As filed with the Securities and Exchange Commission on September 30,
1996
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. 11 X
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940 X
Amendment No. 12 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:
X immediately upon filing pursuant to Rule 485(b)
_______________________________________________________________________
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, 1996 was filed on July 29, 1996 as accession number
91155-96-000292.
To Register Additional Securities under Reg. 270.24e-2
Calculation of Registration Fee
________________________________________________________________________
__
Title of Share Proposed Proposed
securities Amount Maximum Maximum Amount
being being offering aggregate registration
registered registered price per offering* fee
______________________
share____________________________________________
SB Adjustable Rate 1,743,008 9.93 $290,000 $100
The fee for the shares to be registered by this filing has been computed
on the basis of the market value per share in effect on September 19,
1996.
*Calculation of the proposed maximum offering price has been made
pursuant to Rule 24e-2.
During its fiscal year ended May 31, 1996, the fund redeemed 20,887,138
shares. During its current fiscal year, the fund used 19,173,632 shares
it redeemed during its fiscal year ended May 31, 1996, for a reduction
pursuant to Rule 24f-2(c).
During its current fiscal year, the fund filed no other post-effective
amendments sfor the purpose of reduction pursuant to Rule 24e-2(a).
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Part A -Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
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
PROSPECTUS
SMITH BARNEY
Adjustable Rate
Government
Income Fund
SEPTEMBER 30, 1996
Prospectus begins on page one
[Logo] Smith Barney Mutual Funds
Investing for your future.
Every day.
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus September 30, 1996
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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 September 30, 1996, 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
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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 48
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Performance 48
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Management of the Fund 49
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Distributor 51
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Additional Information 52
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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
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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") to investors designed to provide them with the flexibility of
selecting an investment best suited to their needs. The general public is
offered three classes of shares: Class A shares, Class B shares and Class C
shares, which differ principally in terms of sales charges and rate of expenses
to which they are subject. A fourth Class of shares, Class Y shares, 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
<PAGE>
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. In addition, certain investors, including qualified
retirement plans and certain other institutional investors may purchase shares
directly from the Fund through the Fund's transfer agent, First Data Investor
Services Group, Inc. ("First Data"). 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.
5
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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SYSTEMATIC INVESTMENT PLAN The Fund offers Class A shareholders a
Systematic Investment Plan under which they may authorize the automatic
placement of a purchase order each month or quarter for Fund shares in an amount
of at least $50. See "Purchase of Shares."
REDEMPTION OF SHARES Shares may be redeemed on each day the New York Stock
Exchange, Inc. ("NYSE") is open for business. See "Purchase of Shares" and
"Redemption of Shares."
MANAGEMENT OF THE FUND Smith Barney Strategy Advisers Inc. ("Strategy
Advisers") serves as the Fund's investment adviser. Strategy Advisers provides
investment advisory and management services to investment companies affiliated
with Smith Barney. Strategy Advisers is a wholly owned subsidiary of Smith
Barney Mutual Funds Management Inc. ("SBMFM") 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."
SBMFM serves as Administrator. SBMFM 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."
6
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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REINVESTMENT OF DIVIDENDS Dividends and distributions paid on shares of any
Class will be reinvested automatically in additional shares of the same Class at
current net asset value unless otherwise specified by an investor. Shares
acquired through 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 Management Policies."
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 0.23 0.25 0.24 0.20***
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TOTAL FUND OPERATING EXPENSES 1.58% 1.60% 1.59% 0.80%
================================================================================
*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 SBMFM 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
8
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Prospectus Summary (continued)
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result in, or that are primarily attributable to, the sale of
shares, and of which 0.25% is used by Smith Barney to provide compensation for
ongoing servicing and/or maintenance of shareholder accounts. "Other expenses"
in the above table include fees for shareholder services, custodial fees, legal
and accounting fees, printing costs and registration fees.
EXAMPLE
The following example 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*
================================================================================
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 $86 $187
Class B shares 66 80 97 188
Class C shares 26 49 85 186
Class Y shares 8 26 46 103
An investor would pay the following
expenses on the same investment,
assuming the same annual return and
no redemption:
Class A shares $16 $50 $86 $187
Class B shares 16 50 87 188
Class C shares 16 49 85 186
Class Y shares 8 26 46 103
================================================================================
*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
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Smith Barney
Adjustable Rate Government Income Fund
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Financial Highlights
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The following information for the year ended May 31, 1996 has been audited
by KPMG Peat Marwick, LLP independent accountants whose report thereon appears
in the Fund's Annual Report dated July 24, 1996. The following information for
the fiscal years ended May 31, 1993 through May 31, 1995 has been audited by
Coopers & Lybrand LLP. This 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 share of each class of beneficial interest outstanding throughout each
year.
Class A Shares 1996 1995(1) 1994 1993(2)
================================================================================
Net Asset Value, Beginning of Year $ 9.88 $ 9.78 $ 9.96 $ 10.00
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income (3) 0.56 0.47 0.37 0.44#
Net realized and unrealized
gain (loss) (0.04) 0.13 (0.17) (0.05)
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Total Income From Operations 0.52 0.60 0.20 0.39
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Less Distributions From:
Net investment income (0.56) (0.49) (0.37) (0.43)
Overdistribution of net
investment income -- (0.00)* (0.01) --
Net realized gains -- (0.01) -- --
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Total Distributions (0.56) (0.50) (0.38) (0.43)
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Net Asset Value, End of year $ 9.84 $ 9.88 $ 9.78 $ 9.96
- --------------------------------------------------------------------------------
Total Return++ 5.48% 6.39% 2.05% 3.89%
================================================================================
Net Assets, End of Year (000s) $155,622 $174,463 $283,627 $313,184
- --------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses (3)(4) 1.58% 1.60% 1.53% 1.50%+
Net investment income 5.66 4.94 3.72 4.36+
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Portfolio Turnover Rate 273% 524% 525% 236%
================================================================================
(1) 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.
(2) The Fund commenced operations on June 22, 1992. Any shares in existence
prior to November 6, 1992 were designated as Class A shares.
(3) The investment adviser waived a portion of its fees for the period ended
May 31, 1993. If such fees had not been waived, the per share effect on net
investment income would have been a decrease of $0.01 and the expense ratio
would have been 2.03% (annualized).
(4) For the years ended May 31, 1995 and May 31, 1994 and the period ended May
31, 1993, the annualized expense ratios were calculated excluding interest
expense. The ratios including interest expense were 2.47%, 2.31% and 1.92%,
respectively.
* Amount represents less than $0.01 per share.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+ Annualized.
# 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. For a share of each class of beneficial interest
outstanding throughout each year.
10
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
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Financial Highlights (continued)
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For a share of each class of beneficial interest outstanding throughout each
year.
