<PAGE>
SMITH BARNEY ADJUSTABLE
RATE GOVERNMENT INCOME FUND
PLEASE CAST YOUR VOTE PROMPTLY
Dear Investor:
I am writing to encourage you to vote on a proposal which I believe will
provide a positive long-term benefit to you as a shareholder.
As you may be aware, PNC Bank, N.A. ("PNC") has agreed to acquire BlackRock
Financial Management L.P., the current sub-adviser for your mutual fund. Smith
Barney views this sale as a positive development that brings together two
companies with complementary strengths. The details of the transaction are
described in the proxy materials accompanying this letter.
ASSIGNMENT OF SUB-ADVISORY AGREEMENT: YOUR VOTE IS IMPORTANT
Because the sub-investment adviser which is responsible for your Fund s
assets will have a new ultimate corporate parent as a result of the sale to PNC,
you are being asked to approve a new sub-advisory agreement. YOUR APPROVAL IS
REQUIRED IN ORDER FOR THE SUB-INVESTMENT ADVISER TO CONTINUE TO PROVIDE SERVICES
TO YOUR FUND; these services include making investment decisions, supplying
investment research and portfolio management services, and placing orders to
purchase and sell securities on behalf of the Fund. IT IS NOT ANTICIPATED THAT
THE NEW SUB-ADVISORY AGREEMENT WILL RESULT IN ANY SUBSTANTIVE CHANGE IN THE WAY
YOUR FUND IS MANAGED, NOR WILL THE NEW AGREEMENT RESULT IN ANY INCREASE IN THE
COSTS BORNE BY YOU AS A SHAREHOLDER.
THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS OF THE FUND VOTE TO
APPROVE THE NEW SUB-ADVISORY AGREEMENT.
PLEASE CAST YOUR VOTE
I want to thank you for your participation as a shareholder. I encourage
you to read the enclosed proxy materials carefully and return your vote
promptly.
The Shareholder Services Group, Inc. has been engaged by Smith Barney to
assist in returning proxy votes; a representative may contact you to remind you
to cast your vote by the requested deadline. Should you have any questions,
please call your Financial Consultant.
Sincerely,
/s/ Heath B. McLendon
HEATH B. MCLENDON
Chairman of the Board
<PAGE>
SMITH BARNEY ADJUSTABLE
RATE GOVERNMENT INCOME FUND
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
------------------------
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON FEBRUARY 22, 1995
------------------------
To the Shareholders of the
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND:
Notice is hereby given that a Special Meeting of Shareholders of the Smith
Barney Adjustable Rate Government Income Fund will be held at
388 Greenwich
Street, 22nd Floor , New York, New York on Wednesday, February 22, 1995,
commencing at 10:00 a.m. for the following purposes:
1. To approve or disapprove for the Fund a new Sub-Advisory Agreement, set
forth as Exhibit A, with BlackRock Financial Management L.P. (PROPOSAL
1).
2. To transact such other business as may properly come before the meeting
or any adjournment thereof.
Your consideration of the new Sub-Advisory Agreement is necessitated by the
purchase by PNC Bank, N.A. of the outstanding partnership interests of BlackRock
Financial Management L.P. (the Sub-Adviser ), the current sub-investment adviser
for the Fund. Under the terms of the existing Sub-Advisory Agreement and as
required by the Investment Company Act of 1940, the existing Sub-Advisory
Agreement automatically terminates upon its assignment. As more fully discussed
in the accompanying Proxy Statement, the consummation of the transaction will be
considered an assignment of the Fund s existing SubAdvisory Agreement, thereby
causing its termination. In order for the Fund to continue to receive investment
advisory services from the Sub-Adviser after completion of the transaction, it
is necessary that a new Sub-Advisory Agreement be approved by shareholders of
the Fund. The proposed new Sub-Advisory Agreement is identical in all
substantive respects to the existing Sub-Advisory Agreement.
<PAGE>
These items are discussed in greater detail in the attached Proxy
Statement. The close of business on December 30 , 1994 has been fixed as
the record date for the determination of shareholders of the Fund entitled
to notice
of and to vote at the meeting and any adjournment thereof.
By Order of the Board of Trustees,
CHRISTINA T. SYDOR
Secretary
January 9, 1995
SHAREHOLDERS OF THE FUND WHO DO NOT EXPECT TO ATTEND THE SPECIAL MEETING ARE
REQUESTED TO COMPLETE, SIGN, DATE AND RETURN THE PROXY CARD IN THE ENCLOSED
ENVELOPE, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. INSTRUCTIONS
FOR THE PROPER EXECUTION OF PROXY CARDS ARE SET FORTH ON THE FOLLOWING PAGE. IT
IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY.
<PAGE>
INSTRUCTIONS FOR SIGNING PROXY CARDS
The following general rules for signing proxy cards may be of assistance to
you and avoid the time and expense to the Fund involved in validating your vote
if you fail to sign your proxy card properly.
1. Individual Accounts: Sign your name exactly as it appears in the
registration on the proxy card.
2. Joint Accounts: Either party may sign, but the name of the party
signing should conform exactly to the name shown in the registration on
the proxy card.
<TABLE>
3. All Other Accounts: The capacity of the individual signing the proxy
card should be indicated unless it is reflected in the form of
registration. For example:
<CAPTION>
REGISTRATION VALID SIGNATURE
- ------------------------------------------ -----------------------------
<S> <C>
CORPORATE ACCOUNTS
(1) ABC Corp............................. ABC Corp.
(2) ABC Corp............................. John Doe, Treasurer
(3) ABC Corp.
c/o John Doe, Treasurer......... John Doe
(4) ABC Corp. Profit Sharing Plan........ John Doe, Trustee
TRUST ACCOUNTS
(1) ABC Trust............................ Jane B. Doe, Trustee
(2) Jane B. Doe, Trustee
u/t/d 12/28/78.................. Jane B. Doe
CUSTODIAN OR ESTATE ACCOUNTS
(1) John B. Smith, Cust.
f/b/o John B. Smith, Jr.
UGMA................................. John B. Smith
(2) Estate of John B. Smith.............. John B. Smith, Jr., Executor
</TABLE>
<PAGE>
SMITH BARNEY ADJUSTABLE
RATE GOVERNMENT INCOME FUND
388 GREENWICH STREET
NEW YORK, NEW YORK 10013
------------------------
SPECIAL MEETING OF SHAREHOLDERS
FEBRUARY 22, 1995
------------------------
PROXY STATEMENT
INTRODUCTION
The accompanying Proxy is being solicited by the Board of Trustees (the
"Board") of Smith Barney Adjustable Rate Government Income Fund (the "Fund") for
use at the Special Meeting of Shareholders (the "Meeting") of the Fund to be
held on
February 22, 1995 , or any adjournment or adjournments thereof.
