-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. 8 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 9 X
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
(Exact name of Registrant as Specified in Charter)
388 Greenwich Street, 22nd Floor, New York, New York 10013
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, including Area Code
(212) 723-9218
Christina T. Sydor, Secretary
Smith Barney Adjustable Rate Government Income Fund
388 Greenwich Street, 22nd Floor
New York, New York 10013
(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:
immediately upon filing pursuant to Rule 485(b)
on pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
X on October 1, 1995 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, 1995 was filed electronically on July 28, 1995.
SMITH BARNEY 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 Financial Highlights,
Information Performance
4. General Description of Cover Page, Prospectus Summary,
Registrant Investment Objectives and Management
Policies; Management of the Fund
Distributor; Additional Information
5. Management of the Fund Prospectus Summary, Management of
the Fund; Distributor; Additional
Information
6. Capital Stock and Other Purchase of Shares, Dividends
Securities Distributions and Taxes; Additional
Information
7. Purchase of Securities Being Purchase
Offered of Shares; Valuation of Shares;
Redemption of Shares; Exchange
Privilege; Additional Information
8 Redemption or Repurchase 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 Management of the Fund
History Distributor; Organization of the
Fund
13. Investment Objectives and Investment Objective and
Policies Management Policies;
14. Management of the Fund Management of the Fund;
Distributor; Custodian and
Transfer Agent
15. Control Persons and Principal Management of the Fund
Holders of Securities
16. Investment Advisory and Other Mangement of the Fund
Services Distributor, Custodian and
Transfer Agent
17. Brokerage Allocation Investment Objective and
Management Policies
18. Capital Stock and Other Purchase of Shares, Taxes
Securities
19. Purchase, Redemption and Purchase of Shares, Redemption
Pricing of Securities Being of Shares, Distributor,
Offered Valuation of Shares, Exchange
Privilege
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculation of Performance Performance
Data
23. Financial Statements Financial Statements
Registration No. 33-47782
811-6663
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
Form N-1A
Part A
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
---------------------------------------------------------------------------
PROSPECTUS October 1, 1995
388 Greenwich Street, 22nd Floor
New York, New York 10013
(212) 723-9218
Smith Barney 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").
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 October 1, 1995, 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, INC.
Sub-Investment Adviser
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
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.
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.
---------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY
----------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
----------------------------------------------------------------------
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
----------------------------------------------------------------------
VALUATION OF SHARES
----------------------------------------------------------------------
DIVIDENDS, DISTRIBUTIONS AND TAXES
----------------------------------------------------------------------
PURCHASE OF SHARES
----------------------------------------------------------------------
EXCHANGE PRIVILEGE
----------------------------------------------------------------------
REDEMPTION OF SHARES
----------------------------------------------------------------------
MINIMUM ACCOUNT SIZE
----------------------------------------------------------------------
PERFORMANCE
----------------------------------------------------------------------
MANAGEMENT OF THE FUND
----------------------------------------------------------------------
DISTRIBUTOR
----------------------------------------------------------------------
ADDITIONAL INFORMATION
----------------------------------------------------------------------
</TABLE>
---------------------------------------------------------------------------
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."
INVESTMENT OBJECTIVE 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 rate by
investing primarily in a portfolio of Adjustable Rate Securities and U.S.
government securities. See "Investment Objectives and Management Policies."
ALTERNATIVE PURCHASE ARRANGEMENTS The Fund offers several classes
of shares ("Classes") which are sold at net asset value and are
subject to ongoing distribution and services fees. In addition,
certain classes of shares are avialable for investors in the
Smith Barney 401(k) Program and for exchange purchase
transactions by investors in other funds sponsored by Smith
Barney. Shares issued to these investors may be subject to a
contingent deferred sales charge ("CDSD") upon redemption. A
fourth Class of shares with no distribution or service fee is
offered only to investors meeting an initial investment minimum
of $5,000,000. See "Purchase of Shares" and "Redemption of
Shares."
Class A Shares. Class A shares are sold at net asset value
and are subject to annual distribution and service fees
aggregating 0.75% of the average daily net assets of the Class.
Class B Shares. Class B shares are offered at net asset
value and are also subject to annual distribution and service
fees aggregating 0.75%. In addition, Class B shares are subject
to a CDSC based upon the CDSC of the fund from which an exchange
purchase transaction is made. This CDSC may be waived for
certain redemptions. Class B shares are also available to
investors in the Smith Barney 401(k) Program. See "Smith Barney
401(k) Program," below.
Class B Shares Conversion Feature. Class B shares will
convert automatically to Class A shares, based on relative net
asset value, eight years after the date of the original purchase.
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. See
"Purchase of Shares--Deferred Sales Charge Alternatives."
Class C Shares. Class C shares are offered at net asset
value and are also subject to annual distribution and service
fees aggregating 0.75%. Class C shares are offered only to
investors in the Smith Barney 401(k) Program an are subject to a
CDSD of 1.00% for four years. This CDSC may be waived for
certain redemptions. See "Smith Barney 401(k) Program."
Class Y Shares. Class Y shares are available only to
investors meeting an initial investment minimum of $5,000,000.
Class Y shares are sold at net asset value with no initial sales
charge or CDSC. They are not subject to any service or
distribution fees.
PURCHASE OF SHARES Shares may be purchased through the Fund's
distributor, Smith Barney, a broker that clears securities
transactions through Smith Barney on a fully disclosed basis (an
"Introducing Broker") or an investment dealer in the selling
group. See "Purchase of Shares."
INVESTMENT MINIMUMS Investors in Class A and Class B (through
exchange purchases) may open an account by making an initial
investment of at least $1,000 and subsequent investments must be
at least $50.00. Investors in Class B and Class C through the
Smith Barney 401(k) Program may open an account and make
subsequent investments at a minimum of $25.00. Investors in
Class Y shares may open an account for an initial investment of
$5,000,000 and make subsequent investments of at least $50.
SYSTEMATIC INVESTMENT PLAN The Fund offers Class A 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 of at least $50. 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. See
"Purchase of Shares" and "Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Strategy Advisers Inc.
("Strategy Advisers") serves as the Fund's investment adviser.
