular
investment or a portion of its portfolio or to protect against any increase in
the price of securities that the Fund anticipates purchasing at a later date.
The Fund intends to use these transactions as a hedge and not as a speculative
investment.
The Fund will enter into interest rate swap transactions on a net basis;
that
is, the two payment streams are netted out, with the Fund receiving or paying
only the net amount of the two payments. The net amount of the excess, if any,
of the Fund's obligations over its entitlements with respect to each interest
rate swap will be accrued daily, and an amount of cash, U.S. government
securities or other liquid high grade debt obligations having an aggregate net
asset value at least equal to the accrued excess will be maintained by the
Fund
in a segregated account with Boston Safe.
TRANSACTIONS INVOLVING EURODOLLAR INSTRUMENTS. The Fund may from time to
time
purchase Eurodollar instruments traded on the Chicago Mercantile Exchange.
These
instruments are in essence U.S. dollar-denominated futures contracts or
options
on futures contracts that are linked to LIBOR. Eurodollar futures contracts
enable purchasers to obtain a fixed rate for the lending of funds and sellers
to
obtain a fixed rate for borrowings. The Fund intends to use Eurodollar futures
contracts and options on futures contracts to hedge against changes in LIBOR,
to
which many interest rate swaps are linked. The use of these instruments is
subject to the same limitations and risks as those applicable to the use of
the
interest rate futures contracts and options on futures contracts described
under
"Futures Contracts and Options on Futures Contracts" above.
BORROWING. The Fund may borrow from banks and enter into reverse repurchase
agreements or dollar rolls in an amount equal to up to 33 1/3% of the value of
its total assets (computed at the time the loan is made) to take advantage of
investment opportunities and for temporary, extraordinary or emergency
purposes.
The Fund may pledge up to 33 1/3% of its total assets to secure these
borrowings. Under normal market conditions, the Fund expects
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to engage in borrowing with respect to approximately 10% of its total assets.
If
the Fund's asset coverage for borrowings falls below 300%, the Fund will take
prompt action to reduce its borrowings.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions that may
not
be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities as defined in the 1940 Act. Included among those
fundamental investment policies are the following:
1. The Fund will not purchase securities (other than U.S. government
securities) of any issuer if, as a result of the purchase, more than 5% of the
value of the Fund's total assets would be invested in the securities of the
issuer, except that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities of
any
one issuer, except that this limitation is not applicable to the Fund's
investments in U.S. government securities.
3. The Fund will not issue senior securities, borrow money or pledge its
assets, except that the Fund may borrow from banks or through reverse
repurchase
agreements or dollar rolls in an amount equal to up to 33 1/3% of the value of
its total assets (calculated when the loan is made) for temporary,
extraordinary
or emergency purposes and to take advantage of investment opportunities and
may
pledge up to 33 1/3% of the value of its total assets to secure those
borrowings.
4. The Fund will not make loans, except through (a) repurchase agreements
and (b) loans of portfolio securities limited to 30% of the value of the
Fund's
total assets.
5. The Fund will not invest more than 25% of the value of its total
assets
in securities of issuers in any one industry, except that this limitation is
not
applicable to the Fund's investments in U.S. government securities.
Certain other investment restrictions adopted by the Fund are described in
the
Statement of Additional Information.
37
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
RISK FACTORS AND SPECIAL CONSIDERATIONS
INTEREST RATE RISK. The Fund's portfolio will be affected by general changes
in interest rates that will result in increases or decreases in the market
value
of the obligations held by the Fund. The market value of the obligations in
the
Fund's portfolio can be expected to vary inversely to changes in prevailing
interest rates. Investors should also recognize that, in periods of declining
interest rates, the Fund's yield will tend to be somewhat higher than
prevailing
market rates, and in periods of rising interest rates, the Fund's yield will
tend to be somewhat lower. In addition, when interest rates are falling, money
received by the Fund from the continuous sale of its shares will likely be
invested in portfolio instruments producing lower yields than the balance of
its
portfolio, thereby reducing the Fund's current yield. In periods of rising
interest rates, the opposite result can be expected to occur.
ADJUSTABLE RATE SECURITIES. The types of securities in which the Fund will
invest have certain unique attributes that warrant special consideration or
that
present risks that may not exist in other types of mutual fund investments.
Some
of these risks and special considerations are peculiar to Adjustable Rate
Securities whereas others, most notably the risk of prepayments, pertain to
the
characteristics of MBSs or ABSs generally.
Payments of principal of and interest on MBSs and ABSs are made more
frequently than are payments on conventional debt securities. In addition,
holders of MBSs and of certain ABSs (such as ABSs backed by home equity loans)
may receive unscheduled payments of principal at any time representing
prepayments on the underlying mortgage loans or financial assets. These
prepayments may usually be made by the related obligor without penalty.
Prepayment rates are affected by changes in prevailing interest rates and
numerous economic, geographic, social and other factors. (ABSs backed by other
than home equity loans do not generally prepay in response to changes in
interest rates, but may be subject to prepayments in response to other
factors.)
Changes in the rate of prepayments will generally affect the yield to maturity
of the security. Moreover, when the holder of the security attempts to
reinvest
prepayments or even the scheduled payments of principal and interest, it may
receive a rate of interest that is higher or lower than the rate on the MBS or
ABS originally held. To the extent that MBSs or ABSs are purchased by the Fund
at a premium, mortgage foreclosures and principal
38
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
prepayments may result in loss to the extent of premium paid. If MBSs or ABSs
are bought at a discount, however, both scheduled payments of principal and
unscheduled prepayments will increase current and total returns and will
accelerate the recognition of income which, when distributed to shareholders,
will be taxable as ordinary income. BlackRock will consider remaining
maturities
or estimated average lives of MBSs and ABSs in selecting them for the Fund.
ABSs may present certain risks not relevant to MBSs. Although ABSs are a
growing sector of the financial markets, they are relatively new instruments
and
may be subject to a greater risk of default during periods of economic
downturn
than MBSs. In addition, assets underlying ABSs such as credit card receivables
are generally unsecured, and debtors are entitled to the protection of various
state and federal consumer protection laws, some of which provide a right of
set-off that may reduce the balance owed. Finally, the market for ABS may not
be
as liquid as that for MBSs.
The interest rate reset features of Adjustable Rate Securities held by the
Fund will reduce the effect on the net asset value of Fund shares caused by
changes in market interest rates. The market value of Adjustable Rate
Securities
and, therefore, the Fund's net asset value, however, may vary to the extent
that
the current interest rate on the securities differs from market interest rates
during periods between interest reset dates. These variations in value occur
inversely to changes in market interest rates. As a result, if market interest
rates rise above the current rate on the securities, the value of the
securities
will decrease; conversely, if market interest rates fall below the current
rate
on the securities, the value of the securities will rise. If investors in the
Fund sold their shares during periods of rising rates before an adjustment
occurred, those investors could suffer some loss. The longer the adjustment
intervals on Adjustable Rate Securities held by the Fund, the greater the
potential for fluctuations in the Fund's net asset value.
Investors in the Fund will receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the
Fund
in response to market interest rates. The Fund and its shareholders will not
benefit, however, from increases in market interest rates once those rates
rise
to the point at which they cause the rates on the Adjustable Rate Securities
to
reach their maximum adjustment rate, annual or lifetime caps. Because of their
interest rate adjustment feature, Adjustable Rate Securities
39
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
are not an effective means of "locking-in" attractive rates for periods in
excess of the adjustment period. In addition, mortgagors on loans underlying
MBSs with respect to which the underlying mortgage assets carry no agency or
instrumentality guarantee are often qualified for the loans on the basis of
the
original payment amounts; the mortgagor's income may not be sufficient to
enable
it to continue making its loan payments as the payments increase, resulting in
a
greater likelihood of default.
Any benefits to the Fund and its shareholders from an increase in the Fund's
net asset value caused by declining market interest rates is reduced by the
potential for increased prepayments and a decline in the interest rates paid
on
Adjustable Rate Securities held by the Fund. When market rates decline
significantly, the prepayment rate on Adjustable Rate Securities is likely to
increase as borrowers refinance with fixed rate mortgage loans, thereby
decreasing the capital appreciation potential of Adjustable Rate Securities.
As
a result, the Fund should not be viewed as consistent with an objective of
seeking capital appreciation.
OPTIONS AND FUTURES MARKETS. Participation in the options or futures markets
involves investment risks and transaction costs to which the Fund would not be
subject absent the use of these strategies. If BlackRock's predictions of
movements in the direction of the securities and interest rate markets are not
accurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if options or futures strategies were not used. Risks inherent
in
the use of options, futures contracts and options on futures contracts
include:
(a) dependence on BlackRock's ability to predict correctly movements in the
direction of interest rates and securities prices; (b) imperfect correlation
between the price of options and futures contracts and options on futures
contracts and movements in the prices of the securities being hedged; and (c)
the skills needed to use these strategies being different from those needed to
select portfolio securities. In addition, positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board
of
trade on which they were entered into, and no assurance can be given that an
active market will exist for a particular contract or option at a particular
time.
40
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
LENDING PORTFOLIO SECURITIES. In lending securities to brokers, dealers and
other financial organizations, the Fund will be subject to risks, which, like
those associated with other extensions of credit, include the possible loss of
rights in the collateral should the borrower fail financially.
REPURCHASE AND REVERSE REPURCHASE AGREEMENTS. In entering into a repurchase
agreement, the Fund bears 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.
A reverse repurchase agreement involves the risk that the market value of
the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the Fund's use of the proceeds of the
agreement
may be restricted pending a determination by the party, or its trustee or
receiver, whether to enforce the Fund's obligation to repurchase the
securities.
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 when-issued or delayed delivery securities 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.
SHORT SALES. If the price of the security sold short increases between the
time of the short sale and the time the Fund replaces the borrowed security,
the
Fund will incur a loss; conversely, if the price declines, the Fund will
realize
a capital gain. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
BORROWING. If the Fund borrows to invest in securities, any investment gains
made on the securities in excess of interest paid on the borrowing will cause
the net asset value of the Fund's shares to rise faster than would otherwise
be
the case. On the other hand, if the investment performance of
41
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
the additional securities purchased fails to cover their costs (including any
interest paid on the money borrowed) to the Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is
the
speculative characteristic known as "leverage."
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities
ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through
principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer acting as agent. The prices paid to underwriters of
newly issued securities usually include a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers ordinarily
are executed at a price between the bid and asked price.
Transactions on behalf of the Fund are allocated to various dealers by
BlackRock 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 research, statistical or
other services to enable BlackRock to supplement its own research and analysis
with the views and information of other securities firms.
Although investment decisions for the Fund will be made independently from
those of the other accounts managed by BlackRock, investments of the type the
Fund may make may also be made by those other accounts. When the Fund and one
or
more other accounts managed by BlackRock are prepared to invest in, or desire
to
dispose of, the same security or other investment instrument, available
investments or opportunities for sales will be allocated in a manner believed
by
BlackRock 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 has no fixed policy with respect to portfolio turnover, but does
not
expect to trade in securities for short-term gain. BlackRock expects that,
under
normal circumstances, the Fund's annual portfolio turnover rate will
42
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES (CONTINUED)
not exceed 200%. Annual turnover at this rate would occur when the Fund's
portfolio securities are replaced twice during a period of one year. Portfolio
turnover rate is calculated by dividing the lesser of sales or purchases of
portfolio securities by the average monthly value of the Fund's portfolio
securities, excluding securities having a maturity at the date of purchase of
one year or less. High portfolio turnover may involve corresponding greater
transaction costs that will be borne directly by the Fund.
- --------------------------------------------------------------------
PURCHASE OF SHARES
Purchases of Fund shares must be made through a brokerage account maintained
with Smith Barney or with an Introducing Broker, except that investors
purchasing shares of the Fund through a qualified retirement plan may do so
directly through the Fund's transfer agent. When purchasing shares of the
Fund,
investors must specify whether the purchase is for Class A or Class B shares
or,
in the case of Participating Plans, Class D shares. No maintenance fee will be
charged in connection with a brokerage account through which an investor
purchases or holds shares. Purchases are effected at net asset value per share
next determined after a purchase order is received by Smith Barney or an
Introducing Broker (the "trade date"). Payment for Fund shares is generally
due
to Smith Barney or an Introducing Broker on the fifth business day after the
trade date (the "settlement date"). Investors who make payment prior to the
settlement date may permit the payment to be held in their brokerage accounts
or
may designate a temporary investment (such as a money market fund in the Smith
Barney Shearson Group of Funds) for the payment until the settlement date. The
Fund reserves the right to reject any purchase order and to suspend the
offering
of shares for a period of time.
Purchase orders received by Smith Barney or an Introducing Broker prior to
the
close of regular trading on the NYSE, currently 4:00 p.m., New York time, on
any
day that the Fund calculates its net asset value, are priced according to the
net asset value determined on that day. Purchase orders received after the
close
of regular trading on the NYSE are priced as of the time the net asset value
per
share is next determined. See "Valuation of Shares."
43
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
SYSTEMATIC INVESTMENT PLAN. The Fund offers shareholders a Systematic
Investment Plan under which a shareholder may authorize Smith Barney or an
Introducing Broker to place a purchase order each month or quarter for Fund
shares in an amount not less than $100. The purchase price is paid
automatically
from cash held in the shareholder's Smith Barney brokerage account or through
the automatic redemption of the shareholder's shares of a Smith Barney money
market fund. For further information regarding the Systematic Investment Plan,
shareholders should contact their Smith Barney Financial Consultants.
MINIMUM INVESTMENTS. The minimum initial investment in the Fund is $2,500
and
the minimum subsequent investment is $1,000, except that for purchases through
(a) IRAs and Self-Employed Retirement Plans, the minimum initial and
subsequent
investment in the Fund is $250 and $100, respectively, (b) retirement plans
qualified under Section 403(b)(7) or Section 401(a) of the Code the minimum
initial and subsequent investment in the Fund is $25 and (c) purchases through
the Fund's Systematic Investment Plan, the minimum initial and subsequent
investment is $100. There are no minimum investment requirements for employees
of Travelers and its subsidiaries, including Smith Barney. The Fund reserves
the
right at any time to vary the initial and subsequent investment minimums.
Certificates for Fund shares are issued upon written request to TSSG.
CLASS A SHARES
The public offering price for Class A shares is the per share net asset
value
of that Class. Class A shares are offered for sale directly to the general
public. No initial sales charge is imposed on purchases of Class A shares.
Such
purchases will, however, be subject to a CDSC of .75% for the first year after
purchase. The CDSC will be waived in the same circumstances in which the CDSC
is
waived for Class B shares of the Fund. See "Redemption of Shares--Contingent
Deferred Sales Charge--Class B Shares--Waivers of CDSC."
CLASS B SHARES
Class B shares may be acquired only through exchanges with Class B shares of
other funds in the Smith Barney Shearson Group of Funds. Class B shares are
subject to the highest CDSC, if any, of the shares from which the
44
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
exchange or any preceding exchange was made. See "Redemption of
Shares--Contingent Deferred Sales Charge--Class B Shares" and "Exchange
Privilege."
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the 401(k) Program, which is
generally designed to assist employers or plan sponsors in the creation and
operation of retirement plans under Section 401(a) of the Code. The same terms
and conditions offered to 401(k) plans, to the extent applicable, are also
available through the 401(k) Program to other types of participant directed,
tax-qualified employee benefit plans.
The Fund offers to Participating Plans three Classes of shares, Class A,
Class
B and a third Class, Class D shares, as investment alternatives under the
401(k)
Program. All three Classes of shares acquired by Participating Plans are
offered
at net asset value per share. Class A and Class B shares acquired through the
401(k) Program are subject to the same service and/or distribution fees as the
Class A and Class B shares acquired by other investors. In addition, Class B
shares are offered only to Participating Plans satisfying certain criteria
with
respect to the amount of the initial investment and number of employees
eligible
to participate in the Plan at that time. Class D shares are offered only to
Participating Plans that meet other criteria relating to the amount of the
initial investment and number of employees eligible to participate in the Plan
at that time, as described below.
It is anticipated that Participating Plans will purchase shares of the Fund
as
part of a multi-fund investment program. Once a Participating Plan has made an
initial investment in shares of the Fund or other funds in the Smith Barney
Shearson Group of Funds, all of its subsequent investments in the Fund must be
made in the same class of shares. Participating Plans will be eligible to
acquire shares of the Fund so long as they acquire the same class of shares of
the Fund as shares acquired of other funds in the Plan's multi-fund investment
program.
CLASS A SHARES. Class A shares are offered without a sales charge or CDSC to
any Participating Plan that: (a) purchases $750,000 or more of Class A shares
of
the Fund or one or more funds in the Smith Barney Shearson Group of Funds that
offer one or more classes sold subject to either an initial sales charge or
CDSC; (b) has 250 or more employees
45
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
eligible to participate in the Participating Plan at the time of initial
investment in the Fund; or (c) currently holds Class A shares in the Fund that
were received as a result of an exchange of Class B or Class D shares as
described below.
CLASS B SHARES. Class B shares are offered to Participating Plans that: (a)
purchase less than $250,000 of Class B shares of the Fund or one or more funds
in the Smith Barney Shearson Group of Funds that offer one or more classes
sold
subject to either an initial sales charge or CDSC; and (b) have less than 100
employees eligible to participate in the Participating Plan at the time of
initial investment in the Fund.
Class B shares of the Fund may be acquired directly or through an exchange
by
Participating Plans at net asset value per share without the imposition of a
sales charge. However, if a shareholder exchanges Class B shares of the Fund
with Class B shares of another fund in the Smith Barney Shearson Group of
Funds,
the shares acquired through the exchange may become subject to a CDSC of 3% of
redemption proceeds, if redeemed within eight years of the date the
Participating Plan first purchased Class B shares. No CDSC is imposed to the
extent that the net asset value of the Class B shares redeemed does not exceed
(a) the current net asset value of Class B shares purchased through
reinvestment
of dividends or capital gains distributions, plus (b) the current net asset
value of Class B shares purchased more than eight years prior to the
redemption,
plus (c) increases in the net asset value of the shareholder's Class B shares
above the purchase payments made during the preceding eight years. The CDSC
applicable to a Participating Plan depends on the number of years since the
Participating Plan first became a holder of Class B shares, unlike the CDSC
applicable to other Class B shareholders, which depends on the number of years
since those shareholders made the purchase payment from which the amount is
being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of:
(a)
the retirement of an employee in the Participating Plan; (b) the termination
of
employment of an employee in the Participating Plan; (c) the death or
disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by
an
employee in the Participating Plan; (e) hardship
46
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
of an employee in the Participating Plan to the extent permitted under Section
401(k) of the Code; or (f) redemptions of Class B shares in connection with a
loan made by the Participating Plan to an employee.
Eight years after the date a Participating Plan acquired its first Class B
share, it will be offered the opportunity to exchange all of its Class B
shares
for Class A shares of the Fund. Such Plans will be notified of the pending
exchange in writing approximately 60 days before the eighth anniversary of the
purchase date and, unless the exchange has been rejected in writing, the
exchange will occur on or about the eighth anniversary date. Once the exchange
has occurred, a Participating Plan will not be eligible to acquire additional
Class B shares of the Fund but instead may acquire Class A shares of the Fund.
If the Participating Plan elects not to exchange all of its Class B shares at
that time, each Class B share held by the Participating Plan will have the
same
conversion feature as Class B shares held by other investors. See "Variable
Pricing System--Class B Shares."
CLASS D SHARES. Class D shares are offered to Participating Plans that: (a)
purchase less than $750,000 but more than $250,000 of Class D shares of the
Fund
or one or more funds in the Smith Barney Shearson Group of Funds that offer
one
or more Classes of shares subject to a sales charge and/ or CDSC; or (b) have
at
least 100 but no more than 250 employees eligible to participate in the
Participating Plan at the time of initial investment in the Fund.
Class D shares are not subject to an automatic conversion feature as are the
Class B shares. However, beginning in December 1993 and each year thereafter,
Participating Plans which hold Class D shares valued at $750,000 or more in
any
fund or funds in the Smith Barney Shearson Group of Funds that offer one or
more
classes of shares subject to a sales charge and/or CDSC will be offered the
opportunity to exchange all of their Class D shares for Class A shares. Such
Participating Plans will be notified of the pending exchange in writing within
30 days after the last business day of the calendar year, and unless the
exchange offer has been rejected in writing, the exchange will occur on or
about
the last business day of March in the following calendar year. Once the
exchange
has occurred, a Participating Plan will not be eligible to acquire Class D
shares of the Fund but instead may acquire Class A shares of the Fund. Any
Class
D shares not converted will continue to be subject to the distribution fee.
47
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
PURCHASE OF SHARES (CONTINUED)
Participating Plans wishing to acquire shares of the Fund through the 401(k)
Program must purchase such shares directly from the transfer agent. For
further
information regarding the 401(k) Program, investors should contact their Smith
Barney Financial Consultants.
- --------------------------------------------------------------------
REDEMPTION OF SHARES
Shareholders may redeem their shares on any day on which the Fund calculates
its net asset value as described below under "Valuation of Shares." Redemption
requests received in proper form prior to the close of regular trading on the
NYSE will be effected at the net asset value per share determined on that day.
Redemption requests received after the close of regular trading on the NYSE
will
be effected at the net asset value as next determined. If a shareholder holds
shares in more than one Class, any request for redemption must specify the
Class
being redeemed. In the event of a failure to specify which Class, or if the
investor owns fewer shares of the Class than specified, the redemption request
will be delayed until the Fund's transfer agent receives further instructions
from Smith Barney, or if the shareholder's account is not with Smith Barney,
from the shareholder directly.
The Fund normally transmits redemption proceeds for credit to the
shareholder's account at Smith Barney or the Introducing Broker at no charge
(other than any applicable CDSC) within seven days after receipt of a
redemption
request. Generally, these funds will not be invested for the shareholder's
benefit without specific instruction and Smith Barney will benefit from the
use
of temporarily uninvested funds. A shareholder who pays for Fund shares by
personal check will be credited with the proceeds of a redemption of those
shares only after the purchase check has been collected, which may take up to
10
days. Shareholders who anticipate the need for more immediate access to their
investment should purchase shares with Federal funds, by bank wire or by
certified or cashier's check.
A Fund account that is reduced by a shareholder to a value of $500 or less
may
be subject to redemption by the Fund, but only after the shareholder has been
given at least 30 days in which to increase the account balance to more than
$500.
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
Shares may be redeemed in one of the following ways:
REDEMPTIONS THROUGH SMITH BARNEY
Redemption requests may be made through Smith Barney or an Introducing
Broker.
A shareholder desiring to redeem shares represented by share certificates also
must present the certificates to Smith Barney or the Introducing Broker
endorsed
for transfer (or accompanied by an endorsed stock power) signed exactly as the
shares are registered. Redemption requests involving shares represented by
certificates will not be deemed received until the certificates are received
by
the Fund's transfer agent in proper form.
REDEMPTION BY MAIL
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to your Smith Barney Financial Consultant. All other shares
may
be redeemed by submitting a written request for redemption to:
Smith Barney Shearson Adjustable Rate
Government Income Fund
Class A, B or D (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to TSSG or your Smith Barney Financial
Consultant
must (a) state the Class and number or dollar amount of shares to be redeemed,
(b) identify the shareholder's account number and (c) be signed by each
registered owner exactly as the shares are registered. If the shares to be
redeemed were issued in certificate form, the certificates must be endorsed
for
transfer (or be accompanied by an endorsed stock power) and must be submitted
to
TSSG together with the redemption request. Any signature appearing on a
redemption request, share certificate or stock power must be guaranteed by a
domestic bank, savings and loan institution, domestic credit union, member
bank
of the Federal Reserve System, or member firm of a national securities
exchange.
TSSG may require additional supporting documents for redemptions made by
corporations, executors,
49
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SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
administrators, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares of the Fund with a value of at least $10,000 may
elect to receive periodic cash payments of at least $50 monthly. Retirement
plan
accounts are eligible for automatic cash withdrawal plans only where the
shareholder is eligible to receive qualified distributions and has an account
value of at least $5,000. Any applicable CDSC will be waived on amounts
withdrawn by a shareholder that do not exceed 2% per month of the value of the
shareholder's shares subject to the CDSC at the time the withdrawal plan
commences. For further information regarding the automatic cash withdrawal
plan,
shareholders should contact their Smith Barney Shearson Financial Consultants.
CONTINGENT DEFERRED SALES CHARGE--CLASS B SHARES
Class B shares, which may be acquired only upon an exchange with another
fund
in the Smith Barney Shearson Group of Funds, are subject upon redemption to
the
highest CDSC (if any) of the shares from which the exchange or any preceding
exchange was made. A CDSC payable to Smith Barney is imposed on any redemption
of Class B shares, however effected, that causes the current value of a
shareholder's account to fall below the dollar amount of all payments by the
shareholder for the Class B shares (or any predessor of those shares) that
were
exchanged for Class B shares of the Fund ("purchase payments") during the
preceding five years, except in the case of purchases by Participating Plans,
as
described above. See "Purchase of Shares--Smith Barney 401(k) Program." No
charge is imposed to the extent that the net asset value of the Class B shares
redeemed does not exceed (a) the current net asset value of Class B shares
purchased through reinvestment of dividends or capital gains distributions,
plus
(b) the current net asset value of Class B shares acquired in an exchange that
were originally purchased more than five years prior to the redemption, plus
(c)
increases in the net asset value of the shareholder's Class B shares above the
purchase payments made during the preceding five years.
50
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
REDEMPTION OF SHARES (CONTINUED)
In circumstances in which the CDSC is imposed, the amount of the charge will
depend on (a) the CDSC schedule applicable to shares of the fund that were
exchanged for the shares being redeemed; and (b) the number of years since the
shareholder made the purchase payment from which the amount is being redeemed,
except in the case of purchases through Participating Plans which are subject
to
a different CDSC. See "Purchase of Shares--Smith Barney 401(k) Program." A
redemption of shares acquired in exchange for shares that had been the subject
of two or more exchanges among funds with differing CDSC schedules will be
subject to the highest applicable CDSC schedule. See "Exchange Privilege."
Solely for purposes of determining the number of years since a purchase
payment,
all purchase payments during a month will be aggregated and deemed to have
been
made on the last day of the preceding Smith Barney statement month. The
purchase
payment from which a redemption is made is assumed to be the earliest purchase
payment from which a full redemption has not already been effected.
Class B shares will automatically convert to Class A shares eight years
after
the date they were purchased. For this purpose, the date of purchase of Class
B
shares of the Fund refers to the purchase date of the shares given in exchange
for the Class B shares of the Fund. The first of these conversions will begin
on
or about September 30, 1994. See "Variable Pricing System-- Class B Shares."
WAIVERS OF CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to less than 2%
per
month of the value of the shareholder's shares at the time the withdrawal plan
commences (see above); (c) redemptions of shares in connection with certain
post-retirement distributions and withdrawals from retirement plans or IRAs or
following the death or disability of a shareholder; (d) involuntary
redemptions;
(e) redemption proceeds from other funds in the Smith Barney Shearson Group of
Funds that are reinvested within 30 days of the redemption; (f) redemptions of
shares in connection with a combination of any investment company with the
Fund
by merger, acquisition of assets or otherwise; and (g) certain redemption of
shares of the Fund in connection with lump-sum or other distributions made by
a
Participating Plan. See "Purchase of Shares--Smith Barney 401(k) Program."
51
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
VALUATION OF SHARES
Each Class' net asset value per share is calculated on each day, Monday
through Friday, except on days on which the NYSE is closed. The NYSE currently
is scheduled to be closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a
Saturday or Sunday, respectively.
The net asset value per share of a Class is determined as of the close of
regular trading on the NYSE and is computed by dividing the value of the
Fund's
net assets attributable to that Class by the total number of shares of that
Class outstanding. Generally, the Fund's investments are valued at market
value
or, in the absence of a market value with respect to any securities, at fair
value as determined by or under the direction of the Fund's Board of Trustees.
Short-term investments that mature in 60 days or less are valued on the basis
of
amortized cost (which involves valuing an investment at its cost and,
thereafter, assuming a constant amortization to maturity of any discount or
premium, regardless of the effect of fluctuating interest rates on the market
value of the investment) when the Board of Trustees has determined that
amortized cost is fair value. Corporate debt securities, MBSs and ABSs held by
the Fund are valued on the basis of valuations provided by dealers in those
instruments or by an independent pricing service, approved by the Board of
Trustees; any such pricing service, in determining value, will use information
with respect to transactions in the securities being valued, quotations from
dealers, market transactions in comparable securities, analyses and
evaluations
of various relationships between securities and yield to maturity information.
