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. 9 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 10 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)
X on October 1, 1995 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
on pursuant to Rule 485(a)
________________________________________________________________________
The Registrant has previously filed a declaration of indefinite registration of
its shares pursuant to Rule 24f-2 under the Investment Company Act
of 1940, as amended. Registrant's Rule 24f-2 Notice for the fiscal
period ended May 31, 1995 was filed 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 Management 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
PART A - FORM N-1A
SMITH BARNEY
Adjustable Rate
Government
Income Fund
OCTOBER 1, 1995
Prospectus begins on page one
PROSPECTUS
[LOGO] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus October 1, 1995
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388 Greenwich Street
New York, New York 10013
(212) 720-9218
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.
1
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Smith Barney
Adjustable Rate Government Income Fund
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Prospectus (continued)
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(continued from page 1)
ALTHOUGH CERTAIN OF THE SECURITIES IN THE FUND'S PORTFOLIO ARE ISSUED OR
GUARANTEED BY THE UNITED STATES GOVERNMENT, AN INVESTMENT IN THE FUND IS NEITHER
INSURED NOR GUARANTEED BY THE UNITED STATES GOVERNMENT. IN ADDITION, ALTHOUGH
THE FUND'S PORTFOLIO MAY BE EXPECTED TO EXPERIENCE LOW VOLATILITY DUE TO THE
UNIQUE CHARACTERISTICS OF ADJUSTABLE RATE SECURITIES, THE FUND IS NOT A MONEY
MARKET FUND THAT ATTEMPTS TO MAINTAIN A CONSTANT NET ASSET VALUE AND THE FUND'S
INVESTMENT PORTFOLIO CAN BE EXPECTED TO EXPERIENCE GREATER VOLATILITY THAN THAT
OF A MONEY MARKET FUND.
2
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Table of Contents
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Prospectus Summary 4
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Financial Highlights 10
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Investment Objectives and Management Policies 13
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Valuation of Shares 33
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Dividends, Distributions and Taxes 34
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Purchase of Shares 35
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Exchange Privilege 40
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Redemption of Shares 44
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Minimum Account Size 46
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Performance 47
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Management of the Fund 47
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Distributor 50
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Additional Information 51
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================================================================================
No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
=============================================================================
3
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary
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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 OBJECTIVES The Fund is a diversified, open-end, management
investment company that seeks to provide high current income and to limit the
degree of fluctuation of its net asset value resulting from movements in
interest rates by investing primarily in a portfolio of Adjustable Rate
Securities and U.S. government securities. See "Investment Objectives and
Management Policies."
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
available 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 ("CDSC") upon redemption. Another 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 through exchange purchases 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 and are
subject to a CDSC of 1.00% for four years. This CDSC may be waived for certain
redemptions. See "Smith Barney 401(k) Program."
4
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Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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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.
Smith Barney Financial Consultants may receive different compensation for
selling each Class of shares. Investors should understand that the purpose of
the CDSC on the Class B and Class C shares is the same as that of an initial
sales charge. See "Purchase of Shares" and "Management of the Fund" for a
complete description of the sales charges and service and distribution fees for
each class of shares and "Valuation of Shares," "Dividends, Distributions and
Taxes" and "Exchange Privilege" for other differences between the classes of
shares.
401(K) PROGRAM Investors may be eligible to participate in the 401(k)
Program, which is generally designed to assist employers of plan sponsors in the
creation and operation of retirement plans under Section 401(a) of the Internal
Revenue Code of 1986, as amended (the "Code"), as well as other types of
participant directed, tax-qualified employee benefit plans (collectively,
"Participating Plans"). All classes of shares are available as investment
alternatives for Participating Plans. Class A, Class B and Class C shares
acquired through the 401(k) Program are subject to the same service and/or
distribution fee as, but different sales charge and CDSC schedules than such
shares acquired by other investors. Class Y shares acquired by Participating
Plans are offered at net asset value per share without any sales charge, CDSC or
service and distribution fees. See "Purchase of Shares -- Smith Barney 401(k)
Program."
PURCHASE OF SHARES Shares may be purchased through the Fund's distributor,
Smith Barney, a broker that clear 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 shares (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 shares 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 authorized 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."
5
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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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 Management 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 Services. See "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 a Smith Barney Financial Consultant. See "Valuation of Shares."
DIVIDENDS AND DISTRIBUTIONS Dividends are paid monthly from net investment
income. Distributions of net realized long and short-term capital gains, if any,
are declared and paid annually. 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
6
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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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."
7
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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THE FUND'S EXPENSES The following expense table lists the costs and
expenses an investor will incur either directly or indirectly as a shareholder
of the Fund, based on the maximum CDSC that may be incurred at the time of
redemption and the Fund's operating expenses for its most recent fiscal period:
Class A Class B Class C Class Y
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Shareholder Transaction Expenses
Maximum sales charge imposed on
purchases (as a percentage of
offering price) None None None None
Maximum CDSC
(as a percentage of redemption
proceeds) None 5.00* 1.00%** None
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Annual Fund Operating Expenses
(as a percentage of average
net assets)
Management fees 0.60% 0.60% 0.60% 0.60%
12b-1 fees 0.75 0.75 0.75 0.00
Other expenses 0.25 0.28 0.24 0.25***
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TOTAL FUND OPERATING EXPENSES 1.60% 1.63% 1.59% 0.85
================================================================================
* 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 will be subject to the same
CDSC, and will be deemed to have been purchased on the same date as the
Class B shares of the fund that have been exchanged. Class B shares
acquired by participating plans will be subject to an eight year 3.00%
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 acquired 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.
*** No Class Y shares were outstanding at year end, therefore other expenses
are estimated based upon Class A shares.
The CDSC set forth in the above table is the maximum CDSC imposed by any of
the funds participating in the Smith Barney Group of Funds exchange program.
Investors may pay actual charges of less than 5% depending on the CDSC of the
shares from which the exchange was made and the length of time the shares are
held and whether the shares are held through the 401(k) Program. See "Purchase
of Shares," "Redemption of Shares" and "Smith Barney 401(k) Program." Management
fees payable by the Fund include investment advisory fees computed daily and
payable monthly to Strategy Advisers at the annual rate of 0.40% of the value of
the Fund's average daily net assets, and administration fees computed daily and
payable monthly to Funds Management in an amount equal to 0.20% of the value of
the Fund's average daily net assets. The Fund pays no direct fee to BlackRock.
The nature of the services for which the Fund pays management fees is described
under "Management of the Fund." Smith Barney also receives with respect to each
of the Classes except Class Y an annual 12b-1 distribution and shareholder
servicing fee of 0.75% of the value of average daily net assets of the
respective Classes, of which 0.50% is used by Smith Barney to cover expenses
that are primarily intended to result in, or that are primarily attributable to,
the sale of shares, and of which 0.25% is used by Smith Barney to provide
8
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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compensation for ongoing servicing and/or maintenance of shareholder accounts.
"Other expenses" in the above table include fees for shareholder services,
custodial fees, legal and accounting fees, printing costs and registration fees.
EXAMPLE
The following example is intended to assist an investor in understanding
the various costs that an investor in the Fund will bear directly or indirectly.
The example assumes payment by the Fund of operating expenses at the levels set
forth in the table above. See "Purchase of Shares," "Redemption of Shares" and
"Management of the Fund."
1 year 3 years 5 years 10 years*
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An investor would pay the following
expenses on a $1,000 investment,
assuming (1) 5.00% annual return
and (2) redemption at the end of
each time period:
Class A shares $16 $50 $87 $190
Class B shares: 67 81 99 192
Class C shares 26 50 87 189
Class Y shares 9 27 47 105
An investor would pay the following
expenses on the same investment,
assuming the same annual return
and no redemption:
Class A shares $16 $50 $87 $190
Class B shares: 17 51 89 192
Class C shares 16 50 87 189
Class Y shares 9 27 47 105
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* 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.
The example also provides a means for the investor to compare expense
levels of funds with different fee structures over varying investment periods.
To facilitate such comparison, all funds are required to utilize a 5.00% annual
return assumption. However, the Fund's actual return will vary and may be
greater or less than 5.00%. This example should not be considered a
representation of past or future expenses and actual expenses may be greater or
less than those shown.
9
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Financial Highlights
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The following information has been audited by Coopers & Lybrand, L.L.P.
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 each year.
Year Year Period
Ended Ended Ended
5/31/95+++ 5/31/94 5/31/93*
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Net Asset Value, beginning of year $9.78 $9.96 $10.00
Income from investment operations:
Net investment income 0.47 0.37 0.44#
Net realized and unrealized
gain/(loss) on investments 0.13 (0.17) (0.05)
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Total from investment operations 0.60 0.20 0.39
Less distributions:
Distributions from net investment income (0.49) (0.37) (0.43)
Distributions in excess of net
investment income (0.00)@ (0.01) --
Distributions from net realized
capital gains (0.01) -- --
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Total distributions (0.50) (0.38) (0.43)
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Net Asset Value, end of year $9.88 $9.78 $9.96
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Total return++ 6.39% 2.05% 3.89%
================================================================================
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $174,463 $283,627 $313,184
Ratio of operating expenses to
average net assets+ 1.60% 1.53% 1.50%**
Ratio of net investment income to
average net assets 4.94% 3.72% 4.36%**
Portfolio turnover rate 524% 525% 236%
================================================================================
* The Fund commenced operations on June 22, 1992. Any shares in existence
prior to November 6, 1992 were designated as Class A shares.
** Annualized.
+ The annualized operating expense ratios excludes interest expense. The
ratios including interest expense for the years ended May 31, 1995 and 1994
and the period ended May 31, 1993 were 2.47%, 2.31% and 1.92%,
respectively. Annualized expense ratio before voluntary waiver of fees by
investment adviser, sub-investment adviser and administrator (including
interest expense) for the period ended May 31, 1993 was 2.03%.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
# Net investment income before voluntary waiver of fees by investment
adviser, sub-investment adviser and administrator for the period ended May
31, 1993 was $0.43.
@ Amount represents less than $0.01 per share.
10
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Financial Highlights (continued)
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For a Class B share outstanding throughout each year.
Year Year Period
Ended Ended Ended
5/31/95++ 5/31/94 5/31/93*
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Net Asset Value, beginning of year $9.78 $9.96 $ 9.96
Income from investment operations:
Net investment income 0.47 0.37 0.25*
Net realized and unrealized
gain/(loss) on investments 0.13 (0.17) --
- --------------------------------------------------------------------------------
Total from investment operations 0.60 0.20 0.25
Less distributions:
Distributions from net
investment income (0.49) (0.37) (0.25)
Distributions in excess of net
investment income (0.00)@ (0.01) --
Distributions from net realized
capital gains (0.01) -- --
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Total distributions (0.50) (0.38) (0.25)
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Net Asset Value, end of year $9.88 $9.78 $9.96
- --------------------------------------------------------------------------------
Total return++ 6.39% 2.05% 2.56%
================================================================================
Ratios to average net assets/supplemental data:
Net assets, end of year (in 000's) $4,521 $8,422 $3,569
Ratio of operating expenses to
average net assets+ 1.63% 1.57% 1.50%**
Ratio of net investment income
to average net assets 4.92% 3.68% 4.36%**
Portfolio turnover rate 524% 525% 236%
================================================================================
* On November 6, 1992 the Fund commenced selling Class B shares.
** Annualized.
+ The annualized operating expense ratio excludes interest expense. The
ratios including interest expense for the years ended May 31, 1995 and
1994, and the period ended May 31, 1993 were 2.49%, 2.35% and 1.92%,
respectively. Annualized expense ratio before voluntary waiver of fees by
investment adviser, sub-investment adviser and administrator (including
interest expense) for the period ended May 31, 1993 was 2.03%.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charges.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
# Net investment income before voluntary waiver of fees by investment
adviser, sub-investment adviser and administrator for the period ended May
31, 1993 was $0.24.
@ Amount represents less than $0.01 per share.