The
Meeting will be held at 388 Greenwich Street, 22nd Floor, New York, New York at
the time specified in the Notice of Special Meeting of Shareholders and proxy
card that accompany this Proxy Statement. This Proxy Statement and accompanying
proxy card will be first mailed on or about January 9, 1995 . Proxy
solicitations
will be made primarily by mail, but proxy solicitations also may be made by
telephone, telegraph or personal interviews conducted by officers and employees
of the Fund, Smith Barney Inc., the distributor of shares of the Fund ("Smith
Barney"), Smith Barney Strategy Advisers Inc., the investment adviser of the
Fund ("SBSA"), Smith Barney Mutual Funds Management Inc. (formerly known as
Smith, Barney Advisers, Inc.), the administrator of the Fund ("SBMFM"), The
Boston Company Advisors, Inc., the sub-administrator of the Fund ("Boston
Advisors"), and/or The Shareholder Services Group, Inc., the Fund's transfer
agent. The costs of the proxy solicitation and expenses incurred in connection
with the preparation of this Proxy Statement and its enclosures will be borne by
BlackRock Financial Management L.P., the sub-adviser of the Fund (the
"Sub-Adviser"). The Sub-Adviser also will reimburse expenses of forwarding
solicitation material to beneficial owners of shares of the Fund.
If the enclosed proxy is properly executed and returned in time to be voted
at the Meeting, the shares represented thereby will be voted in accordance with
the instructions marked thereon. Unless instructions to the contrary are marked
thereon, a proxy will be voted FOR the proposal listed in the accompanying
Notice of Special Meeting of Shareholders and otherwise in the discretion of the
persons named as proxies. Any shareholder who has given a proxy has the right to
revoke it at any time prior to its exercise either by attending the Meeting and
voting his or her shares in
1
<PAGE>
person or by submitting a letter of revocation or a later-dated proxy to the
Fund at the above address prior to the date of the Meeting.
In the event that a quorum is not present at the Meeting, or in the event
that a quorum is present but sufficient votes to approve the proposal are not
received, the persons named as proxies may propose one or more adjournments of
the Meeting to permit further solicitation of proxies. In determining whether to
adjourn the Meeting, the following factors may be considered: the nature of the
proposals that are the subject of the Meeting, the percentage of votes actually
cast, the percentage of negative votes actually cast, the nature of any further
solicitation and the information to be provided to shareholders with respect to
the reasons for the solicitation. Any adjournment will require the affirmative
vote of a majority of those shares represented at the Meeting in person or by
proxy. Under the Fund's Master Trust Agreement, a quorum is constituted by the
presence in person or by proxy of the holders of a majority of the outstanding
shares of the Fund entitled to vote at the Meeting. Abstentions and broker
"non-votes" (i.e., proxies from brokers or nominees indicating that such persons
have not received instructions from the beneficial owner or other person
entitled to vote shares on a particular matter with respect to which the brokers
or nominees do not have discretionary power) will be counted as shares that are
present for purposes of determining the presence of a quorum and will have the
effect of a vote against the proposal set forth in this Proxy Statement.
The Board has fixed the close of business on
December 30 , 1994 as
the
record date (the "Record Date") for the determination of shareholders of the
Fund entitled to notice of and to vote at the Meeting. The Fund issues shares of
beneficial interest of separate series having a par value of $.001 per share.
The Fund offers three classes of shares designated Class A, Class B and Class C.
Each share of the Fund is entitled to one vote, and any fractional share is
entitled to a fractional vote. On the Record Date, 19,140,439.019 shares
of the
Fund were issued and outstanding and entitled to vote at the Meeting.
As of the Record Date, to the knowledge of the Fund and the Board, no
single shareholder or group (as that term is used in Section 13(d) of the
Securities Exchange Act of 1934 (the "1934 Act")) beneficially owned more than
5% of the outstanding shares of the Fund. As of the Record Date, the officers
and Board members of the Fund beneficially owned less than 1% of the shares of
the Fund.
PNC BANK TRANSACTION
On June 16, 1994,
the partners of BlackRock Financial Management
L.P. (the
"Sub-Adviser" or "BlackRock") entered into a definitive agreement whereby PNC
Bank, N.A. ("PNC") will acquire all of the partnership interests of BlackRock
for $240 million in the form of cash and notes (the "Transaction"). Following
the
2
<PAGE>
closing of the Transaction, the Sub-Adviser will become a wholly owned indirect
subsidiary of PNC Asset Management Group, Inc., the holding company for PNC's
asset management business.
PNC is a commercial bank offering a wide range of domestic and
international commercial banking, retail banking and trust services to its
customers. Its principal office is located in Pittsburgh, Pennsylvania. At
December 31, 1993, PNC had approximate total assets of $40.6 billion, total
deposits of $21.0 billion, total loans (net of unearned income) of $22.1 billion
and total equity capital of $2.8 billion. At
September 30, 1994, the
corresponding amounts approximated $44.8 billion, $24.7 billion, $25.1
billion
and $3.3 billion, respectively . PNC's business is subject to
examination and
regulation by federal banking authorities. Its primary federal bank regulatory
authority is the Office of the Comptroller of the Currency.
PNC is a wholly owned indirect subsidiary of PNC Bank Corp., a bank holding
company organized under the laws of the Commonwealth of Pennsylvania ("PNC
Corp." or the "Holding Company"). The Holding Company was incorporated in 1983
with the consolidation of Pittsburgh National Corporation and Provident National
Corporation. Since 1983, the Holding Company has diversified its geographical
presence and product capabilities through numerous strategic acquisitions and
the formation of various non-banking subsidiaries. At
September 30, 1994,
the
Holding Company operated 10 banking subsidiaries in Pennsylvania, Delaware,
Indiana, Kentucky, Massachusetts, New Jersey and Ohio and 84 non-banking
subsidiaries. At December 31, 1993, the Holding Company had approximate total
assets of $62.1 billion, total deposits of $33.1 billion, total loans (net of
unearned income) of $33.3 billion and total shareholders' equity of $4.3
billion. At September 30, 1994, the corresponding amounts were $64.0
billion,
$33.6 billion, $35.7 billion and $4.4 billion, respectively. Based on September
30, 1994 total assets, the Holding Company was the 12th largest bank holding
company in the United States. As of September 30, 1994, the Holding Company and
its subsidiaries managed $24.0 billion of registered investment company assets.
These assets are held in three different proprietary mutual fund families as
well as in one or more individual portfolios of an additional six
non-proprietary mutual funds. The Holding Company and its subsidiaries employed
approximately 21,100 persons on an average full-time equivalent basis for
the
first nine months of 1994.
The Holding Company delivers a full range of banking products and services
to its customers through four lines of business: Corporate Banking, Retail
Banking, Investment Management and Trust, and Investment Banking. For the most
part, these products and services are distributed through the Holding Company's
retail banking and mortgage origination office networks or its wholesale banking
offices in certain major metropolitan areas located in the United States.
3
<PAGE>
PNC Corp. has informed the Fund that no shareholder either individually or
as a group (as defined in Section 13(d) of the 1934 Act) beneficially owned more
than 10% of the outstanding shares of PNC Corp.'s voting securities.