Class B Shares 1996 1995(1) 1994 1993(2)
================================================================================
Net Asset Value, Beginning of Year $ 9.88 $ 9.78 $ 9.96 $ 9.96
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income (3) 0.56 0.47 0.37 0.25#
Net realized and
unrealized gain (loss) (0.04) 0.13 (0.17) --
- --------------------------------------------------------------------------------
Total Income From Operations 0.52 0.60 0.20 0.25
- --------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.56) (0.49) (0.37) (0.25)
Overdistribution of
net investment income -- (0.00)* (0.01) --
Net realized gains -- (0.01) -- --
- --------------------------------------------------------------------------------
Total Distributions (0.56) (0.50) (0.38) (0.25)
- --------------------------------------------------------------------------------
Net Asset Value, End of year $ 9.84 $ 9.88 $ 9.78 $ 9.96
- --------------------------------------------------------------------------------
Total Return++ 5.48% 6.39% 2.05% 2.56%
================================================================================
Net Assets, End of Year (000s) $5,712 $4,521 $8,422 $3,569
- --------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses (3)(4) 1.60% 1.63% 1.57% 1.50%+
Net investment income 5.64 4.92 3.68 4.36+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 273% 524% 525% 236%
================================================================================
(1) 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.
(2) On November 6, 1992 the Fund commenced selling Class B shares.
(3) The investment adviser waived a portion of its fees for the period ended
May 31, 1993. If such fees had not been waived, the per share effect on net
investment income would have been a decrease of $0.01 and the expense ratio
would have been 2.03% (annualized).
(4) For the years ended May 31, 1995 and May 31, 1994 and the period ended May
31, 1993, the annualized expense ratios were calculated excluding interest
expense. The ratios including interest expense were 2.49%, 2.35% and 1.92%,
respectively.
* Amount represents less than $0.01 per share.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+ Annualized.
# Net investment income before voluntary wavier of fees by investment
adviser, sub-investment adviser and administrator for the period ended May
31, 1993 was $0.24.
11
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Financial Highlights (continued)
- --------------------------------------------------------------------------------
For a share of each class of beneficial interest outstanding throughout each
year.
Class C Shares** 1996 1995(1) 1994(2)
================================================================================
Net Asset Value, Beginning of Year $ 9.88 $ 9.78 $ 9.98
- --------------------------------------------------------------------------------
Income From Operations:
Net investment income 0.56 0.46 0.37
Net realized and unrealized gain (loss) (0.06) 0.10 (0.19)
- --------------------------------------------------------------------------------
Total Income From Operations 0.50 0.56 0.18
- --------------------------------------------------------------------------------
Less Distributions:
Net investment income (0.56) (0.45) (0.37)
Overdistribution of net investment income -- (0.00)* (0.01)
Net realized gains -- (0.01) --
- --------------------------------------------------------------------------------
Total Distributions (0.56) (0.46) (0.38)
- --------------------------------------------------------------------------------
Net Asset Value, End of year $ 9.82 $ 9.88 $ 9.78
- --------------------------------------------------------------------------------
Total Return++ 5.27% 5.93% 1.83%
================================================================================
Net Assets, End of Year (000s) $ 34 $ 2 $ 113
- --------------------------------------------------------------------------------
Ratio to Average Net Assets:
Expenses (3) 1.59% 1.59% 1.55%+
Net investment income 5.66 4.95 3.69+
- --------------------------------------------------------------------------------
Portfolio Turnover Rate 273% 524% 525%
================================================================================
(1) 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.
(2) The Fund commenced selling Class C shares on June 2, 1993.
(3) For the year ended May 31, 1995 and the period ended May 31, 1994, the
annualized expense ratios were calculated excluding interest expense. The
ratios including interest expense were 2.46% and 2.34%, respectively.
* Amount represents less than $0.01 per share.
** Effective November 7, 1994, Class D shares were reclassified as Class C
shares.
++ Total return represents the aggregate total return for the period indicated
and does not reflect any applicable sales charge.
+ Annualized.
12
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies
- --------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
The investment objectives of the Fund are to seek to provide high current
income and to limit the degree of fluctuation of its net asset value resulting
from movements in interest rates. These investment objectives may not be changed
without the approval of the holders of a majority of the Fund's outstanding
shares. No assurance can be given that the Fund will be able to achieve its
investment objectives.
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
13
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
of the Fund's assets, such as the time to the next coupon reset date for the
securities, the payment characteristics of the securities and the dollar
weighted average life of the securities. The Fund expects that under normal
circumstances the dollar weighted average life (or period until the next reset
date) of its portfolio securities will be approximately two years.
ADJUSTABLE RATE SECURITIES
Adjustable Rate Securities are instruments that bear interest at rates that
adjust at periodic intervals at a fixed amount (typically referred to as a
"spread") over the market levels of interest rates as reflected in specified
indexes. The Adjustable Rate Securities in which the Fund will invest will
consist primarily of MBSs and ABSs. MBSs are securities that directly or
indirectly represent an interest in, or are backed by and are payable from,
mortgage loans secured by real property. ABSs are similar in structure to MBSs,
except that the underlying asset pools consist of credit card, automobile or
other types of receivables, or of commercial loans. MBSs and ABSs are issued in
structured financings through which a sponsor 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
average cap or floor,
14
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
GNMA, FNMA and FHLMC are agencies or instrumentalities of the United States
government, and MBSs issued or guaranteed by them are generally considered to be
of higher quality than privately issued securities rated Aa by Moody's or AA by
S&P. GNMA MBSs are guaranteed by GNMA and consist of pass-through interests in
pools of mortgage loans guaranteed or insured by agencies or instrumentalities
of the United States. FNMA and FHLMC MBSs are issued by FNMA and FHLMC,
respectively, and most often represent pass-through interests in pools of
similarly insured or guaranteed mortgage loans or pools of conventional mortgage
loans or participations in the pools. GNMA, FNMA and FHLMC "pass-through" MBSs
are so named because they represent undivided interests in the underlying
mortgage pools and a proportionate share of both regular interest and principal
payments (net of fees assessed by GNMA, FNMA and FHLMC and any applicable loan
servicing fees), as well as unscheduled early prepayments on the underlying
mortgage pool, are passed through monthly to the holders of the MBSs.
Timely payment of principal and interest on GNMA MBSs is guaranteed by
GNMA, a wholly owned corporate instrumentality of the United States government
within the Department of Housing and Urban Development, which guarantee is
backed by the full faith and credit of the United States government. FNMA, a
federally chartered and privately owned corporation organized and existing under
the Federal National Mortgage Association Charter Act, guarantees timely payment
of principal and interest on FNMA MBSs. FHLMC, a corporate instrumentality of
the United States, guarantees (a) the timely payment of interest on all FHLMC
MBSs, (b) the ultimate collection of principal with respect to some FHLMC MBSs
and (c) the timely payment of principal with respect to other FHLMC MBSs.
Neither the obligations of FNMA nor those of FHLMC are backed by the full faith
and credit of the United States. Nevertheless, because of the relationship of
each of these entities to the United States, MBSs issued by them are generally
considered to be high quality securities with minimal credit risk.
Certain of the MBSs, as well as certain of the ABSs, in which the Fund may
invest will be issued by private issuers. Privately issued MBSs and ABSs may
take a form similar to the pass-through MBSs issued by agencies or
instrumentalities of the United States described above, or may be structured in
a manner similar to the other types of MBSs or ABSs described below. Private
issuers include originators of or investors in mortgage loans and receivables
such as savings and loan associations, savings banks, commercial banks,
investment banks, finance companies and special purpose finance subsidiaries of
these types of institutions.