11
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Financial Highlights (continued)
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For a Class C share outstanding throughout each period.**
Year Period
Ended Ended
5/31/95 5/31/94*
- --------------------------------------------------------------------------------
Net Asset Value, beginning of year $9.78 $ 9.98
Income from investment operations:
Net investment income 0.46 0.37
Net realized and unrealized
gain/(loss) on investments 0.10 (0.19)
- --------------------------------------------------------------------------------
Total from investment operations 0.56 0.18
Less distributions:
Distributions from net investment income (0.45) (0.37)
Distributions in excess of net investment income (0.00)@ (0.01)
Distributions from net realized capital gains (0.01) --
- --------------------------------------------------------------------------------
Total distributions (0.46) (0.38)
- --------------------------------------------------------------------------------
Net Asset Value, end of year $9.88 9.78
- --------------------------------------------------------------------------------
Total return++ 5.93% 1.83%
================================================================================
Ratios to average net assets/supplemental data:
Net assets, end of period (in 000's) $2 $113
Ratio of operating expenses to
average net assets 1.59% 1.55%***
Ratio of net investment income
to average net assets 4.95% 3.69%***
Portfolio turnover rate 524% 525%
================================================================================
* The Fund commenced selling Class D shares on June 2, 1993.
** Effective November 7, 1944, Class D shares were reclassified as Class C
shares.
*** Annualized.
+ The annualized operating expense ratio excludes interest expense. The
ratios including interest expense for the year ended May 31, 1995 and the
period ended May 31, 1994 were 2.46% and 2.34%, respectively.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+++ Per share amounts have been calculated using the monthly average shares
method, which more appropriately presents the per share data for the period
since the use of the undistributed net investment income method does not
accord with results of operations.
@ Amount represents less than $0.01 per share.
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies
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INVESTMENT OBJECTIVES
The investment objectives of the Fund are to seek to provide high current
income and to limit the degree of fluctuation of its net asset value resulting
from movements in interest rates. These investment objectives may not be changed
without the approval of the holders of a majority of the Fund's outstanding
shares. No assurance can be given that the Fund will be able to achieve its
investment objectives.
INVESTMENT POLICIES
In seeking to achieve its investment objectives, the Fund will invest
principally in a portfolio of Adjustable Rate Securities and U.S. government
securities. Under normal market conditions, the Fund will invest at least 65% of
its net assets in U.S. government securities. The Fund will also invest at least
65% of its net assets in Adjustable Rate Securities, many of which will also be
U.S. government securities. The Fund's assets not invested in U.S. government
securities may be invested in, among other privately issued instruments, fixed
rate and adjustable rate MBSs, ABSs and corporate debt securities rated Aa by
Moody's Investors Service, Inc. ("Moody's") or AA by Standard & Poor's
Corporation ("S&P") and money market instruments of a comparable short-term
rating. Up to 20% of the Fund's total assets may be invested in securities that
are unrated but deemed to be of comparable credit quality by BlackRock, and up
to 10% of the Fund's total assets may be invested in U.S. dollar-denominated
foreign securities, including MBSs and ABSs issued by foreign entities that are
of comparable credit quality. The Fund's policies as to ratings of portfolio
securities will be applicable at the time particular securities are purchased by
the Fund; if portfolio securities of the Fund are subsequently assigned lower
ratings, if they cease to be rated or if they cease to be deemed to be
comparable to securities rated Aa by Moody's or AA by S&P, BlackRock will
reassess whether the Fund should continue to hold the securities.
The Fund may invest up to 5% of its total assets in municipal obligations
and in zero coupon securities, including zero coupon U.S. Treasury securities.
In addition, the Fund may engage in various hedging strategies to increase
investment return and/or protect against interest rate changes in an effort to
maintain the stability of its net asset value.
The Fund seeks to achieve low volatility of net asset value by investing in
a diversified portfolio of securities that BlackRock believes will, in the
aggregate, be resistant to significant fluctuations in market value. In
selecting securities for the Fund, BlackRock will take into account various
factors that will affect the volatility of the Fund's assets, such as the time
13
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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 securitizes the underlying
mortgage loans or financial assets to provide the underlying assets with greater
liquidity or to achieve certain other financial goals.
The interest paid on Adjustable Rate Securities and, therefore, the current
income earned by the Fund by investing in them, will be a function primarily of
the indexes upon which adjustments are based and the applicable spread relating
to the securities. Examples of indexes that may be used are (a) one-, three- and
five-year U.S. Treasury securities adjusted to a constant maturity index, (b)
U.S. Treasury bills of three or six months, (c) the daily Bank Prime Loan Rate
made available by the Federal Reserve Board, (d) the cost of funds for member
institutions of the Federal Home Loan Bank of San Francisco and (e) the offered
quotations to leading banks in the London interbank market for Eurodollar
deposits of a specified duration ("LIBOR").
The interest rates paid on Adjustable Rate Securities are generally
readjusted periodically to an increment over the chosen interest rate index.
Such readjustments occur at intervals ranging from one to 36 months. The degree
of volatility in the market value of the Adjustable Rate Securities in the
Fund's portfolio will be a function of the frequency of the adjustment period,
the applicable index and the degree of volatility in the applicable index. It
will also be a function of the maximum increase or decrease of the interest rate
adjustment on any one adjustment date, in any one year and 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
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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.
15
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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
16
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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
17
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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 payments on PAC Bonds have the highest priority after interest has
been paid to all classes.
ABSs. The Fund will invest in various types of Adjustable Rate Securities
in the form of ABSs. The securitization techniques used in the context of ABSs
are similar to those used for MBSs; through the use of trusts and special
purpose corporations, various types of receivables, primarily home equity loans
and automobile and credit card receivables, are securitized in pass-through
structures similar to the mortgage pass-through structures described above or in
a pay-through structure similar to the CMO structure. ABSs are typically bought
or sold from or to the same entities that act as primary dealers in U.S.
government securities.
Certain of the ABSs in which the Fund will invest will be guaranteed by the
Small Business Administration ("SBA"). The SBA is an independent agency of the
United States, and ABSs guaranteed by the SBA carry a guarantee of both
principal and interest. The guarantee given by the SBA is backed by the full
faith and credit of the United States. These ABSs may include pass-through
securities collateralized by SBA guaranteed loans whose interest rates adjust in
much the same fashion as described above with respect to ARMs. These loans
generally include commercial loans such as working capital loans and equipment
loans. The underlying loans are originally made by private lenders and are
guaranteed in part by the SBA, the guaranteed portion of the loans constituting
the underlying financial assets in these ABSs.
18
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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
19
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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
20
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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
21
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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 Funds
Management 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
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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 the
Fund will be monitored on an ongoing basis by BlackRock or Funds Management
to ensure that the value is at least equal at all times to the total amount
of the repurchase obligation, including interest. BlackRock or Funds
Management 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 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, PNC
in which the Fund will maintain cash, U.S.
23
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Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
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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 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 PNC Bank
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 PNC Bank 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.
24
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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 PNC Bank 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
25
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- ---------------------------------------------------------------------------
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 PNC Bank 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 SBMFM
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
26
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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).
27
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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 PNC Bank.
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 331/3% 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 331/3% 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.
28
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
RISK FACTORS AND SPECIAL CONSIDERATIONS
Interest Rate Risk. The Fund's portfolio will be affected by general
changes in interest rates that will result in increases or decreases in the
market value of the obligations held by the Fund. The market value of the
obligations in the Fund's portfolio can be expected to vary inversely to changes
in prevailing interest rates. Investors should also recognize that, in periods
of declining interest rates, the Fund's yield will tend to be somewhat higher
than prevailing market rates, and in periods of rising interest rates, the
Fund's yield will tend to be somewhat lower. In addition, when interest rates
are falling, money received by the Fund from the continuous sale of its shares
will likely be invested in portfolio instruments producing lower yields than the
balance of its portfolio, thereby reducing the Fund's current yield. In periods
of rising interest rates, the opposite result can be expected to occur.
Adjustable Rate Securities. The types of securities in which the Fund will
invest have certain unique attributes that warrant special consideration or that
present risks that may not exist in other types of mutual fund investments. Some
of these risks and special considerations are peculiar to Adjustable Rate
Securities whereas others, most notably the risk of prepayments, pertain to the
characteristics of MBSs or ABSs generally.
Payments of principal of and interest on MBSs and ABSs are made more
frequently than are payments on conventional debt securities. In addition,
holders of MBSs and of certain ABSs (such as ABSs backed by home equity loans)
may receive unscheduled payments of principal at any time representing
prepayments on the underlying mortgage loans or financial assets. These
prepayments may usually be made by the related obligor without penalty.
Prepayment rates are affected by changes in prevailing interest rates and
numerous economic, geographic, social and other factors. (ABSs backed by other
than home equity loans do not generally prepay in response to changes in
interest rates, but may be subject to prepayments in response to other factors.)
Changes in the rate of prepayments will generally affect the yield to maturity
of the security. Moreover, when the holder of the security attempts to reinvest
prepayments or even the scheduled payments of principal and interest, it may
receive a rate of interest that is higher or lower than the rate on the MBS or
ABS originally held. To the extent that MBSs or ABSs are purchased by the Fund
at a premium, mortgage foreclosures and principal 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.
29
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
BlackRock will consider remaining maturities or estimated average lives of MBSs
and ABSs in selecting them for the Fund.
ABSs may present certain risks not relevant to MBSs. Although ABSs are a
growing sector of the financial markets, they are relatively new instruments and
may be subject to a greater risk of default during periods of economic downturn
than MBSs. In addition, assets underlying ABSs such as credit card receivables
are generally unsecured, and debtors are entitled to the protection of various
state and federal consumer protection laws, some of which provide a right of
set-off that may reduce the balance owed. Finally, the market for ABS may not be
as liquid as that for MBSs.
The interest rate reset features of Adjustable Rate Securities held by the
Fund will reduce the effect on the net asset value of Fund shares caused by
changes in market interest rates. The market value of Adjustable Rate Securities
and, therefore, the Fund's net asset value, however, may vary to the extent that
the current interest rate on the securities differs from market interest rates
during periods between interest reset dates. These variations in value occur
inversely to changes in market interest rates. As a result, if market interest
rates rise above the current rate on the securities, the value of the securities
will decrease; conversely, if market interest rates fall below the current rate
on the securities, the value of the securities will rise. If investors in the
Fund sold their shares during periods of rising rates before an adjustment
occurred, those investors could suffer some loss. The longer the adjustment
intervals on Adjustable Rate Securities held by the Fund, the greater the
potential for fluctuations in the Fund's net asset value.
Investors in the Fund will receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the Fund
in response to market interest rates. The Fund and its shareholders will not
benefit, however, from increases in market interest rates once those rates rise
to the point at which they cause the rates on the Adjustable Rate Securities to
reach their maximum adjustment rate, annual or lifetime caps. Because of their
interest rate adjustment feature, Adjustable Rate Securities 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
30
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
31
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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
32
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
- ---------------------------------------------------------------------------
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 the Class outstanding.
Generally, the Fund's investments are valued at market value or, in the
absence of a market value with respect to any security, at fair value as
determined by or under the direction of the Fund's Board of Trustees. Short-term
investments that have a maturity of more than 60 days are valued at prices based
on market quotations for securities of similar type, yield and maturity.
Short-term investments with a remaining maturity of 60 days or less are valued
at amortized cost where the Board has determined that amortized cost is fair
value. Corporate debt securities, MBSs and ABSs held by the Fund are valued on
the basis of valuations provided by dealers in those instruments or by an
independent pricing service, approved by the Board of Trustees; any such pricing
service, in determining value, will use information with respect to transactions
in the securities being valued, quotations from dealers, market transactions in
comparable securities, analysis and evaluations of various relationships between
securities and yield to maturity information.
33
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes
- --------------------------------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS
The Fund declares a dividend of substantially all of its net investment
income on each day the NYSE is open. Net investment income includes interest
accrued and discount earned and all short-term realized gains and losses on
portfolio securities and is less premium amortized and expenses accrued. Income
dividends are paid monthly. Distributions of net realized capital gains, if any,
are paid annually.
If a shareholder does not otherwise instruct, dividends and capital gain
distributions will be reinvested automatically in additional shares of the same
Class at net asset value.
Income dividends and capital gain distributions that are invested are
credited to shareholders' accounts in additional shares at the net asset value
as of the close of business on the payment date. A shareholder may change the
option at any time by notifying a Smith Barney Financial Consultant. Accounts
held directly by TSSG should notify TSSG in writing at least five business days
prior to the payment date to permit the change to be entered in the
shareholder's account. If a shareholder redeems in full an account between
payment dates, all dividends accrued to the date of liquidation will be paid
with the proceeds from the redemption of shares.
The per share dividends on Class A, Class B and Class C shares of the Fund
may be lower than the per share dividends on Class Y shares principally as a
result of the service and distribution fees applicable to Class A, Class B and
Class C shares. Distributions of capital gains, if any, will be in the same
amount for each Class of shares.
TAXES
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Code to be relieved of Federal
income tax on that part of its net investment income and realized capital gains
which it pays out to its shareholders. To qualify, the Fund must meet certain
tests, including distributing at least 90% of its investment company taxable
income, and deriving less than 30% of its gross income from the sale or other
disposition of certain investments held for less than three months.