As required by the Investment Company Act of 1940, as amended (the "1940
Act"), the existing Sub-Advisory Agreement between the Fund and the Sub-Adviser
provides for its automatic termination upon its assignment. The 1940 Act defines
assignment to include any direct or indirect transfer of a controlling block of
the assignor's outstanding voting securities. When the Transaction is
consummated, the acquisition of the Sub-Adviser by PNC will give rise to an
assignment of the existing Sub-Advisory Agreement within the meaning of the 1940
Act.
The consummation of the Transaction is subject to prior satisfaction of
several conditions
. At the present time, it is anticipated that the
closing of
the Transaction and, thus, the assignment, will occur in the first
quarter of
1995 . The precise date on which any assignment of the existing Sub-
Advisory
Agreement will occur, if at all, cannot now be determined. The Transaction may
be terminated upon certain events and in any event may be terminated by either
party if the transactions thereunder have not been consummated on or before
March 31, 1995.
I. APPROVAL OR DISAPPROVAL OF NEW SUB-INVESTMENT
ADVISORY ARRANGEMENTS (PROPOSAL 1)
The Board is proposing that shareholders of the Fund approve a new sub-
investment advisory agreement (the "New Sub-Advisory Agreement"), effective with
the consummation of the Transaction, between the Fund and the Sub-Adviser. A
description of the Fund's New Sub-Advisory Agreement and the services to be
provided by the Sub-Adviser is set forth below. This description is qualified in
its entirety by reference to the form of New Sub-Advisory Agreement which is
attached as Exhibit A to this Proxy Statement. The proposed New Sub-Advisory
Agreement is identical in all substantive respects to the existing
sub-investment advisory agreement (the "Old Sub-Advisory Agreement"), differing
only in its effective and termination dates.
In connection with its approval of the proposed New Sub-Advisory Agreement,
the Board considered that the terms of the Transaction do not contemplate any
change in the Fund's investment objective or policies, the
senior
management or
day-to-day operations of the Sub-Adviser relating to the Fund,
the personnel
managing the Fund, or the shareholder services or other business activities of
the Fund. PNC has informed the Board that the Transaction is not expected to
result in any such change, although there can be no assurance that such a change
will not occur. PNC has also informed the Board that at present there are no
plans or proposals developed in connection with the Transaction to make any
material changes in the business or composition of senior management or
personnel of the
4
<PAGE>
Sub-Adviser, or in the manner in which the Sub-Adviser renders investment
advisory services to the Fund. The Fund has also been informed by PNC that, in
connection with the Transaction, certain senior officers and directors of the
Sub-Adviser will participate in compensation arrangements which are designed to
ensure the retention of key individuals and which entitle them to payments both
upon the consummation of the Transaction and upon their continued employment
with the Sub-Adviser for a period of five years thereafter. In addition,
BlackRock will retain its name and will continue to operate from its offices in
New York. If, after the Transaction, changes in the Sub-Adviser are proposed
that might materially affect its services to the Fund, the Board will consider
the effect of those changes and take such action as it deems advisable under the
circumstances.
The Fund has been informed by PNC and the Sub-Adviser that they propose to
comply with Section 15(f) of the 1940 Act. Section 15(f) provides a
non-exclusive safe harbor for an investment adviser or any of its affiliated
persons to receive any amount or benefit in connection with a change in control
of the investment adviser as long as two conditions are met. First, for a period
of three years after the transaction, at least 75% of the Trustees of the
investment company must not be "interested persons" of the Sub-Adviser or the
predecessor adviser. At present, none of the Board members is an "interested
person" of the Sub-Adviser or the predecessor Sub-Adviser. Second, an "unfair
burden" must not be imposed on the investment company as a result of such
transaction or any express or implied terms, conditions or understandings
applicable thereto. The term "unfair burden" is defined in Section 15(f) to
include any arrangement during the two-year period after the transaction whereby
the sub-investment adviser (or predecessor or successor sub-adviser), or any
"interested person" of any such sub-adviser, receives or is entitled to receive
any compensation, directly or indirectly, from the investment company or its
security holders (other than fees for bona fide investment advisory or other
services) or from any person in connection with the purchase or sale of
securities or other property, from or on behalf of the investment company (other
than bona fide ordinary compensation as principal underwriter for such
investment company). Neither PNC nor the Sub-Adviser, after due inquiry, is
aware of any express or implied term, condition, arrangement or understanding
which would impose an "unfair burden" on the Fund as a result of the
Transaction. In particular, PNC, the Sub-Adviser and their affiliates have
informed the Fund that they have not entered into any arrangements in connection
with the Transaction whereby PNC or any of its affiliates is entitled to receive
brokerage commissions for executing portfolio transactions for the Fund. PNC has
agreed that it, the Sub-Adviser and their affiliates will take no action that
would have the effect of imposing an "unfair burden" on the Fund as a result of
the Transaction. The Sub-Adviser has undertaken to pay all costs and expenses
incurred by the Fund as a result of the Transaction, including the costs of the
Meeting.
5
<PAGE>
The Board discussed approval of the New Sub-Advisory Agreement at a meeting
held on September 7, 1994. In evaluating the New Sub-Advisory Agreement, the
Board reviewed materials furnished by the Sub-Adviser and PNC relevant to its
decision. Those materials included information regarding the Sub-Adviser and its
affiliates and their personnel, operations and financial condition.
Representatives of the Sub-Adviser discussed with the Board the Sub-Adviser's
philosophy of management, performance expectations and methods of operation
insofar as they related to the Fund and indicated their belief that as a
consequence of the Transaction, the operations of the Sub-Adviser and its
ability to provide services to the Fund would not be adversely affected and
would likely be enhanced from the resources of PNC, although there could be no
assurances as to any particular benefits that would be obtained. In its
deliberations, the Board considered the terms of the Transaction, including,
among other things, the continued employment of all of the senior members of the
management team of the Sub-Adviser which it believed to be important to assure
continuity of the quality of advisory and other services provided by the
Sub-Adviser to the Fund. The Board also considered comparative information on
other investment companies with similar investment objectives, including
information prepared utilizing information derived from independent statistical
services. In addition, the Board reviewed and discussed the terms and provisions
of the New Sub-Advisory Agreement and compared fees and expenses under the New
Sub-Advisory Agreement with those paid by other investment companies. The Board
considered any benefits that the Fund might obtain from the Sub-Adviser's
relationship with PNC. Based on its review, the Board, including a majority of
the Board members who are not "interested persons" (as defined in the 1940 Act)
of any party to the New Sub-Advisory Agreement, approved the New Sub-Advisory
Agreement with the Sub-Adviser. THE BOARD RECOMMENDS THAT SHAREHOLDERS OF THE
FUND VOTE TO APPROVE THE NEW SUB-ADVISORY AGREEMENT.
Required Vote. Approval of the New Sub-Advisory Agreement will require the
affirmative vote of a "majority of the outstanding voting securities" of the
Fund, which for this purpose means the affirmative vote of the lesser of (1)
more than 50% of the outstanding shares of the Fund or (2) 67% or more of the
shares of the Fund present at the meeting if more than 50% of the outstanding
shares of the Fund are represented at the meeting in person or by proxy
("Majority Vote"). If the shareholders of the Fund do not approve the New
Sub-Advisory Agreement, PNC and the Sub-Adviser intend nevertheless to proceed
with the Transaction (assuming all conditions precedent have been satisfied),
and, in such case, the Sub-Advisory Agreement will terminate automatically. In
this event, the Board shall take such further action as it may deem to be in the
best interests of shareholders of the Fund.