The credit enhancement provided for certain privately issued MBSs and ABSs
typically takes one of two forms (a) liquidity protection or (b) protection
against
16
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
losses resulting from ultimate default by an obligor on the underlying
assets. Liquidity protection refers to the provision of advances, generally by
the entity administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion. Protection against
losses resulting from default ensures ultimate payment of the obligations on at
least a portion of the assets in the pool. This protection may be provided
through guarantees, insurance policies or letters of credit obtained by the
issuer or sponsor from third parties, through various means of structuring the
transaction or through a combination of these approaches. The degree of credit
support provided for each issue is generally based on historical information
with respect to the level of credit risk associated with the underlying assets.
Delinquencies or losses in excess of those anticipated could adversely affect
the return on an investment in a security. The Fund will not pay any additional
fees for credit support, although the existence of credit support may increase
the price of a security. BlackRock will monitor, on an ongoing basis, the
creditworthiness of the providers of credit enhancement for privately issued
MBSs and ABSs held by the Fund.
Among the specific types of MBSs in which the Fund may invest are ARMs,
which are pass-through mortgage securities collateralized by mortgages with
adjustable rather than fixed rates. ARMs eligible for inclusion in a mortgage
pool generally provide for a fixed initial mortgage interest rate for either the
first three, six, 12, 13, 36 or 60 scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.
The Fund may invest in MBSs taking the form of collateralized mortgage
obligations ("CMOs"), which are debt obligations collateralized by mortgage
loans or mortgage pass-through securities. Typically, CMOs are collateralized by
GNMA, FNMA or FHLMC certificates, but also may be collateralized by whole loans
or private mortgage pass-through securities (this collateral being referred to
collectively in this Prospectus as "Mortgage Assets"). Multi-class pass-through
securities are equity interests in a trust composed of Mortgage Assets. Payments
of principal of and interest on the Mortgage Assets, and any reinvestment income
on the Mortgage Assets, provide the funds to pay debt service on the CMOs or
make scheduled distributions on the multi-class pass-through securities. CMOs
may be issued by agencies or instrumentalities of the United States government,
or by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of these types of institutions.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or
17
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
interest and most of the principal from the underlying assets, and the other
class (the interest-only or "IO" class) receiving most of the interest and the
remainder of the principal. In the most extreme case, the IO class receives all
of the interest, while the PO class receives all of the principal. Although the
Fund may purchase securities of a PO class, it is more likely to purchase the
securities of an IO class.
Although IO class SMBSs individually have greater market volatility than
Adjustable Rate Securities, the Fund will seek to combine investments in IOs
with other investments that have offsetting price patterns. The value of IOs
varies with a direct correlation to changes in interest rates, whereas the value
of fixed rate MBSs, like that of other fixed rate debt securities, varies
inversely with interest rate fluctuations. Therefore, active management of IOs
in combination with fixed rate MBSs is intended to add incremental yield from
changes in market rates while not materially increasing the volatility of the
Fund's net asset value.
The yield to maturity of an IO class is extremely sensitive to the rate of
principal payments (including prepayments) on the related underlying assets, and
a rapid rate of principal payments in excess of that considered in pricing the
securities will have a material adverse effect on an IO security's yield to
maturity. If the underlying mortgage assets experience greater than anticipated
payments of principal, the Fund may fail to recoup fully its initial investment
in IOs. The sensitivity of an IO that represents the interest portion of a
particular class as opposed to the interest portion of an entire pool to
interest rate fluctuations may be increased because of the characteristics of
the principal portion to which they relate.
Corporate Debt Securities. The Fund may purchase corporate debt securities
rated Aa by Moody's or AA by S&P, or, if unrated, deemed to be of comparable
credit quality by BlackRock. These debt securities may have adjustable or fixed
rates of interest and in certain instances may be secured by assets of the
issuer. Adjustable rate corporate debt securities may have features similar to
those of adjustable rate MBSs, but corporate debt securities, unlike MBSs, are
not subject to prepayment risk other than through contractual call provisions
that generally impose a penalty for prepayment. Fixed rate debt securities may
also be subject to call provisions.
Foreign Securities. The Fund may invest up to 10% of its total assets in
U.S. dollar-denominated foreign securities, including MBSs and ABSs issued by
foreign entities, although under current market conditions the Fund does not
expect to invest in foreign securities.
Investments in foreign securities involve certain risks not ordinarily
associated with investments in securities of domestic issuers. These risks
include fluctuations
20
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
in foreign exchange rates, future political and economic developments, and the
possible imposition of exchange controls or other foreign governmental laws or
restrictions.
Municipal Obligations. The Fund may invest up to 5% of its total assets in
obligations issued by state and local governments, political subdivisions,
agencies and public authorities ("Municipal Obligations"). Any Municipal
Obligation that depends directly or indirectly on the credit of the United
States government will be considered by BlackRock to have the highest rating by
Moody's and S&P.
Zero Coupon Securities. The Fund may purchase zero coupon securities when
yields on those securities are attractive, to enhance portfolio liquidity or for
a combination of both of these purposes. Zero coupon securities are debt
obligations that are issued or purchased at a significant discount from face
value. The discount approximates the total amount of interest the security will
accrue and compound over the period until maturity or the particular interest
payment date at a rate of interest reflecting the market rate of the securities
at the time of issuance or purchase. Zero coupon securities, which do not
require the periodic payment of interest, benefit the issuer by mitigating its
need for cash to meet debt service, but also require a higher rate of return to
attract investors who are willing to defer receipt of cash. These investments
may experience greater volatility in market value than fixed income securities
that make regular payments of interest. The Fund may invest in zero coupon
securities issued by the United States Treasury as component parts of Treasury
Bonds that represent scheduled interest and principal payments on the bonds. The
Fund will accrue income on zero coupon securities it holds for tax and
accounting purposes, which income is distributable to shareholders and which,
because no cash is received at the time of accrual, may require the liquidation
of portfolio securities to satisfy the Fund's distribution obligations.
Money Market Instruments. Money market instruments in which the Fund may
invest are limited to: U.S. government securities; bank obligations (including
certificates of deposit, time deposits and bankers' acceptances of domestic or
foreign banks, domestic savings and loan associations and other banking
institutions having total assets in excess of $500 million); commercial paper
rated no lower than Prime-1 by Moody's or A-1 by S&P or the equivalent from
another nationally-recognized rating agency, or, if unrated, of an issuer having
an outstanding, unsecured debt issue then rated within the highest rating
category; and repurchase agreements, as more fully described below. U.S.
government securities in which the Fund may invest include: direct obligations
of the United States Treasury and obligations issued or guaranteed by U.S.
agencies and instrumentalities, including instruments that are supported by the
full faith and credit of the
21
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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 SBMFM 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
22
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
dealers on the Federal Reserve Bank of New York's list of reporting dealers. A
repurchase agreement is a contract under which the buyer of a security
simultaneously commits to resell the security to the seller at an agreed-upon
price on an agreed-upon date. Under the terms of a typical repurchase agreement,
the Fund would acquire an underlying debt obligation for a relatively short
period subject to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby determining the
yield during the Fund's holding period. This arrangement results in a fixed rate
of return that is not subject to market fluctuations during the Fund's holding
period. Under each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the repurchase
agreement at not less than their repurchase price. 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 SBMFM to ensure that the
value is at least equal at all times to the total amount of the repurchase
obligation, including interest. BlackRock or SBMFM 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. government securities or other liquid
high grade
23
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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 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
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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 an amount of cash, U.S. government
securities or other liquid high grade debt obligations equal to the difference,
if any, between (a) the market value of the securities sold at the time they
were sold short and (b) any cash or U.S. government securities deposited as
collateral with the broker in connection with the short sale (not including the
proceeds of the short sale). Until it replaces the borrowed securities, the Fund
will maintain the segregated account daily at a level such that the amount
deposited in the account plus the amount deposited with the broker (not
including the proceeds from the short sale) will equal the current market value
of the securities sold short and will not be less than the market value of the
securities at the time they were sold short.