Strategy Advisers provides investment advisory and management
services to investment companies affiliated with Smith Barney.
Strategy Advisers is a wholly owned subsidiary of Smith Barney
Mutual Funds Managment Inc. ("Funds Management"). See
"Management of the Fund."
BlackRock Financial Management Inc. ("BlackRock") serves as sub-
investment adviser. BlackRock is an indirect wholly owned
subsidiary of PNC Bank, National Association ("PNC"). PNC is a
commercial bank offering a wide range of domestic and
international commercial banking, retail banking and trust
services to its customers. See "Management of the Fund."
Smith Barney Mutual Funds Management Inc. ("Funds Management")
serves as Administrator. Funds Management provides investment
advisory and administrative services to investment companies
affiliated with Smith Barney and is a wholly owned subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned subsidiary of Travelers Group Inc. ("Travelers"), a
diversified financial services holding company engaged through
its subsidiaries principally in four business segments:
Investment Services, Consumer Finance Services, Life Insurance
Services and Property & Casualty Insurance ServicesSee
"Management of the Fund."
EXCHANGE PRIVILEGE Shares of a Class may be exchanged for shares
of the same Class of certain other Smith Barney Mutual Funds at
the respective net asset value next determined, plus any
applicable sales charge differential. See "Exchange Privilege."
VALUATION OF SHARES Net asset value of the Fund for the prior day
generally is quoted daily in the financial section of most
newspapers and is also available from Smith Barney Financial
Consultants. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends from net investment income
are paid on the last Friday of each calendar month to
shareholders of record as of the preceding Tuesday. Distributions
of net realized long and short-term capital gains, if any, are
declared and paid annually after the end of the fiscal year in
which they were earned. See "Dividends, Distributions and Taxes."
REINVESTMENT OF DIVIDENDS Dividends and distributions paid on
shares of any Class will be reinvested automatically in
additional shares of the same Class at current net asset value
unless otherwise specified by an investor. Shares acquired by
dividend and distribution reinvestments will not be subject to
any sales charge or CDSC. Class B shares acquired through
dividend and distribution reinvestments will become eligible for
conversion to Class A shares on a pro rata basis. See "Dividends,
Distributions and Taxes."
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 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 year:
<TABLE>
<CAPTION>
CLASS A CLASS B CLASS C
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(as a percentage of offering price) 0.00% 0.00% 0.00%
Maximum CDSC
(as a percentage of redemption proceeds) 0.00% 0.00%* 1.00%*
--------------------------------------------------------------------------------------------
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fees .60% .60% .60%
12b-1 fees .75 .75 .75
Other expenses** .15 .15 .15
--------------------------------------------------------------------------------------------
TOTAL FUND OPERATING EXPENSES 1.50% 1.50% 1.50%
--------------------------------------------------------------------------------------------
<FN>
* Investors in the Smith Barney 401(k) Program may purchase Class B shares
of the Fund; all other investors may acquire Class B shares through exchanges
only. Upon an exchange, the new Class B shares wil be subject to the same
CDSC, and will be deemed to have been purchased on the same date as the
Class B shares fothe fund that have been exchanged. Class B shares acquired
by participating plans will be subject to an eight year3.00% CDSC, payable upon
a participating plan's withdrawal from the Smith Barney 401(k) Program.
See "Smith Barney 401(k) Program," below.
** Only investors in the Smith Barney 401(k) Program may purchase Class C shares
of the Fund. Class C shares aquired by participating plans will be subject to a
four year 1.00% CDSC, payable upon a participating plan's withdrawal from the
Smith Barney 401(k) Program. See "Smith Barney 401(k) Program, " below.
</TABLE>
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 $ $ $ $
Class B shares:
Assumes complete redemption at end of
each time period** $ $ $ $
Assumes no redemption $ $ $ $
Class C shares $ $ $ $
Class Y shares $ $ $ $
-------------------------------------------------------------------------------------
<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 5% which is the maximum CDSC
imposed
by any of the funds participating in Smith Barney Mutual Funds
exchange program. Investors may be subject to a lower CDSC.
</TABLE>
--------------------------------------------------------------------
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, 1995. 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 THE PERIOD.*
<TABLE>
<CAPTION>
PERIOD
ENDED
5/31/95
<S> <C>
Net Asset Value, beginning of period $
Income from investment operations:
Net investment income
Net realized and unrealized loss on investments
--------------------------------------------------------------------------------
Total from investment operations
Less distributions:
Dividends from net investment income
--------------------------------------------------------------------------------
Total distributions
NET ASSET VALUE, end of period $
--------------------------------------------------------------------------------
Total return++
--------------------------------------------------------------------------------
Ratios/Supplemental Data (annualized):
Net assets, end of period (in 000's) $
Ratio of net investment income to average net assets
Ratio of operating expenses to average net assets+
Portfolio turnover rate
--------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on June 22, 1992. On November 6, 1992 the Fund
commenced selling Class B and Class D shares (subsequently redesignated
Class C shares). Those shares in existence prior
to November 6, 1992 were designated as Class A shares.
+The annualized operating expense ratio excludes interest expense. The ratio
including interest expense for the period ended May 31, 1993 was 1.92%.
Annualized expense ratio before voluntary waiver of fees by investment manager,
investment adviser and 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.
FOR A CLASS B SHARE OUTSTANDING THROUGHOUT THE PERIOD.*
<CAPTION>
PERIOD
ENDED
5/31/95
<S> <C>
Net Asset Value, beginning of period $
Income from investment operations:
Net investment income
Net realized and unrealized loss on investments --
--------------------------------------------------------------------------------
Total from investment operations
Less distributions:
Dividends from net investment income
--------------------------------------------------------------------------------
Total distributions
NET ASSET VALUE, end of period $
--------------------------------------------------------------------------------
Total return++
--------------------------------------------------------------------------------
Ratios/Supplemental Data (annualized):
Net assets, end of period (in 000's) $
Ratio of net investment income to average net assets %
Ratio of operating expenses to average net assets+ %
Portfolio turnover rate %
--------------------------------------------------------------------------------
<FN>
*The Fund commenced operations on June 22, 1992. On November 6, 1992 the Fund
commenced selling Class B and Class D shares (subsequently redesingated as
Class C shares). Those shares in existence prior
to November 6, 1992 were designated as Class A shares.