DESCRIPTION OF NEW SUB-ADVISORY AGREEMENT
With the exception of the commencement and termination dates, the
provisions, including fees, of the New and Old Sub-Advisory Agreements are
identical. The
6
<PAGE>
compensation payable to the Sub-Adviser for its services under the New
Sub-Advisory Agreement will be accrued daily and paid monthly at an annual
percentage rate of 0.20% of the Fund's average daily net assets. The rate used
to determine fees payable pursuant to the New Sub-Advisory Agreement is
identical to the rate in the old Sub-Advisory Agreement. The Sub-Adviser
received $759,294 in aggregate remuneration from the Fund pursuant to the Old
Sub-Advisory Agreement for the fiscal year ended May 31, 1994. The Old
Sub-Advisory Agreement is dated July 30, 1993 and was submitted to a vote of the
shareholders of the Fund on June 1, 1993. The continuance of the Old
Sub-Advisory Agreement has been approved annually by the Board, most recently at
a regular meeting of the Board held on September 7, 1994.
Under the terms of the New Sub-Advisory Agreement, the Sub-Adviser is
required, subject to the supervision and approval of the Board, and subject to
review by SBSA, to manage the Fund's investments in accordance with the
investment objective and policies as stated in the Fund's Prospectus and
Statement of Additional Information. The Sub-Adviser is responsible for making
investment decisions, supplying investment research and portfolio management
services and placing orders to purchase and sell securities on behalf of the
Fund.
The Sub-Adviser bears all expenses in connection with the performance of
its services under the New Sub-Advisory Agreement. The Fund bears expenses
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, shareholders or employees of Smith Barney or any of its affiliates;
fees of the Securities and Exchange Commission (the "SEC") 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 existence; investor services (including
allocated telephone and personnel expenses); costs of preparation and printing
of prospectuses and statements of additional information for regulatory purposes
and for distribution to shareholders; shareholder reports; and costs incurred in
connection with meetings of the shareholders of the Fund.
SBSA and
SBMFM 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 SBMFM , 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 SBMFM 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. BlackRock has agreed to reduce its fees by an amount equal to
one-half of any
7
<PAGE>
amount that SBSA is required to reduce its fee pursuant to such agreement. Fee
reductions, if any, will be reconciled monthly.
The New Sub-Advisory Agreement provides that in the absence of willful
misfeasance, bad faith, gross negligence or reckless disregard for its
obligations thereunder, the Sub-Adviser shall not be liable for any act or
omission in the course of or in connection with the rendering of its services
thereunder.
The New Sub-Advisory Agreement will remain in effect pursuant to its terms
for an initial term of one year from its date of execution and thereafter with
respect to the Fund for successive periods if and so long as such continuation
is specifically approved annually by (a) the Board or (b) a Majority Vote of the
Fund's shareholders, provided that in either event the continuation also is
approved by a majority of the Board members who are not "interested persons" (as
defined in the 1940 Act) of any party to the New Sub-Advisory Agreement by vote
cast in person at a meeting called for the purpose of voting on such approval.
The New Sub-Advisory Agreement is terminable, without penalty, on 60 days'
written notice by the Board or by a Majority Vote of the Fund's shareholders, or
on 90 days' written notice by the Sub-Adviser. The New Sub-Advisory Agreement
terminates automatically in the event of its assignment (as defined in the 1940
Act).
OTHER INFORMATION
THE SUB-ADVISER
The Sub-Adviser was founded in April 1988 by Laurence D. Fink and Ralph L.
Schlosstein. The Sub-Adviser'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. The Sub-Adviser is registered as an investment
adviser under the Investment Advisers Act of 1940.
The Sub-Adviser's general and limited partners and employees include
several individuals with extensive experience in creating, evaluating and
investing in a broad range of fixed-income securities including mortgage-backed
securities, U.S. Treasury securities, municipal obligations, corporate bonds,
and hedging products. Prior to co-founding the Sub-Adviser, from July 1976 to
March 1988, Mr. Fink, the Chairman and Chief Executive Officer of the
Sub-Adviser, was employed by The First Boston Corporation where he had been a
Managing Director since January 1979. At First Boston, he was a member of the
Management Committee and co-head of its Taxable Fixed Income division. He also
managed the Financial Futures and Fixed Income Options Department and the
Mortgage and Real Estate Products Group. Mr. Schlosstein, President and a
co-founder of the Sub-Adviser, was employed by Lehman Brothers from February
1981 to March 1988 and became a Managing
8
<PAGE>
Director in August 1984. At Lehman Brothers, he was co-head of the Mortgage and
Savings Institutions Group. Messrs. Fink and Schlosstein, along with other
members of the Sub-Adviser, were instrumental in many of the major innovations
in these securities markets, including the creation of the fixed and floating
rate collateralized mortgage obligation, asset-backed securities and the
seniorsubordinated mortgage pass-through.
<TABLE>
The executive officers of the Sub-Adviser are:
<CAPTION>
NAME POSITION
- ---- --------
<S> <C>
Laurence D. Fink............... Chairman and Chief Executive
Officer
Ralph L. Schlosstein........... President
Robert S. Kapito............... Vice Chairman
Henry Gabbay................... Chief Operating Officer
Scott Amero.................... Partner
Keith T. Anderson.............. Partner
</TABLE>
The Sub-Adviser provides asset management services with respect to high
quality fixed income instruments including mortgage-backed securities, U.S.
Treasury securities, municipal obligations, corporate bonds and hedging
products. The Sub-Adviser currently serves as the investment adviser to
individual and institutional fixed income investors in the United States and
overseas through several funds and separately managed accounts with combined
total assets in excess of $
22 billion as of September 30, 1994.
Messrs. Kapito, Amero and Anderson are officers of the Fund.
The names of the investment companies for which the Sub-Adviser provides
services, the amounts of their net assets as of August 31, 1994, and the annual
rate of the Sub-Adviser's fees for its services to those companies are set forth
as Exhibit B hereto. An audited
Consolidated Statement of Financial
Condition of
the Sub-Adviser as of December 31, 1993, and an unaudited Consolidated
Statement
of Financial Condition as of September 30, 1994, are set forth as Exhibit C
hereto. The Sub-Adviser has represented that, to its knowledge, there has
been
no material adverse change in its financial condition since September 30, 1994.
Proxies solicited for the Meeting will not be voted for approval of the New
Sub-Advisory Agreement unless (a)(i) in the judgment of the Trustees of the
Fund, there has been no material adverse change in the financial condition of
the Sub-Adviser between September 30, 1994 and December 31, 1994, and (ii) the
Fund shall have received a certificate of the Chairman, the President or a
Senior Vice President of the Sub-Adviser, dated the meeting date, that to such
person's knowledge, since December 31, 1994, there has been no material adverse
change in the financial condition of the Sub-Adviser unless such material
adverse change has been disclosed to shareholders of the Fund in additional
proxy solicitation materials, or (b) the Fund shall have mailed to all
shareholders of record a certified balance sheet of the Sub-
9
<PAGE>
Adviser and given shareholders an opportunity to revoke any proxies previously
furnished.