The Fund will not enter into a short sale of securities if, as a result of
the sale, the total market value of all securities sold short by the Fund would
exceed 25% of the value of the Fund's assets. In addition, the Fund may not (a)
sell short the securities of any single issuer listed on a national securities
exchange to the extent of more than 2% of the value of the Fund's net assets or
(b) sell short the securities of any class of an issuer to the extent of more
than 2% of the outstanding securities of the class at the time of the
transaction. The extent to which the Fund may engage in short sales may be
further limited by the Fund's meeting the requirements for qualification as a
regulated investment company imposed under the Code, which requirements are
described below under, "Dividends, Distributions and Taxes."
The Fund may make short sales "against the box" without complying with the
limitations described above. In a short sale against the box transaction, the
Fund, at the time of the sale, owns or has the immediate and unconditional right
to acquire at no additional cost the identical security sold.
Lending of Portfolio Securities. To generate income, the Fund may lend
portfolio securities to brokers, dealers and other financial organizations.
These loans, if and when made, may not exceed 30% of the Fund's assets taken at
value.
25
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Smith Barney
Adjustable Rate Government Income Fund
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Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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 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
in
26
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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.
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 1/43% 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 1/43% 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
29
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
as ordinary income. BlackRock will consider remaining maturities or estimated
average lives of MBSs and ABSs in selecting them for the Fund.
ABSs may present certain risks not relevant to MBSs. Although ABSs are a
growing sector of the financial markets, they are relatively new instruments and
may be subject to a greater risk of default during periods of economic downturn
than MBSs. In addition, assets underlying ABSs such as credit card receivables
are generally unsecured, and debtors are entitled to the protection of various
state and federal consumer protection laws, some of which provide a right of
set-off that may reduce the balance owed. Finally, the market for ABS may not be
as liquid as that for MBSs.
The interest rate reset features of Adjustable Rate Securities held by the
Fund will reduce the effect on the net asset value of Fund shares caused by
changes in market interest rates. The market value of Adjustable Rate Securities
and, therefore, the Fund's net asset value, however, may vary to the extent that
the current interest rate on the securities differs from market interest rates
during periods between interest reset dates. These variations in value occur
inversely to changes in market interest rates. As a result, if market interest
rates rise above the current rate on the securities, the value of the securities
will decrease; conversely, if market interest rates fall below the current rate
on the securities, the value of the securities will rise. If investors in the
Fund sold their shares during periods of rising rates before an adjustment
occurred, those investors could suffer some loss. The longer the adjustment
intervals on Adjustable Rate Securities held by the Fund, the greater the
potential for fluctuations in the Fund's net asset value.
Investors in the Fund will receive increased income as a result of upward
adjustments of the interest rates on Adjustable Rate Securities held by the Fund
in response to market interest rates. The Fund and its shareholders will not
benefit, however, from increases in market interest rates once those rates rise
to the point at which they cause the rates on the Adjustable Rate Securities to
reach their maximum adjustment rate, annual or lifetime caps. Because of their
interest rate adjustment feature, Adjustable Rate Securities are not an
effective means of "locking-in" attractive rates for periods in excess of the
adjustment period. In addition, mortgagors on loans underlying MBSs with respect
to which the underlying mortgage assets carry no agency or instrumentality
guarantee are often qualified for the loans on the basis of the original payment
amounts; the mortgagor's income may not be sufficient to enable it to continue
making its loan payments as the payments increase, resulting in a greater
likelihood of default.
Any benefits to the Fund and its shareholders from an increase in the
Fund's net asset value caused by declining market interest rates is reduced by
the potential
30
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
for increased prepayments and a decline in the interest rates paid on Adjustable
Rate Securities held by the Fund. When market rates decline significantly, the
prepayment rate on Adjustable Rate Securities is likely to increase as borrowers
refinance with fixed rate mortgage loans, thereby decreasing the capital
appreciation potential of Adjustable Rate Securities. As a result, the Fund
should not be viewed as consistent with an objective of seeking capital
appreciation.
Options and Futures Markets. Participation in the options or futures
markets involves investment risks and transaction costs to which the Fund would
not be subject absent the use of these strategies. If BlackRock's predictions of
movements in the direction of the securities and interest rate markets are not
accurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if options or futures strategies were not used. Risks inherent in
the use of options, futures contracts and options on futures contracts include:
(a) dependence on BlackRock's ability to predict correctly movements in the
direction of interest rates and securities prices; (b) imperfect correlation
between the price of options and futures contracts and options on futures
contracts and movements in the prices of the securities being hedged; and (c)
the skills needed to use these strategies being different from those needed to
select portfolio securities. In addition, positions in futures contracts and
options on futures contracts may be closed out only on the exchange or board of
trade on which they were entered into, and no assurance can be given that an
active market will exist for a particular contract or option at a particular
time.
Lending Portfolio Securities. In lending securities to brokers, dealers and
other financial organizations, the Fund will be subject to risks, which, like
those associated with other extensions of credit, include the possible loss of
rights in the collateral should the borrower fail financially.
Repurchase and Reverse Repurchase Agreements. In entering into a repurchase
agreement, the Fund bears a risk of loss in the event that the other party to
the transaction defaults on its obligations and the Fund is delayed or prevented
from exercising its rights to dispose of the underlying securities, including
the risk of a possible decline in the value of the underlying securities during
the period in which the Fund seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of losing
all or a part of the income from the agreement.
A reverse repurchase agreement involves the risk that the market value of
the securities retained by the Fund may decline below the price of the
securities the Fund has sold but is obligated to repurchase under the agreement.
In the event the
31
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
buyer of securities under a reverse repurchase agreement files for bankruptcy or
becomes insolvent, the Fund's use of the proceeds of the agreement may be
restricted pending a determination by the party, or its trustee or receiver,
whether to enforce the Fund's obligation to repurchase the securities.
When-Issued and Delayed Delivery Transactions. Securities purchased on a
when-issued or delayed delivery basis may expose the Fund to risk because the
securities may experience fluctuations in value prior to their delivery.
Purchasing when-issued or delayed delivery securities can involve the additional
risk that the yield available in the market when the delivery takes place may be
higher than that obtained in the transaction itself.