+The annualized operating expense ratio excludes interest expense. The ratio
including interest expense for the period ended May 31, 1993 was 1.92%.
Annualized expense ratio before voluntary waiver of fees by investment and
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 CDSC.
</TABLE>
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INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
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.
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
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 securities 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 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 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 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 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 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 payment 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 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 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.
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); 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 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 Strategy
Advisers 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.
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 ("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. 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 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 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
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
Strategy Advisers
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.
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).
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 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.
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 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 rates 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 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.
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 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 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.
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VALUATION OF SHARES
The Fund's net asset value per share is determined as of the
close of regular trading on the NYSE, on each day that the NYSE
is open, by dividing the value of the Fund's net assets
attributable to each 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. Certain securities may be valued
on the basis of prices provided by pricing services approved by
the Board of Trustees. Short-term investments that mature in 60
days or less are valued at amortized cost whenever the Directors
determine that amortized cost is fair value. Amortized cost
valuation involves valuing an instrument at its cost initially
and, thereafter, assuming a constant amortization to maturity of
any discount or premium, regardless of the impact of fluctuating
interest rates on the market value of the instrument. Further
information regarding the Fund's valuation policies is contained
in the Statement of Additional Information.
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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 last business friday 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 upon the advice of management 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-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 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.
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PURCHASE OF SHARES
GENERAL
The Fund offers four classes of shares. Class A shares are
sold to investors with no initial sales charge and are subject to
ongoing distribution and service fees. Class B and Class C
shares are available through exchange purchases and/or the Smith
Barney 401(k) Program and are subject to a CDSC payable upon
certain redemptions. Class Y shares are sold without an initial
sales charge or CDSC and are available only to investors
investing a minimum of $5,000,000.
Purchases of Fund shares must be made through a brokerage
account maintained with Smith Barney, with an Introducing Broker
or with an investment dealer in the selling group. When
purchasing shares of the Fund, investors must specify whether the
purchase is for Class A, Class B, Class C or Class Y shares. No
maintenance fee will be charged by the Fund in connection with a
brokerage account through which an investor purchases or holds
shares.
Investors in Class A and Class B shares may open an account
in the Fund by making an initial investment of at least $1,000.
Investors in Class Y shares may open an account by making an
initial investment of $5,000,000. Subsequent investments of at
least $50 may be made for all Classes. For the Fund's Systematic
Investment Plan, available only for Class A shares, the minimum
initial investment requirement is $50. There are no minimum
investment requirements for Class A shares for employees of
Travelers and its subsidiaries, including Smith Barney, and
Directors of the Fund and their spouses and children. The Fund
reserves the right to waive or change minimums, to decline any
order to purchase its shares and to suspend the offering of
shares from time to time. Shares purchased will be held in the
shareholder's account by the Fund's transfer agent, The
Shareholder Services Group, Inc., a subsidiary of First Data
Corporation ("TSSG"). Share certificates are issued only upon a
shareholder's written request to TSSG.
Purchase orders received by the Fund or Smith Barney prior
to the close of regular trading on the NYSE, on any day the Fund
calculates its net asset value, are priced according to the net
asset value determined on that day. Orders received by dealers or
Introducing Brokers prior to the close of regular trading on the
NYSE on any day the Fund calculates its net asset value, are
priced according to the net asset value determined on that day,
provided the order is received by the Fund or Smith Barney prior
to Smith Barney's close of business (the "trade date"). Payment
for Fund shares is due on the third business day after the trade
date (the "settlement date").
SYSTEMATIC INVESTMENT PLAN
Class A shareholders may make additions to their accounts at
any time by purchasing shares through a service known as the
Systematic Investment Plan. Under the Systematic Investment Plan,
Smith Barney or TSSG is authorized through preauthorized
transfers of $50 or more to charge an account with a bank or
other financial institution on a monthly or quarterly basis as
indicated by the shareholder to provide for systematic additions
to the shareholder's Fund account. A shareholder who has
insufficient funds to complete the transfer will be charged a fee
of up to $25 by Smith Barney or TSSG. The Systematic Investment
Plan also authorizes Smith Barney to apply cash held in the
shareholder's Smith Barney brokerage account or redeem the
shareholder's shares of a Smith Barney money market fund to make
additions to the account. Additional information is available
from the Fund or a Smith Barney Financial Consultant.
CLASS B CONVERSION FEATURE
Class B shares will convert automatically to Class A shares
eight years after the date on which they were originally
purchased. There will also be converted at that time such
proportion of Class B Dividend Shares owned by the shareholder as
the total number of his or her Class B shares converting at the
time bears to the total number of outstanding Class B shares
(other than Class B Dividend Shares) owned by the shareholder.
Shareholders who held Class B shares of Smith Barney Shearson
Short-Term World Income Fund (the "Short-Term World Income Fund")
on July 15, 1994 and who subsequently exchanged those shares for
Class B shares of the Fund will be offered the opportunity to
exchange all such Class B shares for Class A shares of the Fund
four years after the date on which those shares were deemed to
have been purchased. Holders of such Class B shares will be
notified of the pending exchange in writing approximately 30 days
before the fourth anniversary of the purchase date and, unless
the exchange has been rejected in writing, the exchange will
occur on or about the fourth anniversary date. See "Prospectus
Summary--Alternative Purchase Arrangements--Class B Shares
Conversion Feature."
The length of time that CDSC Shares acquired through an
exchange have been held will be calculated from the date that the
shares exchanged were initially acquired in one of the other
Smith Barney Mutual Funds, and Fund shares being redeemed will be
considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such
other funds. For Federal income tax purposes, the amount of any
CDSC will reduce the gain or increase the loss, as the case may
be, on the amount realized on redemption. The amount of any CDSC
will be paid to Smith Barney.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to
or less than 1.00% per month of the value of the shareholder's
shares at the time the withdrawal plan commences (see "Automatic
Cash Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of
the value of the shareholder's shares will be permitted for
withdrawal plans that were established prior to November 7,
1994); (c) redemptions of shares within 12 months following the
death or disability of the shareholder; (d) involuntary
redemptions; and (e) redemptions of shares in connection with a
combination of the Fund with any investment company by merger,
acquisition of assets or otherwise. In addition, a shareholder
who has redeemed shares from other Smith Barney Mutual Funds may,
under certain circumstances, reinvest all or part of the
redemption proceeds within 60 days and receive pro rata credit
for any CDSC imposed on the prior redemption.