An option that is written by the Fund is generally valued at the last sale
price or, in the absence of the last sale price, the last offer price. An
option
that is purchased by the Fund is generally valued at the last sale price or,
in
the absence of the last sale price, the last bid price. The value of a futures
contract equals the unrealized gain or loss on the contract that is determined
by marking the contract to the current settlement price for a like contract on
the valuation date of the futures contract. A settlement price may not be used
if the market makes a limit move with respect to a particular futures contract
or if the securities underlying the futures contract experience significant
price fluctuations after the determination of the settlement price. When a
settlement price cannot be used, futures contracts will be valued at their
fair
market value as determined by or under the direction of the Fund's
52
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
VALUATION OF SHARES (CONTINUED)
Board of Trustees. For purposes of calculating the Fund's net asset value per
share, assets and liabilities initially expressed in foreign currency values
will be converted into U.S. dollar values based on a formula prescribed by the
Fund or, if the information required by the formula is unavailable, as
determined in good faith by the Board of Trustees. Further information
regarding
the Fund's valuation policies is contained in the Statement of Additional
Information.
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE
Shares of each Class may be exchanged for shares of the same class in the
following funds in the Smith Barney Shearson Group of Funds, to the extent
shares are offered for sale in the shareholder's state of residence:
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
<S> <C>
---------------------------------------------------------------------------
MUNICIPAL BOND FUNDS
A* SMITH BARNEY SHEARSON LIMITED MATURITY MUNICIPALS FUND, an
intermediate-term municipal bond fund investing in investment
grade obligations.
A*, B* SMITH BARNEY SHEARSON MANAGED MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund.
A*, B* SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND, an intermediate-
and
long-term municipal bond fund investing in medium and lower
rated
securities.
A*, B* SMITH BARNEY SHEARSON ARIZONA MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
Arizona investors.
A* SMITH BARNEY SHEARSON INTERMEDIATE MATURITY CALIFORNIA
MUNICIPALS
FUND, an intermediate-term municipal bond fund designed for
California investors.
</TABLE>
53
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
A*, B* SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
California investors.
A*, B* SMITH BARNEY SHEARSON FLORIDA MUNICIPALS FUND, an intermediate-
and long-term municipal bond fund designed for Florida
investors.
A*, B* SMITH BARNEY SHEARSON MASSACHUSETTS MUNICIPALS FUND, an
intermediate- and long-term municipal bond fund designed for
Massachusetts investors.
A*, B* SMITH BARNEY SHEARSON NEW JERSEY MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
New
Jersey investors.
A* SMITH BARNEY SHEARSON INTERMEDIATE MATURITY NEW YORK MUNICIPALS
FUND, an intermediate-term bond fund designed for New York
investors.
A*, B* SMITH BARNEY SHEARSON NEW YORK MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for
New
York investors.
A* SMITH BARNEY SHEARSON OREGON MUNICIPALS FUND, an intermediate-
and
long-term municipal bond fund designed for Oregon investors.
INCOME FUNDS
A* SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND, invests
exclusively in securities issued by the United States Treasury
and
other U.S. government securities.
A*, B*, D+ SMITH BARNEY SHEARSON DIVERSIFIED STRATEGIC INCOME FUND, seeks
high current income primarily by allocating and reallocating
its
assets among various types of fixed-income securities.
</TABLE>
54
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
A*, B*, D+ SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC., invests in
obligations issued or guaranteed by the United States
government
and its agencies and instrumentalities with emphasis on
mortgage-backed government securities.
A*, B*, D+ SMITH BARNEY SHEARSON GOVERNMENT SECURITIES FUND, seeks a high
current return by investing in U.S. government securities.
A*, B*, D+ SMITH BARNEY SHEARSON INVESTMENT GRADE BOND FUND, seeks maximum
current income consistent with prudent investment management
and
preservation of capital by investing in corporate bonds.
A*, B*, D+ SMITH BARNEY SHEARSON HIGH INCOME FUND, seeks high current
income
by investing in high-yielding corporate bonds, debentures and
notes.
A*, B*, D+ SMITH BARNEY SHEARSON GLOBAL BOND FUND, seeks current income
and
capital appreciation by investing in bonds, debentures and
notes
of foreign and domestic issuers.
GROWTH AND INCOME FUNDS
A*, B*, D+ SMITH BARNEY SHEARSON CONVERTIBLE FUND, seeks current income
and
capital appreciation by investing in convertible securities.
A*, B*, D+ SMITH BARNEY SHEARSON UTILITIES FUND, seeks total return by
investing in equity and debt securities of utilities companies.
A*, B*, D+ SMITH BARNEY SHEARSON STRATEGIC INVESTORS FUND, seeks high
total
return consisting of current income and capital appreciation by
investing in a combination of equity, fixed-income and money
market securities.
</TABLE>
55
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
A*, B*, D+ SMITH BARNEY SHEARSON PREMIUM TOTAL RETURN FUND, seeks total
return by investing in dividend-paying common stocks.
A*, B*, D+ SMITH BARNEY SHEARSON GROWTH AND INCOME FUND, seeks income and
long-term capital growth by investing in income producing
equity
securities.
GROWTH FUNDS
A*, B*, D+ SMITH BARNEY SHEARSON APPRECIATION FUND INC., seeks long-term
appreciation of capital.
A*, B*, D+ SMITH BARNEY SHEARSON FUNDAMENTAL VALUE FUND INC., seeks long-
term
capital growth with current income as a secondary objective.
A*, B*, D+ SMITH BARNEY SHEARSON TELECOMMUNICATIONS GROWTH FUND, seeks
capital appreciation, with income as a secondary consideration.
A*, B*, D+ SMITH BARNEY SHEARSON AGGRESSIVE GROWTH FUND INC., seeks
above-average capital growth.
A*, B*, D+ SMITH BARNEY SHEARSON SPECIAL EQUITIES FUND, seeks long-term
capital appreciation by investing in equity securities
primarily
of emerging growth companies.
A*, B*, D+ SMITH BARNEY SHEARSON GLOBAL OPPORTUNITIES FUND, seeks long-
term
capital growth by investing principally in the common stock of
foreign and domestic issuers.
A*, B*, D+ SMITH BARNEY SHEARSON EUROPEAN FUND, seeks long-term capital
appreciation by investing primarily in securities of issuers
based
in European countries.
A*, B*, D+ SMITH BARNEY SHEARSON PRECIOUS METALS AND MINERALS FUND INC.,
seeks long-term capital appreciation by investing primarily in
precious metal- and mineral-related companies and gold bullion.
</TABLE>
56
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
<TABLE>
<CAPTION>
EXCHANGEABLE
WITH SHARES
OF THE
FOLLOWING
CLASSES: FUND NAME AND INVESTMENT OBJECTIVE:
---------------------------------------------------------------------------
<S> <C>
MONEY MARKET FUNDS
** SMITH BARNEY SHEARSON MONEY MARKET FUND, invests in a
diversified
portfolio of high quality money market instruments.
***, D++ SMITH BARNEY SHEARSON DAILY DIVIDEND FUND INC., invests in a
diversified portfolio of high quality money market instruments.
***, D++ SMITH BARNEY SHEARSON GOVERNMENT AND AGENCIES FUND INC.,
invests
in short-term United States government and agency securities.
*** SMITH BARNEY SHEARSON MUNICIPAL MONEY MARKET FUND INC., invests
in
short-term, high quality municipal obligations.
*** SMITH BARNEY SHEARSON CALIFORNIA MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality California municipal
obligations.
*** SMITH BARNEY SHEARSON NEW YORK MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality New York municipal
obligations.
---------------------------------------------------------------------------
<FN>
*Shares of this fund are subject to a sales charge or CDSC.
**Shares of this money market fund may be exchanged for Class B shares of
the
Fund.
***Shares of this money market fund may be exchanged for Class A shares of
the
Fund.
+Class D shares of this fund may be acquired only by Participating Plans.
++Class D shares of the Fund exchanged for shares of this money market fund
will continue to carry
their Class D designation after the exchange.
</TABLE>
TAX EFFECT. The exchange of shares of one fund for shares of another fund is
treated for Federal income tax purposes as a sale of the shares given in
exchange by the shareholder. Therefore, an exchanging shareholder may realize
a
taxable gain or loss in connection with an exchange.
CLASS A EXCHANGES. Shareholders of the Fund who wish to exchange all or a
portion of their Class A shares in the Fund for Class A shares in other funds
of
the Smith Barney Shearson Group of Funds listed above may do so
57
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- ---------------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
subject to the payment of an appropriate "sales charge differential." The
"sales
charge differential" is limited to a percentage rate no greater than the
excess
of the sales charge rate applicable to purchases of shares of the mutual fund
being acquired in the exchange over the sum of the rates of all sales charges
previously paid on the mutual fund shares relinquished in the exchange and on
any predecessor of those shares. For purposes of the exchange privilege,
shares
obtained through automatic reinvestment of dividends, as described below, are
treated as having paid the same sales charges applicable to the shares on
which
the dividends were paid. However, if no sales charge was imposed upon the
initial purchase of the shares (as in the case of Class A shares of the Fund),
any shares obtained through automatic reinvestment will be subject to a sales
charge differential upon exchange.
Class A shareholders of the funds in the Smith Barney Shearson Group of
Funds
who wish to exchange all or a portion of their shares for Class A shares of
the
Fund may do so without imposition of any sales charge or exchange fee and will
be subject to the distribution and shareholder servicing fee applicable to
Class
A shares of the Fund upon the exchange.
CLASS B EXCHANGES. Class B shareholders of the Fund who wish to exchange all
or a portion of their Class B shares for Class B shares in any of the funds
identified above may do so without imposition of an exchange fee. In the event
a
Class B shareholder wishes to exchange all or a portion of his or her shares
for
shares in any of these funds imposing a higher CDSC than that imposed on the
Class B shares of the Fund relinquished in the exchange, the exchanged Class B
shares will be subject to the higher applicable CDSC. Upon an exchange, the
new
Class B shares will be deemed to have been purchased on the same date as the
Class B shares of the Fund (or any predecessor of those shares) that have been
exchanged.
CLASS D EXCHANGES. Class D shares of the Fund will be exchangeable for Class
D
shares of the funds listed above. Class D shareholders who wish to exchange
all
or part of their Class D shares in any of these funds may do so without
charge.
Class D shares may be acquired only by Participating Plans.
ADDITIONAL INFORMATION REGARDING THE EXCHANGE PRIVILEGE. Shareholders
exercising the exchange privilege with any of the other funds in the Smith
Barney Shearson Group of Funds should review the prospectus of that fund
carefully prior to making an exchange. Smith Barney reserves the right to
58
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- --------------------------------------------------------------------
EXCHANGE PRIVILEGE (CONTINUED)
reject any exchange request. The exchange privilege may be modified or
terminated at any time after notice to shareholders. For further information
regarding the exchange privilege or to obtain the current prospectuses for
members of the Smith Barney Shearson Group of Funds, investors should contact
their Smith Barney Financial Consultants.
- --------------------------------------------------------------------
DISTRIBUTOR
Smith Barney is located at 388 Greenwich Street, New York, New York 10013
and
serves as distributor of the Fund's shares. Smith Barney is a wholly owned
subsidiary of Holdings, which is in turn a wholly owned subsidiary of
Travelers.
Smith Barney is paid an annual distribution and shareholder servicing fee with
respect to Class A, Class B and Class D shares at the rate of .75% of the
value
of the average daily net assets attributable to the respective Class. The fee
is
authorized pursuant to a distribution plan (the "Plan") adopted by the Fund
pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended,
and
is used by Smith Barney to pay its Financial Consultants for servicing
shareholder accounts and to cover expenses that are primarily intended to
result
in the sale of those shares. These expenses include: costs of printing and
distributing the Fund's Prospectus, Statement of Additional Information and
sales literature to prospective investors; an allocation of overhead and other
Smith Barney branch office distribution-related expenses; payments to and
expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of the shares; and
accruals
for interest on the amount of the foregoing expenses that exceed distribution
fees and, in the case of Class B shares, the CDSC received by Smith Barney.
The
payments to Smith Barney Financial Consultants for selling shares of a Class
include a commission paid at the time of sale and a continuing fee for
servicing
shareholder accounts for as long as a shareholder remains a holder of that
Class, which is credited at the rate of .25% of the value of the average daily
net assets of the Class that remain invested in the Fund. Smith Barney
Financial
Consultants may receive different levels of compensation for selling one Class
over another.
Payments under the Plan are not tied exclusively to the distribution and
shareholder servicing expenses actually incurred by Smith Barney and the
59
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
DISTRIBUTOR (CONTINUED)
payments may exceed distribution and shareholder servicing expenses actually
incurred. The Fund's Board of Trustees will evaluate the appropriateness of
the
Plan and its payment terms on a continuing basis and in so doing will consider
all relevant factors, including expenses borne by Smith Barney, amounts
received
under the Plan and proceeds of any CDSC.
- --------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
DIVIDENDS AND DISTRIBUTIONS
The Fund's policy is to declare daily (commencing with respect to particular
shares of the Fund, on the shares' settlement date) and distribute monthly,
generally on the 10th calendar day of each calendar month, distributions that
will be calculated in accordance with a monthly target rate to be determined
by
the Fund's Board of Trustees from time to time. The final distribution for
each
calendar year will include any remaining net investment income and will be
accompanied by the distribution of any remaining short-term and long-term
capital gains deemed, for Federal income tax purposes, undistributed for the
year.
If for any fiscal year, the Fund's total distributions exceed net investment
income and net realized capital gains, the excess distributions generally will
be treated as a tax-free return of capital (up to the amount of the
shareholder's tax basis in his or her shares). The amount treated as a tax-
free
return of capital will reduce a shareholder's adjusted basis in his or her
shares. If, however, in addition to distributing all of its net investment
income, the Fund were to distribute net realized gains that otherwise could
have
been offset by a capital loss carryover, the distributions would be taxable as
ordinary dividend income to shareholders and the Fund would lose the benefit
of
the carryover. In accordance with the requirements of the 1940 Act, a notice
will accompany each distribution with respect to the estimated sources of the
distribution.
Unless a shareholder instructs the Fund to pay dividends and capital gains
distributions on sales of any Class in cash and to credit the shareholder's
account at Smith Barney, dividends and capital gains distributions will be
reinvested automatically in additional shares of the Class at net asset value,
subject to no sales charge or CDSC. The Fund is subject to a 4% non-
60
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
deductible excise tax measured with respect to certain undistributed amounts
of
net investment income and capital gains. If necessary to avoid the imposition
of
this tax, and if in the best interests of its shareholders, the Fund will
declare and pay dividends of its net investment income and distributions of
its
net capital gains more frequently than stated above.
TAXES
The Fund intends to qualify each year as a regulated investment company
within
the meaning of the Code. To qualify as a regulated investment company for
Federal income tax purposes, the Fund will limit its income and investments so
that (a) less than 30% of its gross income is derived from the sale or
disposition of stocks, securities and certain financial instruments (including
certain options, futures contracts and forward contracts) that were held for
less than three months and (b) at the close of each quarter of the taxable
year
(i) not more than 25% of the market value of the Fund's total assets is
invested
in the securities (other than U.S. government securities) of a single issuer
or
of two or more issuers controlled by the Fund that are engaged in the same or
similar trades or businesses or in related trades or businesses and (ii) at
least 50% of the market value of the Fund's total assets is represented by
cash
and cash items, U.S. government securities and other securities limited in
respect of any one issuer to an amount not greater in value than 5% of the
market value of the Fund's total assets and to not more than 10% of the
outstanding voting securities of the issuer. The requirements for
qualification
may cause the Fund to restrict the degree to which it sells or otherwise
disposes of stocks, securities and certain financial instruments held for less
than three months. See "Investment Objectives and Management
Policies--Investment Techniques and Strategies" and "--Portfolio Transactions
and Turnover." If the Fund qualifies as a regulated investment company and
meets
certain distribution requirements, the Fund will not be subject to federal
income tax on its net investment income and net realized capital gains that it
distributes to its shareholders.
Dividends paid by the Fund out of net investment income and distributions of
net realized short-term capital gains will be taxable to shareholders as
ordinary income, whether received in cash or reinvested in additional shares.
Distributions of net realized long-term capital gains will be taxable to
shareholders as long-term capital gain, regardless of how long
61
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES (CONTINUED)
shareholders have held their Fund shares and whether the distributions are
received in cash or reinvested in additional Fund shares. Furthermore, as a
general rule, a shareholder's gain or loss on a sale or redemption of Fund
shares will be a long-term capital gain or loss if the shareholder has held
the
shares for more than one year and will be a short-term capital gain or loss if
the shareholder has held the shares for one year or less. The Fund anticipates
that dividends that it pays to its shareholders will not qualify for the
Federal
dividends-received deduction for corporate shareholders; distributions of net
realized capital gains paid to shareholders will not qualify for the Federal
dividends-received deduction for corporate shareholders.
Statements as to the tax status of each shareholder's dividends and
distributions are mailed annually. Each shareholder also will receive, if
applicable, various written notices after the close of the Fund's prior
taxable
year with respect to certain dividends and distributions that were received
from
the Fund during the Fund's prior taxable year.
Shareholders are urged to consult their tax advisors regarding the
applicability of Federal, state and local tax laws to their specific situation
before investing in the Fund.
- --------------------------------------------------------------------
ADDITIONAL INFORMATION
The Fund was organized as an unincorporated business trust under the laws of
the Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated
May
7, 1992. On November 5, 1992 the Fund filed an Amended and Restated Master
Trust
Agreement, as amended from time to time (the "Trust Agreement"). The Fund
commenced operations on June 22, 1992, and on July 30, 1993 the Fund changed
its
name to Smith Barney Shearson Adjustable Rate Government Income Fund.
Each Class represents an identical interest in the Fund's investment
portfolio. As a result, the Classes have the same rights, privileges and
preferences, except with respect to: (a) the designation of each Class; (b)
the
effect of the respective sales charges, if any, for each Class; (c) the
expenses
allocable exclusively to each Class; (d) voting rights on matters exclusively
affecting a single Class; (e) the exchange privileges of each Class; and (f)
the
conversion feature of the Class B shares. The Fund's Board of Trustees does
62
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
not anticipate that there will be any conflicts among the interests of the
holders of the different Classes of shares of the Fund. The Trustees, on an
ongoing basis, will consider whether any such conflict exists and, if so, take
appropriate action.
When matters are submitted for shareholder vote, shareholders of each Class
will have one vote for each full share owned and a proportionate, fractional
vote for any fractional share held of that Class. Generally, shares of the
Fund
will be voted on a Fund-wide basis except matters affecting only the interests
of one Class. The Fund does not hold annual shareholder meetings. There
normally
will be no meeting of shareholders for the purpose of electing Trustees unless
and until such time as less than a majority of the Trustees holding office
have
been elected by shareholders. The Trustees will call a meeting for any purpose
upon written request of shareholders holding at least 10% of the Fund's
outstanding shares. Shareholders of record owning no less than two-thirds of
the
outstanding shares of the Fund may remove a Trustee through a declaration in
writing or by vote cast in person or by proxy at a meeting called for that
purpose. Shareholders who satisfy certain criteria will be assisted by the
Fund
in communicating with other shareholders in seeking the holding of the
meeting.
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place,
Boston, Massachusetts 02108, and serves as custodian of the Fund's
investments.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as
the Fund's transfer agent.
The Fund sends to each of its shareholders a semi-annual report and an
audited
annual report, each of which includes a list of the investment securities held
by the Fund at the end of the period covered. In an effort to reduce the
Fund's
printing and mailing costs, the Fund plans to consolidate the mailing of its
semi-annual and annual reports by household. This consolidation means that a
household having multiple accounts with the identical address of record will
receive a single copy of each report. In addition, the Fund also plans to
consolidate the mailing of its Prospectus so that a shareholder having
multiple
accounts (that is, individual, IRA and/or Self-Employed Retirement Plan
accounts) will receive a single Prospectus annually. When the Fund's annual
report is combined with the Prospectus into a single document, the Fund will
mail the combined document to each
63
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
- -------------------------------------------------------------
ADDITIONAL INFORMATION (CONTINUED)
shareholder to comply with legal requirements. Any shareholder who does not
want
this consolidation to apply to his or her account should contact his or her
Smith Barney Financial Consultant or the Fund's transfer agent.
Shareholders may seek information regarding the Fund from their Smith Barney
Financial Consultants.
------------------------
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, THE STATEMENT
OF
ADDITIONAL INFORMATION AND/OR THE OFFICIAL SALES LITERATURE IN CONNECTION WITH
THE OFFERING OF THE FUND'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER
INFORMATION
OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
FUND. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR
TO
ANY PERSON TO WHOM, SUCH OFFER MAY NOT LAWFULLY BE MADE.
64
<PAGE>
SMITH BARNEY SHEARSON
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
Two World Trade Center
New York, New York 10048
Fund 167, 226, 240
FD0249 G4
<PAGE>
Smith Barney Shearson
ADJUSTABLE RATE
GOVERNMENT INCOME
FUND
STATEMENT OF
ADDITIONAL INFORMATION
JULY 30, 1994
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME FUND
Two World Trade Center
New York, New York 10048 Fund 167, 226, 240
<PAGE>
Smith Barney Shearson
ADJUSTABLE RATE GOVERNMENT INCOME FUND
Two World Trade Center
New York, New York 10048
(212) 720-9218
STATEMENT OF ADDITIONAL INFORMATION
JULY 30,
1994
This Statement of Additional Information expands upon and supplements
the
information contained in the current Prospectus of Smith Barney
Shearson
Adjustable Rate Government Income Fund (the "Fund"), dated July 30, 1994,
as
amended or supplemented from time to time, and should be read in
conjunction
with the Prospectus. The Prospectus may be obtained from your Smith
Barney
Financial Consultant or by writing or calling the Fund at the address
or
telephone number set forth above. This Statement of Additional
Information,
although not in itself a prospectus, is incorporated by reference into
the
Prospectus in its entirety.
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus
and the Statement of Additional Information, except where shown below.
<TABLE>
<S>
<C>
Management of the
Fund.................................................................
2
Investment Objectives and Management
Policies.......................................... 5
Purchase of
Shares.....................................................................
18
Redemption of
Shares...................................................................
18
Distributor...................................................................
......... 19
Valuation of
Shares....................................................................
20
Exchange
Privilege.....................................................................
20
Performance Data (See in the Prospectus "The Fund's
Performance")...................... 21
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes")..................... 23
Custodian and Transfer Agent (See in the Prospectus "Additional
Information").......... 24
Organization of the Fund (See in the Prospectus "Additional
Information").............. 24
Financial
Statements...................................................................
25
</TABLE>
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:
<TABLE>
<CAPTION>
NAME SERVICE
<S> <C>
Smith Barney Inc.
("Smith Barney") .............................................. Distributor
Smith Barney Strategy Advisers Inc.
("SBSA") ...................................................... Investment
Adviser
BlackRock Financial Management, L.P.
("BlackRock") ................................................. Sub-
Investment Adviser
Smith, Barney Advisers, Inc.
("SBA") .......................................................
Administrator
The Boston Company Advisors, Inc.
("Boston Advisors") ........................................... Sub-
Administrator
Boston Safe Deposit and Trust Company
("Boston Safe") ............................................... Custodian
The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data Corporation .............. Transfer
Agent
</TABLE>
These organizations and the functions they perform for the Fund are
discussed
in the Prospectus and in this Statement of Additional Information.
<PAGE>
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS OF THE FUND
The Trustees and executive officers of the Fund, together with information as
to
their principal business occupations during the past five years, are set
forth
below. Each Trustee who is an "interested person" of the Fund, as defined in
the
Investment Company Act of 1940, as amended (the "1940 Act"), is indicated by
an
asterisk.
Charles F. Barber, Trustee. Consultant; formerly Chairman of the Board
of
ASARCO Incorporated. His address is 66 Glenwood Drive, Greenwich,
Connecticut
06830.
Allan J. Bloostein, Trustee. Consultant; formerly Vice Chairman of the
Board
of and Consultant to The May Department Stores Company; Director of
Crystal
Brands, Inc., Melville Corp., and R.G. Barry Corp. His address is Andersen
Road,
Sherman, Connecticut 06784.
Martin Brody, Trustee. Vice Chairman of the Board of Restaurant
Associates
Industries, Inc.; a Director of Jaclyn, Inc. His address is Three ADP
Boulevard,
Roseland, New Jersey 07068.
Dwight B. Crane, Trustee. Professor, Graduate School of
Business
Administration, Harvard University. His address is Harvard Business
School,
Soldiers Field Road, Boston, Massachusetts 02163.
Robert A. Frankel, Trustee. Management Consultant; retired Vice President
of
The Reader's Digest Association, Inc. His address is 102 Grand
Street,
Croton-On-Hudson, New York 10520.
*Heath B. McLendon, Chairman of the Board. Executive Vice President of
Smith
Barney; prior to July 1993, Senior Executive Vice President of Shearson
Lehman
Brothers Inc., Vice Chairman of Shearson Asset Management, a member of the
Asset
Management Group of Shearson Lehman Brothers Inc., a Director of Pan Agora
Asset
Management, Inc. and Pan Agora Asset Management Limited. His address is
Two
World Trade Center, New York, New York 10048.
Richard P. Roelofs, President. Managing Director of Smith Barney
and
President of Smith Barney Strategy Advisers Inc.; prior to July 1993,
Senior
Vice President of Shearson Lehman Brothers Inc., Vice President of
Shearson
Lehman Investment Strategy Advisors Inc. an investment advisory affiliate
of
Shearson Lehman Brothers Inc. His address is Two World Trade Center, New
York,
New York 10048.
Henry Gabbay, Vice President and Investment Officer. Limited partner
and
Chief Operating Officer of BlackRock; from September 1984 to February 1989,
Vice
President of The First Boston Corporation. His address is 345 Park Avenue,
New
York, New York 10154.
Scott M. Amero, Vice President and Investment Officer. Limited partner
of
BlackRock; from 1985 to March 1990, Vice President of The First
Boston
Corporation in the Fixed Income Research Department. His address is 345
Park
Avenue, New York, New York 10154.
Keith T. Anderson, Vice President and Investment Officer. Limited partner
of
BlackRock. His address is 345 Park Avenue, New York, New York 10154.
Robert S. Kapito, Vice President and Investment Officer. Limited partner
of
BlackRock since 1988; formerly Vice President of The First Boston Corporation
in
the Mortgage Products Group. His address is 345 Park Avenue, New York, New
York
10154.
2
<PAGE>
Lewis E. Daidone, Treasurer. Managing Director of Smith Barney and
Greenwich
Street Advisors; Director and Senior Vice President of Mutual Management
Corp.
and Smith Barney Advisors. Prior to January, 1990 Senior Vice President
and
Chief Financial Officer of Cortland Financial Group, Inc. His address
1345
Avenue of the Americas, New York, New York 10105.
Christina T. Sydor, Secretary. Managing Director of Smith Barney
and
Secretary of Mutual Management Corp. and Smith Barney Advisors. Her address
is
1345 Avenue of the Americas, New York, New York 10105.
Each of the Fund's Trustees serves as a trustee, general partner
and/or
director of other mutual funds for which Smith Barney serves as distributor.
As
of June 30, 1994, the Trustees and officers of the Fund as a group
beneficially
owned less than 1% of the outstanding shares of the Fund.
REMUNERATION
No director, officer or employee of Smith Barney, SBSA, BlackRock or SBA or
any
of their affiliates receives any compensation from the Fund for serving as
an
officer or Trustee of the Fund. The Fund pays each Trustee who is not
a
director, officer or employee of Smith Barney, SBSA, BlackRock, SBA, or any
of
their affiliates, a fee of $2,500 per annum plus $250 per meeting attended,
and
reimburses them for travel and out-of-pocket expenses. For the fiscal year
ended
May 31, 1994, such fees and expenses totalled $18,026.
INVESTMENT ADVISER, SUB-INVESTMENT ADVISER, ADMINISTRATOR AND SUB-
ADMINISTRATOR
Certain of the services provided to, and the fees paid by, the Fund under
its
agreements with SBSA, BlackRock, SBA and Boston Advisors are described in
the
Prospectus. For the fiscal period from June 22, 1992 (commencement
of
operations) through May 31, 1993, the Fund paid fees to SBSA and BlackRock
which
amounted to $349,218 and $349,217, respectively. For the fiscal year ended
May
31, 1994, the Fund paid fees to SBSA and BlackRock which amounted to
$759,294
and $759,294, respectively. SBSA is a wholly owned subsidiary of SBA, a
wholly
owned subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is
a
wholly owned subsidiary of The Travelers Inc. ("Travelers"). SBSA pays
BlackRock
a fee for services provided by BlackRock to the Fund that is accrued daily
and
paid monthly at the annual rate of .20% of the value of the Fund's average
daily
net assets. The Fund pays no direct fee to BlackRock.