Short Sales. If the price of the security sold short increases between the
time of the short sale and the time the Fund replaces the borrowed security, the
Fund will incur a loss; conversely, if the price declines, the Fund will realize
a capital gain. Although the Fund's gain is limited to the price at which it
sold the security short, its potential loss is theoretically unlimited.
Borrowing. If the Fund borrows to invest in securities, any investment
gains made on the securities in excess of interest paid on the borrowing will
cause the net asset value of the Fund's shares to rise faster than would
otherwise be the case. On the other hand, if the investment performance of the
additional securities purchased fails to cover their costs (including any
interest paid on the money borrowed) to the Fund, the net asset value of the
Fund's shares will decrease faster than would otherwise be the case. This is the
speculative characteristic known as "leverage."
PORTFOLIO TRANSACTIONS AND TURNOVER
The Fund's portfolio securities ordinarily are purchased from and sold to
parties acting as either principal or agent. Newly issued securities ordinarily
are purchased directly from the issuer or from an underwriter; other purchases
and sales usually are placed with those dealers from which it appears that the
best price or execution will be obtained. Usually no brokerage commissions, as
such, are paid by the Fund for purchases and sales undertaken through principal
transactions, although the price paid usually includes an undisclosed
compensation to the dealer acting as agent. The prices paid to underwriters of
newly issued securities usually include a concession paid by the issuer to the
underwriter, and purchases of after-market securities from dealers ordinarily
are executed at a price between the bid and asked price.
Transactions on behalf of the Fund are allocated to various dealers by
BlackRock in its best judgment. The primary consideration is prompt and
effective execution of orders at the most favorable price. Subject to that
primary consideration, dealers may be selected for research, statistical or
other services to
32
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Investment Objectives and Management Policies (continued)
- --------------------------------------------------------------------------------
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
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Smith Barney
Adjustable Rate Government Income Fund
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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, subject to no sales charge or CDSC.
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. A
shareholder whose account is held directly by First Data should notify First
Data 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
34
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Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Dividends, Distributions and Taxes (continued)
- --------------------------------------------------------------------------------
ordinary income. The Fund's dividends will not qualify for the dividends
received deduction for corporations. Distributions out 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
liability.
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 (except for purchases of Class Y shares by Smith Barney Concert
Series Inc., for which there is no minimum purchase amount). See "Prospectus
Summary -- Alternative Purchase Arrangements" for a discussion of factors to
consider in selecting which class of shares to purchase.
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. In addition, certain investors may purchase shares
directly from the Fund through First Data. 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.
35
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 $25 for monthly purchases and $50 for
quarterly purchases. There are no minimum investment requirements for Class A
shares for employees of Travelers and its subsidiaries, including Smith Barney,
and Directors or Trustees of any of the Smith Barney Mutual Funds and their
spouses and children. The Fund reserves the right to waive or change minimums,
to decline any order to purchase its shares and to suspend the offering of
shares from time to time. Employees of members of the National Association of
Securities Dealers, Inc. may purchase Class A shares of the Fund at net asset
value. Shares purchased will be held in the shareholder's account by the Fund's
transfer agent, First Data Investor Services Group, Inc. ("First Data"). Share
certificates are issued only upon a shareholder's written request to First Data.
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 (the "trade
date"). 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"). For shares purchased through Smith Barney or
Introducing Brokers purchasing through Smith Barney, payment for Fund shares is
due on the third business day (the "settlement date") after the trade date. In
all other cases, payment must be made with the purchase order.
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 First Data is authorized
through preauthorized transfers 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. For shareholders purchasing Class A shares of the Fund through the
Systematic Investment Plan on a monthly basis, the minimum initial investment
requirement and the minimum subsequent investment requirement is $25. For
shareholders purchasing Class A shares of the Fund through the Systematic
Investment Plan on
36
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
a quarterly basis, the minimum initial investment requirement and the minimum
subsequent investment requirement is $50. A shareholder who has insufficient
funds to complete the transfer will be charged a fee of up to $25 by Smith
Barney or First Data. The Systematic Investment Plan also authorizes Smith
Barney to apply cash held in the shareholder's Smith Barney brokerage account or
redeem the shareholder's shares of a Smith Barney money market fund to make
additions to the account. Additional information is available from the Fund or a
Smith Barney Financial Consultant.
CLASS B CONVERSION FEATURE
Class B shares will convert automatically to Class A shares eight years
after the date on which they were originally purchased. There will also be
converted at that time such proportion of Class B Dividend Shares owned by the
shareholder as the total number of his or her Class B shares converting at the
time bears to the total number of outstanding Class B shares (other than Class B
Dividend Shares) owned by the shareholder. Shareholders who held Class B shares
of Smith Barney Shearson Short-Term World Income Fund (the "Short-Term World
Income Fund") on July 15, 1994 and who subsequently exchanged those shares for
Class B shares of the Fund will be offered the opportunity to exchange all such
Class B shares for Class A shares of the Fund four years after the date on which
those shares were deemed to have been purchased. Holders of such Class B shares
will be notified of the pending exchange in writing approximately 30 days before
the fourth anniversary of the purchase date and, unless the exchange has been
rejected in writing, the exchange will occur on or about the fourth anniversary
date. See "Prospectus Summary -- Alternative Purchase Arrangements -- Class B
Shares Conversion Feature."
The length of time that CDSC Shares acquired through an exchange have been
held will be calculated from the date that the shares exchanged were initially
acquired in one of the other Smith Barney Mutual Funds, and Fund shares being
redeemed will be considered to represent, as applicable, capital appreciation or
dividend and capital gain distribution reinvestments in such other funds. For
Federal income tax purposes, the amount of any CDSC will reduce the gain or
increase the loss, as the case may be, on the amount realized on redemption. The
amount of any CDSC will be paid to Smith Barney.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange Privilege"); (b)
automatic cash withdrawals in amounts equal to or less than 1.00% per month of
37
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 First Data in
the case of all other shareholders) of the shareholder's status or holdings, as
the case may be.
SMITH BARNEY 401(K) AND EXECCHOICE(TM) PROGRAMS
Investors may be eligible to participate in the Smith Barney 401(k) Program
or the Smith Barney ExecChoice(TM) Program. To the extent applicable, the
following terms and conditions, which are outlined below, are offered to all
plans participating ("Participating Plans") in these programs.
The Fund offers to Participating Plans Class A shares as an investment
choice under the Smith Barney 401(k) and ExecChoice(TM) Programs, provided the
Participating Plan makes an initial investment of $1,000,000 or more of Class A
shares of one or more funds of the Smith Barney Mutual Funds. Class A shares
acquired through the Participating Plans are subject to the same service and/or
distribution fees as the Class A shares acquired by other investors; however,
they are not subject to any initial sales charge or contingent deferred sales
charge ("CDSC").
Existing 401(k) Plans Investing in Class B Shares. Class B shares of the
Smith Barney Mutual Funds are not available for purchase by 401(k) Participating
Plans opened on or after June 21, 1996, but may continue to be purchased by any
Participating Plan opened prior to such date and originally investing in such
Class. Class B shares acquired 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.
At the end of the eighth year 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
Participating Plans will be notified of the pending exchange in writing
approximately 60 days before the
38
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
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 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" in the Fund's
prospectus.