Dividends from net investment income and distributions of realized
short-term capital gains on the sale of securities, whether paid in cash or
automatically invested in additional shares of the Fund, are taxable to
shareholders of the Fund as ordinary income. The Fund's dividends will not
qualify for the dividends received deduction for corporations. Distributions out
34
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
of net long-term capital gains (i.e., net long-term capital gains in excess of
net short-term capital losses) are taxable to shareholders as long-term capital
gains. Information as to the tax status of dividends paid or deemed paid in each
calendar year will be mailed to shareholders as early in the succeeding year as
practical but not later than January 31.
The Fund is required to withhold and remit to the U.S. Treasury 31% of
dividends, distributions and redemption proceeds to shareholders who fail to
provide a correct taxpayer identification number (the Social Security number in
the case of an individual) or to make the required certifications, or who have
been notified by the Internal Revenue Service that the are subject to backup
withholding and who are not otherwise exempt. The 31% withholding tax is not an
additional tax, but is creditable against a shareholder's Federal income tax
liabilty.
Prior to investing in shares of the Fund, investors should consult with
their tax advisors concerning the Federal, state and local tax consequences of
such an investment.
- --------------------------------------------------------------------------------
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
35
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
36
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 or 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.
37
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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
creation 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
Participating 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
different 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
investors, 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
Barney 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
anniversary 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
38
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 Shares -- 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 at 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
distribution 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
purchases $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
distributions, 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
applicability of the CDSC to other shareholders, which depends on the number of
39
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59-1/2 by an
employee in the Participating Plan; (e) hardship 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 Participating
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 the transfer
agent. For further information regarding the Smith Barney 401(k) Program,
investors should contact their Smith Barney Financial Consultants.
- --------------------------------------------------------------------------------
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
40
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Exchange Privelege (continued)
- --------------------------------------------------------------------------------
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
41
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Exchange Privelege (continued)
- --------------------------------------------------------------------------------
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 the 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
42
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Exchange Privelege (continued)
- --------------------------------------------------------------------------------
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. SBMFM 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, SBMFM will
notify Smith Barney and Smith Barney may, at its discretion, decide to limit
additional purchases and/or exchanges by the 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
of the funds of the 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.
43
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
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 seventh 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. The Fund anticipates that, in
accordance with regulatory changes, beginning on or about June 1, 1995, payment
will be made on the third business day after receipt of proper tender.
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 Adjustable Rate Government Income Fund
Class A, B, C or Y (please specify)
c/o The Shareholder Services Group
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 by TSSG together with the redemption request. Any signature
44
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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, trustees or guardians. A redemption request will not be deemed
properly received until TSSG receives all required documents in proper form.
AUTOMATIC CASH WITHDRAWAL PLAN
The Fund offers shareholders an automatic cash withdrawal plan, under which
shareholders who own shares with a value of at least $10,000 may elect to
receive periodic cash payments of at least $50 monthly or quarterly. The
withdrawal plan will be carried over or exchanged between funds or classes of
the Fund. Any applicable CDSC will be waived on amounts withdrawn by a
shareholder that do not exceed 1% 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 shareholder shares subject to the CDSC). For further information regarding
the automatic cash withdrawal plan, shareholders should contact their Smith
Barney Financial Consultants.
CONTINGENT DEFERRED SALES CHARGE, CLASS B SHARES
Class B shares, which may be acquired only upon an exchange with another
fund in the Smith Barney Group of Funds, are subject upon redemption to the
highest CDSC (if any) of the shares from which the exchange or any preceding
exchange was made. A CDSC payable to Smith Barney is imposed on any redemption
of Class B shares, however effected, that causes the current value of a
shareholder's account to fall below the dollar amount of all payments by the
shareholder for the Class B shares (or any predessor of those shares) that were
exchanged for Class B shares of the Fund ("purchase payments") during the
preceding five years, except in the case of purchases by Participating Plans, as
described above. See "Purchase of Shares-Smith Barney 401(k) Program." No charge
is imposed to the extent that the net asset value of the Class B shares redeemed
does not exceed (a) the current net asset value of Class B shares purchased
through reinvestment of dividends or capital gains distributions, plus (b) the
current net asset value of Class B shares acquired in an exchange that were
originally purchased more than five years prior to the redemption, plus (c)
increases in the net asset value of the shareholder's Class B shares above the
purchase payments made during the preceding five years.
45
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
In circumstances in which the CDSC is imposed, the amount of the charge will
depend on (a) the CDSC schedule applicable to shares of the fund that were
exchanged for the shares being redeemed; and (b) the number of years since the
shareholder made the purchase payment from which the amount is being redeemed,
except in the case of purchases through Participating Plans which are subject to
a different CDSC. See "Purchase of Shares-Smith Barney 401(k) Program." A
redemption of shares acquired in exchange for shares that had been the subject
of two or more exchanges among funds with differing CDSC schedules will be
subject to the highest applicable CDSC schedule. See "Exchange Privilege."
Solely for purposes of determining the number of years since a purchase payment,
all purchase payments during a month will be aggregated and deemed to have been
made on the last day of the preceding Smith Barney statement month. The purchase
payment from which a redemption is made is assumed to be the earliest purchase
payment from which a full redemption has not already been effected.
Class B shares will automatically convert to Class A shares eight years
after the date they were purchased. For this purpose, the date of purchase of
Class B shares of the Fund refers to the purchase date of the shares given in
exchange for the Class B shares of the Fund. The first of these conversions will
begin on or about September 30, 1994. See "Variable Pricing System-Class B
Shares."
Waivers of CDSC. The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to less than 2% per
month of the value of the shareholder's shares at the time the withdrawal plan
commences (see above); (c) redemptions of shares in connection with certain
post-retirement distributions and withdrawals from retirement plans or IRAs or
following the death or disability of a shareholder; (d) involuntary redemptions;
(e) redemption proceeds from other funds in the Smith Barney Group of Funds that
are reinvested within 30 days of the redemption; (f) redemptions of shares in
connection with a combination of any investment company with the Fund by merger,
acquisition of assets or otherwise; and (g) certain redemption of shares of the
Fund in connection with lump-sum or other distributions made by a Participating
Plan. See "Purchase of Shares-Smith Barney 401(k) Program."
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares is less than $500. (If a
shareholder has more than one account in the Fund, each account must satisfy the
minimum account size.) The Fund, however, will not redeem shares based solely
upon 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 minimum to avoid involuntary liquidation.
46
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Performance
- --------------------------------------------------------------------------------
From time to time the Fund may include its total return, average annual
total return and yield in advertisements. In addition, in other types of sales
literature the Fund may include its current dividend return. These figures are
computed separately for Class A and Class Y shares of the Fund. These figures
are based on historical earnings and are not intended to indicate future
performance. Total return is computed for a specified period of time assuming
reinvestment of all income dividends and capital gain distributions on the
reinvestment dates at prices calculated as stated in this Prospectus, then
dividing the value of the investment at the end of the period so calculated by
the initial amount invested and subtracting 100%. The standard average annual
total return, as prescribed by the SEC is derived from this total return, which
provides the ending redeemable value. Such standard total return information may
also be accompanied with nonstandard total return information for differing
periods computed in the same manner but without annualizing the total return.
The yield of the Fund refers to the net investment income earned by investments
in the Fund over a thirty-day period. This net investment income is then
annualized, i.e., the amount of income earned by the investment during that
thirty-day period is assumed to be earned each 30-day period for twelve periods
and is expressed as a percentage of the investments. The yield quotation is
calculated according to a formula prescribed by the SEC to facilitate comparison
with yields quoted by other investment companies. The Fund calculates current
dividend return for each Class by annualizing the most recent distribution and
dividing by the net asset value on the last day of the period for which current
dividend return is presented. The Fund's current dividend return for each Class
may vary from time to time depending on market conditions, the composition of
its investment portfolio and operating expenses. These factors and possible
differences in the methods used in calculating current dividend return should be
considered when comparing the Fund's current return to yields published for
other investment companies and other investment vehicles. The Fund may also
include comparative performance information in advertising or marketing its
shares. Such performance information may include data from Lipper Analytical
Services, Inc. and other financial publications.
- --------------------------------------------------------------------------------
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 distributor, investment adviser,
47
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
sub-investment adviser, administrator, custodian and transfer agent. The
day-to-day operations of the Fund have been delegated to Strategy Advisers and
BlackRock. The Statement of Additional Information contains background
information regarding each Trustee and executive officer of the Fund.
INVESTMENT ADVISER AND ADMINISTRATOR
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 September 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 $22 billion.
As the Fund's sub-investment adviser, BlackRock, subject to the supervision
and direction of the Fund's Board of Trustees, and subject to review by Strategy
Advisers, manages the Fund's portfolio in accordance with the investment
objectives and stated policies of the Fund, makes investment decisions for the
48
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
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 at
BlackRock, 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 during the fiscal year ended May 31, 1995 is
included in the Annual Report for that period. 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 or 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 $32 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.
49
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
Smith Barney distributes shares of the Fund as principal underwriter and as such
conducts a continuous offering pursuant to a "best efforts" arrangement
requiring Smith Barney to take and pay for only such securities as may be sold
to the public. Pursuant to a plan of distribution adopted by the Fund under Rule
12b-1 under the 1940 Act (the "Plan"), Smith Barney is paid a service fee with
respect to Class A, Class B and Class C shares of the Fund at the annual rate of
0.25% of the average daily net assets of the respective Class. Smith Barney is
also paid a distribution fee with respect to Class A, Class B and Class C shares
at the rate of 0.50% of the average daily net assets attributable to those
Classes. The fees are used by Smith Barney to pay its Financial Consultants for
servicing shareholder accounts and to cover expenses primarily intended to
result in the sale of shares. These expenses include: advertising expenses; the
cost of printing and mailing prospectuses to potential investors; payments to
and expenses of Smith Barney Financial Consultants and other persons who provide
support services in connection with the distribution of shares; interest an/or
carrying charges; and indirect and overhead costs of Smith Barney in connection
with the sale of Fund shares, including lease, utility, communications and sales
promotion expenses.
The payments to Smith Barney Financial Consultants for selling shares of a
Class include a commission or fee and, with respect to Class A, Class B and
Class C shares, a continuing fee for servicing shareholder accounts for as long
as a shareholder remains a holder of that Class.Smith Barney Financial
Consultants may receive different levels of compensation for selling different
Classes of shares.
Payments under the Plan are not tied exclusively to the distribution and
shareholder service expenses actually incurred by Smith Barney and the payments
may exceed distribution 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
the CDSC.
50
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
The Fund was organized as an unincorporated business trust under the laws
of the Commonwealth of Massachusetts pursuant to a Master Trust Agreement dated
May 7, 1992. On November 5, 1992 the Fund filed an Amended and Restated Master
Trust Agreement, as amended from time to time (the "Trust Agreement"). The Fund
commenced operations on June 22, 1992, and on July 30, 1993 the Fund changed its
name to Smith Barney Shearson Adjustable Rate Government Income Fund. On
November 7, 1994 the Fund changed its name to Smith Barney Adjustable Rate
Government Income Fund.
Each Class of shares 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 Bank, N.A., located at 17th and Chestnut Streets, Philadelphia,
Pennsylvania, serves as custodian of the Fund's investments.
TSSG, located at Exchange Place, Boston, Massachusetts 02109, 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
51
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Additional Information
- --------------------------------------------------------------------------------
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.
52
<PAGE>
Smith Barney
A Member of the Travelers Group
Smith Barney
Adjustable Rate
Government
Income Fund
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Fund 167, 226, 240
FD 0249 G4
PART B - FORM N-1A
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
STATEMENT OF ADDITIONAL INFORMATION
OCTOBER 1, 1995
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
Management of the Fund 2
Investment Objectives and Management Policies 4
Purchase of Shares 18
Redemption of Shares 18
Distributor 19
Valuation of Shares 20
Exchange Privilege 20
Performance Data (See in the Prospectus "The Fund's Performance") 21
Taxes (See in the Prospectus "Dividends, Distributions and Taxes") 23
Custodian and Transfer Agent (See in the Prospectus "Additional
Information") 23
Organization of the Fund (See in the Prospectus "Additional
Information") 24
Financial Statements 24
MANAGEMENT OF THE FUND
The executive officers of the Fund are employees of certain of the
organizations that provide services to the Fund. These organizations are as
follows:
NAME SERVICE
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 Management Inc. ("Funds Management")
Administrator
PNC Bank, National Association ("PNC")
Custodian
The Shareholder Services Group, Inc. ("TSSG"), a subsidiary of First Data
Corporation
Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and in this Statement of Additional
Information.