For the 1993 and 1994 fiscal years, Boston Advisors received $349,218
and
$759,294, respectively, in administrative fees. For the fiscal period June
22,
1992 (commencement of operations) through May 31, 1993, SBSA, BlackRock
and
Boston Advisors each voluntarily waived fees of $64,400.
SBA serves as administrator to the Fund pursuant to a written agreement
(the
"Administration Agreement") dated June 1, 1994, which was first approved by
the
Fund's Board of Trustees, including a majority of Trustees who are
not
"interested persons" of the Fund or Smith Barney, on June 1, 1994.
Prior to June 1, 1994, Boston Advisors served as administrator to the
Fund.
Boston Advisors currently serves as sub-administrator to the Fund under
a
written agreement (the "Administration Agreement") dated June 1, 1994, which
was
most recently approved by the Fund's Board of Trustees, including a majority
of
Trustees who are not "interested persons" of the Fund or Boston Advisors,
on
June 1, 1994. Boston Advisors is a wholly owned subsidiary of The
Boston
Company, Inc. ("TBC"), a financial services holding company, which is in turn
a
wholly owned subsidiary of Mellon Bank Corporation ("Mellon").
3
<PAGE>
Certain of the services provided to the Fund by SBA and Boston Advisors
are
described in the Prospectus under "Management of the Fund." In addition to
those
services, SBA and Boston Advisors pay the salaries of all officers and
employees
who are employed by either of them and the Fund, maintain office facilities
for
the Fund, furnish the Fund with statistical and research data, clerical help
and
accounting, data processing, bookkeeping, internal auditing and legal
services
and certain other services required by the Fund, prepare reports to the
Fund's
shareholders, and prepare tax returns, reports to and filings with
the
Securities and Exchange Commission (the "SEC") and state blue sky
authorities.
Each of SBA and Boston Advisors bears all expenses in connection with
the
performance of its services.
The Fund bears expenses incurred in its operation, including taxes,
interest,
brokerage fees and commissions, if any; fees of Directors who are not
officers,
directors, shareholders or employees of Smith Barney; SEC fees and state
blue
sky qualification fees; charges of custodians; transfer and dividend
disbursing
agents' fees, including a portion of the charges associated with
check
processing for Fund shareholders participating in certain Smith Barney
central
asset account programs; certain insurance premiums; outside auditing and
legal
expenses; costs of maintenance of corporate existence; investor
services
(including allocated telephone and personnel expenses); costs of preparation
and
printing of prospectuses for regulatory purposes and for distribution
to
shareholders, shareholder reports and corporate meetings.
SBSA, BlackRock, SBA and Boston Advisors each pays the salaries of
all
officers and employees it employs who serve the Fund, and SBA and
Boston
Advisors maintain office facilities for the Fund. SBSA, BlackRock, SBA
and
Boston Advisors bear all expenses in connection with the performance of
their
respective services under their agreements with the Fund.
SBSA and SBA each have agreed that, if in any fiscal year of the Fund,
the
aggregate expenses of the Fund (including fees payable pursuant to the
Fund's
agreements with SBSA and SBA, but excluding interest, taxes, brokerage
fees,
fees paid pursuant to the Fund's distribution and shareholder servicing
plan
(the "Plan"), and, if permitted by the relevant state securities
commissions,
extraordinary expenses) exceed the expense limitation of any state
having
jurisdiction over the Fund, SBSA and SBA will reduce their fees by the amount
of
the excess expenses, the amount to be allocated between them in the
proportion
that their respective fees bear to the aggregate of the fees paid to them by
the
Fund. Fee reductions, if any, will be reconciled monthly. The most
restrictive
state expense limitation applicable to the Fund is 2.5% of the first $30
million
of the Fund's average net assets, 2% of the next $70 million of the
Fund's
average net assets and 1.5% of the Fund's remaining average net assets.
COUNSEL AND AUDITORS
Willkie Farr & Gallagher serves as counsel for the Fund. The Trustees who
are
not "interested persons" of the Fund have selected Stroock & Stroock & Lavan
as
their counsel
Coopers & Lybrand, independent accountants, One Post Office Square,
Boston,
Massachusetts 02109, serve as auditors of the Fund and render an opinion on
the
Fund's Financial Statements annually.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectus discusses the investment objectives of the Fund and the
principal
policies to be employed to achieve those objectives. Supplemental information
is
set out below concerning the types of securities and other instruments in
which
the Fund may invest, the investment policies and strategies that the Fund
may
utilize and certain risks attendant to those investments, policies
and
strategies.
4
<PAGE>
ADJUSTABLE RATE SECURITIES
The Fund will invest at least 65% of its total assets in adjustable
rate
securities ("Adjustable Rate Securities"), consisting principally
of
mortgage-backed and asset-backed securities. The collateral
backing
mortgage-backed securities ("MBSs") and asset-backed securities ("ABSs")
is
usually held by an independent bailee, custodian or trustee on behalf of
the
holders of the related MBSs or ABSs. The holder of the related MBSs or
ABSs
(such as the Fund) will have either an ownership interest or security
interest
in the underlying collateral and can exercise its rights to it through
the
bailee, custodian or trustee.
INDEXES. The key determinant of the interest rates paid on Adjustable
Rate
Securities is the interest rate index chosen (and the spread relating to
the
securities). Certain indexes are tied to interest rates paid on
specified
securities, such as one-, three-or five-year U.S. Treasury securities,
whereas
other indexes are more general. A prominent example of a general type of
index
is the cost of funds for member institutions (that is, savings and
loan
associations and savings banks) of the Federal Home Loan Bank (the "FHLB")
of
San Francisco (The 11th District Cost of Funds Index, "COFI").
A number of factors may affect the COFI and cause it to behave
differently
from indexes tied to specific types of securities. The COFI is dependent
upon,
among other things, the origination dates and maturities of the
member
institutions' liabilities. Consequently, the COFI may not reflect the
average
prevailing market interest rates on new liabilities of similar maturities.
No
assurance can be given that the COFI will necessarily move in the same
direction
as prevailing interest rates since, as longer term deposits or borrowings
mature
and are renewed at market interest rates, the COFI will rise or fall
depending
upon the differential between the prior and the new rates on the deposits
and
borrowings. In addition, associations in the thrift industry in recent
years
have caused and may continue to cause the cost of funds of thrift
institutions
to change for reasons unrelated to changes in general interest rate levels.
Any
movement in the COFI as compared to other indexes based upon specific
interest
rates may be affected by changes instituted by the FHLB of San Francisco in
the
method used to calculate the COFI. To the extent that the COFI may
reflect
interest changes on a more delayed basis than other indexes, in a period
of
rising interest rates any increase may produce a higher yield later than
would
be produced by the other indexes. In a period of declining interest rates,
the
COFI may remain higher than other market interest rates, which may result in
a
higher level of principal prepayments on mortgage loans that adjust
in
accordance with the COFI than mortgage or other loans that adjust in
accordance
with other indexes. In addition, to the extent that the COFI may lag
behind
other indexes in a period of rising interest rates, securities based on the
COFI
may have a lower market value than would result from use of other indexes. In
a
period of declining interest rates, securities based on the COFI may reflect
a
higher market value than would securities based on other indexes.
PRIVATELY ISSUED MBSs AND ABSs -- CREDIT ENHANCEMENTS. Credit
enhancements
for certain privately issued MBSs and ABSs typically are provided by
external
entities such as banks or financial insurance companies or by the structure of
a
transaction itself. Examples of credit support arising out of the structure
of
the transaction include "senior-subordinated securities" (multiple
class
securities with one or more classes subordinated to other classes as to
the
payment of principal and interest with the result that defaults on
the
underlying assets are borne first by the holders of the subordinated
class),
creation of "reserve funds" (in which case cash or investments, sometimes
funded
from a portion of the payments on the underlying assets, are held in
reserve
against future losses) and "overcollateralization" (in which case the
scheduled
payments
5
<PAGE>
on, or the principal amount of, the underlying assets exceeds that required
to
make payment of the securities and pay any servicing or other fees). The
Fund
may purchase subordinated securities that, as noted above, may serve as a
form
of credit support for senior securities purchased by other investors.
U.S. GOVERNMENT AGENCIES OR INSTRUMENTALITIES
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION. The Government National
Mortgage
Association ("GNMA") is a wholly owned corporate instrumentality of the
United
States government within the Department of Housing and Urban Development.
The
National Housing Act of 1934, as amended (the "Housing Act"), authorizes GNMA
to
guarantee the timely payment of the principal of and interest on securities
that
are based on and backed by a pool of specified mortgage loans. For these
types
of securities to qualify for a GNMA guarantee, the underlying mortgages must
be
insured by the Federal Housing Administration (the "FHA") under the Housing
Act,
or Title V of the Housing Act of 1949 ("FHA Loans"), or be guaranteed by
the
Veterans' Administration under the Servicemen's Readjustment Act of 1944,
as
amended ("VA Loans"), or be pools of other eligible mortgage loans. The
Housing
Act provides that the full faith and credit of the United States government
is
pledged to the payment of all amounts that may be required to be paid under
any
guarantee. In order to meet its obligations under a guarantee, GNMA
is
authorized to borrow from the United States Treasury with no limitations as
to
amount.
GNMA pass-through MBSs may represent a proportionate interest in one or
more
pools of the following types of mortgage loans: (a) fixed rate level
payment
mortgage loans; (b) fixed rate graduated payment mortgage loans; (c) fixed
rate
growing equity mortgage loans; (d) fixed rate mortgage loans secured
by
manufactured (mobile) homes; (e) mortgage loans on multifamily
residential
properties under construction; (f) mortgage loans on completed
multifamily
projects; (g) fixed rate mortgage loans as to which escrowed funds are used
to
reduce the borrower's monthly payments during the early years of the
mortgage
loans ("buydown" mortgage loans); (h) mortgage loans that provide
for
adjustments on payments based on periodic changes in interest rates or in
other
payment terms of the mortgage loans; and (i) mortgage-backed serial notes.
FEDERAL NATIONAL MORTGAGE ASSOCIATION. The Federal National
Mortgage
Association ("FNMA") is a Federally chartered and privately owned
corporation
established under the Federal National Mortgage Association Charter Act.
FNMA
was originally organized in 1938 as a United States government agency to
add
greater liquidity to the mortgage market. FNMA was transformed into a
private
sector corporation by legislation enacted in 1968. FNMA provides funds to
the
mortgage market primarily by purchasing home mortgage loans from local
lenders,
thereby providing them with funds for additional lending. FNMA acquires funds
to
purchase loans from investors that may not ordinarily invest in mortgage
loans
directly, thereby expanding the total amount of funds available for housing.
Each FNMA pass-through MBS represents a proportionate interest in one or
more
pools of FHA Loans, VA Loans or conventional mortgage loans (that is,
mortgage
loans that are not insured or guaranteed by any government agency). The
loans
contained in those pools consist of: (a) fixed rate level payment
mortgage
loans; (b) fixed rate growing equity mortgage loans; (c) fixed rate
graduated
payment mortgage loans; (d) variable rate mortgage loans; (e) other
adjustable
rate mortgage loans; and (f) fixed rate mortgage loans secured by
multifamily
projects.
FEDERAL HOME LOAN MORTGAGE CORPORATION. The Federal Home Loan
Mortgage
Corporation ("FHLMC") is a corporate instrumentality of the United
States
established by the Emergency Home Finance
6
<PAGE>
Act of 1970, as amended (the "FHLMC Act"). FHLMC was organized primarily for
the
purpose of increasing the availability of mortgage credit to finance
needed
housing. The operations of FHLMC currently consist primarily of the purchase
of
first lien, conventional, residential mortgage loans and participation
interests
in mortgage loans and the resale of the mortgage loans in the form of
mortgage-
backed securities.
The mortgage loans underlying FHLMC MBSs typically consist of fixed rate
or
adjustable rate mortgage loans with original terms to maturity of between 10
and
30 years, substantially all of which are secured by first liens on one-
to
four-family residential properties or multifamily projects. Each mortgage
loan
must meet the applicable standards set out in the FHLMC Act. Mortgage
loans
underlying FHLMC MBSs may include whole loans, participation interests in
whole
loans and undivided interests in whole loans and participations in another
FHLMC
MBS.
U.S. SMALL BUSINESS ADMINISTRATION. The U.S. Small Business
Administration
(the "SBA") is an independent agency of the United States established by
the
Small Business Act of 1953. The SBA was organized primarily to
assist
independently owned and operated businesses that are not dominant in
their
respective markets. The SBA provides financial assistance, management
counseling
and training for small businesses, as well as acting generally as an advocate
of
small businesses.
The SBA guarantees the payment of principal and interest on portions of
loans
made by private lenders to certain small businesses. The loans are
generally
commercial loans such as working capital loans and equipment loans. The SBA
is
authorized to issue from time to time, through its fiscal and transfer
agent,
SBA-guaranteed participation certificates evidencing fractional
undivided
interests in pools of these SBA-guaranteed portions of loans made by
private
lenders. The SBA's guarantee of the certificates, and its guarantee of a
portion
of the underlying loan, are backed by the full faith and credit of the
United
States.
U.S. GOVERNMENT SECURITIES
Securities issued or guaranteed by the United States government or one of
its
agencies, authorities or instrumentalities ("U.S. government securities")
in
which the Fund may invest include debt obligations of varying maturities
issued
by the United States Treasury or issued or guaranteed by an agency
or
instrumentality of the United States government, including the FHA, Farmers
Home
Administration, Export-Import Bank of the United States, SBA, GNMA,
General
Services Administration, Central Bank for Cooperatives, Federal Farm
Credit
Banks, Federal Home Loan Banks, FHLMC, Federal Intermediate Credit
Banks,
Federal Land Banks, FNMA, Maritime Administration, Tennessee Valley
Authority,
District of Columbia Armory Board, Student Loan Marketing Association
and
Resolution Trust Company. Direct obligations of the United States
Treasury
include a variety of securities that differ in their interest rates,
maturities
and dates of issuance. Because the United States government is not obligated
by
law to provide support to an instrumentality that it sponsors, the Fund will
not
invest in obligations issued by an instrumentality of the United
States
government unless BlackRock determines that the instrumentality's credit
risk
does not make its securities unsuitable for investment by the Fund.
ZERO COUPON TREASURY SECURITIES
The Fund may purchase "zero coupon" U.S. Treasury securities, which are
U.S.
Treasury bills, notes and bonds that have been stripped of their
unmatured
interest coupons and receipts or that are certificates representing interests
in
the stripped debt obligations and coupons. Zero coupon securities are
purchased
at a discount from their face amount giving the purchaser the right to
receive
their full value at maturity. A zero
7
<PAGE>
coupon security pays no interest to its holder during its life. Its value to
an
investor consists of the difference between its face value at the time
of
maturity and the price for which it was acquired, which is generally an
amount
significantly less than its face value (sometimes referred to as a
"deep
discount" price).
The interest rate on zero coupon securities is automatically compounded
and
paid out at maturity. Although compounding at a constant rate eliminates
the
risk of receiving lower yields upon reinvestment of interest if
prevailing
interest rates decline, the owner of a zero coupon security will be unable
to
participate in higher yields upon reinvestment of interest received
if
prevailing interest rates rise. For this reason, zero coupon securities
are
subject to substantially greater market price fluctuations during periods
of
changing prevailing interest rates than are comparable debt securities that
make
current distributions of interest. Current Federal tax law requires that
a
holder (such as the Fund) of a zero coupon security accrue a portion of
the
discount at which the security was purchased as income each year even though
the
holder receives no interest payments in cash on the security during the year.
Currently, the only U.S. Treasury security issued without coupons is the
U.S.
Treasury bill. A number of banks and brokerage firms, however, have
separated
(stripped) the principal portions from the coupon portions of U.S.
Treasury
bonds and notes and have sold them separately in the form of receipts
or
certificates representing undivided interests in these instruments.
These
instruments are generally held by a bank in a custodial or trust account.
ILLIQUID SECURITIES
The Fund may not invest more than 15% of its net assets in repurchase
agreements
that have a maturity of longer than seven days or in other illiquid
securities,
including securities that are illiquid by virtue of the absence of a
readily
available market or legal or contractual restrictions on resale.
Illiquid
securities have historically included securities subject to contractual or
legal
restrictions on resale because they have not been registered under
the
Securities Act of 1933, as amended (the "1933 Act"), securities that
are
otherwise not readily marketable and repurchase agreements having a maturity
of
longer than seven days. Securities that have not been registered under the
1933
Act are typically referred to as "private placements" or restricted
securities
and are purchased directly from the issuer or in the secondary market.
Mutual
funds do not typically hold a significant amount of these restricted or
other
illiquid securities because of the potential for delays on resale
and
uncertainty in valuation. Limitations on resale may have an adverse effect
on
the marketability of portfolio securities and a mutual fund might be unable
to
dispose of restricted or other illiquid securities promptly or at
reasonable
prices and might thereby experience difficulty satisfying redemptions
within
seven days. A mutual fund might also have to register restricted securities
in
order to dispose of them, resulting in additional expense and delay.
Adverse
market conditions could impede such a public offering of securities.
In recent years a large institutional market has developed for
certain
securities that are not registered under the 1933 Act, including
repurchase
agreements, commercial paper, foreign securities, municipal securities
and
corporate bonds and notes. Institutional investors depend on an
efficient
institutional market in which the unregistered security can be readily resold
or
on an issuer's ability to honor a demand for repayment. That contractual
or
legal restrictions on resale apply to the general public or to
certain
institutions may not be indicative of the liquidity of such investments.
8
<PAGE>
The SEC has adopted Rule 144A under the 1933 Act, which allows for a
broader
institutional trading market for securities otherwise subject to restriction
on
resale to the general public. Rule 144A sets out a "safe harbor" from
the
registration requirements of the 1933 Act for resales of certain securities
to
qualified institutional buyers.
Restricted securities issued pursuant to Rule 144A under the 1933 Act are
not
deemed to be illiquid. BlackRock will monitor the liquidity of these
restricted
securities subject to the supervision of SBSA and the Board of Trustees.
In
assessing the liquidity of a security, BlackRock will consider, among
other
things, the following factors: (a) the frequency of trades and quotes for
the
security; (b) the number of dealers wishing to purchase or sell the security
and
the number of other potential purchasers; (c) dealer undertakings to make
a
market in the security and (d) the nature of the security and the nature of
the
marketplace trades (for example, the time needed to dispose of the security,
the
method of soliciting offers and the mechanics of the transfer).
Repurchase
agreements subject to demand are deemed to have a maturity equal to the
notice
period.
REPURCHASE AGREEMENTS
The Fund may engage in repurchase agreement transactions with member banks
of
the Federal Reserve System and with certain dealers listed 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 and date. 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. Repurchase agreements could involve certain risks in
the
event of default or insolvency of the other party, including possible delays
or
restrictions upon the Fund's ability to dispose of the underlying securities.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
When the Fund engages in when-issued or delayed delivery
securities
transactions, it will rely on the other party 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.
LENDING PORTFOLIO SECURITIES
The Fund may lend portfolio securities to brokers, dealers and other
financial
organizations. These loans, if and when made, may not exceed 30% of the value
of
the Fund's total assets. The Fund will not lend securities to Smith Barney,
the
Fund's distributor, unless the Fund has applied for and received
specific
authority to do so from the SEC. The Fund's loans of securities will
be
collateralized by cash, letters of credit or U.S. government securities.
The
cash or instruments collateralizing the Fund's loans of securities will
be
maintained at all times in a segregated account with Boston Safe, the
Fund's
custodian, in an amount at least equal to the current market value of the
loaned
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 is acting as
a
"finder."
By lending its portfolio securities, the Fund can increase its income
by
continuing to receive interest on the loaned securities as well as by
either
investing the cash collateral in short-term instruments or obtaining yield
in
the form of interest paid by the borrower when U.S. government securities
are
used as collateral. The Fund will comply with the following conditions
whenever
it loans securities: (a) the Fund must receive at least 100% cash collateral
or
equivalent securities from the borrower; (b) the borrower must increase
the
9
<PAGE>
collateral whenever the market value of the securities loaned rises above
the
level of the collateral; (c) the Fund must be able to terminate the loan at
any
time; (d) 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; (e) the Fund may pay only reasonable custodian fees
in
connection with the loan; and (f) 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 Trustees
must
terminate the loan and regain the right to vote the securities.
PORTFOLIO STRATEGIES INVOLVING INTEREST RATE TRANSACTIONS, OPTIONS AND FUTURES
The Fund may seek to increase its return through the use of covered options
on
portfolio securities and to hedge its portfolio against movements in
interest
rates by means of other portfolio strategies. The Fund has authority to
write
(that is, sell) covered call and put options on its portfolio
securities,
purchase and sell call and put options on securities and engage in
transactions
in interest rate swaps, caps and floors, financial futures contracts,
and
related options on those contracts. Each of these portfolio strategies
is
described in the Prospectus. Although these strategies entail risks
(as
discussed in the Prospectus and below), BlackRock believes that, because
the
Fund will (a) write only covered options and (b) engage in other
transactions
only for hedging purposes, the strategies should not subject the Fund to
the
risks frequently associated with the speculative use of the strategies.
While
the Fund's use of hedging strategies is intended to reduce the volatility of
the
net asset value of Fund shares, the Fund's net asset value will fluctuate.
The
Fund is not obligated to use any of the listed strategies at any particular
time
or under any particular economic condition, and there is no assurance that
these
strategies will be effective. The following is further information relating
to
certain portfolio strategies the Fund may utilize.
INTEREST RATE HEDGING TRANSACTIONS AND ASSOCIATED RISK FACTORS. The
Fund
may hedge all or a portion of its portfolio against fluctuations in
interest
rates by entering into interest rate transactions. The Fund bears the risk of
an
imperfect correlation between the index used in the hedging transaction and
that
pertaining to the securities that are the subject of the hedging transaction.
The Fund expects to enter into interest rate transactions primarily to
hedge
its portfolio of Adjustable Rate Securities against fluctuations in
interest
rates. Typically, the parties with which the Fund will enter into interest
rate
transactions will be brokers, dealers or other financial institutions
typically
called "counter-parties." Certain Federal income tax requirements may,
however,
limit the Fund's ability to engage in certain interest rate transactions.
Gains
from transactions in interest rate swaps distributed to shareholders of the
Fund
will be taxable as ordinary income or, in certain circumstances, as long-
term
capital gains to the shareholders.
The purchase of an interest rate cap entitles the purchaser, to the
extent
that a specified index exceeds a predetermined rate, to receive payments
of
interest on a notional principal amount from the party selling the cap.
The
purchase of an interest rate cap therefore hedges against an increase
in
interest rates above the cap on an Adjustable Rate Security held by the
Fund.
Thus, for example, in the case of an Adjustable Rate Security indexed to
the
COFI, if the COFI increases above the rate paid on the security,
the
counter-party will pay the differential to the Fund. The opposite is true in
the
case of an interest rate floor; it hedges against a decrease in the index
rate
below any floor on the Adjustable Rate Security.
Interest rate swap transactions involve the exchange by the Fund with
another
party of their respective commitments to pay or receive interest, such as
an
exchange of fixed rate payments for floating rate
10
<PAGE>
payments. If the Fund were to hold an MBS with an interest rate that is
reset
only once each year, for example, it could swap the right to receive interest
at
the fixed rate for the right to receive interest at a rate that is reset
every
week. This swap would enable the Fund to offset a decline in the value of
the
MBS due to rising interest rates, but would also limit its ability to
benefit
from falling interest rates. Conversely, if the Fund were to hold an MBS with
an
interest rate that is reset every week and it desired to lock in what
it
believed to be a high interest rate for one year, it could swap the right
to
receive interest at this variable weekly rate for the right to receive
interest
at a rate that is fixed for one year. This type of a swap would protect the
Fund
from a reduction in yield due to falling interest rates, but would preclude
it
from taking full advantage of rising interest rates.
The Fund will enter into interest rate swap transactions on a net basis;
that
is, the two payment streams are netted out, with the Fund receiving or
paying
only the net amount of the two payments. Inasmuch as these transactions will
be
entered into for good faith hedging purposes, BlackRock believes that
the
obligations should not be deemed to constitute senior securities and, thus,
the
Fund will not treat them as being subject to its borrowing restrictions. The
net
amount of the excess, if any, of the Fund's obligations over its
entitlements
with respect to each interest rate swap will be accrued daily, and an amount
of
cash, U.S. government securities or other liquid high grade debt
obligations
having an aggregate net asset value at least equal to the accrued excess will
be
maintained by the Fund in a segregated account with Boston Safe. The Fund
will
not enter into any interest rate swap transaction unless the credit quality
of
the unsecured senior debt or the claims-paying ability of the other party to
the
transaction is rated in one of the highest two rating categories by at least
one
nationally-recognized statistical rating organization or is believed
by
BlackRock to be equivalent to that rating. If the other party to the
transaction
defaults, the Fund will have contractual remedies pursuant to the
agreements
related to the transaction. The swap market has grown substantially in
recent
years with a large number of banks and investment banking firms acting both
as
principals and as agents utilizing standardized swap documentation. As a
result,
the swap market has become relatively liquid in comparison with other
similar
instruments traded in the interbank market.
The use of interest rate swaps is a highly specialized activity that
involves
investment techniques and risks different from those associated with
ordinary
portfolio securities transactions. If BlackRock is incorrect in its forecasts
of
market values, interest rates and other applicable factors, the
investment
performance of the Fund would be lower than it would have been if interest
rate
swaps were not used.
Interest rate swap transactions do not involve the delivery of securities
or
other underlying assets or principal. As a result, the risk of loss with
respect
to interest rate swaps is limited to the net amount of interest payments
that
the Fund would be contractually obligated to make. If the MBS or other
security
underlying an interest rate swap were prepaid and the Fund continued to
be
obligated to make payments to the other party to the swap, the Fund would
have
to make the payments from another source. If the other party to an interest
rate
swap were to default, the Fund's risk of loss would consist of the net amount
of
interest payments that the Fund contractually was entitled to receive.
Since
interest rate transactions are individually negotiated, BlackRock expects
to
achieve an acceptable degree of correlation between the Fund's rights to
receive
interest on MBSs and its rights and obligations to receive and pay
interest
pursuant to interest rate swaps.
WRITING COVERED OPTIONS. The Fund is authorized to write (that is,
sell)
covered call options on the securities in which it may invest and to enter
into
closing purchase transactions with respect to certain of these options.
A
covered call option is an option pursuant to which the Fund, in return for
a
premium, gives
11
<PAGE>
another party a right to buy specified securities owned by the Fund at
a
specified future date and price set at the time of the contract. The
principal
reason for writing call options is to attempt to realize, through the receipt
of
premiums, a greater return than would be realized on the securities alone.
By
writing covered call options, the Fund gives up the opportunity, while
the
option is in effect, to profit from any price increase in the
underlying
security above the option exercise price. In addition, the Fund's ability
to
sell the underlying security will be limited while the option is in
effect
unless the Fund effects a closing purchase transaction. A closing
purchase
transaction cancels out the Fund's position as the writer of an option by
means
of an offsetting purchase of an identical option prior to the expiration of
the
option it has written. Covered call options serve as a partial hedge against
the
price of the underlying security declining.
The writer of a covered call option has no control over when it may
be
required to sell its securities since it may be assigned an exercise notice
at
any time prior to the termination of its obligation as a writer. If an
option
expires unexercised, the writer realizes a gain in the amount of the
premium.
Such a gain may be offset by a decline in the market value of the
underlying
security during the option period. If a call option is exercised, the
writer
realizes a gain or loss from the sale of the underlying security.
The Fund may write put options that give the holder of the option the
right
to sell the underlying security to the Fund at the stated exercise price.
The
Fund will receive a premium for writing a put option, which increases the
Fund's
return. The Fund will write only covered put options, which means that so
long
as the Fund is obligated as the writer of the option it will have placed
and
maintained cash, U.S. government securities or other high grade liquid
debt
obligations with Boston Safe with a value equal to or greater than the
exercise
price of the underlying securities. By writing a put, the Fund will be
obligated
to purchase the underlying security at a price that may be higher than
the
market value of that security at the time of exercise for as long as the
option
is outstanding. The Fund may engage in closing transactions to terminate
put
options that it has written.