No CDSC is imposed on redemptions of Class B 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 the current net asset value of Class B shares purchased more
than eight years prior to the redemption, plus 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 the redemption by 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 redemptions by other shareholders, which depends on
the number of years since those shareholders made the purchase payment from
which the amount is being redeemed.
The CDSC will be waived on redemptions of Class B shares in connection with
lump-sum or other distributions made by a Participating Plan as a result of: (a)
the retirement of an employee in the Participating Plan; (b) the termination of
employment of an employee in the Participating Plan; (c) the death or disability
of an employee in the Participating Plan; (d) the attainment of age 59 1/2 by
an employee in the Participating Plan; (e) hardship 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.
Existing 401(k) Plans investing in Class C shares. Class C shares of the
Fund are not available for purchase by 401(k) Participating Plans opened on or
after June 21, 1996, but may continue to be purchased by any Participating Plan
opened prior to such date and originally investing in such Class. Class C shares
acquired are not subject to any sales charge or CDSC.
In any year after the date a Participating Plan enrolled in the Smith
Barney 401(k) Program, if its total Class C holdings in all non-money market
Smith Barney Mutual Funds 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 Participating Plans will be
notified in writing within 30 days after the last business day of the calendar
year and, unless the
39
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Purchase of Shares (continued)
- --------------------------------------------------------------------------------
exchange offer has been rejected in writing, the exchange will occur on or about
the last business day of the following March.
Any Participating Plan that has not previously qualified for an exchange
into Class A shares will be offered the opportunity to exchange all of its Class
C shares for Class A shares of the Fund, regardless of asset size, at the end of
the eighth year after the date the Participating Plan enrolled in the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program. Such
Participating 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 an exchange has occurred, a
Participating Plan will not be eligible to acquire additional Class C shares of
the Fund but instead may acquire Class A shares of the Fund. Any Class C shares
not converted will continue to be subject to the distribution fee.
Participating Plans wishing to acquire shares of the Fund through the Smith
Barney 401(k) Program or the Smith Barney ExecChoice(TM) Program must purchase
such shares directly from First Data. For further information regarding these
Programs, investors should contact a Smith Barney Financial Consultant.
- --------------------------------------------------------------------------------
Exchange Privilege
- --------------------------------------------------------------------------------
Except as otherwise noted below, shares of each Class may be exchanged at
the net asset value next determined for shares of the same Class in the
following funds of the Smith Barney Mutual Funds, to the extent shares are
offered for sale in the shareholder's state of residence. Exchanges of Class A,
Class B and Class C shares are subject to minimum investment requirements and
all shares are subject to the other requirements of the fund into which
exchanges are made and a sales charge differential may apply.
Fund Name
- --------------------------------------------------------------------------------
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
40
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. -- Equity Income 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. -- 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 Intermediate Maturity California Municipals Fund
* Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
* 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 -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
41
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Series Inc.
Smith Barney Concert Series Inc. -- High Growth Portfolio
Smith Barney Concert Series Inc. -- Growth Portfolio
Smith Barney Concert Series Inc. -- Balanced Portfolio
Smith Barney Concert Series Inc. -- Conservative Portfolio
Smith Barney Concert Series Inc. -- Income Portfolio
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, except in the case of the Smith Barney 401(k)
Program and ExecChoice(TM) Programs, 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
42
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Exchange Privilege (continued)
- --------------------------------------------------------------------------------
15, 1994) wishes to exchange all or a portion of his or her shares in any of the
funds imposing a higher CDSC than that imposed by the Fund, the exchanged Class
B shares will be subject to the higher applicable CDSC. Upon an exchange, the
new Class B shares will be deemed to have been purchased on the same date as the
Class B shares of the Fund that have been exchanged.
Class C Exchanges. Upon an exchange, the new Class C shares will be deemed
to have been purchased on the same date as the Class C shares of the Fund that
have been exchanged.
Class Y Exchanges. Class Y shareholders of the Fund who wish to exchange
all or a portion of their Class Y shares for Class Y shares in any of the funds
identified above may do so without imposition of any charge.
Additional Information Regarding the Exchange Privilege. Although the
exchange privilege is an important benefit, excessive exchange transactions can
be detrimental to the Fund's performance and its shareholders. 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, the Fund 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.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares -- Telephone Redemption Exchange Program".
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 First Data receives
further instructions from Smith Barney, or if the shareholder's account is not
with Smith Barney, from the shareholder directly. The redemption proceeds will
be remitted on or before the third day following receipt of proper tender,
except on any days on which the NYSE is closed or as permitted under the 1940
Act in extraordinary circumstances. Generally, if the redemption proceeds are
remitted to a Smith Barney brokerage account, these funds will not be invested
for the shareholder's benefit without specific instruction and Smith Barney will
benefit from the use of temporarily uninvested funds. Redemption proceeds for
shares purchased by check, other than a certified or official bank check, will
be remitted upon clearance of the check, which may take up to ten days or more.
Shares held by Smith Barney as custodian must be redeemed by submitting a
written request to a Smith Barney Financial Consultant. Shares other than those
held by Smith Barney as custodian may be redeemed through an investor's
Financial Consultant, Introducing Broker or dealer in the selling group or by
submitting a written request for redemption to:
Smith Barney Adjustable Rate Government Income Fund
Class A, B, C or Y (please specify)
c/o First Data Investor 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 First Data together with the redemption request. Any
signature appearing on a redemption request in excess of $2,000 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
44
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
firm of a national securities exchange. Written redemption requests of $2,000 or
less do not require a signature guarantee unless more than one such redemption
request is made in any 10-day period. Redemption proceeds will be mailed to an
investor's address of record.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Fund shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should contact
First Data at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form, along with a
signature guarantee that will be provided by First Data upon request.
(Alternatively, an investor may authorize telephone redemptions on the new
account application with the applicant's signature guarantee when making his/her
initial investment to the Fund.)
Redemptions. Redemption requests of up to $10,000 of any class or classes
of the Fund's shares may be made by eligible shareholders by calling First Data
at 1-800-451-2010. Such requests may be made between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day the NYSE is open. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset value
next determined. Redemption of shares (i) by retirement plans or (ii) for which
certificates have been issued are not permitted under this program.
A shareholder will have the option of having the redemption proceeds mailed
to his/her address of record or wired to a bank account predesignated by the
shareholder. Generally, redemption proceeds will be mailed or wired, as the case
may be, on the next business day following the redemption request. In order to
use the wire procedures, the bank receiving the proceeds must be a member of the
Federal Reserve System or have a correspondent with a member bank. The fund
reserves the right to charge shareholders a nominal fee for each wire
redemption. Such charges, if any, will be assessed against the shareholder's
account from which shares were redeemed. In order to change the bank account
designated to receive redemption proceeds, a shareholder must complete a new
Telephone/Wire Authorization Form and, for the protection of the shareholder's
assets, will be required to provide a signature guarantee and certain other
documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration from the Fund being acquired is identical to the
registration of the shares of the Fund exchanged. Such exchange request may be
made by calling First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York time) on
45
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
any day on which the NYSE is open. Exchange requests received after the close of
regular trading on the NYSE are processed at the net asset value next
determined.