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the Fund will be made by the Sub-
Adviser, subject to the overall review of SBSA and the Board. Allocation of
transactions on behalf of the Fund, including their frequency, to various
dealers will be determined by the Sub-Adviser in its best judgment and in a
manner deemed fair and reasonable to the Fund's shareholders. The primary
considerations of the Sub-Adviser 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 the Sub-Adviser 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 the Sub-Adviser, and the fees of SBSA and
the Sub-Adviser are not reduced as a consequence of their receipt of the
supplemental information. The information may be useful to SBSA and the
Sub-Adviser 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 the Sub-Adviser 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 were 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 Shearson Lehman Brothers and Smith Barney
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.
DISTRIBUTION PLAN
As more fully set forth below, shares of the Fund are distributed on a best
efforts basis by Smith Barney as exclusive sales agent of the Fund pursuant to a
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
10
<PAGE>
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 the Class A, Class B and Class C shares
(formerly, Class D shares). In addition, Smith Barney also is paid an annual
distribution fee with respect to Class A, Class B and Class C 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,
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, including a majority of
the Trustees who are not "interested persons" (as defined in the 1940 Act) 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 with
periodic reports of amounts expended under the Plan and the purpose for which
such expenditures were made.
DISTRIBUTOR'S CONTRACT
Smith Barney serves as distributor of the Fund's shares. 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 contingent deferred sales charges on the redemption of the
Fund's Class B shares, and did not reallow any portion thereof to dealers.
ADMINISTRATOR
SBMFM serves as the Fund's administrator. The Fund pays SBMFM
a monthly fee
at an annual rate of .20% of the value of the Fund's average daily net assets.
Because SBMFM did not act as the Fund's administrator prior to June 1,
1994, the
11
<PAGE>
Fund paid
SBMFM no administration fees for the fiscal year ended May 31,
1994.
Boston Advisors serves as the Fund's sub-administrator. 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.
SUBMISSION OF SHAREHOLDER PROPOSALS
The Fund is not generally required to hold annual or special shareholders'
meetings. Shareholders wishing to submit proposals for inclusion in a proxy
statement for a subsequent shareholders' meeting should send their written
proposals to the Secretary of the Fund at the address set forth on the cover of
this Proxy Statement. Shareholder proposals for inclusion in the Fund's proxy
statement for any subsequent meeting must be received by the Fund a reasonable
period of time prior to any such meeting.
OTHER MATTERS TO COME BEFORE THE MEETING
The Board does not intend to present any other business at the Meeting, nor
is it aware that any shareholder intends to do so. If, however, any other
matters are properly brought before the Meeting, the persons named in the
accompanying proxy card will vote thereon in accordance with their judgment.
THE BOARD OF TRUSTEES RECOMMENDS THAT SHAREHOLDERS OF THE FUND VOTE TO
APPROVE THE NEW SUB-ADVISORY AGREEMENT.
January 9, 1995
New York, New York
IT IS IMPORTANT THAT PROXIES BE RETURNED PROMPTLY. SHAREHOLDERS WHO DO NOT
EXPECT TO ATTEND THE MEETING ARE THEREFORE URGED TO COMPLETE, SIGN, DATE AND
RETURN THE PROXY AS SOON AS POSSIBLE IN THE ENCLOSED POSTAGE PAID ENVELOPE.
12
<PAGE>
EXHIBIT A
SUB-ADVISORY AGREEMENT
SMITH BARNEY ADJUSTABLE
RATE GOVERNMENT INCOME FUND
February , 1995
BlackRock Financial Management, Inc.
345 Park Avenue
New York, New York 10154
Ladies and Gentlemen:
Pursuant to paragraph 7 of the Advisory Agreement (the "Advisory
Agreement"), between Smith Barney
Adjustable Rate Government Income Fund
(the
"Fund"), a business trust organized under the laws of The Commonwealth of
Massachusetts, and Smith Barney Strategy Advisers, Inc. ("Strategy Advisers"),
Strategy Advisers, as the Fund's investment manager, is generally responsible
for furnishing, or causing to be furnished to the Fund, investment management
and administrative services, which services include, among other things, the
selection and compensation of an investment adviser to the Fund. Strategy
Advisers hereby confirms, and the Fund hereby approves, its agreement with
BlackRock Financial Management, Inc. ("BlackRock") regarding investment
advisory
services to be provided by BlackRock to the Fund upon the following terms and
conditions:
1. INVESTMENT DESCRIPTION; APPOINTMENT.
The Fund anticipates that it will employ its capital by investing and
reinvesting in investments of the kind and in accordance with the limitations
specified in the Fund's Master Trust Agreement dated May 7, 1992, as amended
from time to time (the "Master Trust Agreement"), in the prospectus
("Prospectus") and the statement of additional information (the "Statement")
filed with the Securities and Exchange Commission as part of the Fund's
Registration Statement on Form N-1A, as amended from time to time, and in the
manner and to the extent as may from time to time be approved by the Board of
Trustees of the Fund. Copies of the Prospectus, the Statement and the Master
Trust Agreement have been or will be submitted to BlackRock. Pursuant to
paragraph 1(b) of the Advisory Agreement, Strategy Advisers desires to employ
and appoints BlackRock to act as the Fund's sub-investment adviser. BlackRock
accepts the appointment and agrees to furnish the services for the compensation
set forth below.
2. SERVICES AS SUB-INVESTMENT ADVISER.
Subject to the supervision and direction of Strategy Advisers and the Board
of Trustees of the Fund, BlackRock will (a) manage the Fund's portfolio in
accordance
A-1
<PAGE>
with the Fund's investment objectives and policies as stated in the Prospectus
and the Statement; (b) make investment decisions for the Fund; (c) place orders
to purchase and sell securities on behalf of the Fund; and (d) employ
professional portfolio managers and securities analysts who provide research
services to the Fund. In providing those services, BlackRock will conduct a
continual program of investment evaluation and, if appropriate, sale and
reinvestment of the Fund's assets.
3. BROKERAGE.
In selecting brokers or dealers to execute portfolio transactions on behalf
of the Fund, BlackRock will seek the best overall terms available. In assessing
the best overall terms available for any transaction, BlackRock will consider
the factors it deems relevant, including, but not limited to, the breadth of the
market in the security, the price of the security, the financial condition and
execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
selecting brokers or dealers to execute a particular transaction, and in
evaluating the best overall terms available, BlackRock is authorized to consider
the brokerage and research services (as those terms are defined in Section 28(e)
of the Securities Exchange Act of 1934, as amended) provided to the Fund and/or
other accounts over which BlackRock or its affiliates exercise investment
discretion.
4. INFORMATION PROVIDED TO THE FUND AND STRATEGY ADVISERS.
BlackRock will keep the Fund and Strategy Advisers informed of developments
materially affecting the Fund, and will, on its own initiative, furnish the Fund
from time to time with whatever information BlackRock believes is appropriate
for this purpose. In addition, BlackRock agrees to notify the Fund of any change
of BlackRock's membership within 30 days after the date of the change.