Options purchased or sold by the Fund may include options issued by
The
Options Clearing Corporation (the "Clearing Corporation"), which options
are
currently traded on the Chicago Board Options Exchange, American Stock
Exchange,
Philadelphia Stock Exchange, Pacific Stock Exchange, New York Stock
Exchange,
Inc. ("NYSE") or Midwest Stock Exchange. An option position may be closed
out
only on an exchange that provides a secondary market for an option of the
same
series. If a secondary market does not exist, it might not be possible to
effect
closing transactions in particular options, with the result, in the case of
a
covered call option, that the Fund would not be able to sell the
underlying
security until the option expires or the Fund delivered the underlying
security
upon exercise. Reasons for the absence of a liquid secondary market on
an
exchange include the following: (a) insufficient trading interest in
certain
options may exist; (b) restrictions may be imposed by the exchange on
opening
transactions or closing transactions or both; (c) trading halts, suspensions
or
other restrictions may be imposed with respect to particular classes or
series
of options or underlying securities; (d) unusual or unforeseen circumstances
may
interrupt normal operations on the exchange; (e) the facilities of the
exchange
or the Clearing Corporation may not at all times be adequate to handle
current
trading volume; or (f) the exchange could, for economic or other reasons,
decide
to or be compelled at some future date to discontinue the trading of options
(or
a particular class or series of options), in which event the secondary market
on
the exchange (or in that class or series of options) would cease to
exist,
although outstanding options on the exchange that had been issued by
the
Clearing Corporation as a result of trades on the exchange would continue to
be
exercisable in accordance with their terms.
12
<PAGE>
The Fund may enter into over-the-counter option transactions ("OTC
options"),
which are two-party contracts with prices and terms negotiated between the
buyer
and seller. In the absence of a change of position of the staff of the SEC,
the
Fund will treat OTC options and the assets used as cover for written OTC
options
as illiquid securities. If an OTC option is sold by the Fund to a primary
U.S.
Government securities dealer recognized by the Federal Reserve Bank of New
York
and the Fund has the conditional contractual right to repurchase the OTC
option
from the dealer at the predetermined price, then the Fund will treat as
illiquid
the amount of the underlying securities as is equal to the repurchase price
less
the amount by which the option is "in-the-money" (that is, the current
market
value of the underlying security minus the option's strike price).
The
repurchase price with the primary dealers is typically a formula price that
is
generally based on a multiple of the premium received for the option, plus
the
amount by which the option is "in-the-money."
PURCHASING OPTIONS. The Fund may purchase put options to hedge against
a
decline in the market value of its holdings. By buying a put, the Fund has
a
right to sell the underlying security at the exercise price, thus limiting
the
Fund's risk of loss through a decline in the market value of the security
until
the put option expires. The amount of any appreciation in the value of
the
underlying security will be offset partially by the amount of the premium
paid
for the put option and any related transaction costs. Prior to its expiration,
a
put option may be sold in a closing sale transaction and profit or loss from
the
sale will depend on whether the amount received is more or less than the
premium
paid for the put option plus the related transaction costs. A closing
sale
transaction cancels out the Fund's expiration of the option it has purchased.
In
certain circumstances, the Fund may purchase call options on securities held
in
its portfolio on which it has written call options or that it intends
to
purchase. The Fund may purchase either exchange-traded or OTC options.
FUTURES AND FINANCIAL FUTURES. As described in the Prospectus, the Fund
is
authorized to engage in transactions in financial futures contracts and
related
options on these futures contracts. A futures contract is an agreement
between
two parties to buy and sell a security or, in the case of an index-based
futures
contract, to make and accept a cash settlement for a set price on a future
date.
The Fund may assume both "long" and "short" positions with respect to
futures
contracts. A long position involves entering into a futures contract to buy
a
security, whereas a short position involves entering into a futures contract
to
sell a security. A majority of transactions in futures contracts, however,
do
not result in the actual delivery of the underlying instrument or
cash
settlement, but are settled through liquidation, that is, by entering into
an
offsetting transaction. Futures contracts have been designed by boards of
trade
that have been designated "contracts markets" by the Commodity Futures
Trading
Commission.
The purchase or sale of a futures contract, unlike the purchase or sale of
a
security, contemplates no price or premium being paid or received. Instead,
an
amount of cash or securities acceptable to the broker and the relevant
contract
market, which varies, but is generally about 5% of the contract amount, must
be
deposited with the broker. This amount is known as "initial margin"
and
represents a "good faith" deposit
13
<PAGE>
assuring the performance of both the purchaser and seller under the
futures
contract. Subsequent payments to and from the borrower, called
"variation
margin," are required to be made daily as the price of the futures
contract
fluctuates making the long and short positions in the futures contracts more
or
less valuable, a process known as "marking to the market." At any time prior
to
the settlement date of the futures contract, the position may be closed out
by
taking an opposite position that will operate to terminate the position in
the
futures contract. A final determination of variation margin is then
made,
additional cash is required to be paid or released by the broker and
the
purchaser realizes a loss or gain. In addition, a nominal commission is paid
on
each completed sale transaction.
ADDITIONAL RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS. Utilization
of
futures transactions to hedge the Fund's portfolio will involve the risk
of
imperfect correlation in movements in the prices of futures contracts
and
movements in the price of the security that is the subject of the hedge. If
the
price of the futures contract moves more or less than the price of the
security,
the Fund will experience a gain or loss that would not be completely offset
by
movements in the price of the security that is the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can
only
be terminated by entering into a closing purchase or sale transaction. Such
a
transaction requires a secondary market on an exchange for call or put
options
of the same series. The Fund will enter into an option or futures transaction
on
an exchange only if a liquid secondary market appears to exist for the
options
or futures. No assurance can be given that a liquid secondary market will
exist
for any particular call or put option or futures contract at any specific
time.
Thus, it may not be possible to close an option or futures position. In the
case
of a futures position or an option on a futures position written by the Fund,
in
the event of adverse price movements, the Fund would continue to be required
to
make daily cash payments of variation margin. In such situations, if the
Fund
has insufficient cash, it may have to sell portfolio securities to meet
daily
variation margin requirements at a time when it may be disadvantageous to do
so.
In addition, the Fund may be required to take or make delivery of the
currency
underlying futures contracts it holds. The inability to close options
and
futures positions also could have an adverse effect on the Fund's ability
to
hedge effectively its portfolio. The risk also exists of a loss by the Fund
of
margin deposits in the event of bankruptcy of a broker with which the Fund
has
an open position in a futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
have
generally established limitations governing the maximum number of call or
put
options on the same underlying currency (whether or not covered) that may
be
written by a single investor, whether acting alone or in concert with
others
(regardless of whether the options are written on the same or
different
exchanges or are held or written on one or more accounts or through one or
more
brokers). "Trading limits" are imposed on the maximum number of contracts
that
any person may trade on a particular trading day. An exchange may order
the
liquidation of positions found to be in violation of these limits and it
may
impose other sanctions or restrictions. BlackRock does not believe that
these
trading and position limits will have any adverse effect on the
portfolio
strategies for hedging the Fund's portfolio.
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc. ("Moody's")
and
Standard & Poor's Corporation ("S&P") represent the opinions of those
agencies
as to the quality of debt obligations that they rate. These ratings,
however,
are relative and subjective, are not absolute standards of quality and do
not
evaluate the market risk of securities. An issue of debt obligations
may,
subsequent to its purchase by the Fund, cease to
14
<PAGE>
be rated or its ratings may be reduced below the minimum required for
purchase
by the Fund. Neither event will require the sale of the debt obligation by
the
Fund, but BlackRock will consider the event in its determination of whether
the
Fund should continue to hold the obligation. In addition, to the extent that
the
ratings change as a result of changes in rating organizations or their
rating
systems or as a result of a corporate restructuring of Moody's and
S&P,
BlackRock will attempt to use comparable ratings as standards for the
Fund's
investments.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 15 below have been adopted by
the
Fund as fundamental policies. Under the the 1940 Act, a fundamental policy
may
not be changed without the vote of a majority of the outstanding
voting
securities (as defined in the 1940 Act) of the Fund. Investment restrictions
16
through 18 may be changed by a vote of a majority of the Fund's Board
of
Trustees at any time.
Under its investment restrictions:
1. The Fund will not purchase securities (other than U.S.
government
securities) of any issuer if, as a result of the purchase, more than
5%
of the value of the Fund's total assets would be invested in the
securities
of the issuer, except that up to 25% of the value of the Fund's total
assets
may be invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of the voting securities of
any
one issuer, except that this limitation is not applicable to the
Fund's
investments in U.S. government securities.
3. The Fund will not issue senior securities, borrow money or pledge
its
assets, except that the Fund may borrow from banks or through
reverse
repurchase agreements or dollar rolls in an amount equal to up to 33 1/3%
of
the value of its total assets (calculated when the loan is made)
for
temporary, extraordinary or emergency purposes and to take advantage
of
investment opportunities and may pledge up to 33 1/3% of the value of
its
total assets to secure those borrowings.
4. The Fund will not make loans, except through (a) repurchase
agreements
and (b) loans of portfolio securities limited to 30% of the value of
the
Fund's total assets.
5. The Fund will not invest more than 25% of the value of its total
assets
in securities of issuers in any one industry, except that this
limitation
is not applicable to the Fund's investment in U.S. government securities.
6. The Fund will not purchase securities, other than MBSs, ABSs or
U.S.
government securities of any issuer having a record, together
with
predecessors, of less than three years of continuous operations
if,
immediately after the purchase, more than 5% of the Fund's total assets
would
be invested in the securities.
7. The Fund will not buy or sell real estate or interests in real
estate,
except that the Fund may purchase and sell MBSs,
securities
collateralized by mortgages, securities that are secured by real
estate,
securities of companies that invest or deal in real estate and
publicly
traded securities of real estate investment trusts.
8. The Fund may not purchase interests in real estate limited
partnerships
that are not readily marketable.
15
<PAGE>
9. The Fund will not invest in interests in oil, gas or other
mineral
exploration or development programs, except that the Fund may invest
in
the securities of companies that invest in or sponsor those programs.
10. The Fund will not buy or sell commodities or commodity contracts,
except
that the Fund may purchase and sell financial futures contracts
and
options on financial futures contracts.
11. The Fund will not purchase securities on margin, except that the Fund
may
obtain any short-term credits necessary for the clearance of
purchases
and sales of securities and except that the Fund may pay initial or
variation
margin in connection with options or futures contracts.
12. The Fund will not make short sales of securities, or maintain a
short
position if, when added together, more than 25% of the value of
the
Fund's net assets would be (a) deposited as collateral for the obligation
to
replace securities borrowed to effect the short sales and (b) allocated
to
segregated accounts in connection with the short sales. Short
sales
"against-the-box" are not subject to this restriction.
13. The Fund will not pledge, hypothecate, mortgage or otherwise encumber
its
assets, except to secure permitted borrowings.
14. The Fund will not act as an underwriter of securities, except that
the
Fund may acquire securities under circumstances in which, if
the
securities were sold, the Fund could be deemed to be an underwriter
for
purposes of the 1933 Act.
15. The Fund will not write or purchase puts, calls, straddles, spreads
or
combinations of those transactions, except as consistent with the
Fund's
investment objectives and policies as described in the Prospectus and
this
Statement of Additional Information.
16. The Fund will not purchase any security if, as a result (unless
the
security is acquired pursuant to a plan of reorganization or an offer
of
exchange), the Fund would own any securities of an open-end
investment
company or more than 3% of the total outstanding voting stock of
any
closed-end investment company, or more than 5% of the value of the
Fund's
total assets would be invested in securities of any one or more closed-
end
investment companies.
17. The Fund will not make investments for the purpose of exercising
control
or management.
18. The Fund will not purchase or retain securities of any issuer if, to
the
knowledge of the Fund, any of the Fund's officers or Trustees or
any
officer or director of SBSA, BlackRock, SBA or Boston Advisors
individually
owns more than 1/2 of 1% of the outstanding securities of the issuer
and
together they own beneficially more than 5% of the securities.
The Fund may make commitments more restrictive than the restrictions
listed
above to enable the sale of shares of the Fund in certain states. Should
the
Fund determine that a commitment is no longer in the best interests of
its
shareholders, the Fund will revoke the commitment by terminating the sale of
its
shares in the state involved. The percentage limitations contained in
the
restrictions listed above apply at the time of purchases of securities.
16
<PAGE>
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund will be made by
BlackRock,
subject to the overall review of the Fund's Board of Trustees. Allocation
of
transactions on behalf of the Fund, including their frequency, to
various
dealers will be determined by BlackRock in its best judgment and in a
manner
deemed fair and reasonable to the Fund's shareholders. The
primary
considerations of BlackRock in allocating transactions will be 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
BlackRock 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 SBSA or BlackRock, and the fees of SBSA and BlackRock are
not
reduced as a consequence of their receipt of the supplemental information.
The
information may be useful to SBSA and BlackRock 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 SBSA and BlackRock
in
carrying out their obligations to the Fund.
For the fiscal period from June 22, 1992 (commencement of operations)
through
May 31, 1993, the Fund incurred total brokerage commissions of $29,330, none
of
which was paid to Shearson Lehman Brothers, the Fund's distributor prior
to
Smith Barney. For the fiscal year ended May 31, 1994, the Fund incurred
$135,457
in total brokerage commissions of which Shearson Lehman Brothers and
Smith
Barney were paid $61,028, representing 45% of the total brokerage
commissions
paid by the Fund, and effected 45% of the total dollar amount of the
Fund's
transactions involving payment of brokerage commissions during this period.
The Fund will not purchase U.S. government securities during the existence
of
any underwriting or selling group relating to the securities, of which
Smith
Barney is a member, except to the extent permitted by rules or
exemptions
adopted by the SEC or interpretations of the staff of the SEC. Under
certain
circumstances, the Fund may be at a disadvantage because of this limitation
in
comparison to other funds that have similar investment objectives but that
are
not subject to a similar limitation.
PORTFOLIO TURNOVER
Under certain market conditions, if the Fund is engaged in options
transactions
it may experience increased portfolio turnover as a result of its
investment
strategies. For instance, the exercise of a substantial number of
options
written by the Fund (due to appreciation of the underlying security in the
case
of call options on securities or depreciation of the underlying security in
the
case of put options on securities) could result in a turnover rate in excess
of
100%. A portfolio turnover rate of 100% also would occur, for example, if all
of
the Fund's securities that are included in the computation of turnover
were
replaced once during a period of one year. The Fund's portfolio turnover rate
is
calculated by dividing the lesser of purchases or sales of its
portfolio
securities for one year by the monthly average value of the
portfolio
securities. Securities or options with remaining maturities of one year or
less
on the date of acquisition are excluded from the calculation.
For the fiscal period from June 22, 1992 (commencement of operations)
through
May 31, 1993, and for the fiscal year ended May 31, 1994, the Fund's
portfolio
turnover rates were 236% and 525%, respectively.
17
<PAGE>
PURCHASE OF SHARES
DETERMINATION OF PUBLIC OFFERING PRICE
Shares of the Fund are offered to the public on a continuous basis. The
public
offering price per Class A share of the Fund is equal to the net asset value
per
share at the time of purchase. Class B shares are offered for exchange
with
Class B shares of other funds in the Smith Barney Shearson Group of Funds.
Class
B shares are subject to the contingent deferred sales charge ("CDSC"), if
any,
of the shares with which the exchange is made.
REDEMPTION OF SHARES
Detailed information on how to redeem shares of the Fund is included in
the
Prospectus. The right of redemption of shares of the Fund may be suspended,
or
the date of payment postponed (a) for any periods during which the NYSE
is
closed (other than for customary weekend and holiday closings), (b) when
trading
in the markets the Fund normally utilizes is restricted, or an emergency,
as
defined by the rules and regulations of the SEC, exists making disposal of
the
Fund's investments or determination of net asset value not
reasonably
practicable or (c) for any other periods as the SEC by order may permit for
the
protection of the Fund's shareholders.
DISTRIBUTIONS IN KIND
If the Fund's Board of Trustees determines that it could be detrimental to
the
best interests of the remaining shareholders of the Fund to make a
redemption
payment wholly in cash, the Fund may pay, in accordance with rules adopted
by
the SEC, any portion of a redemption in excess of the lesser of $250,000 or
1%
of the Fund's net assets by a distribution in kind of portfolio securities
in
lieu of cash. Portfolio securities issued in a distribution in kind will
be
readily marketable, although shareholders receiving distributions in kind
may
incur brokerage commissions when subsequently disposing of these securities.
AUTOMATIC CASH WITHDRAWAL PLAN
An automatic cash withdrawal plan (the "Withdrawal Plan") is available to
a
shareholder of the Fund who owns shares with a value of at least $10,000
($5,000
for retirement plan accounts) and who wishes to receive specific amounts of
cash
periodically. Withdrawals of at least $50 monthly may be made under
the
Withdrawal Plan by redeeming as many shares of the Fund as may be necessary
to
cover the stipulated withdrawal payment. Any applicable CDSC will not be
waived
on amounts withdrawn by shareholders that exceed 2% per month of the value of
a
shareholder's shares at the time the Withdrawal Plan commences. To the
extent
that withdrawals exceed dividends, distributions and appreciation of
a
shareholder's investment in the Fund, the shareholder will experience
a
reduction in the value of his or her investment and continued
withdrawal
payments will reduce the shareholder's investment and may ultimately exhaust
it.
Withdrawal payments should not be considered as income from investment in
the
Fund. In addition, because making an additional investment in the Fund at
the
same time a shareholder is participating in the Withdrawal Plan generally
would
not be advantageous to the shareholder, purchases by a participating
shareholder
of additional shares in the Fund in amounts less than $5,000 will not
ordinarily
be permitted.
A shareholder of the Fund who wishes to participate in the Withdrawal
Plan
and who holds his or her shares of the Fund in certificate form must deposit
the
certificates with TSSG, as agent for Withdrawal Plan
18
<PAGE>
participants. All dividends and distributions on shares in the Withdrawal
Plan
are reinvested automatically at net asset value in additional shares of
the
Fund. All applications for participation in the Withdrawal Plan must be
received
by TSSG as plan agent no later than the eighth day of a month to
ensure
eligibility for participation beginning with that month's withdrawal.
The
Withdrawal Plan will not be carried over on exchanges between funds or
classes
of the Fund ("Classes"). A new Withdrawal Plan application is required
to
establish the Withdrawal Plan in the new fund or Class. For
additional
information regarding the Withdrawal Plan, investors should contact their
Smith
Barney Financial Consultants.
DISTRIBUTOR
Smith Barney serves as the Fund's distributor on a best efforts basis
pursuant
to a written agreement (the "Distribution Agreement") dated July 30, 1993.
For
the period from November 6, 1992 through May 31, 1993 and the fiscal year
ended
May 31, 1994, Shearson Lehman Brothers and Smith Barney received $958
and
$21,639, respectively, in CDSC on the redemption of the Fund's Class B
shares,
and did not reallow any portion thereof to dealers.
Smith Barney forwards investors' funds for the purchase of shares
five
business days after the placement of purchase orders (the "settlement
date").
When payment is made by the investor before settlement date, unless
otherwise
directed by the investor, the funds will be held as a free credit balance in
the
investor's brokerage account and Smith Barney may benefit from the temporary
use
of the funds. The investor may designate another use for the funds prior
to
settlement date, such as an investment in a money market fund (other than
Smith
Barney Shearson Money Market Fund) in the Smith Barney Shearson Group of
Funds.
If the investor instructs Smith Barney to invest the funds in a money
market
fund in the Smith Barney Shearson Group of Funds, the amount of the
investment
will be included as part of the average daily net assets of both the Fund
and
the money market fund, and affiliates of Smith Barney which serve the funds
in
an investment advisory capacity will benefit from the fact that they
are
receiving investment management fees from both such investment
companies,
computed on the basis of their average daily net assets. The Fund's Board
of
Trustees has been advised of the benefits to Smith Barney resulting
from
five-day settlement procedures and will take such benefits into
consideration
when reviewing the Advisory and Distribution Agreements for continuance.
DISTRIBUTION ARRANGEMENTS
Shares of the Fund are distributed on a best efforts basis by Smith Barney
as
exclusive sales agent of the Fund pursuant to the Distribution Agreement.
To
compensate Smith Barney for the services it provides and for the expense
it
bears under the Distribution Agreement, the Fund has adopted a services
and
distribution plan (the "Plan") pursuant to Rule 12b-1 under the 1940 Act.
Under
the Plan, the Fund pays Smith Barney a service fee, accrued daily and
paid
monthly, calculated at the annual rate of .25% of the value of the
Fund's
average daily net assets attributable to Class A, Class B and Class D shares.
In
addition, Smith Barney is also paid an annual distribution fee with respect
to
Class A, Class B and Class D shares at the rate of .50% of the value of
the
average daily net assets attributable to each respective class of shares.
For
the fiscal period from June 22, 1992 (commencement of operations) through
May
31, 1993, the Fund incurred service fees of $434,859 and $1,672 for Class A
and
Class B shares, respectively. For the fiscal year ended May 31, 1994, the
Fund
incurred service fees of $935,890, $12,962 and $265 for Class A, Class B
and
Class D shares, respectively. For the fiscal period from June 22,
1992
(commencement of operations) through May 31,
19
<PAGE>
1993, the Fund incurred distribution fees of $869,718 and $3,319 for Class A
and
Class B shares, respectively. For the fiscal year ended May 31, 1994, the
Fund
incurred distribution fees of $1,871,783, $25,923 and $529 for Class A, Class
B
and Class D shares, respectively.
Under its terms, the Plan continues from year to year, provided
such
continuance is approved annually by vote of the Board of Trustees, including
a
majority of the Trustees who are not interested persons of the Fund and who
have
no direct or indirect financial interest in the operation of the Plan or in
the
Distribution Agreement (the "Independent Trustees"). The Plan may not be
amended
to increase the amount of the service and distribution fees without
shareholder
approval, and all material amendments of the Plan also must be approved by
the
Trustees and the Independent Trustees in the manner described above. The
Plan
may be terminated at any time with respect to a Class, without penalty, by
vote
of a majority of the Independent Trustees or by a vote of a majority of
the
outstanding voting securities of the Fund (as defined in the 1940 Act).
Pursuant
to the Plan, Smith Barney will provide the Board of Trustees with
periodic
reports of amounts expended under the Plan and the purpose for which
such
expenditures were made.
VALUATION OF SHARES
As noted in the Prospectus, the net asset value of shares of each Class will
not
be calculated on certain holidays. In carrying out valuation policies adopted
by
the Fund's Board of Trustees, SBA, as administrator, may consult with
an
independent pricing service (the "Pricing Service") retained by the Fund.
The
procedures of the Pricing Service are reviewed periodically by the officers
of
the Fund under the general supervision and responsibility of the Board
of
Trustees.
EXCHANGE PRIVILEGE
Class A, Class B and Class D shares of the Fund may be exchanged for shares
of
the respective Class of many of the funds in the Smith Barney Shearson Group
of
Funds, as indicated in the Prospectus, to the extent such shares are offered
for
sale in the shareholder's state of residence.
Except as noted below, shareholders of any fund in the Smith Barney
Shearson
Group of Funds may exchange all or part of their shares for shares of the
same
class of other funds in the Smith Barney Shearson Group of Funds, as listed
in
the Prospectus, on the basis of relative net asset value per share at the
time
of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may be
exchanged
for Class A shares of any of the other funds, and the sales
charge
differential, if any, will be applied. Class A shares of any fund may
be
exchanged without a sales charge for shares of the funds that are
offered
without a sales charge. Class A shares of any fund purchased without
a
sales charge may be exchanged for shares sold with a sales charge,
and
the appropriate sales charge differential will be applied.
B. Class A shares of any fund acquired by a previous exchange of
shares
purchased with a sales charge may be exchanged for Class A shares of
any
of the other funds, and the sales charge differential, if any, will
be
applied.
20
<PAGE>
C. Class B shares of any fund may be exchanged without a sales charge.
Class
B shares of the Fund exchanged for Class B shares of another fund will
be
subject to the higher applicable CDSC of the two funds and, for
purposes
of calculating CDSC rates and conversion periods, will be deemed to
have
been held since the date the shares being exchanged were purchased.
Dealers other than Smith Barney must notify TSSG of the investor's
prior
ownership of Class A shares of Smith Barney Shearson High Income Fund and
the
account number in order to accomplish an exchange of shares of Smith
Barney
Shearson High Income Fund under paragraph B above.
The exchange privilege enables shareholders to acquire shares of the
same
class in a fund with different investment objectives when they believe that
a
shift between funds is an appropriate investment decision. This privilege
is
available to shareholders resident in any state in which the fund shares
being
acquired may legally be sold. Prior to any exchange, the shareholder
should
obtain and review a copy of the current prospectus of each fund into which
an
exchange is being considered. Prospectuses may be obtained from any Smith
Barney
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents,
shares submitted for exchange are redeemed at the then-current net asset
value
and, subject to any applicable CDSC, the proceeds immediately invested, at
a
price as described above, in shares of the fund being acquired. Smith
Barney
reserves the right to reject any exchange request. The exchange privilege may
be
modified or terminated at any time after notice to shareholders.
PERFORMANCE DATA
From time to time, the Fund may quote the yield or total return of a Class
in
advertisements or in reports and other communications to shareholders. To
the
extent any advertisement or sales literature of the Fund describes the
expenses
or performance of a Class, it will also disclose such information for the
other
Classes.
YIELD
The 30-day yield figure of each Class described in the Prospectus is
calculated
according to a formula prescribed by the SEC, expressed as follows:
YIELD=2 [ (a-b +1)6-1]
---
cd
Where: a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
For the purpose of determining the interest earned (variable "a" in
the
formula) on debt obligations that were purchased by the Fund at a discount
or
premium, the formula generally calls for amortization of the discount
or
premium; the amortization schedule will be adjusted monthly to reflect
changes
in the market values of the debt obligations.
21
<PAGE>
The Fund's yield for the 30-day period ended May 31, 1994 was 3.88%,
3.84%
and 3.83% with respect to its Class A, Class B and Class D shares.
Investors should recognize that, in periods of declining interest
rates,
yield will tend to be somewhat higher than prevailing market rates and,
in
periods of rising interest rates, will tend to be somewhat lower. In
addition,
when interest rates are falling, monies received by the Fund from the
continuous
sale of its shares will likely be invested in instruments producing lower
yields
than the balance of its portfolio of securities, thereby reducing the
current
yield of the Classes. In periods of rising interest rates the opposite
result
can be expected to occur.
AVERAGE ANNUAL TOTAL RETURN
The "average annual total return" of a Class described in the Prospectus
is
computed according to a formula prescribed by the SEC, expressed as follows:
P(1 + T)n= ERV
Where: P = a hypothetical initial payment of $1,000.
T = average annual total return.
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5-or 10-year period at the end
of a 1-, 5- or 10-year period (or fractional portion
thereof),
assuming reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end
of the measuring period.
AGGREGATE TOTAL RETURN
The "aggregate total return" of a Class described in the Prospectus
represents
the cumulative change in the value of an investment in a Class for the
specified
period and is computed by the following formula:
ERV - P
-------
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000 investment
made at the beginning of a 1-, 5- or 10-year period at the
end
of a 1-, 5-or 10-year period (or fractional portion thereof),
assuming reinvestment of all dividends and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end
of the measuring period.
Net investment income changes in response to fluctuations in interest
rates
and the expenses of a Class. Consequently, the given performance
quotations
should not be considered as representative of the Class' performance for
any
specified period in the future.
The Fund's aggregate annual total returns were 3.89% and 2.05% for Class
A
shares and 2.56% and 2.05% for Class B shares for the fiscal period from
June
22, 1992 through May 31, 1993 and the fiscal year
22
<PAGE>
ended May 31, 1994, respectively. For the fiscal year ended May 31, 1994,
the
Fund's aggregate annual total return for Class D shares was 1.83%. Had
the
investment advisory, sub-investment advisory and administration fees not
been
partially waived, the aggregate total returns would have been 3.79% for Class
A
shares and 2.46% for Class B shares for the fiscal period from June 22,
1992
through May 31, 1993.
A Class' performance will vary from time to time depending upon
market
conditions, the composition of the Fund's portfolio and its operating
expenses
and the expenses attributable to a particular Class. Consequently, any
given
performance quotation should not be considered representative of a
Class'
performance for any specified period in the future. In addition,
because
performance will fluctuate, it may not provide a basis for comparing
an
investment in the Class with certain bank deposits or other investments that
pay
a fixed yield for a stated period of time. Investors comparing the
performance
of a Class with that of other mutual funds or classes of other mutual
funds
should give consideration to the quality and maturity of the
portfolio
securities of the funds or classes.
TAXES
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.