MANAGEMENT OF THE FUND
TRUSTEES AND OFFICERS OF THE FUND
The Trustees and executive officers of the Fund, together with information
as to their principal business occupations during the past five years, are
set forth below. Each Trustee who is an "interested person" of the Fund, as
defined in the Investment Company Act of 1940, as amended (the "1940 Act"),
is indicated by an asterisk.
Charles F. Barber, Trustee. Consultant; formerly Chairman of the Board of
ASARCO Incorporated. His address is 66 Glenwood Drive, Greenwich,
Connecticut 06830.
Allan J. Bloostein, Trustee. Consultant; formerly Vice Chairman of the
Board of and Consultant to The May Department Stores Company; Director of
Crystal Brands, Inc., Melville Corp., and R.G. Barry Corp. His address is
Andersen Road, Sherman, Connecticut 06784.
Martin Brody, Trustee. Vice Chairman of the Board of Restaurant
Associates Industries, Inc.; a Director of Jaclyn, Inc. His address is
Three ADP Boulevard, Roseland, New Jersey 07068.
Dwight B. Crane, Trustee. Professor, Graduate School of Business
Administration, Harvard University. His address is Harvard Business School,
Soldiers Field Road, Boston, Massachusetts 02163.
Robert A. Frankel, Trustee. Managing Partner of Robert A. Frankel Managing
Consultants. Former Vice President of the Reader's Digest Association, Inc.
His address is Grand Street, Croton-on-Hudson, New York.
*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 388 Greenwich Street, New York, New York 10048.
Scott M. Amero, (Age 32) Portfolio Manager. BlackRock Financial Management.
His address is 345 Park Avenue, New York, New York 10154.
Keith T. Anderson, (Age 36) Portfolio Manager. BlackRock Financial Management.
His address is 345 Park Avenue, New York, New York 10154.
Robert S. Kapito, (Age 38) Portfolio Manager. BlackRock Financial Management.
His address is 345 Park Avenue, New York, New York 10154.
Lewis E. Daidone, (Age 37) 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, (Age 44) 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 totaled $20,230. The
below information is based upon trustee fees paid during 1994.
TRUSTEE, AGE AGGREGATE AGGREGATE NUMBER OF
COMPENSATION COMPENSATION DIRECTOR/
FROM THE FROM SMITH TRUSTEESHIPS
TRUST BARNEY FUNDS WITHIN FUND
COMPLEX
Charles F. Barber, 76 $4,000 $40,500 6
Allan J. Bloostein, 65 $4,000 $79,000 8
Martin Brody, 73 $4,000 $111,675 15
Dwight Crane, 57 $3,750 $129,975 18
Robert A. Frankel, 67 $2,250 $79,000 7
Heath B. McLendon, 61 $0 $0 29
Heath B. McLendon, 61
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 May 31, 1995, such
fees amounted to $423,344. 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 Management 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
Strategy 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 Management 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 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 rate 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 sale 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 PNC, 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 PNC.
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 PNC
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 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.
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 if the Fund's officers or Trustees or
any officer or director of Strategy Advisers, BlackRock or Funds Management
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 $72,252 of which $63,930 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%, 525%, and 524 %, 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 received $21,639 and $8,410,
respectively in CDSCs on the redemption 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 year ended
May 31, 1993, 1994 and 1995, the Fund incurred service fees of $436,531,
$949,117 and $529,180 respectively. For the fiscal year ended May 31,
1993, 1994 and 1995, the Fund incurred distribution fees of $873,037,
$1,898,235 and $1,058,362, 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:
YIELD =2[( a-b + 1)6-1]/cd
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursement).
c = the average daily number of shares outstanding during the period
that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period.
For the purpose of determining the interest earned (variable "a"
in the formula) on debt obligations that were purchased by the Fund at
a discount or premium, the formula generally calls for amortization of
the discount or premium; the amortization schedule will be adjusted
monthly to reflect changes in the market values of the debt obligations.
The Fund's yield for the 30-day period ended May 31, 1995 was 5.20%, 5.17%
and 5.22% with respect to its Class A, Class B and Class C shares,
respectively.
Investors should recognize that, in periods of declining interest
rates, yield will tend to be somewhat higher than prevailing market
rates and, in periods of rising interest rates, will tend to be somewhat
lower. In addition, when interest rates are falling, monies received by the
Fund from the continuous sale of its shares will likely be invested in
instruments producing lower yields than the balance of its portfolio of
securities, thereby reducing the current yield of the Classes. In
periods of rising interest rates the opposite result can be expected to
occur.
AVERAGE ANNUAL TOTAL RETURN
The "average annual total return" of a Class described in the
Prospectus is computed according to a formula prescribed by the SEC,
expressed as follows:
P(1+T)n =ERV
Where:
P = a hypothetical initial payment of $1,000.
T = average annual total return
n = number of years.
ERV = Ending Redeemable Value of a hypothetical $1,000
investment made at the beginning of a 1-, 5-or 10-year period
at the end of a 1-, 5-or 10-year period (or fractional
portion thereof), assuming reinvestment of all dividends and
distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
For the fiscal period ended May 31, 1995, the Fund's average annual total
returns for Class A, Class B and Class C shares were 6.39%, 6.39% and
5.93%, respectively, before deduction of maximum contingent deferred sale
charge. Over the life of the Fund, the average annual returns for Class
A, Class B and Class C shares were 4.18%, 4.28% and 3.87% respectively,
before deduction of maximum contingent deferred sale charge with waiver.
Had the investment advisory, sub-investment advisory and administration
fees not been partially waived, the aggregate total returns for Class A,
Class B and Class C shares over the life of the Fund would have been 4.18%,
4.28% and 3.87%, respectively.
AGGREGATE TOTAL RETURN
The "aggregate total return" of a Class described in the Prospectus
represents the cumulative change in the value of an investment in a Class
for the specified period and is computed by the following formula:
ERV - P/P
Where:
P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the beginning of a 1-, 5-or 10-year
period at the end of a 1-, 5-or 10-year period (or
fractional portion thereof), assuming reinvestment of all dividends
and distributions.
The ERV assumes complete redemption of the hypothetical investment at the
end of the measuring period.
Net investment income changes in response to fluctuations in interest
rates and the expenses of a Class. Consequently, the given performance
quotations should not be considered as representative of the Class'
performance for any specified period in the future.
For the fiscal period ended May 31, 1995, the Fund's aggregate total
returns for Class A, Class B and Class C shares were 6.39%, 6.39% and
5.93%, respectively, before deduction of maximum contingent deferred sale
charge. Over the life of the Fund, the returns for Class A, Class B and
Class C shares were 4.18%, 3.18% and 3.39% respectively, assuming
deduction of maximum contingent deferred sale charge with waiver. Had the
investment advisory, sub-investment advisory and administration fees not
been partially waived, the aggregate total returns for Class A, Class B and
Class C shares would have been 4.17%, 3.18% and 3.39%, respectively.
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 is
incorporated herein by reference in its entirety.
PART C - FORM N-1A
Item 24. Financial Statements and Exhibits
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The following incorporated by reference to the Registrant's
Annual Report to Shareholders filed July 28, 1995.
Portfolio of Investments
Statement of Assets and Liabilities
Statement of Operations
Statement of Cash Flows
Statement of Changes in Net Assets
Financial Highlights
Report of Independent Accountants
Included in Part C:
Consent of Independent Accountants
(b) Exhibits
References are to the Registrant's registration statement on Form N-
1A as filed with the SEC on May 8, 1992, (File Nos. 33-47782 and
811-6663) (the "Registration Statement") and amendments thereto.
(1)(a) First Amended and Restated Master Trust Agreement dated
November 5, 1992 is incorporated by reference to Post-Effective
Amendment No. 5 to the Registration Statement filed September 28, 1993
("Post Effective Amendment No. 5").
(b) Amendment No. 1 to First Amended and Restated Master Trust
Agreement is incorporation by reference to Post-Effective Amendment No. 5.
(c) Amendment No. 2 to First Amended and Restated Master Trust
Agreement is filed herewith.
(2) Registrant's By-Laws are incorporated by reference to Pre-
Effective Amendment No. 1 to the Registration Statement filed
June 6, 1992 ("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 to the
Registration Statement filed August 14, 1992 ("Post-Effective Amendment
No. 2").
(5)(a) Advisory Agreement between the Registrant and Smith Barney
Strategy Advisers Inc. (formerly, Smith Barney Shearson Strategy
Advisers Inc.) is incorporated by reference to Post-Effective Amendment
No. 5.
(b) Form of Sub-Advisory Agreement between the Registrant and
BlackRock Financial Management Inc. is incorporated by reference
to definitive Proxy Materials filed by Registrant 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 Inc.
(formerly, Smith Barney Shearson Inc.) dated July 30, 1993 is incorporated
by reference to Post-Effective Amendment No. 5.
(7) Not Applicable.
(8) Custody Agreement between the Registrant and PNC Bank, National
Association is filed herewith.
(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 is filed herewith.
(12) Not Applicable.
(13) Purchase Agreement between the Registrant and Shearson Lehman
Brothers Inc. 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 is filed herewith.
(16) Not Applicable.
(17) Financial Data Statement is filed herewith.
(18) Plan pursuant to Rule 18f-3 under the Investment Company Act of 1940
is filed herewith.
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 September 27, 1995
Shares representing Class A- 5638
beneficial interests,
par value $.001 per Class B - 216
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 Management 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 (Luxembourg); 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 29th day of September, 1995.
Further, the Registrant certifies that this Amendment No. 9 is being filed
solely for the purposes specified in Rule 485(b)(1)(iii) and (vii) and no
material event has occurred since August 1, 1995 which would render the
Registrant ineligible to file under such Rule.
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 9/29/95
Chief Executive Officer
and Trustee
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer 9/29/95
Chief Financial Officer
/s/ Charles F. Barber*
Charles F. Barber Trustee 9/29/95
/s/ Allan J. Bloostein*
Allan J. Bloostein Trustee 9/29/95
/s/ Martin Brody* Trustee 9/29/95
Martin Brody
/s/ Dwight B. Crane*
Dwight B. Crane Trustee 9/29/95
Robert A. Frankel Trustee
* Signed by Lee D. Augsburger, their duly authorized attorney-in-fact,
pursuant to power of attorney incorporated by reference to Post-Effective
Amendment No. 2.
/s/ Lee D. Augsburger
Lee D. Augsburger
EXHIBIT 1(c)
SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND
AMENDMENT NO. 2 TO THE FIRST AMENDED AND RESTATED MASTER TRUST
AGREEMENT
(Change of Name of the Fund and Change of Emeritus Policy)
The undersigned, Assistant Secretary of Smith Barney Shearson Adjustable
Rate Government Income Fund (the "Fund"), does hereby certify that pursuant
to Article I, Section 1.1 and Article VII, Section 7.3 of the First Amended
and Restated Master Trust Agreement dated November 5, 1992 ("Master Trust
Agreement"), which amended and restated the Master Trust Agreement of the
Fund dated 7, 1992, the following votes were duly adopted by the Board of
Trustees at a regular Meeting of the Board held on July 21, 994:
(Change of Name of the Fund)
VOTED: That the name of the Fund previously established and
designated pursuant to the Fund's Master Trust Agreement be modified
and amended as set forth below:
Current Name: Smith Barney Shearson Adjustable Rate Government Income Fund
Name as Amended: Smith Barney Adjustable Rate Government Income Fund;
and further
(Change of Emeritus Policy)
VOTED: That Article III, Sections 3.1(d) and 3.1(j) of the Fund's
Master Trust Agreement be and are hereby amended and restated in their
entirety as follows:
Section 3.1(d)
A Trustee who has reached the age of seventy two (72) years may elect the
status of Trustee Emeritus provided that the Trustee has served for ten(10)
years as a member of the Fund's Board of Trustees or of the Board of
Trustees of another investment company distributed, advised or administered
by an entity under common control with the Fund's distributor, investment
adviser or administrator. Upon reaching eighty (80) years of age, a Trustee
must elect status as a Trustee Emeritus. (The foregoing provisions shall
not be deemed to restrict a Trustee's ability to resign.)