CDSC waivers will be granted subject to confirmation (by
Smith Barney in the case of shareholders who are also Smith
Barney clients or by TSSG in the case of all other shareholders)
of the shareholder's status or holdings, as the case may be.
SMITH BARNEY 401(K) PROGRAM
Investors may be eligible to participate in the Smith Barney 401(k) Program,
which is generally designed to assist employers or plan sponsors in the crea-
tion and operation of retirement plans under Section 401(a) of the Code. To the
extent applicable, the same terms and conditions are offered to all Participat-
ing Plans in the Smith Barney 401(k) Program.
The Fund offers to Participating Plans Class A, Class B, Class C and Class Y
shares, as investment alternatives under the Smith Barney 401(k) Program. The
Class A, Class B and Class C shares acquired through the Smith Barney 401(k)
Program are subject to the same service and/or distribution fees as, but dif-
ferent sales charge and CDSC schedules than, the Class A, Class B and Class C
shares acquired by other investors. Similar to those available to other invest-
ors, Class Y shares acquired through the Smith Barney 401(k) Program are not
subject to any initial sales charge, CDSC or service or distribution fees. Once
a Participating Plan has made an initial investment in the Fund, all of its
subsequent investments in the Fund must be in the same Class of shares, except
as otherwise described below.
Class A Shares. Class A shares of the Fund are offered without any initial
sales charge to any Participating Plan that purchases from $500,000 to
$4,999,999 of Class A shares of one or more funds of the Smith Barney Mutual
Funds. Class A shares acquired through the Smith Barney 401(k) Program after
November 7, 1994 are subject to a CDSC of 1.00% of redemption proceeds, if the
Participating Plan terminates within four years of the date the Participating
Plan first enrolled in the Smith Barney 401(k) Program.
Class B Shares. Class B shares of the Fund are offered to any Participating
Plan that purchases less than $250,000 of one or more funds of the Smith Barney
Mutual Funds. Class B shares acquired through the Smith Barney 401(k) Program
are subject to a CDSC of 3.00% of redemption proceeds, if the Participating
Plan terminates within eight years of the date the Participating Plan first
enrolled in the Smith Barney 401(k) Program.
Eight years after the date the Participating Plan enrolled in the Smith Bar-
ney 401(k) Program, 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 anni-
versary of the enrollment 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
"Purchase of Sales -- Deferred Sales Charge Alternatives."
Class C Shares. Class C shares of the Fund are offered to any Participating
Plan that purchases from $250,000 to $499,999 of one or more funds of the Smith
Barney Mutual Funds. Class C shares acquired through the Smith Barney 401(k)
Program after November 7, 1994 are subject to a CDSC of 1.00% of redemption
proceeds, if the Participating Plan terminates within four years of the date
the Participating Plan first enrolled in the Smith Barney 401(k) Program. In
any year after the date a Participating Plan enrolled in the Smith Barney
401(k) Program, if its total Class C holdings equal to least $500,000 as of the
calendar year-end, the Participating Plan will be offered the opportunity to
exchange all of its Class C shares for Class A shares of the Fund. Such Plans
will be notified 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 the following March.
Once the exchange has occurred, a Participating Plan will not be eligible to
acquire Class C shares of the Fund but instead may acquire Class A shares of
the Fund. Class C shares not converted will continue to be subject to the dis-
tribution fee.
Class Y Shares. Class Y shares of the Fund are offered without any service or
distribution fees, sales charge or CDSC to any Participating Plan that pur
chases $5,000,000 or more of Class Y shares of one or more funds of the
Smith Barney Mutual Funds.
No CDSC is imposed on redemptions of CDSC Shares to the extent that the net
asset value of the shares redeemed does not exceed the current net asset value
of the shares purchased through reinvestment of dividends or capital gain dis-
tributions, plus (a) with respect to Class A and Class C shares, the current
net asset value of such shares purchased more than one year prior to redemption
and, with respect to Class B shares, the current net asset value of Class B
shares purchased more than eight years prior to the redemption, plus (b) with
respect to Class A and Class C shares, increases in the net asset value of the
shareholder's Class A or Class C shares above the purchase payments made during
the preceding year and, with respect to Class B shares, increases in the net
asset value of the shareholder's Class B shares above the purchase payments
made during the preceding eight years. Whether or not the CDSC applies to a
Participating Plan depends on the number of years since the Participating Plan
first became enrolled in the Smith Barney 401(k) Program, unlike the applica-
bility of the CDSC to other 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 CDSC 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 termina-
tion 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 of an employee in
the Participating Plan to the extent permitted under Section 401(k) of the
Code; or (f) redemptions of shares in connection with a loan made by the Par-
ticipating Plan to an employee.
Participating Plans wishing to acquire shares of the Fund through the
Smith Barney 401(k) Program must purchase such shares directly from TSSG. For
further information regarding the Smith Barney 401(k) Program, investors should
contact a Smith Barney Financial Consultant.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of each Class may be
exchanged at the net asset value next determined for shares of
the same Class in the following funds of the Smith Barney Mutual
Funds, to the extent shares are offered for sale in the
shareholder's state of residence. Exchanges of Class A, Class B
and Class C shares are subject to minimum investment requirements
and all shares are subject to the other requirements of the fund
into which exchanges are made and a sales charge differential may
apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.--Income and Growth Portfolio
Smith Barney Funds, Inc.--Utility Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
Smith Barney Diversified Strategic Income Fund
*Smith Barney Funds, Inc.--Income Return Account Portfolio
Smith Barney Funds, Inc.--Monthly Payment Government Portfolio
++Smith Barney Funds, Inc.--Short-Term U.S. Treasury Securities
Portfolio
Smith Barney Funds, Inc.--U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc.