The Fund has qualified and will seek to qualify each year as a
"regulated
investment company" under the Internal Revenue Code of 1986, as
amended.
Provided the Fund (a) is a regulated investment company and (b) distributes
to
its shareholders at least 90% of its taxable net investment income
(including,
for this purpose, its net realized short-term capital gains), it will not
be
liable for Federal income taxes to the extent that its taxable net
investment
income and its net realized long-term and short-term capital gains, if any,
are
distributed to its shareholders.
As a general rule, the Fund's gain or loss on a sale or exchange of
an
investment will be a long-term capital gain or loss if the shareholder has
held
the investment for more than one year and will be a short-term capital gain
or
loss if the shareholder has held the investment for one year or less.
In
addition, as a general rule, a shareholder's gain or loss on a sale
or
redemption of shares of the Fund will be a long-term capital gain or loss if
the
shareholder has held his or her Fund 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 Fund shares
for
one year or less.
Shareholders of the Fund will receive, as more fully described in
the
Prospectus, an annual statement as to the income tax status of his or
her
dividends and distributions for the prior calendar year. Each shareholder
will
also receive, if appropriate, various written notices after the close of
the
Fund's prior taxable year as to the Federal income tax status of the Fund
during
the Fund's prior taxable year.
Investors considering buying shares of the Fund on or just prior to
the
record date for a taxable dividend or capital gain distribution should be
aware
that the amount of the forthcoming dividend or distribution payment will be
a
taxable dividend or distribution payment.
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
or she has provided a correct taxpayer identification number and that
the
shareholder is not subject to "backup withholding," then the shareholder may
be
subject to a 31% "backup withholding" tax with respect to (a) taxable
dividends
and distributions and (b) the proceeds of
23
<PAGE>
any redemptions of shares of the Fund. An individual's taxpayer
identification
number is his or her social security number. The backup withholding tax is
not
an additional tax and may be credited against a taxpayer's regular
Federal
income tax liability.
The discussion above is only a summary of certain tax
considerations
generally affecting the Fund and its shareholders, and is not intended to be
a
substitute for careful tax planning. Shareholders are urged to consult their
tax
advisors with specific reference to their own tax situations, including
their
state and local tax liabilities.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of TBC, is located at One Boston
Place,
Boston, Massachusetts 02108, and serves as the custodian of the Fund. The
assets
of the Fund are held under bank custodianship in accordance with the 1940
Act.
Under its custody agreement with the Fund, Boston Safe is authorized
to
establish separate accounts and appoint securities depositories
as
sub-custodians of assets owned by the Fund. For its custody services,
Boston
Safe receives monthly fees charged to the Fund based upon the month-
end,
aggregate net asset value of the Fund plus certain charges for
securities
transactions. Boston Safe is also reimbursed by the Fund for out-of-
pocket
expenses, including the costs of any sub-custodians.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and serves
as
the Fund's transfer agent. For its services as transfer agent, TSSG
receives
fees charged to the Fund at an annual rate based upon the number of
shareholder
accounts maintained for the Fund during the year. TSSG is also reimbursed by
the
Fund for out-of-pocket expenses.
ORGANIZATION OF THE FUND
The Fund was organized as an unincorporated business trust under the laws of
the
Commonwealth of Massachusetts pursuant to an Amended and Restated Master
Trust
Agreement dated November 5, 1992, as amended from time to time (the
"Trust
Agreement"). The Fund commenced operations on June 22, 1992, and on July
30,
1993 the Fund changed its name to Smith Barney Shearson Adjustable
Rate
Government Income Fund.
In the interest of economy and convenience, certificates representing
shares
in the Fund are not physically issued except upon specific request made by
a
shareholder to TSSG, the Fund's transfer agent. TSSG maintains a record of
each
shareholder's ownership of Fund shares. Shares do not have cumulative
voting
rights, which means that holders of more than 50% of the shares voting for
the
election of Trustees can elect all Trustees. Shares are transferable but have
no
preemptive, conversion or subscription rights.
Under Massachusetts law, shareholders could, under certain circumstances,
be
held personally liable for the obligations of the Fund. The Trust
Agreement
disclaims shareholder liability for acts or obligations of the Fund,
however,
and requires that notice of such disclaimer be given in each
agreement,
obligation or instrument entered into or executed by the Fund or a Trustee.
The
Trust Agreement provides for indemnification from the Fund for all losses
and
expenses of any shareholder held personally liable for the obligations of
the
Fund. Thus, the risk of a shareholder's incurring financial loss on account
of
shareholder liability is limited to circumstances in which the Fund itself
would
be unable to meet its obligations, a possibility which management of the
Fund
believes is remote. Upon payment of any liability incurred by the Fund,
a
24
<PAGE>
shareholder paying such liability will be entitled to reimbursement from
the
general assets of the Fund. The Trustees intend to conduct the operations of
the
Fund in such a way so as to avoid, as far as possible, ultimate liability of
the
shareholders for liabilities of the Fund.
FINANCIAL STATEMENTS
The Fund's Annual Report for the fiscal period ended May 31, 1994
accompanies
this Statement of Additional Information and is incorporated herein by
reference
in its entirety.
25
<PAGE>
[GRAPHIC]
SMALL BOX ABOVE FUND NAME
SHOWING AN EAGLE CENTERED
WITH THE AMERICAN FLAG
BEHIND IT.
1994 Smith Barney Shearson
ANNUAL ADJUSTABLE
REPORT RATE
GOVERNMENT
INCOME
FUND
.......................................
MAY 31, 1994
[LOGO]
<PAGE>
Adjustable Rate Government Income Fund
DEAR SHAREHOLDER:
We are pleased to present the Annual Report for the Smith
Barney Shearson Adjustable Rate Government Income Fund (the
"Fund") for the fiscal year ended May 31, 1994. The Fund is
an open-end bond fund whose investment objective is to seek high
current income and to limit the degree of fluctuation in its net
asset
value resulting from movements in interest rates by investing
primarily in a portfolio of adjustable rate mortgage-backed
securities
and U.S. government securities. The Fund is part of the Smith Barney
Shearson family of mutual funds and is managed by its investment
manager, Smith Barney Strategy Advisers Inc., and by its investment
sub-adviser, BlackRock Financial Management.
The Fund began operating on June 22, 1992 with an initial net asset
value for Class A shares of $10.00 per share. As of May 31, 1994,
the
net asset value for both Class A and Class B shares was $9.78 per
share. During the past year, the Fund's net asset value ranged from
$10.00 to $9.75 for both Class A and Class B shares. The Fund's net
asset value is calculated daily and reported for Class A shares in
the
mutual funds listing in national newspapers under the heading Smith
Barney Shearson Funds A as "AdjGvA".
THE FIXED-INCOME MARKETS
Declining U.S. interest rates dominated the market during 1993 as the U.S.
fixed
income markets presented a tremendous challenge to investors. Treasury yields
ended the year down over 100 basis points from the close of 1992 in part due
to
conflicting data regarding the economic recovery of the U.S. and due to
inflation continuing at low levels. However, as the economy showed clear signs
of improvement during the first half of 1994, the markets indicated that fears
of inflationary pressure were growing as both fixed-income and equity prices
declined. The Federal Reserve Board demonstrated its resolve to limit
inflation
with a series of "preemptive" measures. Four times between February and May,
the
central bank raised the federal funds rate -- the interest rate that banks
charge each other for overnight loans -- resulting in an overall increase from
3% to 4.25%. While these moves were intended to calm fears of rising long-term
rates, bond prices across all points of the yield curve declined
significantly,
with the yield on the two-year U.S. Treasury note eclipsing the 6% mark for
the
first time since early 1991, and the yield on the 30-year U.S. Treasury bond
crossing over 7.5%.
1
<PAGE>
Adjustable rate mortgage-backed securities ("ARMs") performed relatively well
in
these volatile markets, since their coupons adjust periodically to changes in
interest rates. However, ARMs with restrictive caps, which limit a coupon's
increase when a security resets, have experienced some pressure. In reaction
to
the recent rise in interest rates, mortgage prepayments have subsided to more
normal lower levels, causing mortgage investors to focus less on fears of
rapid
prepayments than on fears of extension risk. The concern is that, as interest
rates continue to rise, homeowners will "lock in" their current mortgage
rates,
making prepayments unlikely. This would result in a lengthening of the average
life of certain mortgage-backed securities ("MBSs"). Very seasoned, short
average life MBSs (30-year mortgages that originated in the late 1970s and now
have small remaining loan balances) have performed relatively well in this
environment since they are unlikely to extend significantly. One-year credit
card asset-backed securities have also performed well because of their AAA
credit quality, short term, stable cash flow and their 40 to 50 basis point
yield advantage over U.S. Treasury securities with comparable maturities. The
Fund's flexible asset allocation policy allows the portfolio managers to
allocate assets among different types of adjustable rate mortgage securities
and
other short term assets, thus providing the Fund with the opportunity to take
advantage of the value of the securities such as short average life
mortgage-backed securities and one-year credit card asset-backed securities.
PORTFOLIO STRATEGY AND PERFORMANCE
As sub-investment adviser, BlackRock is responsible for making the day-to-day
investment decisions for the portfolio. The Fund is managed to seek to achieve
a
volatility which corresponds to a 1-and 2-year Treasury by managing a
portfolio
primarily of ARMs. The adjustable rate securities in the Fund's portfolio have
coupons which adjust, subject to restrictive caps, in relation to changes in
certain indices, such as the 1-year Constant Maturity Treasury Index (an index
of Treasury securities with remaining terms of one year as published by the
Federal Reserve), 6-month London Interbank Offered Rate (LIBOR) and the 11th
District Cost of Funds Index (the weighted average costs of funds for savings
and loan institutions of the Federal Home Loan Bank of San Francisco). As the
value of the index changes at the time of the reset of the adjustable rate
mortgage, the coupon will adjust, subject to the terms of the security.
BlackRock manages the Fund using a "targeted duration" approach such that the
Fund's duration is approximately between 1 and 1 1/2 years. That duration
target
should create a fund with the price or net asset value
2
<PAGE>
sensitivity between a 1- and 2-year Treasury. Changes in the prices and yields
of these Treasury securities affect the value of the Fund's securities. In
addition to interest rates, the Fund's net asset value is affected by the rate
of prepayments of the mortgage securities in its portfolio. As such, the
Fund's
investment in mortgage-backed securities is highly dependent upon the degree
to
which homeowners refinance their mortgages. The actual performance of these
securities depends upon whether the rate of prepayments is higher or lower
than
anticipated at the time of purchase of these securities. The past year has
presented one of the most challenging periods for managers of mortgage
securities as the rate of prepayments of mortgages rose to unprecedented
levels
through the end of 1993, affecting the performance of such securities. This
was
followed by interest rates rising since the beginning of 1994 to two-year
highs.
The portfolio managers have positioned the Fund to take advantage of this
volatile market by limiting its exposure to fixed income instruments which are
highly sensitive to changes in interest rates such as interest-only securities
and other mortgage derivatives and emphasizing securities with stable cash
flows
and limited cap risk such as 1-year asset-backed securities, and short
weighted
average maturity MBSs.
In addition to the securities mentioned above, the Fund continues to be
weighted
heavily in ARMs, ending the fiscal period with 75% of the portfolio in these
securities. Since the coupons of ARMs reset periodically to reflect current
interest rates, thus limiting their price sensitivity, the Fund's
concentration
in these securities has helped to limit its net asset value volatility in
light
of the dramatic increase in short-term Treasury rates since the beginning of
1994. The Fund also emphasizes strong credit quality by investing primarily in
securities issued or guaranteed by the United States government, its agencies
or
instrumentalities. As of May 31, 1994, approximately 78% of the portfolio was
invested in U.S. Government or Agency securities and approximately 18% was
invested in "AAA" and 7% in "AA" rated securities.
The Fund's net asset value for its Class A shares has been relatively stable
since its inception in June 1992, fluctuating within a narrow band between
$10.05 and $9.75 and performing according to its investment objective. Since
year-end 1993, the 2-year Treasury has risen 1.73%; however, during this same
period the Fund has outperformed its benchmark, decreasing only 18 cents since
year-end. For the twelve-month period ended May 31, 1994, the Fund's net asset
value for both Class A and Class B shares fluctuated from $10.00 to $9.75. For
the dividend period ended June 10th, the Fund's monthly dividend was increased
to $0.03333 per share reflecting the resets towards higher interest rates of
many of the coupons of the ARMs in the
3
<PAGE>
portfolio. This new distribution rate represents an annualized rate of 4.09%
for
Class A shares. The Fund's SEC yield for Class A shares as of May 31, 1994 was
3.88%.
While the past year has been difficult for all investors, Smith Barney
Shearson
Adjustable Rate Government Income Fund has performed well in comparison to its
ARM fund peers largely because of its emphasis on securities with a low degree
of interest rate sensitivity and less cash flow risk. We believe that going
forward, this conservative strategy will continue to benefit investors seeking
to achieve relative stability of principal while earning a higher level of
income than that offered by money market funds. Of course, while the Fund's
share price will fluctuate with market conditions, money market funds seek to
maintain a stable net asset value of $1.00.
ECONOMIC OUTLOOK
We believe the Federal Reserve Board is likely to continue to tighten monetary
policy over the next four to six months in reaction to the weakened U.S.
dollar
and to demonstrate its commitment to controlling inflation, but recently
released data does not warrant as strong a market reaction as is currently the
case. As a result, our forecast is for continued volatility throughout the
summer as investors attempt to price in expected Fed tightening on the short
end
of the yield curve. After this period of volatility, however, we believe that
short-term interest rates, such as that of the two-year Treasury note, will
stabilize between 5.75% and 6.00% by the end of the year. In the interim, the
volatility in the markets should create additional demand for less interest
rate
sensitive investments, such as ARMs and short average life MBSs, which should
benefit the Fund throughout the next fiscal period.
4
<PAGE>
We would like to thank you for your investment in the Fund and look forward to
serving your future investment needs.
Sincerely,
Heath B. McLendon Keith T. Anderson
CHAIRMAN OF THE BOARD VICE PRESIDENT AND
INVESTMENT OFFICER
Scott M. Amero Robert S. Kapito
VICE PRESIDENT AND VICE PRESIDENT AND
INVESTMENT OFFICER INVESTMENT OFFICER
JULY 15, 1994
5
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
HISTORICAL PERFORMANCE -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
May 31, Beginning Ending Distributed Paid Return
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------
6/22/92*-
5/31/93 $10.00 $9.96 -- $0.43 3.89%
- ---------------------------------------------------------------------------
1994 9.96 9.78 -- 0.38 2.05
- ---------------------------------------------------------------------------
Total -- $0.81
- ---------------------------------------------------------------------------
Cumulative Total Return (6/22/92 through 5/31/94) 6.02%
- ---------------------------------------------------------------------------
<FN>
*The Fund commenced operations on June 22, 1992 and on November 6, 1992 its
existing shares were designated as Class A shares. On November 6, 1992 the
Fund
commenced offering Class B shares.
</TABLE>
IT IS THE FUND'S POLICY TO DISTRIBUTE DIVIDENDS MONTHLY
AND CAPITAL GAINS, IF ANY, ANNUALLY.
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS A SHARES (UNAUDITED)
<TABLE>
<CAPTION>
With Without
Waiver Waiver
<S> <C> <C>
- ---------------------------------------------------------------------------
Year Ended 1994 N/A 2.05%
- ---------------------------------------------------------------------------
Inception (6/22/92) through 5/31/94 3.06% 3.01%
- ---------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends at net asset value. A portion of the Fund's investment
management,
sub-investment advisory and administration fees were waived from inception
through May 31, 1993; a shareholder's actual return for the period during
which fees were waived would be the higher of the two numbers shown.
</TABLE>
NOTE: On November 6, 1992, existing shares of the Fund were designated Class A
shares. Class A shares are not subject to a sales charge. Class A shares are
subject to annual service and distribution fees of 0.25% and 0.50%,
respectively, of the value of the average daily net assets attributable to
that
class.
6
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends
and
capital gains) of a hypothetical investment of $10,000 in Adjustable Rate
Government Income Fund's Class A shares on June 22, 1992 through May 31, 1994
as
compared with the growth of a $10,000 investment in the U.S. Government 1-Year
Treasury Bill. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
INVESTMENT IN THE
GROWTH OF $10,000 U.S. GOVERNMENT
MONTH INVESTED IN CLASS A SHARES 1-YEAR
ENDED OF THE FUND TREASURY BILL
<S> <C> <C>
06/22/92 $10,000 --
06/92 $10,050 $10,000
08/92 $10,095 $10,057
11/92 $10,166 $10,138
02/93 $10,310 $10,224
05/93 $10,389 $10,306
08/93 $10,533 $10,392
11/93 $10,540 $10,477
02/94 $10,633 $10,570
05/94 $10,602 $10,691
</TABLE>
+ Illustration of $10,000 invested in Class A shares on June 22, 1992 assuming
reinvestment of dividends at net asset value through May 31, 1994.
The U.S. Government 1-Year Treasury Bill Index is comprised of U.S.
Government
Treasury Bills with a maturity of one year.
Index information is available at month-end only; therefore the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results. Investment return and
principal value of an investment will fluctuate so that an investor's shares
upon redemption may be worth more or less than original cost.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
7
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------
HISTORICAL PERFORMANCE -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Net Asset Value Capital Gains Dividends Total
May 31, Beginning Ending Distributed Paid Return*
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------
11/6/92-
5/31/93 $9.96 $9.96 -- $0.25 2.56%
- --------------------------------------------------------------------------
1994 9.96 9.78 -- 0.38 2.05
- --------------------------------------------------------------------------
Total -- $0.63
- --------------------------------------------------------------------------
Cumulative Total Return (11/6/92 through 5/31/94) 4.66%
- --------------------------------------------------------------------------
<FN>
*Figures assume reinvestment of all dividends at net asset value and do not
assume deduction of the contingent deferred sales charge ("CDSC").
</TABLE>
- --------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN** -- CLASS B SHARES (UNAUDITED)
<TABLE>
<CAPTION>
With Without
Waiver Waiver
<S> <C> <C>
- ----------------------------------------------------------------------------
Year Ended 1994 N/A 2.05%
- ----------------------------------------------------------------------------
Inception (11/6/92) through 5/31/94 2.97% 2.90%
- ----------------------------------------------------------------------------
<FN>
**All average annual total return figures shown reflect the reinvestment of
dividends at net asset value. A portion of the Fund's investment
management,
sub-investment advisory and administration fees were waived from inception
through May 31, 1993; a shareholder's actual return for the period during
which fees were waived would be the higher of the two numbers shown.
</TABLE>
NOTE: Class B shares may be acquired only through exchanges from Class B
shares
of other Smith Barney Shearson Funds and will assume the CDSC structure of the
shares from which the exchange was made. Class B shares are subject to annual
service and distribution fees of 0.25% and 0.50%, respectively, of the value
of
the average daily net assets attributable to that class.
8
<PAGE>
A line graph depicting the total growth (including reinvestment of dividends
and
capital gains) of a hypothetical investment of $10,000 in Adjustable Rate
Government Income Fund's Class B shares on November 9, 1992 through May 31,
1994
as compared with the growth of a $10,000 investment in U.S. Government 1-Year
Treasury Bill. The plot points used to draw the line graph were as follows:
<TABLE>
<CAPTION>
GROWTH OF $10,000
GROWTH OF $10,000 GROWTH OF $10,000
INVESTMENT IN THE
INVESTED IN CLASS B SHARES INVESTED IN CLASS B SHARES U.S.
GOVERNMENT
MONTH OF THE FUND OF THE FUND
1-YEAR
ENDED (NO LOAD) (BACK-END LOAD)
TREASURY BILL
<S> <C> <C> <C>
10/31/92 -- --
$10,000
11/09/92 $10,000 $10,000
- --
11/92 $10.036 $10,036
$10,029
02/93 $10,178 $10,178
$10,114
05/93 $10,256 $10,256
$10,196
08/93 $10,397 $10,397
$10,280
11/93 $10,404 $10,404
$10,365
02/94 $10,497 $10,497
$10,456
05/94 $10,466 $ 9,975
$10,576
</TABLE>
+ Illustration of $10,000 invested in Class B shares on November 6, 1992
assuming deduction of the maximum CDSC at time of redemption and
reinvestment
of dividends at net asset value through May 31, 1994.
++ Value does not assume deduction of applicable CDSC.
+++ Value assumes deduction of applicable CDSC (assuming redemption on May 31,
1994).
The U.S. Government 1-Year Treasury Bill Index is comprised of U.S.
Government Treasury Bills with a maturity of one year.
Index information is available at month-end only; therefore the closest
month-end to inception date of the Fund has been used.
NOTE: All figures cited here and on the following pages represent past
performance and do not guarantee future results. Investment return and
principal value of an investment will fluctuate so that an investor's
shares
upon redemption may be worth more or less than original cost.
FOR A GLOSSARY OF TERMS, PLEASE TURN TO THE END OF THIS REPORT.
9
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS MAY 31,
1994
PORTFOLIO BREAKDOWN
Pie chart depicting the allocation of the Adjustable Rate Government Income
Fund's investment securities held at May 31, 1994 by industry classification.
The pie is broken in pieces representing industries in the following
percentages:
<TABLE>
<CAPTION>
INDUSTRY PERCENTAGE
<S> <C>
Asset-Backed Securities 7.1%
Collateralized Mortgage Obligation
Planned Amortization Class
Interest-Only Strips 0.8%
Principal-Only Strips 0.5%
Adjustable Rate Mortgage-Backed
Securities 71.9%
Put Option Purchased 0.1%
U.S. Treasury Notes 0.8%
Fixed Rate Mortgage Pass-Through
Securities 9.5%
Fixed Rate Collateralized Mortgage
Obligations 4.9%
Project Loans 4.4%
</TABLE>
*Percentages are based on total investments
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES (ARMS) are instruments that bear
interest at rates that adjust at periodic intervals at a fixed amount over the
market levels of interest rates as reflected in specified indexes. ARMs
directly
or indirectly represent an interest in, or are backed by and are payable from
mortgage loans secured by real property.
ASSET-BACKED SECURITIES are similar in structure to Mortgage-Backed
Securities,
except that the underlying asset pools consist of credit card, automobile or
other types of receivables, or of commercial loans.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS) are Mortgage-Backed Securities
collateralized by mortgage loans or mortgage pass-through securities.
Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC Mortgage Pass-Through
Certificates, but also may be collateralized by whole loans or private
mortgage
pass-through securities.
COLLATERALIZED MORTGAGE OBLIGATIONS PLANNED AMORTIZATION CLASS INTEREST ONLY
(PAC IOS) are CMO IOs which have repayment schedules that are guaranteed if
the
actual speed of prepayments is within a designated range.
PRINCIPAL-ONLY STRIPS (POS) are a common type of Stripped Mortgage-Backed
Securities which receive most of the principal and some of the interest from
the
underlying assets. In the most extreme case the PO Strips would receive all
the
principal and none of the interest from the underlying assets.
10
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ------------------------------------------
PORTFOLIO OF INVESTMENTS MAY 31,
1994
-------------------------------------------------------------
<TABLE>
<S> <C>
KEY TO ABBREVIATIONS
CMO -- Collateralized Mortgage Obligation
COFI -- Cost of funds for member institutions for the
Federal Home Loan Bank of San Francisco
IO -- Interest Only
LIBOR -- London Interbank Offered Rate
PAC -- Planned Amortization Class
PO -- Principal Only
REMIC -- Real Estate Mortgage Investment Conduit
</TABLE>
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
<C> <S> <C>
---------------------------------------------------------------------
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES -- 82.2%
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) -- 22.9%
FHLMC ONE YEAR+ -- 7.4%
$ 4,182,855 5.506%, 12/1/18 $ 4,250,157
7,429,699 5.549%, 5/1/19 7,544,637
4,723,522 5.193%, 12/1/20 4,803,963
4,771,294 5.689%, 3/1/22 4,880,127
---------------------------------------------------------------------
21,478,884
---------------------------------------------------------------------
FHLMC THREE YEAR+ -- 1.5%
1,027,486 8.281%, 2/1/18 1,045,879
3,285,448 8.052%, 1/1/22 3,356,085
---------------------------------------------------------------------
4,401,964
---------------------------------------------------------------------
FHLMC SIX MONTH LIBOR+ -- 1.9%
5,366,437 5.042%, 4/1/23 5,470,439
---------------------------------------------------------------------
FHLMC -- FLOATERS+ -- 7.3%
9,000,000 Multiclass 1043F, 5.450%, 2/15/21 9,101,250
11,000,000 Multiclass 1189G, 8.500%, 1/15/22 12,402,500
---------------------------------------------------------------------
21,503,750
---------------------------------------------------------------------
FHLMC -- SUPER FLOATERS+ -- 2.8%
Multiclass 1584, Series FB, 5.828%,
7,806,903 9/15/23 8,119,179
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
FACE VALUE
---------------------------------------------------------------------
<C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES --
(CONTINUED)
FEDERAL HOME LOAN MORTGAGE CORPORATION (FHLMC) --
(CONTINUED)
FHLMC COFI+ -- 2.0%
$ 5,998,908 4.463%, 9/1/13++ $ 5,833,938
---------------------------------------------------------------------
FEDERAL NATIONAL MORTGAGE ASSOCIATION (FNMA) -- 21.2%
FNMA ONE YEAR+ -- 7.2%
6,424,433 5.210%, 5/1/22 6,504,738
6,669,908 5.073%, 8/1/22 6,771,624
200,346 5.523%, 2/1/23 203,383
7,596 5.206%, 9/1/22 7,699
7,533,280 5.792%, 4/1/23 7,669,858
---------------------------------------------------------------------
21,157,302
---------------------------------------------------------------------
FNMA THREE YEAR+ -- 5.9%
9,372,990 7.897%, 11/1/17 9,494,839
4,241,697 7.380%, 9/1/20 4,301,505
3,303,527 7.452%, 7/1/22 3,377,856
---------------------------------------------------------------------
17,174,200
---------------------------------------------------------------------
FNMA SIX MONTH CERTIFICATE OF DEPOSIT+
-- 2.7%
8,317,713 4.250%, 7/29/94 8,166,996
---------------------------------------------------------------------
FNMA SIX MONTH LIBOR+ -- 2.7%
2,017,165 5.470%, 7/1/22 2,086,939
1,338,571 5.288%, 8/1/22 1,380,937
4,531,419 5.129%, 4/1/23 4,534,274
---------------------------------------------------------------------
8,002,150
---------------------------------------------------------------------
FNMA -- FLOATERS+ -- 2.7%
7,721,324 REMIC 92-123, Class F, 5.594%, 3/25/21 7,759,931
---------------------------------------------------------------------
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) --
16.7%
GNMA ONE YEAR+ -- 16.7%
10,000,000 6.500%, 7/25/94 10,050,000
10,027,019 4.875%, 8/20/21 9,726,208
15,902,637 5.500%, 8/20/22 15,798,316
12,905,442 6.500%, 4/20/23 13,103,024
---------------------------------------------------------------------
48,677,548
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
FACE VALUE
---------------------------------------------------------------------
<C> <S> <C>
ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES --
(CONTINUED)
NON-AGENCY ARMS -- 21.4%
Bear Stearns, Series 1992-3B, Class A2,
$ 4,944,740 7.571%, 5/25/23 $ 4,969,464
Capstead Mortgage Corporation II, Series
8,152,822 93-H, Class A1,
5.094%, 9/25/23 8,203,777
Prudential Home Mortgage Services,
10,997,099 Series 92-15, Class A1,
6.300%, 5/25/22 11,148,309
Resolution Trust Corporation, Series
5,180,681 1992-4, Class A2,
5.880%, 7/25/28 5,237,358
Resolution Trust Corporation, Series
6,803,355 1992-4, Class A,
8.854%, 6/25/24 6,860,776
Salomon Brothers Corporation:
4,777,246 Series 92-5, Class VII, 5.824%, 11/25/22 4,839,923
10,093,197 Series 93-2, Class VII, 5.807%, 3/25/23 10,244,595
Sears Mortgage Corporation, 92-16 Class
10,882,136 A2,
5.058%, 8/25/20 10,990,958
---------------------------------------------------------------------
62,495,160
---------------------------------------------------------------------
TOTAL ADJUSTABLE RATE MORTGAGE-BACKED SECURITIES
(Cost $242,276,942) 240,241,441
---------------------------------------------------------------------
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- 10.9%
FHLMC 15 YEAR -- 3.2%
6,425,079 8.500%, 10/1/01 6,540,730
2,635,016 9.000%, 11/1/05 2,705,450
---------------------------------------------------------------------
9,246,180
---------------------------------------------------------------------
FHLMC GOLD 30 YEAR -- 0.4%
1,105,656 9.000%, 10/1/20 1,141,745
---------------------------------------------------------------------
FHLMC 30 YEAR -- 4.2%
8,030,652 7.500%, 7/1/07 7,991,623
4,329,329 9.000%, 9/1/09 4,467,781
---------------------------------------------------------------------
12,459,404
---------------------------------------------------------------------
FNMA 30 YEAR -- 0.5%
1,537,137 8.500%, 7/1/17 1,560,195
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
FACE VALUE (NOTE 1)
---------------------------------------------------------------------
<C> <S> <C>
FIXED RATE MORTGAGE PASS-THROUGH SECURITIES -- (CONTINUED)
GNMA 30 YEAR SEASONED -- 2.6%
$ 7,365,538 8.000%, 3/15/08 $ 7,441,034
---------------------------------------------------------------------
TOTAL FIXED RATE MORTGAGE PASS-THROUGH SECURITIES
(Cost $33,219,768) 31,848,558
---------------------------------------------------------------------
FIXED RATE CMOS -- 7.1%
AGENCY BACKED FIXED RATE CMO -- 3.7%
Salomon Brothers Corporation, Series
9,930,162 83-1, Class Z,
12.000%, 12/1/13 10,873,527
---------------------------------------------------------------------
COMMERCIAL MORTGAGE-BACKED FIXED RATE
CMO -- 1.4%
Cheslock Bakker Mortgage Corporation,
4,000,000 7.158%, 1/25/04 3,952,520
---------------------------------------------------------------------
NON-AGENCY BACKED FIXED RATE CMO -- 0.5%
Resolution Trust Corporation, Series
1,553,428 1991-M5, Class A1,
9.000%, 3/15/17 1,570,904
---------------------------------------------------------------------
PAC IOS -- 0.9%
28,932 FNMA REMIC 91-132, Class J,
1018.775%, (1) 12/25/18 708,243
55,569 FNMA REMIC 90-76, Class L,
960.75% (2),
7/25/20 1,331,615
22,818 FNMA REMIC 90-106, Class K,
928.95% (3),
9/25/20 530,002
---------------------------------------------------------------------
2,569,860
---------------------------------------------------------------------
PAC POS -- 0.6%
1,847,581 FNMA REMIC 92-115A, Zero Coupon, 6/25/22 1,829,400
---------------------------------------------------------------------
TOTAL FIXED RATE CMO'S
(Cost $23,074,155) 20,796,211
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
FACE VALUE
---------------------------------------------------------------------
<C> <S> <C>
PROJECT LOANS -- 5.0%
FEDERAL HOUSING ADMINISTRATION -- 5.0%
$ 1,949,396 Alliance, 7.350%, 4/1/19 $ 1,907,991
9,321,071 Citi, Project 85-1, 6.875%, 3/1/16 9,376,252
3,363,823 Salomon, 7.350%, 12/1/19 3,287,767
---------------------------------------------------------------------
TOTAL PROJECT LOANS
(Cost $15,162,255) 14,572,010
---------------------------------------------------------------------
ASSET-BACKED SECURITIES -- 8.1%
First Chicago Mortgage Trust II, Series
10,000,000 90-A, 9.250%, 6/15/95 10,312,500
12,900,000 Standard Credit Card, 9.375%, 6/10/95 13,319,250
---------------------------------------------------------------------
TOTAL ASSET-BACKED SECURITIES
(Cost $23,929,582) 23,631,750
---------------------------------------------------------------------
U.S. TREASURY NOTES -- 0.9% (Cost $2,565,527)
2,600,000 U.S. Treasury Notes, 5.125%, 3/31/96 2,563,418
---------------------------------------------------------------------
<CAPTION>
NUMBER OF
CONTRACTS
<C> <S> <C>
---------------------------------------------------------------------
PUT OPTIONS PURCHASED -- 0.1% (Cost $404,301)
Five Year U.S. Treasury Notes,
517 September, $102.00 274,656
---------------------------------------------------------------------
TOTAL INVESTMENTS
(Cost $340,632,530*) 114.3 333,928,044
---------------------------------------------------------------------
<CAPTION>
FACE VALUE
<C> <S> <C>
---------------------------------------------------------------------
SECURITIES SOLD SHORT -- (3.7)% (Cost $10,887,625)
U.S. Treasury Notes, 6.500%,
$(10,820,000) 5/15/97+++ (3.7) (10,887,625)
---------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31,
1994
<TABLE>
<CAPTION>
MARKET VALUE
(NOTE 1)
NUMBER OF
CONTRACTS
---------------------------------------------------------------------
<C> <S> <C>
FUTURES CONTRACTS -- LONG POSITION -- 1.8% (Contract Amount
$5,217,188)
50 September 5 year U.S. Treasury Note 1.8 $ 5,196,875
---------------------------------------------------------------------
FUTURES CONTRACTS -- SHORT POSITION -- (10.0)% (Contract Amount
$28,971,594)
(278) June 5 year U.S. Treasury Note (10.0) (29,142,219)
---------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (NET) (2.4) (6,943,088)
---------------------------------------------------------------------
NET ASSETS 100.0% $292,151,987
---------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Initial mortgage rates fixed for period indicated. Thereafter, interest
rates
are subject to periodic adjustment based on a benchmark index.