5. STANDARD OF CARE.
BlackRock will exercise its best judgment in rendering the services
described in paragraph 2 of this Agreement. BlackRock will 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, except that nothing
in this Agreement may be deemed to protect or purport to protect BlackRock
against any liability to the Fund or to shareholders of the Fund to which
BlackRock 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
BlackRock's reckless disregard of its obligations and duties under this
Agreement.
A-2
<PAGE>
6. COMPENSATION.
In consideration of the services rendered pursuant to this Agreement,
Strategy Advisers will pay BlackRock on the first business day of each month a
fee for the previous month at the annual rate of .20% of the value of the Fund's
average daily net assets. The fee for the period from the date set forth on this
Agreement to the end of that month shall be prorated according to the proportion
that the period bears to the full monthly period. Upon any termination of this
Agreement before the end of a month, the fee for such part of that month will be
prorated according to the proportion that the period bears to the full monthly
period and will be payable upon the date of termination of this Agreement. For
the purpose of determining fees payable to BlackRock, the value of the Fund's
net assets will be computed at the times and in the manner specified in the
Prospectus and/or the Statement.
7. EXPENSES.
BlackRock will bear all expenses in connection with the performance of its
services under this Agreement. The Fund or Strategy Advisers will bear all other
expenses to be incurred in its operation, including, but not limited to: costs
incurred in connection with the Fund's organization; investment management;
investment advisory, sub-investment advisory, administration and distribution
fees; fees for necessary professional and brokerage services; fees for any
pricing service; the costs of regulatory compliance; and costs associated with
maintaining the Fund's legal existence and shareholder relations.
8. REDUCTION OF FEE.
If in any fiscal year of the Fund, the aggregate expenses of the Fund
(including, as applicable, fees pursuant to the Advisory Agreement, the Fund's
Sub-Investment Advisory Agreement and Administration Agreement, but excluding
interest, taxes, brokerage fees, fees paid by the Fund pursuant to the Fund's
shareholder servicing plan, and, if permitted by the relevant state securities
commissions, extraordinary expenses) exceed the expense limitation of any state
having jurisdiction over the Fund, BlackRock will reduce its fee under paragraph
6 hereof by an amount equal to one-half of the amount that Strategy Advisers
shall be required to reduce its fee pursuant to paragraph 5 of the Advisory
Agreement. A fee reduction pursuant to this paragraph 8, if any, will be
estimated, reconciled and paid on a monthly basis.
9. SERVICES TO OTHER COMPANIES OR ACCOUNTS.
(a) The Fund understands that BlackRock now acts, will continue to act and
may act in the future as investment adviser to fiduciary and other managed
accounts, and may act in the future as investment adviser to other investment
companies, and the Fund has no objection to BlackRock so acting, provided that
whenever the Fund and one or more fiduciary and other managed accounts or other
investment companies advised by BlackRock have available funds for investment,
A-3
<PAGE>
investments suitable and appropriate for each will be allocated in a manner
believed by BlackRock to be equitable to each. The Fund recognizes that 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.
(b) The Fund understands that the persons employed by BlackRock to assist
in the performance of BlackRock's duties under this Agreement will not devote
their full time to that service and nothing contained in this Agreement will be
deemed to limit or restrict the right of BlackRock or any affiliate of BlackRock
to engage in and devote time and attention to other businesses or to render
services of whatever kind or nature.
10. TERM OF AGREEMENT.
(a) This Agreement will become effective as of the "Closing Date" as that
term is defined in that
certain Purchase Agreement executed between
BlackRock
and PNC Bank, N.A., dated June 16 , 1994 (the "Effective Date"),
and will
continue for an initial two-year term and will continue thereafter so long as
the continuance is specifically approved at least annually by (i) the Board of
Trustees of the Fund or (ii) a vote of a "majority" (as defined in the
Investment Company Act of 1940, as amended (the "1940 Act")) of the Fund's
outstanding voting securities, provided that in either event the continuance is
also approved by a majority of the Board of Trustees who are not "interested
persons" (as defined in the 1940 Act) of any party to this Agreement, by vote
cast in person at a meeting called for the purpose of voting on the approval.
(b) This Agreement is terminable, without penalty, on 60 days' written
notice, by Strategy Advisers or the Board of Trustees of the Fund or by vote of
holders of a majority of the Fund's outstanding voting shares, or upon 90 days'
written notice, by BlackRock.
(c) This Agreement will terminate automatically in the event of its
assignment (as defined in the 1940 Act).
11. REPRESENTATION BY THE FUND.
The Fund represents that a copy of the Master Trust Agreement is on file
with the Secretary of The Commonwealth of Massachusetts and with the Boston City
Clerk.
Strategy Advisers and BlackRock agree that the obligations of the Fund
under this Agreement will not be binding upon any of the Trustees of the Fund,
shareholders of the Fund, 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 of
the Fund. The execution and delivery of this Agreement have been authorized by
the Trustees of
A-4
<PAGE>
the Fund and signed by an authorized officer of the Fund, acting as such, and
neither the authorization by the Trustees, nor the execution and delivery by the
officer will be deemed to have been made by any of them individually or to
impose any liability on any of them personally, but will bind only the assets
and property of the Fund as provided in its Master Trust Agreement.
If the foregoing is in accordance with your understanding, kindly indicate
your acceptance of this Agreement by signing and returning the enclosed copy of
this Agreement.
Very truly yours,
SMITH BARNEY STRATEGY ADVISERS, INC.
By:..................................
Name:
Title:
SMITH BARNEY ADJUSTABLE RATE
GOVERNMENT INCOME FUND
By:..................................
Name:
Title:
Accepted:
BLACKROCK FINANCIAL MANAGEMENT,
INC.
By:..................................
Name:
Title:
A-5
<PAGE>
EXHIBIT B
<TABLE>
BLACKROCK FINANCIAL MANAGEMENT L.P.