Smith Barney Florida Municipals Fund
*Smith Barney Intermediate Maturity California Municipals Fund
*Smith Barney Intermediate Maturity New York Municipals Fund
*Smith Barney Limited Maturity Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds--California Portfolio
*Smith Barney Muni Funds--Florida Limited Term Portfolio
Smith Barney Muni Funds--Florida Portfolio
Smith Barney Muni Funds--Georgia Portfolio
*Smith Barney Muni Funds--Limited Term Portfolio
Smith Barney Muni Funds--National Portfolio
Smith Barney Muni Funds--New Jersey Portfolio
Smith Barney Muni Funds--New York Portfolio
Smith Barney Muni Funds--Ohio Portfolio
Smith Barney Muni Funds--Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc.--Emerging Markets Portfolio
Smith Barney World Funds, Inc.--European Portfolio
Smith Barney World Funds, Inc.--Global Government Bond Portfolio
Smith Barney World Funds, Inc.--International Balanced Portfolio
Smith Barney World Funds, Inc.--International Equity Portfolio
Smith Barney World Funds, Inc.--Pacific Portfolio
Smith Barney Precious Metals and Minerals Fund Inc.
Money Market Funds
+Smith Barney Exchange Reserve Fund
++Smith Barney Money Funds, Inc.--Cash Portfolio
++Smith Barney Money Funds, Inc.--Government Portfolio
**Smith Barney Money Funds, Inc.--Retirement Portfolio
++Smith Barney Municipal Money Market Fund, Inc.
++Smith Barney Muni Funds--California Money Market Portfolio
++Smith Barney Muni Funds--New York Money Market Portfolio
-----------------------------------------------------------------
------------
*Available for exchange with Class A, Class C and Class Y shares
of the Fund.
**Available for exchange with Class A shares of the Fund.
+Available for exchange with Class B and Class C shares of the
Fund.
++Available for exchange with Class A and Class Y shares of the
Fund.
Class A Exchanges. Class A shares of Smith Barney Mutual
Funds sold without a sales charge or with a maximum sales charge
of less than the maximum charged by other Smith Barney Mutual
Funds will be subject to the appropriate "sales charge
differential" upon the exchange of such shares for Class A shares
of a fund sold with a higher sales charge. 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 sales
charge rate(s) actually 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 and capital gains
distributions are treated as having paid the same sales charges
applicable to the shares on which the dividends or distributions
were paid; however, if no sales charge was imposed upon the
initial purchase of shares, any shares obtained through automatic
reinvestment will be subject to a sales charge differential upon
exchange.
Class B Exchanges. In the event a Class B shareholder
(unless such shareholder was a Class B shareholder of the Short-
Term World Income Fund on July 15, 1994) wishes to exchange all
or a portion of his or her shares in any of the funds imposing a
higher CDSC than that imposed by the Fund, 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 that
have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will
be deemed to
have been purchased on the same date as the Class C shares of the
Fund that have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish
to exchange all or a portion of their Class Y shares for Class Y
shares in any of the funds identified above may do so without
imposition of any charge.
Additional Information Regarding the Exchange Privilege.
Although the exchange privilege is an important benefit,
excessive exchange transactions can be detrimental to the Fund's
performance and its shareholders Strategy Advisers or Funds
Management may determine that a
pattern of frequent exchanges is excessive and contrary to the
best interests of the Fund's other shareholders. In this event,
Strategy Advisers or Funds Management will notify Smith
Barney and Smith Barney may, at its
discretion, decide to limit additional purchases and/or exchanges
by a shareholder. Upon such a determination, Smith Barney will
provide notice in writing or by telephone to the shareholder at
least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a)
redeem his or her shares in the Fund or (b) remain invested in
the Fund or exchange into any Smith Barney Mutual Funds
ordinarily available, which position the shareholder would be
expected to maintain for a significant period of time. All
relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Exchanges will be processed at the net asset value next
determined, plus any applicable sales charge differential.
Redemption procedures discussed below are also applicable for
exchanging shares, and exchanges will be made upon receipt of all
supporting documents in proper form. If the account registration
of the shares of the fund being acquired is identical to the
registration of the shares of the fund exchanged, no signature
guarantee is required. A capital gain or loss for tax purposes
will be realized upon the exchange, depending upon the cost or
other basis of shares redeemed. Before exchanging shares,
investors should read the current prospectus describing the
shares to be acquired. The Fund reserves the right to modify or
discontinue exchange privileges upon 60 days' prior notice to
shareholders.
REDEMPTION OF SHARES
The Fund is required to redeem the shares of the Fund
tendered to it, as described below, at a redemption price equal
to their net asset value per share next determined after receipt
of a written request in proper form at no charge other than any
applicable CDSC. Redemption requests received after the close of
regular trading on the NYSE are priced at the net asset value
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 redemption proceeds will be remitted on or before the third
business day following receipt of proper tender, except on any
days on which the NYSE is closed or as permitted under the 1940
Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Smith Barney brokerage account, 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. Redemption proceeds for shares
purchased by check, other than a certified or official bank
check, will be remitted upon clearance of the check, which may
take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by
submitting a written request to a Smith Barney Financial
Consultant. Shares other than those held by Smith Barney as
custodian may be redeemed through an investor's Financial
Consultant, Introducing Broker or dealer in the selling group or
by submitting a written request for redemption to:
Smith Barney Adjustabel Rate Government Income Fund.
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request 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 an eligible guarantor institution such as 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, administrators, Directors 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 with a value of at least
$10,000 may elect to receive cash payments of at least $50
monthly or quarterly. The withdrawal plan will be carried over on
exchanges between funds or Classes of the Fund. Any applicable
CDSC will not be waived on amounts withdrawn by a shareholder
that exceed 1.00% per month of the value of the shareholder's
shares subject to the CDSC at the time the withdrawal plan
commences. (With respect to withdrawal plans in effect prior to
November 7, 1994, any applicable CDSC will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of the
shareholder's shares subject to the CDSC.) For further
information regarding the automatic cash withdrawal plan,
shareholders should contact a Smith Barney Financial Consultant.