Section 3.1(j)
A Board Member designated as a Trustee Emeritus may attend meetings of the
Board of Trustees, however, he or she shall have no voting rights and shall
not be under a duty to manage or direct the business and affairs of the
Fund. A Trustee Emeritus shall not be deemed to stand in a fiduciary
relation to the Fund and shall not be responsible to discharge the duties
of a Trustee or to exercise that diligence, care or skill which a Trustee
would ordinarily be required to exercise under applicable laws. In
addition, a Trustee Emeritus shall be indemnified to the full extent that
an officer or Trustee of the Fund may be indemnified under the Fund's
governing documents and applicable state and federal laws.
As long as a Board Member is a Trustee Emeritus, but in no event for more
than a period of ten(10) years, provided the Fund has net assets in excess
of $100 million, a Trustee Emeritus will receive 50% of the annual retainer
and annual meeting fees paid to active Board Members. In any event, a
Trustee Emeritus shall be entitled to reasonable out-of-pocket expenses for
each meeting attended; and further
VOTED: That the appropriate officers of the Fund be, and each hereby
is, authorized to execute and file any notices required to be filed
reflecting the foregoing changes; to execute amendments to the Fund's
Master Trust Agreement and By-Laws reflecting the foregoing change;
and to execute and file all requisite certificates, documents and
instruments and to take such other actions required to cause said
amendment to become effective and to pay all requisite fees and
expenses incident thereto.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand this 14th day
of October, 1994.
/s/ Lee D. Augsburger
Lee D. Augsburger
Assistant Secretary
EXHIBIT 8
CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of September 29, 1995 by and between SMITH
BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND., a Massachusetts business
trust (the "Fund") and PNC BANK, NATIONAL ASSOCIATION, a national banking
association ("PNC Bank").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes
to retain PNC Bank to provide custodian services and PNC Bank wishes to
furnish such services, either directly or through an affiliate or affiliates,
as more fully described herein. In consideration of the premises and mutual
covenants herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by
the Fund's Governing Board, to give Oral and Written Instructions on behalf
of the Fund. Such persons are listed in the Certificate attached hereto as
the Authorized Persons Appendix, as such Appendix may be amended in writing
by the Fund's Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal
agency securities, its successor or successors, and its nominee or nominees
and any book-entry system maintained by an exchange registered with the SEC
under the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(g) "Securities and Commodities Laws". The term "Securities and
Commodities Laws" shall mean the "1933 Act" which shall mean the Securities
Act of 1933, the "1934 Act" which shall mean the Securities Exchange Act of
1934, the 1940 Act, and the "CEA" which shall mean the Commodities Exchange
Act, as amended.
(h) "Shares". The term "Shares" shall mean the shares of stock of
any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items which
the Fund may from time to time deposit, or cause to be deposited, with PNC
Bank or which PNC Bank may from time to time hold for the Fund;
(ii) all income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the
Fund, which are received by PNC Bank from time to time, from or on behalf of
the Fund.
(j) "Written Instructions". The term "Written Instructions" shall
mean written instructions signed by one Authorized Person and received by PNC
Bank. The instructions may be delivered by hand, mail, tested telegram,
cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services to the Fund, and PNC Bank accepts such appointment and agrees to
furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of PNC Bank or its
affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if PNC Bank is
not providing the Fund with such services; (f) copies of
any shareholder servicing agreements made in respect of the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank
undertakes to comply with all applicable requirements of the Securities and
Commodities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PNC Bank hereunder. Except as specifically set forth herein, PNC Bank
assumes no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
shall act only upon Oral and Written Instructions. PNC Bank shall be
entitled to rely upon any Oral and Written Instructions it receives from an
Authorized Person (or from a person reasonably believed by PNC Bank to be an
Authorized Person) pursuant to this Agreement. PNC Bank may assume that any
Oral or Written Instructions received hereunder are not in any way
inconsistent with the provisions of organizational documents or this
Agreement or of any vote, resolution or proceeding of the Fund's Governing
Board or of the Fund's shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming
Oral Instructions so that PNC Bank receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received.
The fact that such confirming Written Instructions are not received by PNC
Bank shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any action
it should or should not take, PNC Bank may request directions or advice,
including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PNC
Bank may request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's advisor or PNC Bank, at the
option of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral
or Written Instructions it receives from the Fund or from counsel and which
PNC Bank believes, in good faith, to be consistent with those directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (i) to seek such directions, advice or Oral or
Written Instructions, or (ii) to act in accordance with such directions,
advice or Oral or Written Instructions unless, under the terms of other
provisions of this Agreement, the same is a condition of PNC Bank's properly
taking or not taking such action.
7. Records. The books and records pertaining to the Fund which are in
the possession of PNC Bank, shall be the property of the Fund. Such books
and records shall be prepared and maintained as required by the 1940 Act and
other applicable securities laws, rules and regulations. The Fund, or the
Fund's Authorized Persons, shall have access to such books and records at all
time during PNC Bank's normal business hours. Upon the reasonable request of
the Fund, copies of any such books and records shall be provided by PNC Bank
to the Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records
of the Fund and information relative to the Fund and its shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall not be unreasonably withheld and may not be withheld where PNC
Bank may be exposed to civil or criminal contempt proceedings or when
required to divulge. The Fund further agrees that, should PNC Bank be
required to provide such information or records to duly constituted
authorities (who may institute civil or criminal contempt proceedings for
failure to comply), PNC Bank shall not be required to seek the Fund's consent
prior to disclosing such information.
9. Cooperation with Accountants. PNC Bank shall cooperate with the
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the
expression of their opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment
failures, PNC Bank shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions but shall have no
liability with respect thereto.
11. Compensation. As compensation for custody services rendered by PNC
Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee
or fees as may be agreed to in writing from time to time by the Fund and PNC
Bank.
12. Indemnification. The Fund agrees to indemnify and hold harmless
PNC Bank and its nominees from all taxes, charges, expenses, assessment,
claims and liabilities (including, without limitation, liabilities arising
under the Securities and Commodities Laws and any state and foreign
securities and blue sky laws, and amendments thereto, and expenses, including
(without limitation) attorneys' fees and disbursements, arising directly or
indirectly from any action which PNC Bank takes or does not take (i) at the
request or on the direction of or in reliance on the advice of the Fund or
(ii) upon Oral or Written Instructions. Neither PNC Bank, nor any of its
nominees, shall be indemnified against any liability to the Fund or to its
shareholders (or any expenses incident to such liability) arising out of PNC
Bank's own willful misfeasance, bad faith, negligence or reckless disregard
of its duties and obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to
take any action on behalf of the Fund except as specifically set forth herein
or as may be specifically agreed to by PNC Bank, in writing. PNC Bank shall
be obligated to exercise care and diligence in the performance of its duties
hereunder, to act in good faith and to use its best effort, within reasonable
limits, in performing services provided for under this Agreement. PNC Bank
shall be responsible for its own negligent failure to perform its duties
under this Agreement. Notwithstanding the foregoing, PNC Bank shall not be
responsible for losses beyond its control, provided that PNC Bank has acted
in accordance with the standard of care set forth above; and provided further
that PNC Bank shall only be responsible for that portion of losses or damages
suffered by the Fund that are attributable to the negligence of PNC Bank.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under
this Agreement, shall not be under any duty or obligation to inquire into and
shall not be liable for (a) the validity or invalidity or authority or lack
thereof of any Oral or Written Instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, and which PNC Bank
reasonably believes to be genuine; or (b) delays or errors or loss of data
occurring by reason of circumstances beyond PNC Bank's control, including
acts of civil or military authority, national emergencies, labor
difficulties, fire, flood or catastrophe, acts of God, insurrection, war,
riots or failure of the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank
shall have no liability to the Fund for any consequential, special or
indirect losses or damages which the Fund may incur or suffer by or as a
consequence of PNC Bank's performance of the services provided hereunder,
whether or not the likelihood of such losses or damages was known by PNC
Bank.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange
for delivery to PNC Bank, all the property owned by the Fund, including cash
received as a result of the distribution of its Shares, during the period
that is set forth in this Agreement. PNC Bank will not be responsible for
such property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon
Written Instructions, shall open and maintain separate account(s) in the
Fund's name using all cash received from or for the account of the Fund,
subject to the terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial accounts for each
separate series, class or portfolio of the Fund and shall hold in such
account(s) all cash received from or for the accounts of the Fund
specifically designated to each separate series, class or portfolio. PNC
Bank shall make cash payments from or for the account of the Fund only for:
(i) purchases of securities in the name of the Fund or PNC
Bank or PNC Bank's nominee as provided in sub-paragraph j and for which PNC
Bank has received a copy of the broker's or dealer's confirmation or payee's
invoice, as appropriate;
(ii) purchase or redemption of Shares of the Fund delivered
to PNC Bank;
(iii) payment of, subject to Written Instructions, interest,
taxes, administration, accounting, distribution, advisory, management fees or
similar expenses which are to be borne by the Fund;
(iv) payment to, subject to receipt of Written Instructions,
the Fund's transfer agent, as agent for the shareholders, an amount equal to
the amount of dividends and distributions stated in the Written Instructions
to be distributed in cash by the transfer agent to shareholders, or, in lieu
of paying the Fund's transfer agent, PNC Bank may arrange for the direct
payment of cash dividends and distributions to shareholders in accordance
with procedures mutually agreed upon from time to time by and among the Fund,
PNC Bank and the Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in
connection with the conversion, exchange or surrender of securities owned or
subscribed to by the Fund and held by or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with
respect to securities sold short; payments made to a sub-custodian pursuant
to provisions in sub-paragraph c of this Paragraph; and
(viii) payments, upon Written Instructions made for other
proper Fund purposes. PNC Bank is hereby authorized to endorse and collect
all checks, drafts or other orders for the payment of money received as
custodian for the account of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received by it for
the account of the Fund in a separate account that physically segregates
such securities from those of any other persons, firms or corporations,
except for securities held in a Book-Entry System. All such securities
shall be held or disposed of only upon Written Instructions of the Fund
pursuant to the terms of this Agreement. PNC Bank shall have no power or
authority to assign, hypothecate, pledge or otherwise dispose of any such
securities or investment, except upon the express terms of this Agreement and
upon Written Instructions, accompanied by a certified resolution of the
Fund's Governing Board, authorizing the transaction. In no case may any
member of the Fund's Governing Board, or any officer, employee or agent of
the Fund withdraw any securities. At PNC Bank's own expense and for its own
convenience, PNC Bank may enter into sub-custodian agreements with other
banks or trust companies to perform duties described in this sub-paragraph c.
Such bank or trust company shall have an aggregate capital, surplus and
undivided profits, according to its last published report, of at least one
million dollars ($1,000,000), if it is a subsidiary or affiliate of PNC Bank,
or at least twenty million dollars ($20,000,000) if such bank or trust
company is not a subsidiary or affiliate of PNC Bank. In addition, such
bank or trust company must agree to comply with the relevant provisions of
the 1940 Act and other applicable rules and regulations. PNC Bank shall
remain responsible for the performance of all of its duties as described in
this Agreement and shall hold the Fund harmless from PNC Bank's own (or any
sub-custodian chosen by PNC Bank under the terms of this sub-paragraph c)
acts or omissions, under the standards of care provided for herein.