++ A portion of the securities are held as collateral for reverse repurchase
agreements.
+++ Collateralized by a cash deposit with the broker in the amount of
$10,891,006.
(1) Annualized yield at date of purchase (unaudited): 23.221%.
(2) Annualized yield at date of purchase (unaudited): 13.721%.
(3) Annualized yield at date of purchase (unaudited): 18.505%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES MAY 31,
1994
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost
$340,632,530) (Note 1)
See accompanying schedule $333,928,044
Cash 305,945
Receivable for investment securities
sold 105,972,977
Deposit with broker (Note 1) 10,891,006
Interest receivable 3,585,344
Receivable for Fund shares sold 951,739
Unamortized organization costs (Note 7) 95,056
Prepaid expenses 26,995
Fee income receivable 5,391
- ----------------------------------------------------------------------------
TOTAL ASSETS 455,762,497
- ----------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities
purchased $99,650,646
Securities sold under agreement to
repurchase (Notes 1 and 5) 50,700,000
Investments sold short, at value
(Contract amount $10,887,625) (Note
1)
See accompanying schedule 10,887,625
Payable for Fund shares redeemed 993,210
Dividends payable 678,187
Net unrealized depreciation of futures
contracts
(Note 1) See accompanying schedule 190,938
Distribution fee payable (Note 3) 132,627
Investment advisory fee payable (Note
2) 105,718
Service fees payable (Note 3) 66,314
Administration fee payable (Note 2) 52,859
Custodian fees payable (Note 2) 12,763
Transfer agent fees payable (Note 2) 9,556
Accrued Trustees' fees and expenses
(Note 2) 3,500
Accrued expenses and other payables 117,192
- ----------------------------------------------------------------------------
TOTAL LIABILITIES 163,601,135
- ----------------------------------------------------------------------------
NET ASSETS $292,161,362
- ----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (CONTINUED) MAY 31,
1994
<TABLE>
<S> <C> <C>
NET ASSETS consist of:
Distributions in excess of net
investment income $ (209,374)
Accumulated net realized loss on
securities transactions, futures
contracts and investments sold
short (1,425,398)
Net unrealized depreciation of
securities, written options,
futures contracts and investments
sold short (6,895,424)
Par value 29,885
Paid-in capital in excess of par
value 300,661,673
- --------------------------------------------------------------------------
TOTAL NET ASSETS $292,161,362
- --------------------------------------------------------------------------
NET ASSET VALUE:
CLASS A SHARES:
NET ASSET VALUE, offering and redemption price per
share
(283,627,176 DIVIDED BY 29,012,075 shares of
beneficial interest outstanding) $9.78
- --------------------------------------------------------------------------
CLASS B SHARES:
NET ASSET VALUE and offering price per share+
($8,421,610 DIVIDED BY 861,490 shares of beneficial
interest outstanding) $9.78
- --------------------------------------------------------------------------
CLASS D SHARES:
NET ASSET VALUE, offering and redemption price per
share
($112,576 DIVIDED BY 11,516 shares of beneficial
interest outstanding) $9.78
- --------------------------------------------------------------------------
<FN>
+ Redemption price per share is equal to net asset value less any
applicable
contingent deferred sales charge.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF OPERATIONS FOR THE YEAR ENDED MAY 31,
1994
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Interest (Note 5)
$22,894,057
- ------------------------------------------------------------------------------
- ------
EXPENSES:
Distribution fee (Note 3) $1,898,235
Investment advisory fee (Note 2) 1,518,588
Service fees (Note 3) 949,117
Administration fee (Note 2) 759,294
Transfer agent fees (Notes 2 and 4) 125,735
Legal and audit fees 115,182
Custodian fees (Note 2) 103,651
Amortization of organization costs (Note 7) 31,692
Trustees' fees and expenses (Note 2) 18,026
Other 274,309
- ------------------------------------------------------------------------------
- ------
Total Expenses before interest
5,793,829
Interest expense (Note 5)
2,994,801
- ------------------------------------------------------------------------------
- ------
TOTAL EXPENSES
8,788,630
- ------------------------------------------------------------------------------
- ------
NET INVESTMENT INCOME
14,105,427
- ------------------------------------------------------------------------------
- ------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (NOTES 1 AND 5):
Net realized gain/(loss) on:
Securities transactions
(1,061,058)
Written options
(56,400)
Futures contracts
200,460
Investments sold short
3,381
- ------------------------------------------------------------------------------
- ------
Net realized loss on investments during the
year
(913,617)
- ------------------------------------------------------------------------------
- ------
Net change in unrealized
appreciation/(depreciation) of:
Securities
(5,889,741)
Written options
63,600
Futures contracts
(190,938)
- ------------------------------------------------------------------------------
- ------
Net unrealized depreciation of investments during the year
(6,017,079
- ------------------------------------------------------------------------------
- ------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(6,930,696)
- ------------------------------------------------------------------------------
- ------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $
7,174,731
- ------------------------------------------------------------------------------
- ------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CASH FLOWS FOR THE YEAR ENDED MAY 31,
1994
<TABLE>
<S> <C> <C>
NET INCREASE IN CASH:
Cash flows from operating activities:
Interest received $ 25,804,870
Fee income received 136,250
Operating expenses paid (5,660,379)
- ------------------------------------------------------------------------------
- -----
Net cash provided by operating
activities $
20,280,741
- ------------------------------------------------------------------------------
- -----
Cash flows from investing activities:
Increase in short-term portfolio
securities, net (28,162)
Purchase of long term investment
securities and purchased options (2,241,633,524)
Proceeds from disposition of investment
securities and purchased options 2,239,965,187
Net proceeds from futures transactions 200,460
- ------------------------------------------------------------------------------
- -----
Net cash used in investing activities
(1,496,039)
- ------------------------------------------------------------------------------
- -----
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES
18,784,702
- ------------------------------------------------------------------------------
- -----
Cash flows from financing activities:
Proceeds from shares sold 401,910,444
Payments on shares redeemed (422,502,690)
Cash dividends paid to shareholders* (1,417,631)
Increase in reverse repurchase agreements
outstanding 6,555,000
Interest expense (3,016,830)
- ------------------------------------------------------------------------------
- -----
NET CASH USED IN FINANCING ACTIVITIES
(18,471,707)
- ------------------------------------------------------------------------------
- -----
NET INCREASE IN CASH
322,370
CASH -- BEGINNING OF YEAR
(16,425)
- ------------------------------------------------------------------------------
- -----
CASH -- END OF YEAR $
305,945
- ------------------------------------------------------------------------------
- -----
RECONCILIATION OF NET INCREASE IN NET ASSETS FROM OPERATIONS TO
CASH PROVIDED BY OPERATING AND INVESTING ACTIVITIES:
Net increase in net assets resulting from
operations $
7,165,356
Decrease in investments $ 15,772,247
Increase in securities sold short and
written options 10,777,625
Increase in futures contracts 190,938
Decrease in receivable for investment
securities sold (106,596,972)
Increase in payable for investment
securities purchased 89,414,260
Increase in interest and fees receivable (1,067,003)
Decrease in other assets 4,697
Increase in accrued expenses 128,753
Interest expense 2,994,801
- ------------------------------------------------------------------------------
- -----
TOTAL ADJUSTMENTS
11,619,346
- ------------------------------------------------------------------------------
- -----
NET CASH PROVIDED BY OPERATING AND
INVESTING ACTIVITIES $
18,784,702
- ------------------------------------------------------------------------------
- -----
<FN>
* Non-cash financing activities include reinvestment of dividends of
$12,939,671.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
5/31/94
5/31/93*
<S> <C>
<C>
Net investment income $ 14,105,427
$ 7,608,601
Net realized loss on securities transactions, futures
contracts and investments sold short during the
period (913,617)
(511,781)
Net unrealized depreciation on securities, written
options, futures contracts and investments sold
short during the period (6,017,079)
(878,345)
- ------------------------------------------------------------------------------
- -------
Net increase in net assets resulting from operations 7,174,731
6,218,475
Distributions to shareholders from net investment
income:
Class A (13,963,952)
(7,521,122)
Class B (195,811)
(29,148)
Class D (3,995)
- --
Distributions to shareholders in excess of net
investment income:
Class A (206,420)
- --
Class B (2,895)
- --
Class D (59)
- --
Net increase/(decrease) in net assets from Fund share
transactions (Note 6):
Class A (22,490,133)
314,407,594
Class B 4,982,086
3,577,056
Class D 114,945
10
- ------------------------------------------------------------------------------
- -------
Net increase/(decrease) in net assets (24,591,503)
316,652,865
NET ASSETS:
Beginning of year 316,752,865
100,000
- ------------------------------------------------------------------------------
- -------
End of year (including distributions in excess of net
investment income and undistributed net investment
income of $209,374 and $58,331, respectively) $292,161,362
$316,752,865
- ------------------------------------------------------------------------------
- -------
<FN>
* The Fund commenced operations on June 22, 1992.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
21
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS A SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR PERIOD
ENDED ENDED
5/31/94
5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $
10.00
- ------------------------------------------------------------------------------
- --
Income from investment operations:
Net investment income 0.37
0.44#
Net realized and unrealized loss on investments (0.17)
(0.05)
- ------------------------------------------------------------------------------
- --
Total from investment operations 0.20
0.39
Less distributions:
Distributions from net investment income (0.37)
(0.43)
Distributions in excess of net investment income (0.01) --
- ------------------------------------------------------------------------------
- --
Total distributions (0.38)
(0.43)
- ------------------------------------------------------------------------------
- --
Net Asset Value, end of period $ 9.78 $
9.96
- ------------------------------------------------------------------------------
- --
Total return++ 2.05%
3.89%
- ------------------------------------------------------------------------------
- --
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $283,627
$313,184
Ratio of operating expenses to average net assets+ 1.53%
1.50%**
Ratio of net investment income to average net
assets 3.72%
4.36%**
Portfolio turnover rate 525%
236%
- ------------------------------------------------------------------------------
- --
<FN>
* The Fund commenced operations on June 22, 1992. Any shares in existence
prior
to November 6, 1992 were designated as Class A shares.
** Annualized.
+ The annualized operating expense ratios exclude interest expense. The
ratios
including interest expense for the year ended May 31, 1994 and period
ended
May 31, 1993 were 2.31% and 1.92%, respectively. Annualized expense ratio
before voluntary waiver of fees by investment adviser, sub-investment
adviser
and administrator (including interest expense) for the period ended May
31,
1993 was 2.03%.
++ Total return represents the aggregate total return for the period
indicated.
# Net investment income before voluntary waiver of fees by investment
adviser,
sub-investment adviser and administrator for the period ended May 31,
1993
was $0.43.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
22
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<TABLE>
<CAPTION>
YEAR
PERIOD
ENDED
ENDED
5/31/94
5/31/93*
<S> <C> <C>
Net Asset Value, beginning of period $ 9.96 $
9.96
- ------------------------------------------------------------------------------
- --
Income from investment operations:
Net investment income 0.37
0.25#
Net realized and unrealized loss on investments (0.17) --
- ------------------------------------------------------------------------------
- --
Total from investment operations 0.20
0.25
Less distributions:
Distributions from net investment income (0.37)
(0.25)
Distributions in excess of net investment income (0.01) --
- ------------------------------------------------------------------------------
- --
Total distributions (0.38)
(0.25)
- ------------------------------------------------------------------------------
- --
Net Asset Value, end of period $ 9.78 $
9.96
- ------------------------------------------------------------------------------
- --
Total return++ 2.05%
2.56%
- ------------------------------------------------------------------------------
- --
Ratios to average net assets/Supplemental Data:
Net assets, end of period (in 000's) $8,422
$3,569
Ratio of operating expenses to average net assets+ 1.57%
1.50%**
Ratio of net investment income to average net assets 3.68%
4.36%**
Portfolio turnover rate 525%
236%
- ------------------------------------------------------------------------------
- --
<FN>
* On November 6, 1992 the Fund commenced selling Class B shares.
** Annualized.
+ The annualized operating expense ratios exclude interest expense. The
ratios
including interest expense for the year ended May 31, 1994 and period
ended
May 31, 1993 were 2.35% and 1.92%, respectively. Annualized expense ratio
before voluntary waiver of fees by investment adviser, sub-investment
adviser
and administrator (including interest expense) for the period ended May
31,
1993 was 2.03%.
++ Total return represents the aggregate total return for the period
indicated
and does not reflect any applicable sales charges.
# Net investment income before voluntary waiver of fees by investment
adviser,
sub-investment adviser and administrator for the period ended May 31,
1993
was $0.24.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
23
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A CLASS D SHARE OUTSTANDING THROUGHOUT THE PERIOD.
<TABLE>
<CAPTION>
PERIOD
ENDED
5/31/94*
<S> <C>
Net Asset Value, beginning of period $ 9.98
- ----------------------------------------------------------------------------
Income from investment operations:
Net investment income 0.37
Net realized and unrealized loss on investments (0.19)
- ----------------------------------------------------------------------------
Total from investment operations 0.18
Less distributions:
Distributions from net investment income (0.37)
Distributions in excess of net investment income (0.01)
- ----------------------------------------------------------------------------
Total distributions (0.38)
- ----------------------------------------------------------------------------
Net Asset Value, end of period $ 9.78
- ----------------------------------------------------------------------------
Total return++ 1.83%
- ----------------------------------------------------------------------------
Ratios to average net assets/Supplemental Data (annualized):
Net assets, end of period (in 000's) $ 113
Ratio of operating expenses to average net assets+ 1.55%
Ratio of net investment income to average net assets 3.69%
Portfolio turnover rate 525%
- ----------------------------------------------------------------------------
<FN>
* The Fund commenced selling Class D shares on June 2, 1993.
+ The annualized operating expense ratio excludes interest expense. The
ratio
including interest expense for the period ended May 31, 1994 was 2.34%.
++ Total return represents the aggregate total return for the period
indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
24
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Shearson Adjustable Rate Government Income Fund (the "Fund") was
organized as a "Massachusetts business trust" under the laws of The
Commonwealth
of Massachusetts on May 7, 1992. The Fund is a diversified, open-end
management
investment company registered with the Securities and Exchange Commission
under
the Investment Company Act of 1940, as amended (the "1940 Act"). As of
November
6, 1992, the Fund offered two classes of shares: Class A shares available for
direct purchases and Class B shares available only through exchanges. Class A
shares are sold without a sales charge. Class B shares may be subject to a
contingent deferred sales charge ("CDSC") upon redemption. Class B shares will
convert automatically to Class A shares eight years after the date of original
purchase. On January 29, 1993, the Fund began offering Class D shares to
investors that are eligible to participate in the Smith Barney 401(k) Program.
Class D shares are offered without a front-end sales load or a CDSC. All
classes
of shares have identical rights and privileges except with respect to the
effect
of the respective sales charges to each class, if any, expenses allocable
exclusively to each class, voting rights on matters affecting a single class,
and the conversion feature of Class B shares. The following is a summary of
significant accounting policies consistently followed by the Fund in the
preparation of its financial statements.
PORTFOLIO VALUATION: Generally, the Fund's investments are valued at market
value or, in the absence of market value with respect to any portfolio
securities, at fair value as determined by or under the direction of the
Fund's
Board of Trustees. An option generally is valued at the last sale price or, in
the absence of the last sales price, the last offer price. Investments in U.S.
government securities (other than short-term securities) are valued at the
quoted bid price in the over-the-counter market. Corporate debt securities,
mortgage-backed securities and asset-backed securities are valued on the basis
of valuations provided by dealers in those instruments or by an independent
pricing service, approved by the Fund's Board of Trustees. The value of a
futures contract equals the unrealized gain or loss on the contract, which is
determined by marking the contract to the current settlement price for a like
contract acquired on the day on which the futures contract is being valued.
Short-term investments that mature in 60 days or less are valued at amortized
cost.
25
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions.
Under the terms of a typical repurchase agreement, the Fund takes possession
of
an underlying debt obligation 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. The value of the collateral is
at
least equal at all times to the total amount of the repurchase obligations,
including interest. In the event of counterparty default, the Fund has the
right
to use the collateral to offset losses incurred. There is potential loss to
the
Fund in the event the Fund is delayed or prevented from exercising its rights
to
dispose of the collateral securities, including the risk of a possible decline
in the value of the underlying securities during the period while the Fund
seeks
to assert its rights. The Fund's investment manager or administrator, acting
under the supervision of the Board of Trustees, reviews on an ongoing basis
the
value of the collateral and the creditworthiness of those banks and dealers
with
which the Fund enters into repurchase agreements to evaluate potential risks.
OPTIONS: Upon the purchase of a put option or a call option by the Fund, the
premium paid is recorded as an investment, the value of which is
marked-to-market daily. When a purchased option expires, the Fund will realize
a
loss in the amount of the cost of the option. When the Fund enters into a
closing sale transaction, the Fund will realize a gain or loss depending on
whether the sales proceeds from the closing sale transaction are greater or
less
than the cost of the option. When the Fund exercises a put option, it will
realize a gain or loss from the sale of the underlying security and the
proceeds
from such sale will be decreased by the premium originally paid. When the Fund
exercises a call option, the cost of the security which the Fund purchases
upon
exercise will be increased by the premium originally paid. When purchased
index
options are exercised, settlement is made in cash.
When the Fund writes a call option or a put option an amount equal to the
premium received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a
gain
equal to the amount of the premium received. When the Fund enters
26
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was sold) without regard to any unrealized gain or loss on the
underlying
security or index, and the liability related to such option is eliminated.
When
a call option is exercised, the Fund realizes a gain or loss from the sale of
the underlying security and the proceeds from such sale are increased by the
premium originally received. When a put option is exercised, the amount of the
premium originally received will reduce the cost of the security which the
Fund
purchased upon exercise. When written index options are exercised, settlement
is
made in cash. The risk associated with purchasing options is limited to the
premium originally paid. The risk in writing a call option is that the Fund
may
forego the opportunity of profit if the market value of the underlying
security
or index increases and the option is exercised. The risk in writing a put
option
is that the Fund may incur a loss if the market value of the underlying
security
or index decreases and the option is exercised. In addition, there is the risk
the Fund may not be able to enter into a closing transaction because of an
illiquid secondary market.
FUTURES CONTRACTS: Upon entering into a futures contract, the Fund is required
to deposit with the broker an amount of cash or cash equivalents equal to a
certain percentage of the contract amount. This is known as the "initial
margin." Subsequent payments ("variation margin") are made or received by the
Fund each day, depending on the daily fluctuation of the value of the
contract.
The daily changes in the contract are recorded as unrealized gains or losses
and
are shown net on the balance sheet. The Fund recognizes a realized gain or
loss
when the contract is closed.
There are several risks associated with the use of futures contracts as a
hedging device. The change in value of futures contracts primarily corresponds
with the value of their underlying instruments, which may not correlate with
the
change in value of the hedged investments. In addition, there is the risk the
Fund may not be able to enter into a closing transaction because of an
illiquid
secondary market.
REVERSE REPURCHASE AGREEMENTS: The Fund may enter into reverse repurchase
agreement transactions with member banks on the Federal Reserve Bank of New
York's list of reporting dealers for leverage purposes. A reverse
27
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
repurchase agreement involves a sale by the Fund of securities that it holds
with an agreement by the Fund to repurchase the same securities at an agreed
upon price and date. A reverse repurchase agreement involves the risk that the
market value of the securities sold by the Fund may decline below the
repurchase
price of the securities. In the event the buyer of securities under a reverse
repurchase agreement files for bankruptcy or becomes insolvent, the Fund's use
of the proceeds of the agreement may be restricted pending a determination by
the party, or its trustee or receiver, whether to enforce the Fund's
obligation
to repurchase the securities. The Fund will establish a segregated account
with
its custodian, Boston Safe Deposit and Trust Company ("Boston Safe"), in which
the Fund will maintain cash, U.S. government securities or other liquid high
grade debt obligations equal in value to its obligations with respect to
reverse
repurchase agreements.
DOLLAR ROLL TRANSACTIONS: The Fund may enter into dollar roll transactions
with
broker dealers to take advantage of opportunities in the mortgage market. A
dollar roll transaction involves a sale by the Fund of securities that it
holds
with an agreement by the Fund to repurchase similar securities at an agreed
upon
price and date. The securities repurchased will bear the same interest as
those
sold, but generally will be collateralized by pools of mortgages with
different
prepayment histories than those securities sold. During the period between the
sale and repurchase, the Fund will not be entitled to receive interest and
principal payments on the securities sold. Proceeds of the sale will be
invested
and the income from these investments, together with any additional income
received on the sale, will generate income for the Fund exceeding the yield on
the securities sold. Dollar roll transactions involve the risk that the market
value of the securities may decline in value.
SHORT SALES: A short sale is a transaction in which the Fund sells securities
it
does not own (but has borrowed) in anticipation of a decline in the market
price
of the securities. To complete a short sale, the Fund must arrange through a
broker to borrow the securities to be delivered to the buyer. The proceeds
received by the Fund from the short sale are retained by the broker until the
Fund replaces the borrowed securities. In borrowing the securities
28
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
to be delivered to the buyer, the Fund becomes obligated to replace the
securities borrowed at their market price at the time of replacement, whatever
that price may be.
Possible losses from short sales differ from losses that could be incurred
from
a purchase of a security, because losses from short sales may be unlimited,
whereas losses from purchases can equal only the total amount invested.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Interest income is recorded on the accrual
basis.
Securities purchased or sold on a when-issued or delayed-delivery basis may be
settled a month or more after the trade date. Realized gains or losses from
securities sold are recorded on the identified cost basis. Investment income
and
realized and unrealized gains and losses are allocated based upon the relative
net assets of each class.
MORTGAGE-BACKED SECURITIES: Income is accrued on the security using the
effective yield method. The effective yield is calculated monthly based on
current estimate of future cash flows. This effective yield is then used to
accrue income on the investment balance in the subsequent month.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: Dividends from net investment
income, if any, are determined on a class level and declared daily and
distributed monthly. Distributions from any short-term and long-term capital
gains are determined on a Fund level and are declared and paid annually with
the
final distribution of each calendar year. To the extent net realized capital
gains can be offset by capital loss carryovers, it is the policy of the Fund
not
to distribute such gains. Additional distributions of net investment income
and
capital gains may be made at the discretion of the Fund's Board of Trustees to
avoid the application of a nondeductible 4% excise tax on certain
undistributed
amounts of ordinary income and capital gains. Income distributions and capital
gain distributions are determined in accordance with income tax regulations
which may differ from generally accepted accounting principles. These
differences are primarily due to differing treatments of
29
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
income and gains on various investment securities held by the Fund, timing
differences and differing characterization of distributions made by the Fund
as
a whole.
FEDERAL INCOME TAXES: It is the Fund's policy to qualify as a regulated
investment company, if such qualification is in the best interests of its
shareholders, by complying with the requirements of the Internal Revenue Code
of
1986, as amended, applicable to regulated investment companies and by
distributing substantially all of its earnings to its shareholders. Therefore,
no Federal income tax provision is required.