MINIMUM ACCOUNT SIZE
The Fund reserves the right to involuntarily liquidate any
shareholder's account in the Fund if the aggregate net asset
value of the shares held in the Fund account is less than $500.
(If a shareholder has more than one account in this Fund, each
account must satisfy the minimum account size.) The Fund,
however, will not redeem shares based solely on market reductions
in net asset value. Before the Fund exercises such right,
shareholders will receive written notice and will be permitted 60
days to bring accounts up to the minimum to avoid automatic
redemption.
-------------------------------------------------------------
PERFORMANCE
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
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.
--------------------------------------------------------------------
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 adviser, sub-investment adviser,
administrator, distributor, custodian and transfer agent. The day-to-day
operations of the Fund have been delegated to Strategy Advisers, BlackRock
and Funds Managements. The Statement of Additional Information contains
background
information regarding each Trustee and executive officer of the Fund.
INVESTMENT ADVISER
Strategy Advisers, located at 388 Greenwich Street, New York, New York
10013,
serves as the Fund's investment adviser. In this capacity, Strategy Advisers,
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 Strategy
Advisers
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 Strategy Advisers. Strategy Advisers
provides investment management, investment advisory and/or administrative
services to individual, institutional and investment company clients that had
aggregate assets under management, as of Septemer 1, 1995, in excess of
$742 million. For the fiscal year ended May 31, 1995, Strategy Advisers
received fees in an amount equal to .40% of the Fund's average daily net
assets.
SUB-INVESTMENT ADVISER--BLACKROCK
Under the terms of the sub-investment advisory agreement among Strategy
Advisers, the Fund and BlackRock, Strategy Advisers employs BlackRock
as the Fund's sub-investment adviser. BlackRock is a wholly owned indirect
subsidiary of PNC Asset Management Group, Inc., the holding company
for PNC Bank N.A.'s asset management business. BlackRock
maintains its principal offices at 345 Park Avenue, New York, New
York 10154. BlackRock serves as investment adviser to
fixed income investors in the United States and overseas through several funds
that as of September 1, 1995 had combined total assets in excess of $
billion,
of which approximately $ billion represents investment company assets.
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
Strategy
Advisers, 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. Strategy
Advisers 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 senior officer of BlackRock and
Portfolio Managers of the Fund, have been responsible for managing the
day-to-day operations of the Fund, including the making of investment
decisions.
Management's discussion and analysis, and additional performance information
regarding the Fund for the fiscal year ended May 31, 1995 is included in the
Fund's Annual Report dated May 31, 1995. A copy of the Annual Report may
be obtained upon request and without charge from a Smith Barney Financial
Consultant or by writing or calling the Fund at the address of phone number
listed on page one of this Prospectus.
ADMINISTRATOR--FUNDS MANAGEMENT
Funds Management, located at 388 Greenwich Street, New York New York
10013 serves as the Fund's administrator. As the Fund's administrator,
Funds Management calculates the net asset value of the Fund's shares and
generally assists in all aspects of the Fund's administration and operation.
Funds Management provides investment management, investment advisory
and/or administrative services to investment companies that had aggregate
assets under management, as of September 1, 1995, in excess of $ billion.
Funds Management receives 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.
--------------------------------------------------------------------
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 Group Inc. 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 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.
--------------------------------------------------------------------
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 and
on November 7, 1994, the name was changed to its current name.
Each share of 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 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.
PNC, located at 17th and Chestnut Streeets,
Philadelphia, Pennsylvania serves as custodian of the Fund's investments.
TSSG, is located at Exchange Place, Boston, Massachusetts
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 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.
PART B - FORM N-1A
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
STATEMENT OF
ADDITIONAL INFORMATION
OCTOBER 1, 1995
SMITH BARNEY
ADJUSTABLE RATE GOVERNMENT INCOME FUND
388 Greenwich Street
New York, New York 10013
(212) 720-9218
This Statement of Additional Information expands upon and
supplements the
information contained in the current Prospectus of Smith Barney
Adjustable Rate Government Income Fund (the "Fund"), dated October 1,
1995, 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......................................................
Investment Objectives and Management Policies...............................
Purchase of Shares.........................................................
Redemption of Shares.....................................................
Distributor.................................................................
Valuation of Shares........................................................
Exchange Privilege.......................................................
Performance Data (See in the Prospectus "The Fund's Performance")........
Taxes (See in the Prospectus "Dividends, Distributions and Taxes").........
Custodian and Transfer Agent (See in the Prospectus "Additional Information")
Organization of the Fund (See in the Prospectus "Additional Information")..
Financial Statements.......................................................
</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.
("Strategy Advisers") ..................................................... Investment Adviser
BlackRock Financial Management, Inc.
("BlackRock") ................................................. Sub-Investment Adviser
Smith Barney Mutual Funds Managment Inc.
("Funds Management") ........................................... Administrator
PNC Bank, National Association
("PNC") ............................................... 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.
*Heath B. McLendon, Chairman of the Board. Managing Director 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.
Scott M. Amero, Portfolio Manager. BlackRock Title.
His address is 345 Park Avenue, New York, New York 10154.
Keith T. Anderson, Portfolio Manager. BlackRock Title.
His address is 345 Park Avenue, New York, New York 10154.
Robert S. Kapito, Portfolio Manager. BlackRock Title.
His address is 345 Park Avenue, New York, New York
10154.
Lewis D. Daidone, Senior Vice President and Treasurer. Managing Director
of Smith Barney Inc., Director of Strategy Advisers. His address is 388
Greenwich Street, New York New York 10013.
Christina T. Sydor. Secretary. Managing Director of Smith Barney Inc.
Her address is 388 Greenwich Street, New York, New York 10013.
Each of the Fund's Trustees serves as a trustee or
director of other mutual funds for which Smith Barney serves as
sponsor. As of September 1, 1995, 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, Strategy Advisers,
BlackRock or
Funds Management 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, Strategy
Advisers, BlackRock, Funds Management, 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, 1995 such fees and
expenses totalled $ .