(d) Transactions Requiring Instructions. Upon receipt of Oral or
Written Instructions and not otherwise, PNC Bank, directly or through the use
of the Book-Entry System, shall:
(i) deliver any securities held for the Fund against the
receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be
designated in such Oral or Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the authority of the Fund
as owner of any securities may be exercised;
(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are called, redeemed, retired or otherwise become
payable; provided that, in any such case, the cash or other consideration is
to be delivered to PNC Bank;
(iv) deliver any securities held for the Fund against receipt
of other securities or cash issued or paid in connection with the
liquidation, reorganization, refinancing, tender offer, merger, consolidation
or recapitalization of any corporation, or the exercise of any conversion
privilege;
(v) deliver any securities held for the Fund to any
protective committee, reorganization committee or other person in connection
with the reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and receive and hold
under the terms of this Agreement such certificates of deposit, interim
receipts or other instruments or documents as may be issued to it to evidence
such delivery;
(vi) make such transfer or exchanges of the assets of the
Fund and take such other steps as shall be stated in said Oral or Written
Instructions to be for the purpose of effectuating a duly authorized plan of
liquidation, reorganization, merger, consolidation or recapitalization of the
Fund;
(vii) release securities belonging to the Fund to any bank or
trust company for the purpose of a pledge or hypothecation to secure any loan
incurred by the Fund; provided, however, that securities shall be released
only upon payment to PNC Bank of the monies borrowed, except that in cases
where additional collateral is required to secure a borrowing already made
subject to proper prior authorization, further securities may be released for
that purpose; and repay such loan upon redelivery to it of the securities
pledged or hypothecated therefor and upon surrender of the note or notes
evidencing the loan;
(viii) release and deliver securities owned by the Fund in
connection with any repurchase agreement entered into on behalf of the Fund,
but only on receipt of payment therefor; and pay out moneys of the Fund in
connection with such repurchase agreements, but only upon the delivery of the
securities;
(ix) release and deliver or exchange securities owned by the
Fund in connection with any conversion of such securities, pursuant to their
terms, into other securities;
(x) release and deliver securities owned by the Fund for the
purpose of redeeming in kind shares of the Fund upon delivery thereof to PNC
Bank; and
(xi) release and deliver or exchange securities owned by the
Fund for other corporate purposes. PNC Bank must also receive a certified
resolution describing the nature of the corporate purpose and the name and
address of the person(s) to whom delivery shall be made when such action is
pursuant to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
certified resolutions of the Fund's Governing Board approving, authorizing
and instructing PNC Bank on a continuous and on-going basis, to deposit in
the Book-Entry System all securities belonging to the Fund eligible for
deposit therein and to utilize the Book-Entry System to the extent possible
in connection with settlements of purchases and sales of securities by the
Fund, and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. PNC Bank
shall continue to perform such duties until it receives Written or Oral
Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of the Fund which are
maintained in the Book-Entry system, established pursuant to this
sub-paragraph e hereof, the records of PNC Bank shall identify by Book-Entry
or otherwise those securities belonging to the Fund. PNC Bank shall furnish
the Fund a detailed statement of the Property held for the Fund under this
Agreement at least monthly and from time to time and upon written request.
(ii) Securities and any cash of the Fund deposited in the
Book-Entry System will at all times be segregated from any assets and cash
controlled by PNC Bank in other than a fiduciary or custodian capacity but
may be commingled with other assets held in such capacities. PNC Bank and
its sub-custodian, if any, will pay out money only upon receipt of securities
and will deliver securities only upon the receipt of money.
(iii) All books and records maintained by PNC Bank which
relate to the Fund's participation in the Book-Entry System will at all times
during PNC Bank's regular business hours be open to the inspection of the
Fund's duly authorized employees or agents, and the Fund will be furnished
with all information in respect of the services rendered to it as it may
require.
(iv) PNC Bank will provide the Fund with copies of any report
obtained by PNC Bank on the system of internal accounting control of the
Book-Entry System promptly after receipt of such a report by PNC Bank. PNC
Bank will also provide the Fund with such reports on its own system of
internal control as the Fund may reasonably request from time to time.
(f) Registration of Securities. All Securities held for the Fund
which are issued or issuable only in bearer form, except such securities held
in the Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name of the Fund; PNC
Bank; the Book-Entry System; a sub-custodian; or any duly appointed
nominee(s) of the Fund, PNC Bank, Book-Entry system or sub-custodian. The
Fund reserves the right to instruct PNC Bank as to the method of registration
and safekeeping of the securities of the Fund. The Fund agrees to furnish to
PNC Bank appropriate instruments to enable PNC Bank to hold or deliver in
proper form for transfer, or to register its registered nominee or in the
name of the Book-Entry System, any securities which it may hold for the
account of the Fund and which may from time to time be registered in the name
of the Fund. PNC Bank shall hold all such securities which are not held in
the Book-Entry System in a separate account for the Fund in the name of the
Fund physically segregated at all times from those of any other person or
persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee
shall vote any of the securities held pursuant to this Agreement by or for
the account of the Fund, except in accordance with Written Instructions. PNC
Bank, directly or through the use of the Book-Entry System, shall execute in
blank and promptly deliver all notice, proxies, and proxy soliciting
materials to the registered holder of such securities. If the registered
holder is not the Fund then Written or Oral Instructions must designate the
person(s) who owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PNC Bank is authorized to take the following
actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund,
all income, dividends, distributions, coupons, option premiums, other
payments and similar items, included or to be included in the Property, and,
in addition, promptly advise the Fund of such receipt and credit such income,
as collected, to the Fund's custodian account;
(B) endorse and deposit for collection, in the name of
the Fund, checks, drafts, or other orders for the payment of money;
(C) receive and hold for the account of the Fund all
securities received as a distribution on the Fund's portfolio securities as
a result of a stock dividend, share split-up or reorganization,
recapitalization, readjustment or other rearrangement or distribution of
rights or similar securities issued with respect to any portfolio securities
belonging to the Fund held by PNC Bank hereunder;
(D) present for payment and collect the amount payable
upon all securities which may mature or be called, redeemed, or retired, or
otherwise become payable on the date such securities become payable; and
(E) take any action which may be necessary and proper
in connection with the collection and receipt of such income and other
payments and the endorsement for collection of checks, drafts, and other
negotiable instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver or cause to be
delivered Property against payment or other consideration or written receipt
therefor in the following cases:
(1) for examination by a broker or dealer selling
for the account of the Fund in accordance with street delivery custom;
(2) for the exchange of interim receipts or
temporary securities for definitive securities; and
(3) for transfer of securities into the name of
the Fund or PNC Bank or nominee of either, or for exchange of securities for
a different number of bonds, certificates, or other evidence, representing
the same aggregate face amount or number of units bearing the same interest
rate, maturity date and call provisions, if any; provided that, in any such
case, the new securities are to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral or Written
Instructions to the contrary, PNC Bank shall:
(1) pay all income items held by it which call for
payment upon presentation and hold the cash received by it upon such payment
for the account of the Fund;
(2) collect interest and cash dividends received,
with notice to the Fund, to the Fund's account;
(3) hold for the account of the Fund all stock
dividends, rights and similar securities issued with respect to any
securities held by PNC Bank; and
(4) execute as agent on behalf of the Fund
all necessary ownership certificates required by the Internal Revenue Code or
the Income Tax Regulations of the United States Treasury Department or under
the laws of any State now or hereafter in effect, inserting the Fund's name,
on such certificate as the owner of the securities covered thereby, to the
extent it may lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written or Oral
Instructions establish and maintain segregated account(s) on its records for
and on behalf of the Fund. Such account(s) may be used to transfer cash and
securities, including securities in the Book-Entry System:
(A) for the purposes of compliance by the Fund with the
procedures required by a securities or option exchange, providing such
procedures comply with the 1940 Act and any releases of the SEC relating to
the maintenance of segregated accounts by registered investment companies;
and
(B) Upon receipt of Written Instructions, for other
proper corporate purposes.
(ii) PNC Bank may enter into separate custodial agreements
with various futures commission merchants ("FCMs") that the Fund uses ("FCM
Agreement"). Pursuant to an FCM Agreement, the Fund's margin deposits in
any transactions involving futures contracts and options on futures contracts
will be held by PNC Bank in accounts ("FCM Account") subject to the
disposition by the FCM involved in such contracts and in accordance with the
customer contract between FCM and the Fund ("FCM Contract"), SEC rules and
the rules of the applicable commodities exchange. Such FCM Agreements shall
only be entered into upon receipt of Written Instructions from the Fund
which state that:
(A) a customer agreement between the FCM and the Fund
has been entered into; and
(B) the Fund is in compliance with all the rules and
regulations of the CFTC. Transfers of initial margin shall be made into a FCM
Account only upon Written Instructions; transfers of premium and variation
margin may be made into a FCM Account pursuant to Oral Instructions.
Transfers of funds from a FCM Account to the FCM
for which PNC Bank holds such an account may only occur upon certification by
the FCM to PNC Bank that pursuant to the FCM Agreement and the FCM Contract,
all conditions precedent to its right to give PNC Bank such instructions have
been satisfied.
(iii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such share- holders holding Shares through IRA
accounts, in accordance with the Fund's prospectuses, the Internal Revenue
Code (including regulations), and with such other procedures as are mutually
agreed upon from time to time by and among the Fund, PNC Bank and the Fund's
transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the securities,
including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased
and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through
whom the purchase was made. PNC Bank shall upon receipt of securities
purchased by or for the Fund pay out of the moneys held for the account of
the Fund the total amount payable to the person from whom or the broker
through whom the purchase was made, provided that the same conforms to the
total amount payable as set forth in such Oral or Written Instructions.
(k) Sales of Securities. PNC Bank shall settle sold securities
upon receipt of Oral or Written Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and
accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to
whom the sale was made; and
(vii) the location to which the security must be delivered and
delivery deadline, if any. PNC Bank shall deliver the securities upon receipt
of the total amount payable to the Fund upon such sale, provided that the
total amount payable is the same as was set forth in the Oral or Written
Instructions. Subject to the foregoing, PNC Bank may accept payment in such
form as shall be satisfactory to it, and may deliver securities and arrange
for payment in accordance with the customs prevailing among dealers in
securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions
and entries for the account of the Fund, listing the portfolio securities
belonging to the Fund with the adjusted average cost of each issue and the
market value at the end of such month, and stating the cash account of the
Fund including disbursement;
(C) the reports to be furnished to the Fund pursuant to
Rule 17f-4; and
(D) such other information as may be agreed upon from
time to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or conversion or similar
communication received by it as custodian of the Property. PNC Bank shall be
under no other obligation to inform the Fund as to such actions or events.
(m) Collections. All collections of monies or other property, in
respect, or which are to become part of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time after proper
demands have been made, PNC Bank shall notify the Fund in writing, including
copies of all demand letters, any written responses, memoranda of all oral
responses and telephonic demands thereto, and await instructions from the
Fund. PNC Bank shall not be obliged to take legal action for collection
unless and until reasonably indemnified to its satisfaction. PNC Bank shall
also notify the Fund as soon as reasonably practicable whenever income due on
securities is not collected in due course.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty (60) days' prior written
notice to the other party. In the event this Agreement is terminated
(pending appointment of a successor to PNC Bank or vote of the shareholders
of the Fund to dissolve or to function without a custodian of its cash,
securities or other property), PNC Bank shall not deliver cash, securities or
other property of the Fund to the Fund. It may deliver them to a bank or
trust company of PNC Bank's choice, having an aggregate capital, surplus and
undivided profits, as shown by its last published report, of not less than
twenty million dollars ($20,000,000), as a custodian for the Fund to be held
under terms similar to those of this Agreement. PNC Bank shall not be
required to make any such delivery or payment until full payment shall have
been made to PNC Bank of all of its fees, compensation, costs and expenses.
PNC Bank shall have a security interest in and shall have a right of setoff
against Property in the Fund's possession as security for the payment of such
fees, compensation, costs and expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at
PNC Bank's address: Airport Business Center, International Court 2, 200
Stevens Drive, Lester, Pennsylvania 19113, marked for the attention of the
Custodian Services Department (or its successor) (b) if to the Fund, at the
address of the Fund; or (c) if to neither of the foregoing, at such other
address as shall have been notified to the sender of any such notice or other
communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
five days after it has been mailed. If notice is sent by messenger, it shall
be deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought. 18. Delegation.
PNC Bank may assign its rights and delegate its duties hereunder to any
wholly-owned direct or indirect subsidiary of PNC Bank, National Association
or PNC Bank Corp., provided that (i) PNC Bank gives the Fund thirty (30) days
prior written notice; (ii) the delegate agrees with PNC Bank to comply with
all relevant provisions of the 1940 Act; and (iii) PNC Bank and such delegate
promptly provide such information as the Fund may request, and respond to
such questions as the Fund may ask, relative to the assignment, including
(without limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument. 20. Further
Actions. Each party agrees to perform such further acts and execute such
further documents as are necessary to effectuate the purposes hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the
parties may embody in one or more separate documents their agreement, if any,
with respect to delegated duties and/or Oral Instructions. The captions in
this Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania and
governed by Pennsylvania law, without regard to principles of conflicts of
law. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and
shall inure to the benefit of the parties hereto and their respective
successors and permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
/s/ John Foster
By: John Foster
Title: Vice President
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
/s/ Heath B. McLendon
By: Heath B. McLendon
Title: Chairman of the Board
13
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Trustees of
Smith Barney Adjustable Rate Government Income Fund:
We hereby consent to the following with respect to
Post-Effective Amendment No. 8 to the Registration Statement on
Form N-1A (File No. 33-47782) under the Securities Act of 1933,
as amended, of Smith Barney Adjustable Rate Government Income
Fund:
1. The incorporation by reference of our report dated July 26,
1995 accompanying the Annual Report dated May 31, 1995 of Smith
Barney Adjustable Rate Government Income Fund, in the Statement
of Additional Information.