CASH FLOW INFORMATION: Cash, as used in the Statement of Cash Flows, is the
amount reported in the Statement of Assets and Liabilities. The Fund issues
and
redeems its shares, invests in securities, and distributes dividends from net
investment income and net realized gains (which are either paid in cash or
reinvested at the discretion of shareholders). These activities are reported
in
the Statement of Changes in Net Assets. Information on cash payments is
presented in the Statement of Cash Flows. Accounting practices that do not
affect reporting activities on a cash basis include unrealized gain or loss on
investment securities, accretion income recognized on investment securities
and
amortization of deferred organization costs.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE
AND OTHER TRANSACTIONS
The Fund has entered into an Investment Advisory Agreement (the "Advisory
Agreement") with Smith Barney Strategy Advisors Inc. ("SBSA"), a division of
Smith, Barney Advisers, Inc. ("SBA"). SBA is a wholly-owned subsidiary of
Smith
Barney Holdings Inc. ("Holdings"), which in turn is a wholly-owned subsidiary
of
The Travelers Inc. Under the Advisory Agreement, the Fund pays a monthly fee
at
the annual rate of 0.40% of the value of its average daily net assets.
As of July 30, 1993, BlackRock Financial Management, L.P. ("BlackRock"),
formerly investment adviser to the Fund, became the sub-adviser to the
30
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Fund. Under the terms of the sub-investment advisory agreement, BlackRock
provides investment advisory assistance and portfolio management advice with
respect to the Fund's holdings.
Prior to June 1, 1994, the Fund was party to an administration agreement with
The Boston Company Advisors Inc. ("Boston Advisors"), an indirect wholly owned
subsidiary of Mellon Bank Corporation ("Mellon"). Under this agreement, the
Fund
paid a monthly fee at the annual rate of .20% of the value of its average
daily
net assets.
As of the close of business on June 1, 1994, SBA, which is controlled by
Holdings, succeeded Boston Advisors as the Fund's administrator. The new
administration agreement contains substantially the same terms and conditions,
including the level of fees, as the predecessor agreement.
As of the close of business on June 1, 1994, the Fund also entered into a
sub-administration agreement ("the Sub-Administration Agreement") with Boston
Advisors. Under the Sub-Administration Agreement, Boston Advisors is paid a
portion of the fees paid by the Fund to SBA at a rate agreed upon from time to
time between SBA and Boston Advisors.
For the year ended May 31, 1994, the Fund incurred total brokerage commissions
of $135,457 on futures and options transactions, of which $61,028 was paid to
Smith Barney, Inc. ("Smith Barney").
A CDSC is generally payable by a shareholder in connection with the redemption
of Class B shares within five years (eight years in the case of purchases in
certain 401(k) Plans) after the date of purchase. In circumstances in which
the
charge is imposed, the amount of the charge ranges between 5% and 1% of net
asset value depending on the number of years since the date of purchase
(except
in the case of purchases by certain 401(k) plans in which case a 3% charge is
imposed for the eight-year period after the date of purchase). For the year
ended May 31, 1994, Smith Barney received from investors $21,639 in CDSC on
the
redemption of Class B Shares.
31
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
No officer, director or employee of Smith Barney or BlackRock, or of any
parent
or affiliate of those corporations receives any compensation from the Fund for
serving as a Trustee or officer of the Fund. The Fund pays each Trustee who is
not an officer, director, or employee of Smith Barney or BlackRock, or any of
their affiliates $2,500 per annum plus $250 per meeting attended and
reimburses
each such Trustee for travel and out-of-pocket expenses.
Boston Safe, an indirect wholly owned subsidiary of Mellon, serves as the
Fund's
custodian. The Shareholder Services Group, Inc., a subsidiary of First Data
Corporation, serves as the Fund's transfer agent.
3. DISTRIBUTION AGREEMENT
Smith Barney acts as exclusive distributor of the Fund's shares pursuant to a
distribution agreement with the Fund, and sells shares of the Fund through
Smith
Barney or its affiliates.
Pursuant to Rule 12b-1 under the 1940 Act, the Fund has adopted a Services and
Distribution Plan (the "Plan"). Under this Plan, the Fund compensates Smith
Barney for servicing shareholder accounts for Class A, Class B and Class D
shareholders, and covers expenses incurred in distributing Class A, Class B
and
Class D shares. Smith Barney is paid an annual service fee with respect to
Class
A, Class B and Class D shares of the Fund at the rate of 0.25% of the value of
the average daily net assets of each respective class of shares. Smith Barney
is
also paid an annual distribution fee with respect to Class A, Class B and
Class
D shares at the rate of 0.50% of the value of the average daily net assets
attributable to each respective class of shares. For the year ended May 31,
1994, the Fund incurred service fees of $935,890, $12,962 and $265,
respectively, for Class A, Class B and Class D shares, respectively. For the
year ended May 31, 1994, the Fund incurred distribution fees of $1,871,783,
$25,923 and $529, for Class A, Class B and Class D shares, respectively.
4. EXPENSE ALLOCATION
Expenses of the Fund not directly attributable to the operations of any class
of
shares are prorated among the classes based upon the relative net assets
32
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
of each class of shares. Operating expenses directly attributable to a class
of
shares are charged to that class of shares' operations. In addition to the
above
servicing and distribution fees, class specific operating expenses include
transfer agent fees of $121,906, $3,766 and $63 for Class A, Class B and Class
D
shares.
5. SECURITIES TRANSACTIONS
Cost of purchases and proceeds from sales of investment securities, excluding
short-term investments and U.S. government securities for the year ended May
31,
1994, aggregated $79,480,732 and $57,173,554, respectively. Costs of purchases
and proceeds from sales of long-term U.S. government securities aggregated
$2,235,184,265 and $2,262,533,720, respectively, for the year ended May 31,
1994.
At May 31, 1994, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost amounted to $91,422, and
aggregate gross unrealized depreciation for all securities in which there was
an
excess of tax cost over value amounted to $6,821,335.
Information regarding borrowing by the Fund under reverse repurchase
agreements
is as follows:
33
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Reverse repurchase agreements outstanding at May 31, 1994:
<TABLE>
<CAPTION>
FACE VALUE
MARKET VALUE
<C> <S> <C>
-----------------------------------------------------------------------------
- -------
$45,100,000 Reverse Repurchase Agreement with Nikko Securities, dated
5/31/94 bearing 4.450% to be repurchased at $45,217,072
on 6/21/94, collateralized by: $10,027,017 GNMA II Pool
008822, 6.500% due 8/20/21; $6,135,204 FNMA Pool 181279,
5.172% due 9/1/22; $4,723,527 FNMA Pool 116590, 5.193%
due 12/1/20; $7,533,280 FNMA Pool 124845, 5.750% due
1/1/23; $9,884,765 FNMA Pool 200357, 5.523% due 8/1/22;
$8,030,652 FHLMC Pool 141845, 7.500% due 7/1/07;
$2,809,687 FHLMC Pool 850106, 9.000% due 11/1/05
$45,100,000
5,600,000 Reverse Repurchase Agreement with Prudential Securities,
dated 5/25/94 bearing 4.400% to be repurchased at
$5,609,582 on 6/8/94, collateralized by $5,687,493 FNMA
Pool 022794, 7.896% due 11/1/17
5,600,000
-----------------------------------------------------------------------------
- -------
TOTAL REVERSE REPURCHASE AGREEMENTS
$50,700,000
-----------------------------------------------------------------------------
- -------
REVERSE REPURCHASE AGREEMENTS--
--------------------------------------------------------------------------
Maximum amount outstanding during the year $169,870,000
Average amount outstanding during the year $ 86,732,463
-----------------------------------------------------------------------------
- -------
</TABLE>
Interest rates ranged from 2.98% to 4.44% during the period. The average
amount
outstanding during the period was calculated by adding the borrowings at the
end
of each day and dividing the sum by the number of days in the year ended May
31,
1994.
Interest expense for the year ended May 31, 1994 on borrowings by the Fund
under
reverse repurchase agreements aggregated $2,994,801.
Information regarding transactions by the Fund under dollar roll transactions
is
as follows:
<TABLE>
<C> <S> <C>
-------------------------------------------------------------------
DOLLAR ROLL TRANSACTIONS--
--------------------------------------------------------------------------
Maximum amount outstanding during the year $28,000,000
Average amount outstanding during the year $ 3,769,863
-----------------------------------------------------------------------------
- -------
</TABLE>
The average amount outstanding during the period was calculated by adding the
borrowings at the end of each day and dividing the sum by the number of days
in
the year ended May 31, 1994.
34
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Interest income earned for the year ended May 31, 1994, by the Fund under
dollar
roll transactions aggregated $104,741.
Written option activity for the year ended May 31, 1994 was as follows:
<TABLE>
<CAPTION>
Number
of
Premiums
Contracts
<S> <C> <C>
- ------------------------------------------------------------------------------
- ---
Options outstanding at May 31, 1993 $ 46,400
400
Options closed (46,400)
(400)
- ------------------------------------------------------------------------------
- ---
Options outstanding at May 31, 1994 $ 0
0
- ------------------------------------------------------------------------------
- ---
</TABLE>
6. SHARES OF BENEFICIAL INTEREST
At May 31, 1994, an unlimited number of shares of beneficial interest divided
into three classes, Class A, Class B and Class D shares, with a par value of
$.001 per share, were authorized. Changes in the Fund's shares of beneficial
interest for each class were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
PERIOD ENDED
CLASS A SHARES: Shares 5/31/94Amount
Shares 5/31/93*Amount
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------
- -------
Sold 37,723,115 $ 375,317,501
50,155,149 $ 501,502,604
Issued as reinvestment of dividends 1,288,488 12,786,604
616,364 6,157,760
Redeemed (41,442,947) (410,594,238)
(19,338,094) (193,252,770)
- ------------------------------------------------------------------------------
- -------
Net increase/(decrease) (2,431,344) $ (22,490,133)
31,433,419 $ 314,407,594
- ------------------------------------------------------------------------------
- -------
<CAPTION>
YEAR ENDED
PERIOD ENDED
5/31/94
5/31/93**
CLASS B SHARES: Shares Amount
Shares Amount
<S> <C> <C> <C>
<C>
- ------------------------------------------------------------------------------
- -------
Sold 1,642,723 $ 16,273,982
383,519 $ 3,829,121
Issued as reinvestment of dividends 15,084 149,272
1,561 15,579
Redeemed (1,154,619) (11,441,168)
(26,778) (267,644)
- ------------------------------------------------------------------------------
- -------
Net increase 503,188 $ 4,982,086
358,302 $ 3,577,056
- ------------------------------------------------------------------------------
- -------
<FN>
* The Fund commenced operations on June 22, 1992.
** The Fund commenced selling Class B shares on November 6, 1992. Any shares
outstanding prior to November 6, 1992 were designated as Class A shares.
</TABLE>
35
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- -------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED
5/31/94***
CLASS D SHARES: Shares Amount
<S> <C> <C>
- -------------------------------------------------------------------
Sold 12,666 $126,234
Issued as reinvestment of dividends 382 3,795
Redeemed (1,533) (15,084)
- -------------------------------------------------------------------
Net increase 11,515 $114,945
- -------------------------------------------------------------------
<FN>
*** The Fund commenced selling Class D shares on June 2, 1993.
</TABLE>
At May 31, 1993, the Fund had one Class D share issued in the amount of $9.96.
7. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the
fees
and expenses of registering and qualifying its shares for distribution under
Federal and state securities regulations. All such costs are being amortized
on
the straight-line method over a period of five years from June 22, 1992, the
date that the Fund commenced operations. In the event that any of the initial
shares of the Fund are redeemed during such amortization period, the Fund will
be reimbursed for any unamortized costs in the same proportion as the number
of
shares redeemed bears to the number of initial shares outstanding at the time
of
redemption.
8. SUBSEQUENT EVENT
On June 16, 1994, BlackRock entered into a definitive agreement to be acquired
by PNC Bank, N.A. The acquisition, which is subject to regulatory approval, is
expected to close prior to the end of the year. Prior to closing, BlackRock
will
seek approval for the assignment of the investment advisory contract from the
Fund's Board and Shareholders. Shareholder approval will be solicited by a
proxy
statement. Following closing, BlackRock will become a subsidiary of PNC
Investment Management and Research, the holding company for PNC's asset
management business.
36
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
REPORT OF INDEPENDENT ACCOUNTANTS
TO THE TRUSTEES AND SHAREHOLDERS OF
SMITH BARNEY SHEARSON ADJUSTABLE RATE
GOVERNMENT INCOME FUND:
We have audited the accompanying statement of assets and liabilities of Smith
Barney Shearson Adjustable Rate Government Income Fund, including the schedule
of portfolio investments, as of May 31, 1994, the related statement of
operations and the statement of cash flows for the year then ended, and the
statement of changes in net assets and the financial highlights for the year
then ended and for the period June 22, 1992 (commencement of operations) to
May
31, 1993. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on
a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of May
31, 1994 by correspondence with the custodian and brokers. An audit also
includes assessing the accounting principles used and significant estimates
made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Smith
Barney Shearson Adjustable Rate Government Income Fund as of May 31, 1994, the
results of its operations and the results of its cash flows for the year then
ended, and the changes in its net assets and the financial highlights for the
year then ended and for the period June 22, 1992 (commencement of operations)
to
May 31, 1993, in conformity with generally accepted accounting principles.
COOPERS & LYBRAND
Boston, Massachusetts
July 22, 1994
37
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
TAX INFORMATION (UNAUDITED)
FISCAL YEAR ENDED MAY 31, 1994
Of the dividends paid by the Fund from investment income for the year ended
May
31, 1994, 78.80% was derived from investments in U.S. Government and Agency
Obligations. All or a portion of the distributions from this income may be
exempt from taxation at the state level. Consult your tax advisor for state
specific information.
38
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
INVESTMENT ADVISER
Smith Barney Strategy Advisers Inc.
Two World Trade Center
New York, New York 10048
SUB-INVESTMENT ADVISER
BlackRock Financial
Management L.P.
345 Park Avenue
New York, New York 10154
ADMINISTRATOR
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105
SUB-ADMINISTRATOR
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
AUDITORS AND COUNSEL
Coopers & Lybrand
One Post Office Square
Boston, Massachusetts 02109
Willkie Farr & Gallagher
153 East 53rd Street
New York, New York 10022
TRANSFER AGENT
The Shareholder Services
Group, Inc.
Exchange Place
Boston, Massachusetts 02109
CUSTODIAN
Boston Safe Deposit and
Trust Company
One Boston Place
Boston, Massachusetts 02108
39
<PAGE>
Smith Barney Shearson
Adjustable Rate Government Income Fund
- ---------------------------------------------------------------------------
GLOSSARY OF COMMONLY USED MUTUAL FUND TERMS
CAPITAL GAIN (OR LOSS): This is the increase (or decrease) in the market value
(price) of a security in your portfolio. If a stock or bond appreciates in
price, there is a capital gain; if it depreciates there is a capital loss. A
capital gain or loss is "realized" upon the sale of a security; if net capital
gains exceed net capital losses, there may be a capital gain distribution to
shareholders.
CONTINGENT DEFERRED SALES CHARGE (CDSC): A back-end load, a CDSC is imposed if
shares are redeemed during the first few years of ownership. The CDSC may be
expressed as a percentage of either the original purchase price or the
redemption proceeds. Most CDSCs decline over time, and some will not be
charged
if shares are redeemed under certain conditions.
DISTRIBUTION RATE: This is the rate at which a mutual fund pays out (or
distributes) interest, dividends and realized capital gains to shareholders. A
fund's distribution rate is usually expressed as an annualized percent of the
fund's offering price.
DIVIDEND: This is income generated by securities in a portfolio and
distributed
after expenses to shareholders.
FRONT-END SALES CHARGE: This is the sales charge applied to an investment at
the
time of initial purchase.
NET ASSET VALUE (NAV): Net asset value is the total market value of all
securities held by a fund, minus any liabilities, divided by the number of
shares outstanding. It is the value of a single share of a mutual fund on a
given day. The total value of your investment would be the NAV multiplied by
the
number of shares you own.
SEC YIELD: This standardized calculation of a mutual fund's yield is based on
a
formula developed by the Securities and Exchange Commission (SEC) to allow
funds
to be compared on an equal basis. It is an annualized yield based on the
portfolio's potential earnings from dividends, interest and yield to maturity
of
its holdings, and it reflects the payments of all portfolio expenses for the
most recent 30-day period. Mutual funds are required to use this figure when
stating yield.
TOTAL RETURN: Total return measures a fund's performance, taking into account
the combination of dividends paid and the gain or loss in the value of the
securities held in the portfolio. It may be expressed on an AVERAGE ANNUAL
basis
or CUMULATIVE basis (total change over a given period). In addition, total
return may be expressed with or without the effects of sales charges or the
reinvestment of dividends and capital gains.
Whenever a fund reports any type of performance, it must also report the
average
annual total return according to the standardized calculation developed by the
SEC. The SEC AVERAGE ANNUAL TOTAL RETURN calculation includes the effects of
all
fees and sales charges and assumes the reinvestment of all dividends and
capital
gains.
40
<PAGE>
ADJUSTABLE RATE
GOVERNMENT
INCOME FUND
TRUSTEES
Charles F. Barber
Allan J. Bloostein
Martin Brody
Dwight B. Crane
Robert A. Frankel
Heath B. McLendon
OFFICERS
Heath B. McLendon
CHAIRMAN OF THE BOARD
Stephen J. Treadway
PRESIDENT
Richard P. Roelofs
EXECUTIVE VICE PRESIDENT
Scott M. Amero
VICE PRESIDENT AND
INVESTMENT OFFICER
Keith T. Anderson
VICE PRESIDENT AND
INVESTMENT OFFICER
Robert S. Kapito
VICE PRESIDENT AND
INVESTMENT OFFICER
Lewis E. Daidone
TREASURER
Christina T. Sydor
SECRETARY
THIS REPORT IS SUBMITTED FOR THE GENERAL INFORMATION OF THE SHAREHOLDERS OF
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND. IT IS NOT
AUTHORIZED FOR DISTRIBUTION TO PROSPECTIVE INVESTORS UNLESS ACCOMPANIED OR
PRECEDED BY AN EFFECTIVE PROSPECTUS FOR THE FUND, WHICH CONTAINS INFORMATION
CONCERNING THE FUND'S INVESTMENT POLICIES AND EXPENSES AS WELL AS OTHER
PERTINENT INFORMATION.
[LOGO]
SMITH BARNEY SHEARSON
MUTUAL FUNDS
Two World Trade Center
New York, New York 10048
Fund 167, 226, 240
FD2224 G4
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
Portfolio Highlights
Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Cash Flows
Statement of Changes in Net Assets
Financial Highlights
Report of Independent Accountants
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
References are to the Registrant's registration statement on Form N-1A as
filed with the SEC on May 8, 1992, File Nos. 33-47782 & 811-6663 (the
"Registration Statement").
(1)(a) First Amended and Restated Master Trust Agreement dated November
5, 1992 is incorporated by reference to Post-Effective Amendment No. 5 to the
Registration Statement filed on September 29, 1993. ("Post-Effective Amendment
No. 5").
(b) Amendment No. 1 to First Amended and Restated Master Trust
Agreement is incorporated by reference to Post-Effective Amendment No. 5.
(2) Registrant's By-Laws are incorporated by reference to Pre-Effective
Amendment No. 1 to the Registration Statement filed on June 17, 1992 ("Pre-
Effective Amendment No. 1").
(3) Not Applicable.
(4) Registrant's form of share certificate for Class A, B and D shares is
incorporated by reference to Post-Effective Amendment No. 2 to the
Registration Statement filed on October 23, 1992 ("Post-Effective Amendment
No. 2).
(5)(a) Investment Management Agreement between the Registrant and
Shearson Lehman Investment Strategy Advisors, Inc. ("Strategy Advisors") is
incorporated by reference to Pre-Effective Amendment No. 1.
(b) Investment Advisory Agreement between the Registrant and Smith
Barney Shearson Strategy Advisers, Inc. ("SBSSA") dated July 30, 1993 is
incorporated by reference to Post-Effective Amendment No. 5.
(c) Sub-Investment Advisory Agreement between the Registrant and
BlackRock Financial Management L.P. ("BlackRock") is incorporated by reference
to Post-Effective Amendment No. 4 to the Registration Statement filed on
October 1, 1993 ("Post-Effective Amendment No. 4").
(d) Administration Agreement dated June 1, 1994 between the Registrant
and Smith, Barney Advisers, Inc. is filed herein.
(e) Sub-Administration Agreement dated June 1, 1994 between the
Registrant and Boston Advisors is filed herein.
(6) Distribution Agreement between the Registrant and Smith Barney
Shearson Inc. ("Smith Barney Shearson") dated July 30, 1993 is incorporated
by reference to Post-Effective Amendment No. 5.
(7) Not Applicable.
(8) Custody Agreement between the Registrant and Boston Safe Deposit and
Trust Company ("Boston Safe") is incorporated by reference to Pre-Effective
Amendment No. 1.
(9) Transfer Agency Agreement between the Registrant and The Shareholder
Services Group, Inc. ("TSSG") is incorporated by reference to Pre-Effective
Amendment No. 1.
(10) Opinion of Counsel is filed herein.
(11) Consent of Independent Accountants is filed herein.
(12) Not Applicable.
(13) Purchase Agreement between the Registrant and Shearson Lehman Brothers
is incorporated by reference to Pre-Effective Amendment No. 1.
(14) Not Applicable.
(15)(a) Distribution Plan pursuant to Rule 12b-1 is incorporated by
reference to Pre-Effective Amendment No. 1.
(15)(b) Services and Distribution Plan pursuant to Rule 12b-1 dated
November 6, 1992 is incorporated by reference to Post-Effective Amendment No.
4.
(c) Services and Distribution Plan pursuant to Rule 12b-1 dated July 30,
1993 is incorporated by reference to Post-Effective Amendment No. 5.<R/>
(16) Not Applicable.
Item 25. Persons Controlled by or Under Common Control with Registrant
None.
Item 26. Number of Holders of Securities
(1) (2)
Number of Record
Title of Class Holders by Class as of
July 27, 1994
Shares representing Class A- 8,517
beneficial interests,
par value $.001 per Class B - 292
share
Class D - 2
Item 27. Indemnification
The response to this item is incorporated by reference to Pre-Effective
Amendment No. 1.
Item 28(a). Business and Other Connections of Investment Adviser
Investment Adviser - - Smith Barney Shearson Strategy Advisers Inc.
Smith Barney Shearson Strategy Advisers Inc. ("Strategy Advisers") was
incorporated on October 22, 1986 under the laws of the State of Delaware.
Strategy Advisers is a wholly owned subsidiary of Smith, Barney Advisers, Inc.
("SBA"), which was incorporated under the laws of the state of Delaware in
1968. SBA is a wholly owned subsidiary of Smith Barney Shearson Holdings
Inc., which in turn is a wholly owned subsidiary of The Travelers Inc.
(formerly know as Primerica Corporation) ("Travelers"). Strategy Advisers is
registered as an investment adviser under the Investment Adviser Act of 1940
(the "Advisers Act"). Strategy Advisers is also registered with the Commodity
Futures Trading Commission (the "CFTC") as a commodity pool operator under the
Commodity Exchange Act (the "CEA"), and is a member of the National Futures
Association (the "NFA").
The list required by this Item 28 of officers and directors of SBA and
Strategy Advisers, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in by such
officers and directors during the past two years, is incorporated by reference
to Schedules A and D of FORM ADV filed by SBA on behalf of Strategy Advisers
pursuant to the Advisers Act (SEC File No. 801-8314).
Prior to the close of business on July 30, 1993 (the "Closing"), Shearson
Lehman Investment Strategy Advisors Inc. ("Shearson Lehman Strategy
Advisors"), was a wholly owned subsidiary of Shearson Lehman Brothers Inc.
("Shearson Lehman Brothers"), and served as the Registrant's investment
adviser. On the Closing, Travelers and Smith Barney Shearson Inc. acquired
the domestic retail brokerage and asset management business of Shearson Lehman
Brothers which included the business of the Registrant's prior investment
adviser. Shearson Lehman Brothers was a wholly owned subsidiary of Shearson
Lehman Brothers Holdings Inc. ("Shearson Holdings"). All of the issued and
outstanding common stock of Shearson Holdings (representing 92% of the voting
stock) was held by American Express Company. Information as to any past
business vocation or employment of a substantial nature engaged in by officers
and directors of Shearson Lehman Investment Strategy Advisors can be located
in Schedules A and D of FORM ADV filed by Shearson Lehman Investment Strategy
Advisors prior to July 30, 1993. (SEC FILE NO. 801-28715)
3/15/94
Item 28 (b). Business and Other Connections of Investment Adviser.
Sub-Investment Adviser -- BlackRock Financial Management L.P.
BlackRock Financial Management L.P. ("BlackRock") is a Delaware Limited
partnership and is a registered investment adviser engaged in the investment
advisory business. Information as to BlackRock's general and limited partners
is incorporated by reference to the Form ADV filed by BlackRock pursuant to
the Advisers Act (SEC file No. 801-32183).
Item 29. Principal Underwriters
Smith Barney Shearson Inc. ("Smith Barney Shearson") currently acts as
distributor for Smith Barney Shearson Managed Municipals Fund Inc., Smith
Barney Shearson New York Municipals Fund Inc., Smith Barney Shearson
California Municipals Fund Inc., Smith Barney Shearson Massachusetts
Municipals Fund, Smith Barney Shearson Global Opportunities Fund, Smith Barney
Shearson Aggressive Growth Fund Inc., Smith Barney Shearson Appreciation Fund
Inc., Smith Barney Shearson Worldwide Prime Assets Fund, Smith Barney
Shearson Short-Term World Income Fund, Smith Barney Shearson Principal Return
Fund, Smith Barney Shearson Municipal Money Market Fund Inc., Smith Barney
Shearson Daily Dividend Fund Inc., Smith Barney Shearson Government and
Agencies Fund Inc., Smith Barney Shearson Managed Governments Fund Inc., Smith
Barney Shearson New York Municipal Money Market Fund, Smith Barney Shearson
California Municipal Money Market Fund, Smith Barney Shearson Income Funds,
Smith Barney Shearson Equity Funds, Smith Barney Shearson Investment Funds
Inc., Smith Barney Shearson Precious Metals and Minerals Fund Inc., Smith
Barney Shearson Telecommunications Trust, Smith Barney Shearson Arizona
Municipals Fund Inc., Smith Barney Shearson New Jersey Municipals Fund Inc.,
The USA High Yield Fund N.V., Garzarelli Sector Analysis Portfolio N.V., The
Advisors Fund L.P., Smith Barney Shearson Fundamental Value Fund Inc., Smith
Barney Shearson Series Fund, The Trust for TRAK Investments, Smith Barney
Shearson Income Trust, Smith Barney Shearson FMA R Trust, Smith Barney
Shearson Adjustable Rate Government Income Fund, Smith Barney Shearson Florida
Municipals Fund, Smith Barney Funds, Inc., Smith Barney Muni Funds, Smith
Barney World Funds, Inc., Smith Barney Money Funds, Inc., Smith Barney Tax
Free Money Fund, Inc., Smith Barney Variable Account Funds, Smith Barney U.S.
Dollar Reserve Fund (Cayman), Worldwide Special Fund, N.V., Worldwide
Securities Limited, (Bermuda), Smith Barney International Fund (Luxembourg)
and various series of unit investment trusts.
Smith Barney Shearson is a wholly owned subsidiary of Smith Barney
Shearson Holdings Inc., which in turn is a wholly owned subsidiary of The
Travelers Inc. (formerly known as Primerica Corporation) ("Travelers"). The
information required by this Item 29 with respect to each director, officer
and partner of Smith Barney Shearson is incorporated by reference to Schedule
A of FORM BD filed by Smith Barney Shearson pursuant to the Securities
Exchange Act of 1934 (SEC File No. 812-8510).
3/15/94
Item 30. Location of Accounts and Records
(1) Smith Barney Shearson Adjustable Rate Government Income Fund
Two World Trade Center
New York, New York 10048
(2) Smith Barney Strategy Advisers, Inc.
Two World Trade Center
New York, New York 10048
(3) BlackRock Financial Management L.P.
345 Park Avenue, 31st Floor
New York, New York 10154
(4) Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10105.
(5) The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
(6) Boston Safe Deposit and Trust Company
One Boston Place
Boston, Massachusetts 02108
(7) The Shareholder Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of shareholders for the
purpose of voting upon the question of removal of a trustee or trustees of
Registrant when requested in writing to do so by the holders of at least 10%
of Registrant's outstanding shares and, in connection with the meeting, to
comply with the provisions of Section 16(c) of the 1940 Act relating to
communications with the shareholders of certain common-law trusts.
Rule 485(b) Certification
The Registrant hereby certifies that it meets all of the requirements
for effectiveness pursuant to Rule 485(b) under the Securities Act of 1933, as
amended.