INVESTMENT ADVISER, SUB-INVESTMENT ADVISER AND ADMINISTRATOR
Certain of the services provided to, and the fees paid by,
the Fund under its
agreements with Strategy Advisers, BlackRock and Funds
Management
are described in the Prospectus. For the fiscal year
ended Many 31, 1995,
such fees amounted to $ , $
and $ ,
respectively. Funds Management, in addition to providing
the services
described in the Prospectus: furnishes the Fund with
statistical and research
data, clerical assistance and accounting, data processing,
bookkeeping, internal
auditing and legal services and certain other services
required by the Fund;
prepares reports to the Fund's shareholders; and prepares
tax returns, reports
to and filings with, the Securities and Exchange
Commission (the "SEC") and
state regulatory authorities. Strategy Advisers, is a wholly
owned subsidiary of
Funds Management, a wholly owned subsidiary of Smith Barney
Holdings
Inc. ("Holdings"). Holdings is a wholly owned subsidiary
of Primerica
Corporation
("Primerica"). Strategy Advisers 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. Strategy Advisers, BlackRock and Funds
Management each
pays the salaries of all officers and employees it employs
who serve the Fund,
and Strategy Advisers and Funds Management maintain office
facilities for the
Fund. Strategy Advisers, BlackRock and Funds Management
bear all
expenses in connection with the performance of their
respective services under
their agreements with the Fund.
Strategy Advisers and Funds Managment have each 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 Stratgey Advisers and
Funds
Management, 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, Strategy Advisers and
Funds Managment
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
KPMG Peat Marwick, independent accountants, [New York],
New York, New
York serve as auditors for the Fund and render and opinion
of the Fund's
Financial Statement annually. Prior to the fiscal year
ended May 31, 1995,
Coopers & Lybrand, independent accountants, One Post Office
Square,
Boston, Massachusetts 02109, served as auditors of the
Fund.
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.
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 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 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
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.
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 Strategy Advisers 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
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
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
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.
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 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 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.
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 Stratgey Advisers, BlackRock or
Funds Managmenet
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.
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 Strategy
Advisers or BlackRock,
and the fees of Strategy Advisers and BlackRock are not
reduced as a
consequence of their receipt of the supplemental
information. The information
may be useful to Strategy Advisers 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
Strategy Advisers and
BlackRock in carrying out their obligations to the Fund.
For the fiscal period ending May 31, 1995, the Fund
incurred total brokerage commissions of $ ,
none of which was paid to
Smith Barney.
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 periods ended May 31, 1993, 1994 and 1995,
the Fund's
portfolio turnover rate was 236%, %, and %,
respectively.
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
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. Class C
shares are offered to
investors in the Smith Barney 401(k) Program as net asset
value and subject to a
1.00% CDSC. See the Prospectus for detailed information
under the caption
"Purchase of Shares."
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 (1% for plans
established after November 7, 1994). 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
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, Shearson Lehman
Brothers, the Fund's distributor prior to Smith Barney,
received $958
in CDSC on the redemption of the Fund's Class B shares, and
did not reallow any
portion thereof to dealers. Smith Barney, for the fiscal
periods ending May 31, 1994
and 1995 recieved $ and $ , respectively in
CDSCs on the resdeption of the
Fund's Class B and Class C shares, and did not reallow any
portion thereof to dealers.
Smith Barney forwards investors' funds for the
purchase of shares
three 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 Money Market Fund) in
the Smith
Barney Group of Funds. If the investor instructs Smith
Barney
to invest the funds in a money market fund in the Smith
Barney Mutual 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 three-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 C shares. In addition, Smith Barney is
also 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 periods ended May
31, 1993, 1994 and
1995, the Fund incurred service fees of $ and $
and $ ,
respectively. For the fiscal periods ended May 31, 1993,
1994 and 1995, the
Fund incurred distribution fees of $ and $
and $ ,
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, Funds Management, 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 C shares of the Fund may be
exchanged for shares of
the respective Class of many of the funds of the Smith
Barney Mutual 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 of Smith
Barney Mutual Funds
may exchange all or part of their shares for shares of the
same
class of other of the Smith Barney Mutual 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.
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 High
Income Fund and
the account number in order to accomplish an exchange of
shares of 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:
[Mathematical formula goes here]
<TABLE>
<C> <S> <C> <C>
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.
</TABLE>
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.
The Fund's yield for the 30-day period ended May 31, 1995
was % with respect to its Class A, Class B and Class C
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:
[Mathematical formula goes here]
<TABLE>
<C> <S> <C> <C>
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.
</TABLE>
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:
[Mathematical formula goes here]
<TABLE>
<C> <S> <C> <C>
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.
</TABLE>
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.
For the fiscal period ended May 31, 1995, the Fund's
aggregate annual total
returns for Class A, Class B and Class C shares were
%, % and %
respectively. Over the life of the Fund, the returns for
Class A shares and
Class B were % and %. Class A
shares, Class B shares
and Class C shares were first issued on June 22, 1992, Had
the
investment advisory, sub-investment advisory and
administration fees not been
partially waived, the aggregate total returns would have
been % for Class A
shares and % for Class B shares for this ame period.
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 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
PNC, is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania, 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, PNC is
authorized to
establish separate accounts and appoint securities
depositories as
sub-custodians of assets owned by the Fund. For its
custody services, PNC
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. PNC is also reimbursed by the Fund for
out-of-pocket
expenses, including the costs of any sub-custodians.
TSSG, a subsidiary of First Data Corporation, 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 and 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. On November 7, 1994
the Fund changed
its name to its current name.
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
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, 1995 accompanies
this Statement of Additional Information and is incorporated
herein by reference
in its entirety.
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements - To be filed by amendment
(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 and
811-6663) (the "Registration Statement") and amendmements thereto.
(1)(a) First Amended and Restated Master Trust Agreement dated
November 5, 1992 is incorporated by reference to Post-Effective
Amendment No. 7 to the Regsitration Statement filed August 29, 1994
("Post Effective Amendment No. 7")
(b) Amendment No. 1 to First Amended and Restated Master Trust
Agreement is incorporation by reference to Post-Effective Amendment No. 7.
(2) Registrant's By-Laws are incorporated by reference to Pre-
Effective Amendment No. 1.