2. The reference to our firm under the heading "Financial
Highlights" in the Prospectus.
3. The reference to our firm under the heading "Counsel and
Auditors" in the Statement of Additional Information.
COOPERS & LYBRAND L.L.P.
Boston, Massachusetts
September 29, 1995
EXHIBIT 15
AMENDED SERVICES AND DISTRIBUTION PLAN
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
This Services and Distribution Plan (the "Plan") is adopted in accordance
with rule 12b-1 (the "Rule") under the Investment Company Act of 1940, as
amended (the "1940 Act"), by Smith Barney Adjustable Rate Government Income
Fund, a business trust organized under the laws of the Commonwealth of
Massachusetts (the "Fund"), subject to the following terms and conditions:
Section 1. Annual Fee
(a) Class A Service Fee. The Fund will pay to the distributor of its
shares, Smith Barney Inc., a corporation organized under the laws of the
State of Delaware ("Distributor"), a service fee under the Plan at the
annual rate of .25% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Service Fee").
(b) Service Fee for Class B shares. The Fund will pay to the Distributor a
service fee under the Plan at the annual rate of .25% of the average daily
net assets of the Fund attributable to the Class B shares (the "Class B
Service Fee").
(c) Service Fee for Class C shares. The Fund will pay to the Distributor a
service fee under the Plan at the annual rate of .25% of the average daily
net assets of the Fund attributable to the Class C shares (the "Class C
Service Fee," and collectively with the Class A Service Fee and the Class B
Service Fee, the "Service Fees").
(d) Distribution Fee for Class A shares. In addition to the Class A
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the Fund
attributable to the Class A shares (the "Class A Distribution Fee" and
collectively with the Class A Service Fee, the "Class A Distribution and
Shareholder Servicing Fees").
(e) Distribution Fee for Class B shares. In addition to the Class B
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the fund
attributable to the Class B Distribution Fee, the "Distribution Fees").
(f) Distribution Fee for Class C shares. In addition to the Class C
Service Fee, the Fund will pay the Distributor a distribution fee under the
Plan at the annual rate of .50% of the average daily net assets of the Fund
attributable to the Class C shares (the "Class C Distribution Fee," and
collectively with the Class B Distribution Fee, the "Distribution Fees").
(g) Payment of Fees. The Service Fees and Distribution Fees will be
calculated daily and paid monthly by the Fund with respect to the foregoing
classes of the fund's shares (each a "Class" and together the "Classes") at
the annual rates indicated above.
Section 2. Expenses Covered by the Plan
With respect to expenses incurred by each Class its respective Service Fees
and/or Distribution Fees may be used for; (a) costs of printing and
distributing the Fund's prospectus, statement of additional information and
reports to prospective investors in the Fund; (b) costs involved in
preparing, printing and distributing sales literature pertaining o the
Fund; (c) an allocation of overhead and other branch office distribution-
related expenses of the Distributor; (d) payments made to, and expenses of
Smith Barney Financial Consultants and other persons who provide support
services in connection with the distribution of the Fund's shares,
including but not limited to, office space and equipment, telephone
facilities, answering routine inquires regarding the Fund, processing
shareholder transactions and providing any other shareholder services not
otherwise provided by the Fund's Transfer agent; and (e) accruals for
interest on the amount of the foregoing expenses that exceed the
Distribution Fee and, in the case of Class B shares, the contingent
deferred sales charge received by the Distributor; provided, however, that
the Distribution Fees may be used by the Distributor only to cover expenses
primarily intended to result in the sale of the Fund's Class B and C
shares, including without limitation, payments to Distributor's financial
consultants ant the time of the sale of Class B and C shares. In addition,
Service Fees are intended to be used by the Distributor primarily to pay
its financial consultants for servicing shareholder accounts, including a
continuing fee to each such financial consultant, which fee shall begin to
accrue immediately after the sale of such shares.
Section 3. Approval of Shareholders
The Plan will not take effect, and no fees will be payable in accordance
with Section 1 of the Plan, with respect to a Class until the Plan has been
approved by a vote of a least a majority of the outstanding voting
securities of the Class. The Plan will be deemed to have been approved
with respect to a class so longer as a majority of the outstanding voting
securities of the Class votes for the approval of the Plan, notwithstanding
that: (a) the Plan has not been approved by a major of the outstanding
voting securities of any other Class, or (b) the Plan has not been approved
by a majority of the outstanding voting securities of the Fund.
Section 4. Approval of Trustees
Neither the Plan nor any related agreements will take effect until approved
by a majority of both (a) the full Board of Trustees of the Fund and (b)
those Trustees who are not interested persons of the Fund and who have not
direct or indirect financial interest in the operation of the Plan or in
any agreements related to it (the "Qualified Trustees"), cast in person at
a meeting called for the purpose of voting on the Plan and the related
agreements.
Section 5. Continuance of the Plan
The Plan will continue in effect with respect to each Class until November
7, 1995, and thereafter for successive twelve-month periods with respect to
each Class; provided, however, that such continuance is specifically
approved at least annually by the Trustees of the Fund and by a majority of
the Qualified Trustees.
Section 6. Termination
The Plan may be terminated at any time with respect to a Class (i) by the
Fund without the payment of any penalty, by the vote of a majority of the
outstanding voting securities of such Class or (ii) by a vote of the
Qualified Trustees. The Plan may remain in effect with respect to a
particular Class even if the Plan has been terminated in accordance with
this Section 6 with respect to any other Class.
Section 7. Amendments
The Plan may to be amended with respect to any Class so as to increase
materially the amounts of the Fees described in Section 1 above, unless the
amendment is approved by a vote of the holders of at least a majority of
the outstanding voting securities of that class. No material amendment to
the Plan may be made unless approved by the Fund's Board of Trustees in the
manner described in Section 4 above.
Section 8. Selection of Certain Trustees
While the Plan is in effect, the selection and nomination of the Fund's
Trustees who are not interested persons of the Fund will be committed to
the discretion of the Trustees then in office who are not interested
persons of the Fund.
Section 9. Written Reports
In each year during which the Plan remains in effect, a person authorized
to direct the disposition of monies paid or payable by the Fund pursuant to
the Plan or any related agreement will prepare and furnish to the Fund's
Board of Trustees and the Board will review, at least quarterly, written
reports complying with the requirements of the Rule, which sets out the
amounts expended under the Plan and the purposes for which those
expenditures were made.
Section 10. Preservation of Materials
The Fund will preserve copies of the Plan, any agreement relating to the
Plan and any report made pursuant to Section 9 above, for a period of not
less than six years (the first two years in an easily accessible place)
from the date of the Plan, agreement or report.
Section 11. Meanings of Certain Terms
As used in the Plan, the terms "interested person" and "majority of the
outstanding voting securities" will be deemed to have the same meaning that
those terms have under the 1940 Act by the Securities and Exchange
Commission.
Section 12. Limitation of Liability
It is expressly agreed that the obligations of the Fund hereunder shall not
be binding upon of the Trustees, shareholders, nominees, officers,
employees or agents, whether past, present or future, of the Fund,
individually, but are binding only upon the assets and property of the
Fund, as provided, as provided in the Master Trust Agreement of the Fund.
The execution and delivery of this Plan has been authorized by the Trustees
and by shareholders of the Fund holding at least a majority of the
outstanding voting securities and signed by an authorized officer of the
Fund, acting as such, and neither such authorization by such Trustees and
shareholders nor such execution and delivery by such officer be deemed to
have made by any of them individually or to impose any liability on any of
them personally, but shall bind only the trust property or the Fund as
provided in its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund execute the Plan as of November 7, 1994.
SMITH BARNEY
ADJUSTABLE RATE GOVERNMENT INCOME FUND
By: /s/ Heath B. McLendon
Heath B. McLendon
Chairman of the Board
EXHIBIT 18
Rule 18f-3 (d) Multiple Class Plan for
Smith Barney Adjustable Rate Government Income Fund
Introduction
This plan (the "Plan") is adopted pursuant to Rule 18f-3 (d) of
the Investment Company Act of 1940, as amended (the "1940 Act").
The purpose of the Plan is to restate the existing arrangements
previously approved by the Boards of Directors and Trustees of
certain of the open-end investment companies set forth on
Schedule A (the "Funds" and each a "Fund") distributed by Smith
Barney Inc. ("Smith Barney") under the Funds' existing order of
exemption (Investment Company Act Release Nos. 20042 (January 28,
1994) (notice) and 20090 (February 23, 1994)). Shares of the
Funds are distributed pursuant to a system (the "Multiple Class
System") in which each class of shares (a "Class") of a Fund
represents a pro rata interest in the same portfolio of
investments of the Fund and differs only to the extent outlined
below.
I. Distribution Arrangements and Service Fees
One or more Classes of shares of the Funds are offered for
purchase by investors with the following sales load structure.
In addition, pursuant to Rule 12b-1 under the 1940 Act (the
"Rule"), the Funds have each adopted a plan (the "Services and
Distribution Plan") under which shares of the Classes are subject
to the services and distribution fees described below.
1. Class A Shares
Class A shares are offered at net asset value and under
the Services and Distribution Plan are subject to a service fee
at an annual rate of up to 0.25% of average daily net assets and
a distribution fee at an annual rate of up to 0.75% of average
daily net assets.
2. Class B Shares
Class B shares are offered at net asset value and under
the Services and Distribution Plan are subject to a service fee
at an annual rate of up to 0.25% of average daily net assets and
a distribution fee at an annual rate of up to 0.75% of average
daily net assets. In addition, Class B shares purchased through
exchange purchases may be subject to a CDSC of up to 5.00%
based upon the CDSC imposed by the mutual fund from which
the investor exchanged.
3. Class C Shares
Class C shares are offered without a front-end load, but are
subject to a one-year CDSC and under the Services and
Distribution Plan are subject to a service fee at an annual rate
of up to 0.25% of average daily net assets and a distribution fee
at an annual rate of up to 0.75% of average daily net assets.
Unlike Class B shares, Class C shares do not have the conversion
feature as discussed below and accordingly, these shares are
subject to a distribution fee for an indefinite period of time.
The Funds reserve the right to impose these fees at such higher
rates as may be determined.
4. Class Y Shares
Class Y shares are offered without impositions of either a sales
charge or a service or distribution fee for investments where the
amount of purchase is equal to or exceeds $5 million.
5. Class Z Shares
Class Z shares may be offered without imposition of either a
sales charge or a service or distribution fee for purchase (i) by
employee benefit and retirement plans of Smith Barney and its
affiliates, (ii) by certain unit investment trusts sponsored by
Smith Barney and its affiliates, and (iii) although not currently
authorized by the governing boards of the Funds, when and if
authorized, (x) by employees of Smith Barney and its affiliates
and (y) by directors, general partners or trustees of any
investment company for which Smith Barney serves as a distributor
and, for each of (x) and (y), their spouses and minor children.
6. Additional Classes of Shares
The Boards of Directors and Trustees of the Funds have the
authority to create additional classes, or change existing
Classes, from time to time, in accordance with Rule 18f-3 of the
1940 Act.
II. Expense Allocations
Under the Multiple Class System, all expenses incurred by a Fund
are allocated among the various Classes of shares based on the
net assets of the Fund attributable to each Class, except that
each Class's net assets value and expenses reflect the expenses
associated with that Class under the Fund's Services and
Distribution Plan, including any costs associated with obtaining
shareholder approval of the Services and Distribution Plan (or an
amendment thereto) and any expenses specific to that Class. Such
expenses are limited to the following:
(I) transfer agency fees as identified by the transfer
agent as being attributable to a specific Class;
(ii) printing and postage expenses related to preparing and
distributing materials such as shareholder reports,
prospectuses and proxies to current shareholders;
(iii) Blue Sky registration fees incurred by a Class of
shares;
(iv) Securities and Exchange Commission registration fees
incurred by a Class of shares;
(v) the expense of administrative personnel and services as
required to support the shareholders of a specific Class;
(vi) litigation or other legal expenses relating solely to
one Class of shares; and
(vii) fees of members of the governing boards of the funds
incurred as a result of issues relating to one Class of
shares.
Pursuant to the Multiple Class System, expenses of a Fund
allocated to a particular Class of shares of that Fund are borne
on a pro rata basis by each outstanding share of that Class.