Additional Information regarding Telephone Redemption and Exchange Program.
Neither the Fund nor its agents will be liable for following instructions
communicated by telephone that are reasonably believed to be genuine. The Fund
and its agents will employ procedures designed to verify the identity of the
caller and legitimacy of instructions (for example, a shareholder's name and
account number will be required and phone calls may be recorded). The Fund
reserves the right to suspend, modify or discontinue the telephone redemption
and exchange program or impose a charge for this service at any time following
at least seven (7) days' prior notice to shareholders.
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
46
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Redemption of Shares (continued)
- --------------------------------------------------------------------------------
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.
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
began on 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 redemptions 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 and ExecChoice(TM)
Programs."
47
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Minimum Account Size
- --------------------------------------------------------------------------------
The Fund reserves the right to involuntarily liquidate any shareholder's
account if the aggregate net asset value of the shares held in the Fund 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 automatic
liquidation.
- --------------------------------------------------------------------------------
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
48
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Performance (continued)
- --------------------------------------------------------------------------------
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,
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 June 30, 1996,
in excess of $3.110 billion. For the fiscal year ended May 31, 1996, Strategy
Advisers earned fees in an amount equal to .20% of the Fund's average daily
net assets.
SUB-INVESTMENT ADVISER -- BLACKROCK
Under the terms of the sub-investment advisory agreement among Strategy
49
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
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 April 30, 1996, had combined total assets in excess of $4 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
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, 1996, 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 -- SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013 serves as
the Fund's administrator. As the Fund's administrator, SBMFM calculates the net
asset value of the Fund's shares and generally assists in all aspects of the
Fund's
50
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Management of the Fund (continued)
- --------------------------------------------------------------------------------
administration and operation. SBMFM provides investment management,
investment advisory and/or administrative services to investment companies that
had aggregate assets under management, as of June 30, 1996, in excess of $70
billion. SBMFM receives a fee for services provided to the Fund that is accrued
daily and paid monthly at the annual rate of .20% of the value of the Fund's
average daily net assets.
- --------------------------------------------------------------------------------
Distributor
- --------------------------------------------------------------------------------
Smith Barney is located at 388 Greenwich Street, New York, New York 10013.
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 and/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.
51
<PAGE>
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 for 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, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania,
19103, serves as custodian of the Fund's investments.
First Data, 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
securities held by the
52
<PAGE>
Smith Barney
Adjustable Rate Government Income Fund
- --------------------------------------------------------------------------------
Additional Information (continued)
- --------------------------------------------------------------------------------
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.
53
<PAGE>
SMITH BARNEY
------------
A Member of TravelersGroup[Logo]
Smith Barney
Adjustable Rate
Government
Income Fund
388 Greenwich Street
New York, New York 10013
(212) 723-9218
FD 0249 9/96
[/R]
Smith Barney
Adjustable Rate Government Income Fund
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
September 30, 1996
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
September 30, 1996, 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.
TABLE OF 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................................................................
..........
5
Purchase of
Shares..................................................................
....................................................
17
Redemption of
Shares..................................................................
................................................
17
Distributor.............................................................
.....................................................................
18
Valuation of
Shares..................................................................
...................................................
19
Exchange
Privilege...............................................................
.......................................................
19
Performance Data (See in the Prospectus "The Fund's
Performance")...........................................
20
Taxes (See in the Prospectus "Dividends, Distributions and
Taxes").............................................
22
Custodian and Transfer Agent (See in the Prospectus "Additional
Information")...........................
23
Organization of the Fund (See in the Prospectus "Additional
Information")...................................
23
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.
("SBMFM")...............................................................
......................
Administrator
PNC Bank, National Association
("PNC")...........................................
Custodian
First Data Investor Services Group, Inc. ("First
Data")........................
Transfer Agent
These organizations and the functions they perform for the Fund are
discussed in the Prospectus and 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 (Age 79). Consultant; formerly Chairman of
the Board of ASARCO
Incorporated. His address is 66 Glenwood Drive, Greenwich, Connecticut
06830.
Allan J. Bloostein, Trustee (Age 66). Consultant; formerly Vice
Chairman of the Board of the 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 (Age 75). 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 (Age 58). Professor, Graduate School of
Business Administration, Harvard
University. His address is Harvard Business School, Soldiers Field
Road, Boston, Massachusetts 02163.
Robert A. Frankel, Trustee (Age 69). Managing Partner of Robert A.
Frankel Management Consultants.
Former Vice President of the Reader's Digest Association, Inc. His
address is Grand Street, Croton-on-
Hudson, New York 10520
William R. Hutchinson, Director (Age 53). Vice President, Financial
Operations of Amoco Corp.;
Director of Associated Banks and Associated Bank Corp. His address is
132 East Delaware Place, Apt.
#5705 Chicago, Illinois 60611.
*Heath B. McLendon, Chairman of the Board and Chief Executive Officer
(Age 63). Managing Director
of Smith Barney, Chairman of the Board of Smith Barney Strategy Advisers
Inc. and President of
SBMFM; prior to July 1993, Senior Executive Vice President of Shearson
Lehman Brothers Inc.
("Shearson Lehman Brothers"); Vice Chairman of Asset Management Division
of Shearson Lehman
Brothers; a Director of PanAgora Asset Management, Inc. and PanAgora
Asset Management Limited. His
address is 388 Greenwich Street, New York, New York 10013.
Scott M. Amero, (Age 33) Portfolio Manager. Vice President of BlackRock
Financial Management. His
address is 345 Park Avenue, New York, New York 10154.
Keith T. Anderson, (Age 37) Portfolio Manager. Managing Director of
BlackRock Financial Management.
His address is 345 Park Avenue, New York, New York 10154.
Robert S. Kapito, (Age 39) Portfolio Manager. Vice Chairman of
BlackRock Financial Management. His
address is 345 Park Avenue, New York, New York 10154.
Jessica M. Bibliowicz, President (Age 36). Executive Vice President of
Smith Barney; prior to 1994,
Director of Sales and Marketing for Prudential Mutual Funds; prior to
1990, First Vice President, Asset
Management Division of Shearson Lehman Brothers. Ms. Bibliowicz serves
as President of 39 Smith
Barney Mutual Funds. Her address is 388 Greenwich Street, New York, New
York 10013.
Lewis D. Daidone, Senior Vice President and Treasurer (Age 38).
Managing Director of Smith Barney;
Director and Senior Vice President of SBMFM. Mr. Daidone also serves as
Senior Vice President and
Treasurer of 41 funds of Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York
New York 10013.
Christina T. Sydor, (Age 45) Secretary. Managing Director of Smith
Barney; General Counsel and
Secretary of SBMFM. Ms. Sydor also serves as Secretary of 41 Smith
Barney Mutual Funds. Her
address is 388 Greenwich Street, New York, New York 10013.
As of August 31, 1996, 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 SBMFM 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, SBMFM, 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, 1996 such
fees and expenses totaled $23,811.25.