(3) Not Applicable.
(4) Registrant's form of share certificate for Class A, B and C shares
is incorporated by reference to Post-Effective Amendment No. 2.
(5)(a) Form of Investment Management Agreement between the Registrant
and Smith Barney Strategy Advisers Inc. is incoporated by reference to
definitive Proxy Materials filed by Registrant on January 12, 1995.
(b) Form of Sub-Investment Advisory Agreement between the
Registrant and BlackRock Financial Management Inc. is incorporated by
reference to definitive Proxy Materials filed by Regsistrant on January 12,
1995.
(c) Administration Agreement dated June 1, 1994 between the Registrant
and Smith Barney Mutual Funds Management Inc. (formerly Smith, Barney
Advisers, Inc.) is incorporation by reference to Post-Effective Amendment
No. 6 to the Registration Statement as filed July 29, 1994 ("Post-Effective
Amendment No. 6")
(6) Distribution Agreement between the Registrant and Smith
Barney Shearson Inc. ("Smith Barney Shearson") dated July 30, 1993 is
filed herein.
(7) Not Applicable.
(8) Custody Agreement between the Registrant and PNC Bank, Natioinal
Association to be filed by amendment.
(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 incorporated by reference to Pre-Effective
Amendment No. 1.
(11)(a) Not Applicable.
(b) Consent of Independent Accountants to be filed by amendment.
(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) Amended Services and Distribution Plan pursuant to Rule 12b-1 dated
November 7, 1994 to be filed by amendment.
(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 June 30, 1995
Shares representing Class A- 5865
beneficial interests,
par value $.001 per Class B - 217
share
Class C - 3
Class Y - 0
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
See the material under the caption "Management of the Fund" included in
Part A (Prospectus) of this Registration Statement and the material
appearing under the caption "Management of the Fund" included in
Part B (Statement of Additional Information) of this Registration Statement.
Investment Adviser - - Smith Barney Strategy Advisers Inc.
Smith Barney Strategy Advisers Inc. ("SBSA") was incorporated on
October 22, 1986 under the laws of the State of Delaware. SBSA is a
wholly owned subsidiary of Smith Barney Mutual Funds Managment Inc.
("Funds Management"),which was incorporated under the laws of the
State of Delaware in 1968. Funds Management is a wholly owned
subsidiary of Primerica Corporation ("Primerica"). SBSA
is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 28 of officers and Trustees of Funds
Management, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged in
by such officers and trustees during the past two years, is incorporated by
reference to Schedules A and D of FORM ADV filed by Funds Management
pursuant to the Advisers Act (SEC File No. 801-8314).
Item 28 (b). Business and Other Connections of Investment Adviser.
Sub-Investment Adviser -- BlackRock Financial Management L.P.
BlackRock Financial Management Inc. ("BlackRock") is a Delaware
corporation and is a registered investment adviser engaged in the
investment advisory business. Information as to BlackRock's offers and
directors 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
(a) Smith Barney Inc., currently acts as underwriter for
Smith Barney Funds, Inc.; Smith Barney Money Funds, Inc.;
Smith Barney Municipal Money Market Fund, Inc.; Smith Barney
Muni Funds; Smith Barney Variable Account Funds; Smith
Barney/Travelers Series Fund Inc.; Smith Barney World Funds,
Inc.; Smith Barney Institutional Cash Management Fund, Inc.;
Smith Barney Investment Funds, Inc.; Smith Barney Aggressive
Growth Fund Inc.; Smith Barney Telecommunications Trust;
Smith Barney Principal Return Fund; Consulting Group Capital
Markets Funds; Smith Barney Adjustable Rate Government Income
Fund; Smith Barney Fundamental Value Fund Inc.; Smith Barney
Equity Funds; Smith Barney Income Funds; Smith Barney
Massachusetts Municipals Fund; Smith Barney Arizona Municipals
Fund Inc.; Smith Barney Series Fund; Smith Barney Income Trust;
Smith Barney Appreciation Fund Inc.; Smith Barney California
Municipals Fund Inc.; Smith Barney Managed Governments
Fund Inc.; Smith Barney Managed Municipals Fund Inc.; Smith
Barney New York Municipals Fund Inc.; Smith Barney New
Jersey Municipals Fund Inc; Smith Barney Precious Metals and
Minerals Fund Inc.; Smith Barney Florida Municipals Fund;
Smith Barney Oregon Municipals Fund; USA High Yield Fund N.V.;
Smith Barney International Funds (Luxemburg); Smith Barney
Worldwide Securities Limited (Bermuda); Smith Barney Worldwide
Special Fund N.V. (Netherlands, Antilles); Smith Barney
Investment Funds Ltd. (Cayman Islands).
Smith Barney, the distributor of Registrant's shares, is a
wholly owned subsidiary of Travelers Group Inc.
(b) The information required by this Item 29 with respect to
each director and officer of Smith Barney is incorporated by
reference to Schedule A of Form BD filed by Smith Barney pursuant
to the Securities Exchange Act of 1934 (SEC File No. 8-8177).
(c) Not applicable
Item 30. Location of Accounts and Records
(1)
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Strategy Advisers Inc.
Smith Barney Mutual Funds Management Inc.
388 Greenwich Street, 22nd Floor
New York, New York 10013
(2) BlackRock Financial Management Inc.
345 Park Avenue, 31st Floor
New York, New York 10154
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania
(4) 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.
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 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 1st day of August, 1995.
SMITH BARNEY 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 and the above
Signature Title Date
/s/ Heath B. McLendon
Heath B. McLendon Chairman of the Board 8/1/95
Chief Executive Officer
and Trustee
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer 8/1/95
Chief Financial Officer
/s/ Charles F. Barber*
Charles F. Barber Trustee 8/1/95
/s/ Allan J. Bloostein*
Allan J. Bloostein Trustee 8/1/95
/s/ Martin Brody* Trustee 8/1/95
Martin Brody
/s/ Dwight B. Crane*
Dwight B. Crane Trustee 8/1/95
Robert A. Frankel Trustee
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement dated and filed July 14, 1992.
/s/ Heath B. McLendon
Heath B. McLendon