III. Conversion Rights of Class B Shares
All Class B shares of each Fund will automatically convert to
Class A shares after a certain holding period, expected to be, in
most cases, approximately eight years but may be shorter. Upon
the expiration of the holding period, Class B shares (except
those purchases through the reinvestment of dividends and other
distributions paid in respect of Class B shares) will
automatically convert to Class A shares of the Fund at the
relative net asset value of each of the Classes, and will, as a
result, thereafter be subject to the lower fee under the Services
and Distribution Plan. For purposes of calculating the holding
period required for conversion, newly created Class B shares
issued after the date of implementation of the Multiple Class
System are deemed to have been issued on (i) the date on which
the issuance of the Class B shares occurred or (ii) for Class B
shares obtained through an exchange, or a series of exchanges,
the date on which the issuance of the original Class B shares
occurred.
Shares purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares are also Class B
shares. However, for purposes of conversion to Class A, all
Class B shares in a shareholder's Fund account that were
purchased through the reinvestment of dividends and other
distributions paid in respect of Class B shares (and that have
not converted to Class A shares as provided in the following
sentence) are considered to be held in a separate sub-account.
Each time any Class B shares in the shareholder's Fund account
(other than those in the sub-account referred to in the preceding
sentence) convert to Class A, a pro rata portion of the Class B
shares then in the sub-account also converts to Class A. The
portion is determined by the ratio that the shareholder's Class B
shares converting to Class A bears to the shareholder's total
Class B shares not acquired through dividends and distributions.
The conversion of Class B shares to Class A shares is subject to
the continuing availability of a ruling of the Internal Revenue
Service that payment of different dividends on Class A and Class
B shares does not result in the Fund's dividends or distributions
constituting "preferential dividends" under the Internal Revenue
Code of 1986, as amended (the "Code"), and the continuing
availability of an opinion of counsel to the effect that the
conversion of shares does not constitute a taxable event under
the Code. The conversion of Class B shares to Class A shares may
be suspended if this opinion is no longer available, In the
event that conversion of Class B shares of not occur, Class B
shares would continue to be subject to the distribution fee and
any incrementally higher transfer agency costs attending the
Class B shares for an indefinite period.
IV. Exchange Privileges
Shareholders of a Fund may exchange their shares at net asset
value for shares of the same Class in certain other of the Smith
Barney Mutual Funds as set forth in the prospectus for such Fund.
Class A shareholders who wish to exchange all or part of their
shares for Class A shares of a Fund sold subject to a sales
charge equal to or lower that that assessed with respect to the
shares of the Fund being exchanged may do so without paying a
sales charge. Class A shareholders of a Fund who wish to
exchange all or part of their shares for Class A shares of a Fund
sold subject to a sales charge higher than that assessed with
respect to the shares of the Fund being exchanged are charged the
appropriate "sales charge differential." Funds only permit
exchanges into shares of money market funds having a plan under
the Rule if, as permitted by paragraph (b) (5) of Rule 11a-3
under the 1940 Act, either (i) the time period during which the
shares of the money market funds are held is included in the
calculations of the CDSC or (ii) the time period is not included
but the amount of the CDSC is reduced by the amount of any
payments made under a plan adopted pursuant to the Rule by the
money market funds with respects to those shares. Currently, the
Funds include the time period during which shares of the money
market fund are held in the CDSC period. The exchange privileges
applicable to all Classes of shares must comply with Rule 11a-3
under the 1940 Act.
Smith Barney Sponsored Investment Companies
Operating under Rule 18f-3 - Schedule A
(as of August 25, 1995)
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund
Smith Barney Equity Funds -
Smith Barney Strategic Investors Fund
Smith Barney Growth and Income Fund
Smith Barney Florida Municipals Fund
Smith Barney Fundamental Value Fund Inc.
Smith Barney Funds, Inc. -
Income and Growth Portfolio
Utilities Portfolio
Income Return Account Portfolio
Monthly Payment Government Portfolio
Short-Term U.S. Treasury Securities Portfolio
U.S. Government Securities Portfolio
Smith Barney Income Funds -
Smith Barney Premium Total Return Fund
Smith Barney Convertible Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney High Income Fund
Smith Barney Tax-Exempt Income Fund
Smith Barney Exchange Reserve Fund
Smith Barney Utilities Fund
Smith Barney Income Trust -
Smith Barney Limited Maturity Municipals Fund
Smith Barney Limited Maturity Treasury Fund
Smith Barney Intermediate Maturity
California Municipals Fund
Smith Barney Intermediate Maturity
New York Municipals Fund
Smith Barney Investment Funds Inc. -
Smith Barney Special Equities Fund
Smith Barney Government Securities Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Institutional Cash Management Fund Inc.
Smith Barney Managed Governments Fund Inc.
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Money Funds, Inc. -
Cash Portfolio
Government Portfolio
Retirement Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Smith Barney Muni Funds -
California Portfolio
California Limited Portfolio
California Money Market Portfolio
Florida Portfolio
Florida Limited Portfolio
Georgia Portfolio
Limited Term Portfolio
National Portfolio
New Jersey Portfolio
New York Portfolio
New York Money Market Portfolio
Ohio Portfolio
Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney New York Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Precious Metals and Minerals Fund Inc.
Smith Barney Telecommunications Trust -
Smith Barney Telecommunications Growth Fund
Smith Barney Telecommunications Income Fund
Smith Barney World Funds, Inc. -
International Equity Portfolio
International Balanced Portfolio
European Portfolio
Pacific Portfolio
Global Government Bond Portfolio
u:\legal\data\18f3plan.txt 08/25/95 1:55 PM
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> SMITH BARNEY ADJUSTABLE RATE GOVT INCOME CLASS A
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> NOV-30-1994
<INVESTMENTS-AT-COST> 193,479,291
<INVESTMENTS-AT-VALUE> 194,035,783
<RECEIVABLES> 24,700,946
<ASSETS-OTHER> 162,391
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 218,899,120
<PAYABLE-FOR-SECURITIES> 15,367,791
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 24,545,712
<TOTAL-LIABILITIES> 39,913,503
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 185,704,358
<SHARES-COMMON-STOCK> 17,658,222
<SHARES-COMMON-PRIOR> 29,012,075
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (100,601)
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> (7,240,679)
<ACCUM-APPREC-OR-DEPREC> 622,539
<NET-ASSETS> 178,985,617
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 15,682,080
<OTHER-INCOME> 0
<EXPENSES-NET> 5,223,075
<NET-INVESTMENT-INCOME> 10,459,005
<REALIZED-GAINS-CURRENT> (5,595,082)
<APPREC-INCREASE-CURRENT> 7,517,963
<NET-CHANGE-FROM-OPS> 12,381,886
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 10,056,390
<DISTRIBUTIONS-OF-GAINS> 213,778
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 14,386,553
<NUMBER-OF-SHARES-REDEEMED> 26,681,307
<SHARES-REINVESTED> 940,901
<NET-CHANGE-IN-ASSETS> (113,165,571)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> (209,374)
<OVERDIST-NET-GAINS-PRIOR> (1,425,398)
<GROSS-ADVISORY-FEES> 846,688
<INTEREST-EXPENSE> 1,828,319
<GROSS-EXPENSE> 5,223,075
<AVERAGE-NET-ASSETS> 211,672,086
<PER-SHARE-NAV-BEGIN> 9.78
<PER-SHARE-NII> 0.47
<PER-SHARE-GAIN-APPREC> 0.13
<PER-SHARE-DIVIDEND> 0.49
<PER-SHARE-DISTRIBUTIONS> 0.01
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.88
<EXPENSE-RATIO> 1.60
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
<ARTICLE> 6
<SERIES>
[NUMBER] 002
<NAME> SMITH BARNEY ADJUSTABLE RATE GOVT INCOME CLASS B
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> NOV-30-1994
[INVESTMENTS-AT-COST] 193,479,291
[INVESTMENTS-AT-VALUE] 194,035,783
[RECEIVABLES] 24,700,946
[ASSETS-OTHER] 162,391
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 218,899,120
[PAYABLE-FOR-SECURITIES] 15,367,791
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 24,545,712
[TOTAL-LIABILITIES] 39,913,503
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 185,704,358
[SHARES-COMMON-STOCK] 457,513
[SHARES-COMMON-PRIOR] 861,490
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (100,601)
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] (7,240,679)
[ACCUM-APPREC-OR-DEPREC] 622,539
[NET-ASSETS] 178,985,617
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 15,682,080
[OTHER-INCOME] 0
[EXPENSES-NET] 5,223,075
[NET-INVESTMENT-INCOME] 10,459,005
[REALIZED-GAINS-CURRENT] (5,595,082)
[APPREC-INCREASE-CURRENT] 7,517,963
[NET-CHANGE-FROM-OPS] 12,381,886
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 290,060
[DISTRIBUTIONS-OF-GAINS] 6,326
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 1,416,453
[NUMBER-OF-SHARES-REDEEMED] 1,844,482
[SHARES-REINVESTED] 24,052
[NET-CHANGE-IN-ASSETS] (113,165,571)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (209,374)
[OVERDIST-NET-GAINS-PRIOR] (1,425,398)
[GROSS-ADVISORY-FEES] 846,688
[INTEREST-EXPENSE] 1,828,319
[GROSS-EXPENSE] 5,212,901
[AVERAGE-NET-ASSETS] 211,672,086
[PER-SHARE-NAV-BEGIN] 9.78
[PER-SHARE-NII] 0.47
[PER-SHARE-GAIN-APPREC] 0.13
[PER-SHARE-DIVIDEND] 0.49
[PER-SHARE-DISTRIBUTIONS] 0.01
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 9.88
[EXPENSE-RATIO] 1.63
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
<ARTICLE> 6
<SERIES>
[NUMBER] 003
<NAME> SMITH BARNEY ADJUSTABLE RATE GOVT INCOME CLASS C
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1995
<PERIOD-END> NOV-30-1994
[INVESTMENTS-AT-COST] 193,479,291
[INVESTMENTS-AT-VALUE] 194,035,783
[RECEIVABLES] 24,700,946
[ASSETS-OTHER] 162,391
[OTHER-ITEMS-ASSETS] 0
[TOTAL-ASSETS] 218,899,120
[PAYABLE-FOR-SECURITIES] 15,367,791
[SENIOR-LONG-TERM-DEBT] 0
[OTHER-ITEMS-LIABILITIES] 24,545,712
[TOTAL-LIABILITIES] 39,913,503
[SENIOR-EQUITY] 0
[PAID-IN-CAPITAL-COMMON] 185,704,358
[SHARES-COMMON-STOCK] 205
[SHARES-COMMON-PRIOR] 11,516
[ACCUMULATED-NII-CURRENT] 0
[OVERDISTRIBUTION-NII] (100,601)
[ACCUMULATED-NET-GAINS] 0
[OVERDISTRIBUTION-GAINS] (7,240,679)
[ACCUM-APPREC-OR-DEPREC] 622,539
[NET-ASSETS] 178,985,617
[DIVIDEND-INCOME] 0
[INTEREST-INCOME] 15,682,080
[OTHER-INCOME] 0
[EXPENSES-NET] 5,223,075
[NET-INVESTMENT-INCOME] 10,459,005
[REALIZED-GAINS-CURRENT] (5,595,082)
[APPREC-INCREASE-CURRENT] 7,517,963
[NET-CHANGE-FROM-OPS] 12,381,886
[EQUALIZATION] 0
[DISTRIBUTIONS-OF-INCOME] 3,782
[DISTRIBUTIONS-OF-GAINS] 95
[DISTRIBUTIONS-OTHER] 0
[NUMBER-OF-SHARES-SOLD] 2,375
[NUMBER-OF-SHARES-REDEEMED] 14,088
[SHARES-REINVESTED] 402
[NET-CHANGE-IN-ASSETS] (113,165,571)
[ACCUMULATED-NII-PRIOR] 0
[ACCUMULATED-GAINS-PRIOR] 0
[OVERDISTRIB-NII-PRIOR] (209,374)
[OVERDIST-NET-GAINS-PRIOR] (1,425,398)
[GROSS-ADVISORY-FEES] 846,688
[INTEREST-EXPENSE] 1,828,319
[GROSS-EXPENSE] 5,223,075
[AVERAGE-NET-ASSETS] 211,672,086
[PER-SHARE-NAV-BEGIN] 9.78
[PER-SHARE-NII] 0.46
[PER-SHARE-GAIN-APPREC] 0.10
[PER-SHARE-DIVIDEND] 0.45
[PER-SHARE-DISTRIBUTIONS] 0.01
[RETURNS-OF-CAPITAL] 0.00
[PER-SHARE-NAV-END] 9.88
[EXPENSE-RATIO] 1.59
[AVG-DEBT-OUTSTANDING] 0
[AVG-DEBT-PER-SHARE] 0
</TABLE>