INVESTMENT ADVISER OR SUB-ADVISER
FOR THE FOLLOWING REGISTERED
INVESTMENT COMPANIES
<CAPTION>
NET ASSETS
AS OF CURRENT
11/30/94 ADVISORY
ADVISER: (IN THOUSANDS) FEE RATE
-------- -------------- --------
<S> <C> <C>
THE BLACKROCK INCOME TRUST INC.*........... $ 449,618 0.65%
THE BLACKROCK TARGET TERM TRUST INC.*...... 865,473 0.45%
(1)
THE BLACKROCK ADVANTAGE TERM TRUST INC.*... 87,030 0.60% (2)
THE BLACKROCK STRATEGIC TERM TRUST INC.*... 469,319 0.60% (3)
THE BLACKROCK 1998 TERM TRUST INC.*........ 528,907 0.50% (4)
THE BLACKROCK NORTH AMERICAN GOVERNMENT
INCOME TRUST INC.*....................... 358,364 0.60%
THE BLACKROCK INVESTMENT QUALITY TERM TRUST
INC.*.................................... 304,461 0.60% (5)
THE BLACKROCK 1999 TERM TRUST INC.*........ 183,726 0.40%
THE BLACKROCK 2001 TERM TRUST INC.*........ 1,149,975 0.40%
THE BLACKROCK BROAD INVESTMENT GRADE 2009
TERM TRUST INC.*......................... 34,868 0.55%
THE BLACKROCK MUNICIPAL TARGET TERM TRUST
INC.*.................................... 438,816 0.35% (6)
THE BLACKROCK INSURED MUNICIPAL TERM TRUST
INC.*.................................... 240,732 0.35% (6)
THE BLACKROCK INSURED MUNICIPAL 2008 TERM
TRUST INC.*.............................. 357,309 0.35% (6)
THE BLACKROCK INVESTMENT QUALITY MUNICIPAL
TRUST INC.*.............................. 185,103 0.35% (6)
THE BLACKROCK CALIFORNIA INSURED MUNICIPAL
2008 TERM TRUST INC.*.................... 134,277 0.35% (6)
THE BLACKROCK NEW YORK INSURED MUNICIPAL
2008 TERM TRUST INC.*.................... 146,553 0.35% (6)
THE BLACKROCK FLORIDA INSURED MUNICIPAL
2008 TERM TRUST *........................ 113,839 0.35% (6)
THE BLACKROCK FLORIDA INVESTMENT QUALITY
MUNICIPAL TRUST*......................... 12,215 0.35% (6)
THE BLACKROCK CALIFORNIA INVESTMENT QUALITY
MUNICIPAL TRUST INC.*.................... 11,137 0.35% (6)
THE BLACKROCK NEW YORK INVESTMENT QUALITY
MUNICIPAL TRUST INC.*.................... 13,935 0.35% (6)
THE BLACKROCK NEW JERSEY INVESTMENT QUALITY
MUNICIPAL TRUST INC*..................... 10,679 0.35% (6)
</TABLE>
B-1
<PAGE>
<TABLE>
<CAPTION>
NET ASSETS
AS OF CURRENT
11/30/94 ADVISORY
ADVISER: (IN THOUSANDS) FEE RATE
-------- -------------- --------
<S> <C> <C>
THE BFM INSTITUTIONAL TRUST INC.**......... $ 128,031 0.30%
(7)
INVESTMENT SUBADVISER:
THE BLACKROCK GOVERNMENT INCOME TRUST
INC.**................................... 56,792 0.25%
DEAN WITTER PREMIER INCOME TRUST**......... 41,349 0.20%
ACCESSOR FUNDS, INC. -- MORTGAGE SECURITIES
PORTFOLIO**.............................. 33,032 0.25% (8)
FRANK RUSSELL INVESTMENT COMPANY**......... 98,265 0.25% (9)
US AFFINITY TAX-FREE MUNICIPAL FUND**...... 1,840 0.20% (10)
<FN>
- ---------------
* Closed-End Registered Investment Company
** Open-End Registered Investment Company
(1) This advisory fee rate remains in effect until December 31, 1995.
Thereafter, this advisory fee rate changes to .30% per annum until the fund
terminates on or about December 31, 2000. From inception through December
31, 1992 the advisory fee rate was .60%.
(2) This advisory fee rate remains in effect until December 31, 1995. From
January 1, 1996 until December 31, 2000, the advisory fee rate changes to
.50% per annum. Thereafter, the advisory fee rate changes to .40% per annum
until the fund terminates on or about December 31, 2005.
(3) This advisory fee rate remains in effect until December 31, 1994. From
January 1, 1995 until December 31, 1998, the advisory fee rate changes to
.45% per annum. Thereafter, the advisory fee rate changes to .30% per annum
until the fund terminates on or about December 31, 2002.
(4) This advisory fee rate remains in effect until December 31, 1994. From
January 1, 1995 until December 31, 1996, the advisory fee rate changes to
.40% per annum. Thereafter, the advisory fee rate changes to .30% per annum
until the fund terminates on or about December 31, 1998.
(5) This advisory fee rate remains in effect until December 31, 1998. From
January 1, 1999 until December 31, 2002, the advisory fee rate changes to
.50% per annum. Thereafter, the advisory fee rate changes to .40% per annum
until the fund terminates on or about December 31, 2004.
(6) This advisory fee rate is calculated as a percentage of total investment
assets for these funds.
(7) The BlackRock Institutional Trust is a series of no load, open-end mutual
funds which currently consist of the Short Duration Portfolio and the Core
Fixed Income Portfolio. The Short Duration Portfolio s advisory fee rate is
.30%, while the Core Fixed Income Portfolio s advisor fee rate is .35%.
</TABLE>
B-2
<PAGE>
However the advisor currently has agreed to waive .05% of the Core Fixed
Income Portfolio s fee.
(8) Maximum fee that can be earned is .25% (Portion of fee is fixed and balance
based on performance).
(9) .25% of 1st $100 Million and .20% in excess of $100 Million.
(10) .20% of the funds average daily net assets up to $100 Million, .15% of the
next $200 Million, .125% of the next $300 Million, .10% of the next $400
Million and .075% of such assets in excess of $1 Billion.
B-3
<PAGE>
EXHIBIT C
BLACKROCK FINANCIAL MANAGEMENT L.P.
CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION
AS OF DECEMBER 31, 1993
AND INDEPENDENT AUDITORS' REPORT
AND
UNAUDITED CONSOLIDATED STATEMENT OF
FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1994
C-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
BlackRock Financial Management L.P.:
We have audited the accompanying consolidated statement of financial
condition of BlackRock Financial Management L.P. and subsidiary (the
"Partnership") as of December 31, 1993. This financial statement is the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit 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 statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, such consolidated financial statement presents fairly, in
all material respects, the financial position of BlackRock Financial Management
L.P. and subsidiary at December 31, 1993 in conformity with generally accepted
accounting principles.
/S/ DELOITTE & TOUCHE
February 18, 1994
C-2
<PAGE>
<TABLE>
BLACKROCK FINANCIAL MANAGEMENT L.P.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1993
<S> <C>
ASSETS
Cash and cash equivalents............................. $ 7,931,040
Accounts receivable................................... 6,503,904
Investments, at market value.......................... 2,213,199
Property and equipment, net........................... 3,827,819
Other assets.......................................... 1,642,528
-----------
Total assets................................ $22,118,490
===========
LIABILITIES AND PARTNERS' INTERESTS
Liabilities:
Accounts payable and accrued expenses............ $14,814,444
Payable to affiliates............................ 486,679
-----------
Total liabilities........................... 15,301,123
-----------
Partners' interests:
Subordinated notes............................... 1,477,674
Partners' capital:
General partner.................................. 2,898,340
Limited partners................................. 2,441,353
-----------
Total partners' interests................... 6,817,367
-----------
Total liabilities and partners'
interests............................ $22,118,490
===========
</TABLE>
See notes to consolidated statement of financial condition.
C-3
<PAGE>
BLACKROCK FINANCIAL MANAGEMENT L.P.
NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
1. THE PARTNERSHIP
BlackRock Financial Management L.P. ("BFM") provides investment management
services to registered investment companies, offshore funds and private accounts
for both domestic and international clients and portfolio advisory services to
companies in the financial services industry. The general partner of BFM is BFM
Management Partners L.P. ("BFM Management"). The general partner of BFM
Management is BFM Management Corp. Effective as of January 1, 1993, there was a
reorganization of partnership interests in which certain general and limited
partners transferred their partnership interests to BFM Management. Net income
(loss) of BFM is allocated to its partners based on specific profit sharing
allocations.
BFM owns a 99% limited partnership interest in BFM International L.P. ("BFM
I") which provides investment management services for internationally based
clients. BFM International Inc. is the general partner of BFM I and is
controlled by certain partners of BFM.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated statement of financial condition includes the accounts of
BFM and BFM I (the "Partnership"). All interpartnership accounts have been
eliminated.
CASH AND CASH EQUIVALENTS
The Partnership has defined cash and cash equivalents as cash and
short-term, highly liquid investments with maturities of three months or less.
REVENUE RECOGNITION
Investment management fees are recognized as earned under the Partnership's
Investment Advisory Agreements ("Agreements"). Under the Agreements, investment
management fees paid to the Partnership are based on a percentage of the net
assets managed by the Partnership. Under the Partnership's portfolio advisory
agreements, revenues are recognized over the terms of such agreements.
FINANCIAL INSTRUMENTS
Financial instruments are carried at fair value or at amounts which
approximate fair value. Cash and cash equivalents, accounts receivable and
payable to affiliates are carried at cost which approximates fair value.
Investments, consisting of shares of registered investment companies managed by
the Partnership, are valued at their quoted market value.
C-4
<PAGE>
BLACKROCK FINANCIAL MANAGEMENT L.P.
NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment is recorded at cost. Depreciation is generally
provided on the straight-line method over an estimated useful life of five
years.
INCOME TAXES
Effective January 1, 1993, the Partnership adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes". This change had no
significant impact on the consolidated statement of financial condition.
3. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consists of the following:
<S> <C>
Office and computer equipment............ $3,771,099
Furniture and fixtures................... 1,302,349
Leasehold improvements................... 144,157
----------
5,217,605
Less accumulated depreciation............ 1,389,786
----------
Property and equipment, net.............. $3,827,819
==========
</TABLE>
4. SUBORDINATED NOTES
Under the terms of the BFM partnership agreement, a portion of
undistributed net operating income (as defined in the partnership agreement) is
converted into subordinated notes. Each subordinated note bears interest at
LIBOR plus 1 percent per annum, payable semi-annually, and shall mature five
years from the date of issuance, subject to extension.
C-5
<PAGE>
BLACKROCK FINANCIAL MANAGEMENT L.P.
NOTES TO CONSOLIDATED STATEMENT OF FINANCIAL CONDITION (CONTINUED)
5. COMMITMENTS
<TABLE>
The Partnership and an affiliate have an agreement, expiring in 1999, to
lease the Partnership's primary office space. Future minimum commitments under
this agreement, net of rental reimbursements from affiliates, are as follows:
<S> <C>
1994..................................... $1,296,054
1995..................................... 1,317,396
1996..................................... 1,317,396
1997..................................... 1,317,396
1998..................................... 1,317,396
Thereafter............................... 219,783
----------
$6,785,421
==========
</TABLE>
Under the lease agreement, the Partnership and an affiliate are responsible
for certain escalation payments.
C-6
<PAGE>
<TABLE>
BLACKROCK FINANCIAL MANAGEMENT L.P.
UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
AS OF SEPTEMBER 30, 1994
<S> <C>
ASSETS
Cash and cash equivalents............................. $ 2,908,724
Accounts receivable................................... 6,386,377
Investments, at market value.......................... 1,834,164
Property and equipment, net........................... 3,705,725
Other assets.......................................... 1,473,794
-----------
Total assets................................ $16,308,784
===========
LIABILITIES AND PARTNERS CAPITAL
Liabilities:
Accounts payable and accrued expenses............ $13,947,237
-----------
Total liabilities........................... 13,947,237
-----------
Partners capital...................................... 2,361,547
-----------
Total liabilities and partners capital...... $16,308,784
===========
</TABLE>
See notes to unaudited consolidated statement of financial condition.
C-7
<PAGE>
BLACKROCK FINANCIAL MANAGEMENT L.P.
NOTES TO UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
1. THE PARTNERSHIP
BlackRock Financial Management L.P. ("BFM") provides investment management
services to registered investment companies, offshore funds and private accounts
for both domestic and international clients and portfolio advisory services to
companies in the financial services industry. The general partner of BFM is BFM
Management Partners L.P. ("BFM Management"). The general partner of BFM
Management is BFM Management Corp.
BFM owns a 99% limited partnership interest in BFM International L.P. ("BFM
I") which provides investment management services for internationally based
clients. BFM International Inc. is the general partner of BFM I and is
controlled by certain partners of BFM.
On June 16, 1994 BFM 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 in early 1995.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of BFM and BFM I
(the "Partnership"). All interpartnership accounts and transactions have been
eliminated.
The consolidated statement of financial condition include herein as of
September 30, 1994 is unaudited. In the opinion of management, such consolidated
statement of financial condition reflects all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
consolidated financial condition of the interim period presented.
3. PARTNER'S CAPITAL
During 1994 BFM cancelled the subordinated notes that were held at December
31, 1993.
C-8
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
Please indicate your vote by an "X" in the appropriate box below.
This proxy, if properly executed, will be voted in the manner directed by the
undersigned shareholder.
IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR THE PROPOSAL.
Please refer to the Proxy Statement for a discussion of the Proposal.
1. To approve a new sub-investment advisory agreement among Smith Barney
Adjustable Rate Government Income Fund, Smith Barney
reement.
FOR AGAINST ABSTAIN
VOTE THIS VOTING INSTRUCTION CARD TODAY!
YOUR PROMPT RESPONSE WILL SAVE
THE EXPENSE OF ADDITIONAL MAILINGS
(Please Detach at Perforation Before Mailing)
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . .
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND PROXY SOLICITED BY THE
BOARD OF TRUSTEES
The undersigned holder of shares of Smith Barney Adjustable Rate Government
Income Fund ("the Fund"), a Massachusetts business trust
bstitution and revocation, to represent the undersigned and to vote on
behalf of the undersigned all shares of the Fund that the undersigned is
entitled to vote at the Special Meeting of Shareholders of the Fund to be
held at the offices of the Fund, 388 Greenwich Street, New York,
New York, on February 22, 1995 at 10:00 a.m. and any adjournment
or adjournments thereof. The undersigned hereby acknowle
e said shares as indicated hereon. In their discretion, the proxies are
authorized to vote upon such other business as may properly
all be so present, then that one,) shall have and may exercise all the power
and authority of said proxies hereunder. The undersign
PLEASE SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE
NOTE: Please sign exactly as your name appears on this Proxy. If joint
owners, EITHER may sign this Proxy. When signing as attorn
DATE: _________________________________________
_______________________________________________
_______________________________________________
Signature(s) (Title(s), if applicable)