The Registrant further represents pursuant to Rule 485(b)(2)(iv) that
the resignation of Robert Borgesen as Trustee of the Registrant was not due to
any disagreement with the Registrant on any matter relating to its operation,
policies or practices. Mr. Borgesen resigned because of health and age
considerations.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as
amended, and the Investment Company Act of 1940, as amended, the Registrant,
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND, has duly caused
this Amendment to the Registration Statement 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 29th day of July 1994.
SMITH BARNEY SHEARSON
ADJUSTABLE RATE GOVERNMENT INCOME
FUND
By: /s/ Heath B. McLendon*
Heath B. McLendon, Chief Executive Officer
WITNESS our hands on the date set forth below.
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, 7/29/94
Chief Executive Officer
and Trustee
/s/ Richard P. Roelofs*
Richard P. Roelofs President 7/29/94
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer 7/29/94
(Chief Financial Officer)
/s/ Charles F. Barber*
Charles F. Barber Trustee 7/29/94
/s/ Allan J. Bloostein*
Allan J. Bloostein Trustee
7/29/94
/s/ Martin Brody* Trustee 7/29/94
Martin Brody
/s/ Dwight B. Crane*
Dwight B. Crane Trustee
7/29/94
Robert A. Frankel Trustee 7/29/94
*Signed by Lee D. Augsburger, their
duly authorized attorney-in-fact,
pursuant to power of attorney dated
September 29, 1993
/s/ Lee D. Augsburger______
Lee D. Augsburger
g:/shared/domestic/clients/shearson/funds/arms/pea6
Exhibit 5(d)
ADMINISTRATION AGREEMENT
SMITH BARNEY SHEARSON ADJUSTABLE GOVERNMENT INCOME FUND
June 1, 1994
Smith, Barney Advisers, Inc.
1345 Avenue of the Americas
New York, New York 10019
Dear Sirs:
Smith Barney Shearson Adjustable Rate Government Income Fund (the
"Fund"), an unincoporated business trust organized under the laws of the
Commonwealth of Massachusetts, confirms its agreement with Smith, Barney
Advisors, Inc. ("SBA") as follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Amended and Restated Master Trust Agreement dated November 5,
1992, as amended from time to time (the "Master Trust Agreement"), in its
Prospectus and Statement of Additional Information as from time to time in
effect and in such manner and to such extent as may from time to time be
approved by the Board of Trustees of the Fund (the "Board"). Copies of the
Fund's Prospectus, Statement of Additional Information and Master Trust
Agreement have been or will be submitted to SBA. Smith Barney Shearson
Strategy Advisers Inc. ("SBSSA") serves as the Fund's investment adviser;
Black Rock Financial Management L.P., (Black Rock") serves as the Fund's sub-
investment adviser; and the Fund desires to employ and hereby appoints SBA to
act as its administrator. SBA accepts this appointment and agrees to furnish
the services to the Fund for the compensation set forth below. SBA is hereby
authorized to retain third parties and is hereby authorized to delegate some
or all of its duties and obligations hereunder to such persons provided that
such persons shall remain under the general supervision of SBA.
2. Services as Administrator
Subject to the supervision and direction of the Board, SBA will:
(a) assist in supervising all aspects of the Fund's operations except those
performed by the Fund's investment adviser under its investment advisory
agreement; (b) supply the Fund with office facilities (which may be in SBA's
own offices), statistical and research data, data processing services,
clerical, accounting and bookkeeping services, including, but not limited to,
the calculation of (i) the net asset value of shares of the Fund, (ii)
applicable contingent deferred sales charges and similar fees and charges and
(iii) distribution fees, internal auditing and legal services, internal
executive and administrative services, and stationary and office supplies; and
(c) prepare reports to shareholders of the Fund, tax returns and reports to
and filings with the Securities and Exchange Commission (the "SEC") and state
blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this Agreement,
the Fund will pay SBA on the first business day of each month a fee for the
previous month at an annual rate of .20 of 1.00% of the Fund's average daily
net assets. The fee for the period from the date the Fund's initial
registration statement is declared effective by the SEC to the end of the
month during which the initial registration statement is declared effective
shall be prorated according to the proportion that such period bears to the
full monthly period. Upon any termination of this Agreement before the end of
any month, the fee for such part of a month shall be prorated according to the
proportion which such period bears to the full monthly period and shall be
payable upon the date of termination of this Agreement. For the purpose of
determining fees payable to SBA, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's Prospectus and
Statement of Additional Information as from time to time in effect.
4. Expenses
SBA will bear all expenses in connection with the performance of
its services under this Agreement. The Fund will bear certain other expenses
to be incurred in its operation, including: taxes, interest, brokerage fees
and commissions, if any; fees of the members of the Board of the Fund who are
not officers, directors or employees of Smith Barney Shearson Inc. or its
affiliates or any person who is an affiliate of any person to whom duties may
be delegated hereunder; SEC fees and state blue sky qualification fees;
charges of custodians and transfer and dividend disbursing agents; the Fund's
and Board members' proportionate share of insurance premiums, professional
association dues and/or assessments; outside auditing and legal expenses;
costs of maintaining the Fund's existence; costs attributable to investor
services, including, without limitation, telephone and personnel expenses;
costs of preparing and printing prospectuses and statements of additional
information for regulatory purposes and for distribution to existing
shareholders; costs of shareholders' reports and meetings of the officers or
Board and any extraordinary expenses. In addition, the Fund will pay all
distribution fees pursuant to a Distribution Plan adopted under Rule 12b-1 of
the Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement to the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment advisory
agreement (s), but excluding distribution fees, interest, taxes, brokerage
and, if permitted by state securities commissions, extraordinary expenses)
exceed the expense limitations of any state having jurisdiction over the Fund,
SBA will reimburse the Fund for that excess expense to the extent required by
state law in the same proportion as its respective fees bear to the combined
fees for investment advice and administration. The expense reimbursement
obligation of SBA will be limited to the amount of its fees hereunder. Such
expense reimbursement, if any, will be estimated, reconciled and paid on a
monthly basis.
6. Standard of Care
SBA shall exercise its best judgment in rendering the services
listed in paragraph 2 above, and SBA shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Fund in connection
with the matters to which this Agreement relates, provided that nothing herein
shall be deemed to protect or purport to protect SBA against liability to the
Fund or to its shareholders to which SBA would otherwise be subject by reason
of willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or by reason of SBA's reckless disregard of its
obligations and duties under this Agreement.
7. Term of Agreement
This Agreement shall continue automatically for successive annual
periods, provided such continuance is specifically approved at least annually
by the Board.
8. Service to Other Companies or Accounts
The Fund understands that SBA now acts, will continue to act and
may act in the future as administrator to one or more other investment
companies, and the Fund has no objection to SBA so acting. In addition, the
Fund understands that the persons employed by SBA or its affiliates to assist
in the performance of its duties hereunder will not devote their full time to
such service and nothing contained herein shall be deemed to limit or restrict
the right of SBA or its affiliates to engage in and devote time and attention
to other businesses or to render services of whatever kind or nature.
9. Indemnification
The Fund agrees to indemnify SBA and its officers, directors,
employees, affiliates, controlling persons, agents (including persons to whom
responsibilities are delegated hereunder) ("indemnitees") against any loss,
claim, expense or cost of any kind (including reasonable attorney's fees)
resulting or arising in connection with this Agreement or from the performance
or failure to perform any act hereunder, provided that no such indemnification
shall be available if the indemnitee violated the standard of care in
paragraph 6 above. This indemnification shall be limited by the 1940 Act, and
relevant state law. Each indemnitee shall be entitled to advancement of its
expenses in accordance with the requirements of the 1940 Act and the rules,
regulations and interpretations thereof as in effect from time to time.
10. Limitation of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon the
assets and property of the Fund, as provided in the Master Trust Agreement.
The execution and delivery of this Agreement has been duly authorized by the
Fund, SBA and Boston
Advisors, and signed by an authorized officer of each, acting as such.
Neither the authorization by the Board members of the Fund, nor the execution
and delivery by the officer of the Fund shall be deemed to have been made by
any of them individually or to impose any liability on any of them personally,
but shall bind only the assets and property of the Fund as provided in the
Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by singing and returning to us the enclosed
copy hereof.
Very truly yours,
Smith Barney Shearson
Adjustable Rate Government Fund
By: /s/Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
Accepted:
Smith, Barney Advisers, Inc.
By: /s/Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
APPENDIX A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act"), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
o Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
o Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
o Formal Reconciliations - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
o Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
o Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
o Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
o Calculate Net Income, Mil Rate and Yield for Daily
Distribution Funds - Calculate income on purchase and sales, calculate
change in income due to variable rate change, combine all daily income
less expenses to arrive at net income, calculate mil rate and yields (1
day, 7 day and 30 day);
o Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
o Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian records;
o Pricing - Determine N.A.V. for Fund using market value of
all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
o Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
o System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
o Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
o Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
o Reporting of Price to Transfer Agent- N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio managers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board members, tax authorities, statistical and performance
reporting companies and the Fund's auditors; interface with the Fund's
auditors; prepare monthly reconciliation packages, including expense pro
forma; prepare amortization schedules for premium and discount bonds
based on the effective yield method; prepare vault reconciliation
reports to indicate securities currently "out-for-transfer;" and
calculate daily expenses based on expense ratios supplied by Fund's
treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
o Coordinate the preparation and review of the annual,
semi-annual and quarterly portfolio of investments and financial
statements included in the Fund's shareholder reports.
Statistical Reporting
o Total return reporting;
o SEC 30-day yield reporting and 7-day yield reporting
(for money market funds);
o Prepare dividend summary;
o Prepare quarter-end reports;
o Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.)
Publications
o Coordinate the printing and mailing process with
outside printers for annual and semi-annual reports, prospectuses,
statements of additional information, proxy statements and special
letters or supplements;
o Provide graphics and design assistance relating to the
creation of marketing materials and shareholder reports.
Treasury. The following is a summary of the treasury services available
to the Fund:
o Provide a Treasurer and Assistant Treasurer for the
Fund;
o Determine expenses properly chargeable to the Fund;
o Authorize payment of bills for expenses of the Fund;
o Establish and monitor the rate of expense accruals;
o Prepare financial materials for review by the Fund's
Board (e.g., Rule 2a-7, 10f-3, 17a-7 and 17e-1 reports, repurchase
agreement dealer lists, securities transactions);
o Recommend dividends to be voted by the Fund's Board;
o Monitor mark-to-market comparisons for money market
funds;
o Recommend valuation to be used for securities which
are not readily saleable;
o Function as a liaison with the Fund's outside auditors
and arrange for audits;
o Provide accounting, financial and tax support relating
to portfolio management and any contemplated changes in the Fund's
structure or operations;
o Prepare and file forms with the Internal Revenue
Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and
related regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
o File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
o File annual and semi-annual shareholder reports with
the appropriate regulatory agencies;
o Prepare and file proxy statements;
o Review marketing material for SEC and NASD clearance;
o Provide legal assistance for shareholder
communications.
Corporate and Secretarial Services
o Provide a Secretary and an Assistant Secretary for the
Fund;
o Maintain general corporate calendar;
o Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
o Organize, attend and keep minutes of shareholder
meetings;
o Maintain Master Trust Agreement and By-Laws of the
Fund.
Legal Consultation and Business Planning
o Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
o Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
o Develop or assist in developing guidelines and
procedures to improve overall compliance by the Fund and its various
agents;
o Manage Fund litigation matters and assume full
responsibility for the handling of routine Fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing
compliance manuals, conducting seminars for fund accounting and advisory
personnel and performing on-going testing of the Fund's portfolio to
assist the Fund's investment adviser in complying with prospectus
guidelines and limitations, 1940 Act requirements and Internal Revenue
Code requirements. The Department may also act as liaison to the SEC
during its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully
automated environment using blue sky registration software developed by
Price Waterhouse. In addition to being responsible for the initial and
on-going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
4
shared\domestic\clients\shearson\funds\arms\admin1.doc
Exhibit 5(e)
SUB-ADMINISTRATION AGREEMENT
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND
June 1, 1994
The Boston Company Advisors, Inc.
One Exchange Place
Boston, MA 02210
Dear Sirs:
Smith Barney Shearson Adjustable Rate Government Income Fund (the
"Fund"), an unincorporated business trust organized under the laws of the
Commonwealth of Massachusetts and Smith, Barney Advisers, Inc. ("SBA") confirm
their agreement with The Boston Company Advisors, Inc. ("Boston Advisors") as
follows:
1. Investment Description; Appointment
The Fund desires to employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in its Amended and Restated Master Trust Agreement dated November 5,
1992 as amended from time to time (the "Master Trust Agreement"), in its
Prospectus and Statement of Additional Information as from time to time in
effect, and in such manner and to such extent as may from time to time be
approved by the Board of Trustees of the Fund (the "Board"). Copies of the
Fund's Prospectus, Statement of Additional Information and Master Trust
Agreement have been or will be submitted to you. The Fund employs SBA as its
administrator, and the Fund and SBA desire to employ and hereby appoint Boston
Advisors as the Fund's sub-administrator. Boston Advisors accepts this
appointment and agrees to furnish the services to the Fund, for the
compensation set forth below, under the general supervision of SBA.
2. Services as Sub-Administrator
Subject to the supervision and direction of the Board and SBA,
Boston Advisors will: (a) assist in supervising all aspects of the Fund's
operations except those performed by the Fund's investment adviser under the
Fund's investment advisory agreement; (b) supply the Fund with office
facilities (which may be in Boston Advisor's own offices), statistical and
research data, data processing services, clerical, accounting and bookkeeping
services, including, but not limited to, the calculation of (i) the net asset
value of shares of the Fund, (ii) applicable contingent deferred sales charges
and similar fees and changes and (iii) distribution fees, internal auditing
and legal services, internal executive and administrative services, and
stationery and office supplies; and (c) prepare reports to shareholders of the
Fund, tax returns and reports to and filings with the Securities and Exchange
Commission (the "SEC") and state blue sky authorities.
3. Compensation
In consideration of services rendered pursuant to this Agreement,
SBA will pay Boston Advisors on the first business day of each month a fee for
the previous month calculated in accordance with the terms set forth in
Appendix B, and as agreed to from time to time by the Fund, SBA and Boston
Advisors. Upon any termination of this Agreement before the end of any month,
the fee for such part of a month shall be prorated according to the proportion
which such period bears to the full monthly period and shall be payable upon
the date of termination of this Agreement. For the purpose of determining
fees payable to Boston Advisors, the value of the Fund's net assets shall be
computed at the times and in the manner specified in the Fund's Prospectus and
Statement of Additional Information as from time to time in effect.
4. Expenses
Boston Advisors will bear all expenses in connection with the
performance of its services under this Agreement. The Fund will bear certain
other expenses to be incurred in its operation, including: taxes, interest,
brokerage fees and commissions, if any; fees of the Board members of the Fund
who are not officers, directors or employees of Smith Barney Shearson Inc.,
Boston Advisors of their affiliates; SEC fees and state blue sky qualification
fees; charges of custodians and transfer and dividend disbursing agents; the
Fund's and its Board members' proportionate share of insurance premiums,
professional association dues and/or assessments; outside auditing and legal
expenses; costs of maintaining the Fund's existence; costs attributable to
investor services, including, without limitation, telephone and personnel
expenses; costs of preparing and printing prospectuses and statements of
additional information for regulatory purposes and for distribution to
existing shareholders; costs of shareholders' reports and meetings of the
officers or Board and any extraordinary expenses. In addition, the Fund will
pay all distribution fees pursuant to a Distribution Plan adopted under Rule
12b-1 of the Investment Company Act of 1940, as amended (the "1940 Act").
5. Reimbursement of the Fund
If in any fiscal year the aggregate expenses of the Fund
(including fees pursuant to this Agreement and the Fund's investment advisory
agreement(s) and administration agreement, but excluding distribution fees,
interest, taxes, brokerage and, if permitted by state securities commissions,
extraordinary expenses) exceed the expense limitations of any state having
jurisdiction over the Fund, Boston Advisory will reimburse the Fund for that
excess expense to the extent required by state law in the same proportion as
its respective fees bear to the combined fees for investment advice and
administration. The expense reimbursement obligation of Boston Advisors will
be limited to the amount of its fees hereunder. Such expense reimbursement,
if any, will be estimated, reconciled and paid on a monthly basis.
6. Standard of Care
Boston Advisors shall exercise its best judgment in rendering the
services listed in paragraph 2 above. Boston Advisors shall not be liable for
any error of judgment or mistake of law or for any loss suffered by the Fund
in connection with the matters to which this Agreement
relates, provided that nothing herein shall be deemed to protect or purport to
protect Boston Advisors against liability to the Fund or to its shareholders
to which Boston Advisors would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on its part in the performance of
its duties or by reason of Boston Advisor's reckless disregard of its
obligations and duties under this Agreement.
7. Term of Agreement
This agreement shall continue automatically for successive annual
periods, provided that it may be terminated by 90 days' written notice to the
other parties by any of the Fund, SBA or Boston Advisors. This Agreement
shall extend to and shall be binding upon the parties hereto, and their
respective successors and assigns, provided, however, that this agreement may
not be assigned, transferred or amended without the written consent of all the
parties hereto.
8. Service to Other Companies or Accounts
The Fund understands that Boston Advisors now acts, will continue
to act and may act in the future as administrator to one or more other
investment companies, and the Fund has no objection to Boston Advisors so
acting. In addition, the Fund understands that the persons employed by Boston
Advisors to assist in the performance of its duties hereunder may or may not
devote their full time to such service and nothing contained herein shall be
deemed to limit or restrict the right of Boston Advisors or its affiliates to
engage in and devote time and attention to other businesses or to render
services of whatever kind of nature.
9. Indemnification
SBA agrees to indemnify Boston Advisors and its officers,
directors, employees, affiliates, controlling persons and agents
("indemnitees") to the extent that indemnification is available from the Fund,
and Boston Advisors agrees to indemnify SBA and its indemnitees, against any
loss, claim, expenses or cost of (including reasonable attorney's fees)
resulting or arising in connection with this Agreement or from the performance
or failure to perform any act hereunder, provided that not such
indemnification shall be available if the indemnitee violated the standard of
care in paragraph 6 above. This indemnification shall be limited by the 1940
Act, and relevant state law. Each indemnitee shall be entitled to advancement
of its expenses in accordance with the requirements of the 1940 Act and the
rules, regulations and interpretations thereof as in effect from time to time.
10. Limitations of Liability
The Fund, SBA and Boston Advisors agree that the obligations of
the Fund under this Agreement shall not be binding upon any of the Board
members, shareholders, nominees, officers, employees or agents, whether past,
present or future, of the Fund individually, but are binding only upon the
assets and property of the Fund, as provided in the Master Trust Agreement and
Bylaws. The execution and delivery of this Agreement has been duly authorized
by the Fund, SBA and Boston Advisors, and signed by an authorized officer of
each, acting as such. Neither the authorization by the Board Members of the
Fund, nor the execution and delivery by the officer of the Fund shall be
deemed to have been made by any of them individually or to impose any
liability on any of them personally, but shall bind only the assets and
property of the Fund as provided in the Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly
indicate your acceptance hereof by signing and returning to us the enclosed
copy hereof.
Very truly yours,
Smith Barney Shearson
Adjustable Rate Government Income Fund
By: /s/Heath B. McLendon
Name: Heath B. McLendon
Title: Chairman of the Board
Smith, Barney Advisers, Inc.
By: /s/Christina T. Sydor
Name: Christina T. Sydor
Title: Secretary
Accepted:
The Boston Company Advisors, Inc.
By: /s/Joseph W. Dello Russo
Name: Joseph W. Dello Russo
Title: Senior Vice President
Appendix A
ADMINISTRATIVE SERVICES
Fund Accounting. Fund accounting services involve comprehensive
accrual-based recordkeeping and management information. They include
maintaining a fund's books and records in accordance with the Investment
Company Act of 1940, as amended (the "1940 Act" ), net asset value
calculation, daily dividend calculation, tax accounting and portfolio
accounting.
The designated fund accountants interact with the Fund's
custodian, transfer agent and investment adviser daily. As required,
the responsibilities of each fund accountant may include:
- Cash Reconciliation - Reconcile prior day's ending cash
balance per custodian's records and the accounting system to the prior
day's ending cash balance per fund accounting's cash availability
report;
- Cash Availability - Combine all activity affecting the
Fund's cash account and produce a net cash amount available for
investment;
- Formal Reconciliation - Reconcile system generated reports
to prior day's calculations of interest, dividends, amortization,
accretion, distributions, capital stock and net assets;
- Trade Processing - Upon receipt of instructions from the
investment adviser review, record and transmit buys and sells to the
custodian;
- Journal Entries - Input entries to the accounting system
reflecting shareholder activity and Fund expense accruals;
- Reconcile and Calculate N.O.A. (net other assets) - Compile
all activity affecting asset and liability accounts other than
investment account;
- Calculate Net Income, Mil Rate and Yield for Daily
Distribution
Funds - Calculate income on purchases and sales, calculate
change in income due to variable rate change; combine all daily income
less expenses to arrive at net income; calculate mil rate and yields (1
day, 7 day and 30 day);
- Mini-Cycle (except for Money Market Funds) - Review intra
day trial balance and reports, review trial balance N.O.A.;
- Holdings Reconciliation - Reconcile the portfolio holdings
per the system to custodian reports;
- Pricing - Determine N.A.V. for the Fund using market value
of all securities and currencies (plus N.O.A.), divided by the shares
outstanding, and investigate securities with significant price changes
(over 5%);
- Money Market Fund Pricing - Monitor valuation for compliance
with Rule 2a-7;
- System Check-Back - Verify the change in market value of
securities which saw trading activity per the system;
- Net Asset Value Reconciliation - Identify the impact of
current day's Fund activity on a per share basis;
- Reporting of Price to NASDAQ - 5:30 P.M. is the final
deadline for Fund prices being reported to the newspaper;
- Reporting of Price to Transfer Agent - N.A.V.s are reported
to transfer agent upon total completion of above activities.
In addition, fund accounting personnel: communicate corporate
actions of portfolio holdings to portfolio mangers; initiate
notification to custodian procedures on outstanding income receivables;
provide information to the Fund's treasurer for reports to shareholders,
SEC, Board, tax authorities, statistical and performance reporting
companies and the Fund's auditors; interface with Fund's auditors;
prepare monthly reconciliation packages, including expense pro forma;
prepare amortization schedules for premium and discount bonds based on
the effective yield method; prepare vault reconciliation reports to
indicate securities currently "out-for-transfer;" and calculate daily
expenses based on expense ratios supplied by Fund's treasurer.
Financial Administration. The financial administration services made
available to the Fund fall within three main categories: Financial
Reporting; Statistical Reporting; and Publications. The following is a
summary of the services made available to the Fund by the Financial
Administration Division:
Financial Reporting
- Coordinate the preparation and review of the annual, semi-
annual and quarterly portfolio of investments and financial statements
included in the Fund's shareholder reports.
Statistical Reporting
- Total return reporting;
- SEC 30-day yield reporting and 7-day yield reporting (for
money market funds);
- Prepare dividend summary;
- Prepare quarter-end reports;
- Communicate statistical data to the financial media
(Donoghue, Lipper, Morningstar, et al.).
Publications
- Coordinate the printing and mailing process with outside
printers for annual and semi-annual reports, prospectuses, statements of
additional information, proxy statements and special letters or
supplements;
Treasury. The following is a summary of the treasury services available
to the Fund:
- Provide an Assistant Treasurer for the Fund;
- Authorize payment of bills for expenses of the Fund;
- Establish and monitor the rate of expense accruals;
- Prepare financial materials for review by the Fund's Board
(e.g., Rule 2a-7, 10f-3 17a-7 and 17e-1 reports, repurchase agreement
dealer lists, securities transactions);
- Monitor mark-to-market comparisons for money market funds;
- Recommend valuations to be used for securities which are not
readily saleable;
- Function as a liaison with the Fund's outside auditors and
arrange for audits;
- Provide accounting, financial and tax support relating to
portfolio management and any contemplated changes in the fund's
structure or operations;
- Prepare and file forms with the Internal Revenue Service
* Form 8613
* Form 1120-RIC
* Board Members' and Shareholders' 1099s
* Mailings in connection with Section 852 and related
regulations.
Legal and Regulatory Services. The legal and regulatory services made
available to the Fund fall within four main areas: SEC and Public
Disclosure Assistance; Corporate and Secretarial Services; Compliance
Services; and Blue Sky Registration. The following is a summary of the
legal and regulatory services available to the Fund:
SEC and Public Disclosure Assistance
- File annual amendments to the Fund's registration
statements, including updating the prospectus and statement of
additional information where applicable;
- File annual and semi-annual shareholder reports with the
appropriate regulatory agencies;
- Prepare and file proxy statements;
- Provide legal assistance for shareholder communications.
Corporate and Secretarial Services
- Provide an Assistant Secretary for the Fund;
- Maintain general corporate calendar;
- Prepare agenda and background materials for Fund board
meetings, make presentations where appropriate, prepare minutes and
follow-up matters raised at Board meetings;
- Organize, attend and keep minutes of shareholder meetings;
- Maintain Articles of Incorporation or Master Trust
Agreements and By-Laws of the Fund.
Legal Consultation and Business Planning
- Provide general legal advice on matters relating to
portfolio management, Fund operations and any potential changes in the
Fund's investment policies, operations or structure;
- Maintain continuing awareness of significant emerging
regulatory and legislative developments which may affect the Fund,
update the Fund's Board and the investment adviser on those developments
and provide related planning assistance where requested or appropriate;
- Develop or assist in developing guidelines and procedures to
improve overall compliance by the Fund and its various agents;
- Manage Fund litigation matters and assume full
responsibility for the handling of routine fund examinations and
investigations by regulatory agencies.
Compliance Services
The Compliance Department is responsible for preparing compliance
manuals, conducting seminars for fund accounting and advisory personnel
and performing on-going testing of the Fund's portfolio to assist the
Fund's investment adviser in complying with prospectus guidelines and
limitations, 1940 Act requirements and Internal Revenue Code
requirements. The Department may also act as liaison to the SEC during
its routine examinations of the Fund.
State Regulation
The State Regulation Department operates in a fully automated
environment using blue sky registration software development by Price
Waterhouse. In addition to being responsible for the initial and on-
going registration of shares in each state, the Department acts as
liaison between the Fund and state regulators, and monitors and reports
on shares sold and remaining registered shares available for sale.
4
shared\domestic\clients\shearson\funds\arms\admin1.doc
Exhibit 10
July 28, 1994
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Registration of Shares of Smith Barney Shearson Adjustable Rate
Government Income Fund Pursuant to Section 24(e)(1) of the Investment Company
Act of 1940
1933 Act File No. 2-47782
Gentlemen:
As Massachusetts counsel to Smith Barney Shearson Adjustable Rate
Government Income Fund (the "Trust"), we have been requested to render this
opinion in connection with the filing by the Trust of Post-Effective
Amendment No. 6 to its Registration Statement on Form N-1A (the "Amendment")
to be filed by the Trust.
Reference is made to the cover page of the Amendment wherein the Trust
reports the number of shares (the "Shares") to be registered by the Amendment
in reliance upon Section 24(e)(1) of the Investment Company Act of 1940, as
amended.
We have examined the Trust's First Amended and Restated Master Trust
Agreement dated November 5, 1992, the By-Laws of the Trust, the Notice,
certain resolutions adopted by the Trustees of the Trust, and such other
documents as we deemed necessary for purposes of this opinion.
Based upon the foregoing, and assuming that all of the Shares will be
sold, issued and paid for in accordance with the terms of the Trust's
Prospectus and Statement of Additional Information contained in the Trust's
Registration Statement on Form N-1A in effect at the time of sale, in our
opinion the Shares will be legally issued, fully paid and non-assessable by
the Trust under the laws of The Commonwealth of Massachusetts.
We hereby consent to a copy of this opinion being filed as an exhibit to
the Amendment.
Very truly yours,
GOODWIN, PROCTER & HOAR
98705.c1
Securities and Exchange Commission
July 28, 1994
Page 1
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Smith Barney Shearson Adjustable Rate Government Income Fund:
We hereby consent to the following with respect to
Post-Effective Amendment No. 6 to the Registration Statement on
Form N-1A (File No. 33-47782) under the Securities Act of 1933,
as amended, of Smith Barney Shearson Adjustable Rate Government
Income Fund:
1. The incorporation by reference of our report dated July 29,
1994 accompanying the Annual Report dated May 31, 1994 of Smith
Barney Shearson Adjustable Rate Government Income Fund, in the
Statement of Additional Information.
2. The reference to our firm under the heading "Financial
Highlights" in the Prospectus.
3. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information.
COOPERS & LYBRAND
Boston, Massachusetts
July 29, 1994