TRUSTEE
AGGREGATE
COMPENSATION
FROM THE TRUST
AGGREGATE
COMPENSATION
FROM SMITH
BARNEY FUNDS
NUMBER OF
DIRECTOR/
TRUSTEESHIPS
HELD WITHIN
FUND COMPLEX
Charles Barber
$3,750
$38,500
6
Allan J. Bloostein
$3,750
$87,600
8
Martin Brody
$3,750
$103,400
21
Dwight Crane
$3,750
$132,050
26
Robert A. Frankel
$3,750
$67,100
7
William R. Hutchinson
$2,625
$28,875
6
Heath B. McLendon
$0
$0
41
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 SBMFM are described in the Prospectus. For the
fiscal years ended May 31,
1994, 1995 and 1996, such fees amounted to $2,277,882, $1,270,032 and
$351,074.07, respectively.
SBMFM, 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 SBMFM, a wholly owned subsidiary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly
owned subsidiary of Travelers Group, Inc. ("Travelers"). 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 SBMFM each pays the salaries of all
officers and employees it employs
who serve the Fund, and Strategy Advisers and SBMFM maintain office
facilities for the Fund. Strategy
Advisers, BlackRock and SBMFM bear all expenses in connection with the
performance of their respective
services under their agreements with the Fund. Strategy Advisers and
SBMFM 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 SBMFM but excluding
interest, taxes, brokerage fees, fees
paid pursuant to the Fund's distribution and shareholder servicing plan
(the "Plan"), and, if permitted by the
relevant state securities commissions, extraordinary expenses) exceed
the expense limitation of any state
having jurisdiction over the Fund, Strategy Advisers and SBMFM will
reduce their fees by the amount of
the excess expenses, the amount to be allocated between them in the
proportion that their respective fees
bear to the aggregate of the fees paid to them by the Fund. 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 STROOK&
STROOCK & LAVAN AS THEIR COUNSEL.
KPMG Peat Marwick LLP, 345 Park Avenue, New York 10154, has been
selected as the Fund's independent auditors to examine and report the
Fund's financial statements and financial highlights for the fiscal year
ending May 31, 1997. Prior to the fiscal year ended May 31, 1995,
Coopers& Lybrand, independent accounts, 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 the 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 net 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 dby an independent bailee, custodian or trustee
on behalf of the holders sof 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 sto 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 the 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
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 institutions 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 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 Boston
Safe. The Fund will not enter into any interest rate swap transaction
unless the credit quality of the
unsecured senior debt or the claims-paying ability of the other party to
the transaction is rated in one of the
highest two rating categories by at least one nationally-recognized
statistical rating organization or is
believed by BlackRock to be equivalent to that rating. If the other
party to the transaction defaults, the
Fund will have contractual remedies pursuant to the agreements
related to the transaction. The swap
market has grown substantially in recent years with a large number of
banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. As a result, the swap
market has become relatively liquid in comparison with other similar
instruments traded in the interbank
market.
The use of interest rate swaps is a highly specialized activity that
involves investment techniques and risks
different from those associated with ordinary portfolio securities
transactions. If BlackRock is incorrect
in its forecasts of market values, interest rates and other applicable
factors, the investment performance of
the Fund would be lower than it would have been if interest rate swaps
were not used.
Interest rate swap transactions do not involve the delivery of
securities or other underlying assets or
principal. As a result, the risk of loss with respect to interest rate
swaps is limited to the net amount of
interest payments that the Fund would be contractually obligated to
make. If the MBS or other security
underlying an interest rate swap were prepaid and the Fund continued
to be obligated to make payments
to the other party to the swap, the Fund would have to make the
payments from another source. If the other
party to an interest rate swap were to default, the Fund's risk of loss
would consist of the net amount of
interest payments that the Fund contractually was entitled to
receive. Since interest rate transactions are
individually negotiated, BlackRock expects to achieve an acceptable
degree of correlation between the
Fund's rights to receive interest on MBSs and its rights and
obligations to receive and pay interest
pursuant to interest rate swaps.
WRITING COVERED OPTIONS. The Fund is authorized to write (that is,
sell) covered call options on
the securities in which it may invest and to enter into closing
purchase transactions with respect to
certain of these options. A covered call option is an option pursuant
to which the Fund, in return for a
premium, gives another party a right to buy specified securities
owned by the Fund at a specified
future date and price set at the time of the contract. The principal
reason for writing call options is to
attempt to realize, through the receipt of premiums, a greater return
than would be realized on the
securities alone. By writing covered call options, the Fund gives up
the opportunity, while the option is
in effect, to profit from any price increase in the underlying
security above the option exercise price.
In addition, the Fund's ability to sell the underlying security will
be limited while the option is in effect
unless the Fund effects a closing purchase transaction. A closing
purchase transaction cancels out the
Fund's position as the writer of an option by means of an offsetting
purchase of an identical option prior to
the expiration of the option it has written. Covered call options serve
as a partial hedge against the price of
the underlying security declining.
The writer of a covered call option has no control over when it may be
required to sell its securities since it
may be assigned an exercise notice at any time prior to the termination
of its obligation as a writer. If an
option expires unexercised, the writer realizes a gain in the amount of
the premium. Such a gain may be
offset by a decline in the market value of the underlying security
during the option period. If a call option
is exercised, the writer realizes a gain or loss from the sale of the
underlying security.
The Fund may write put options that give the holder of the option the
right to sell the underlying security to
the Fund at the stated exercise price. The Fund will receive a premium
for writing a put option, which
increases the Fund's return. The Fund will write only covered put
options, which means that so long as the
Fund is obligated as the writer of the option it will have placed and
maintained cash, U.S. government
securities or other high grade liquid debt obligations with Boston Safe
with a value equal to or greater than
the exercise price of the underlying securities. By writing a put, the
Fund will be obligated to purchase the
underlying security at a price that may be higher than the market value
of that security at the time of
exercise for as long as the option is outstanding. The Fund may
engage in closing transactions to
terminate put options that it has written.
Options purchased or sold by the Fund may include options issued by The
Options Clearing Corporation
(the "Clearing Corporation"), which options are currently traded on the
Chicago Board Options Exchange,
American Stock Exchange, Philadelphia Stock Exchange, Pacific Stock
Exchange, New York Stock
Exchange, Inc. ("NYSE") or Midwest Stock Exchange. An option position
may be closed out only on an
exchange that provides a secondary market for an option of the same
series. If a secondary market does
not exist, it might not be possible to effect closing transactions in
particular options, with the result, in the
case of a covered call option, that the Fund would not be able to
sell the underlying security until the
option expires or the Fund delivered the underlying security upon
exercise. Reasons for the absence of a
liquid secondary market on an exchange include the following: (a)
insufficient trading interest in
certain options may exist; (b) restrictions may be imposed by the
exchange on opening transactions or
closing transactions or both; (c) trading halts, suspensions or other
restrictions may be imposed with
respect to particular classes or series of options or underlying
securities; (d) unusual or unforeseen
circumstances may interrupt normal operations on the exchange; (e) the
facilities of the exchange or the
Clearing Corporation may not at all times be adequate to handle
current trading volume; or (f) the
exchange could, for economic or other reasons, decide to or be compelled
at some future date to discontinue
the trading of options (or a particular class or series of options), in
which event the secondary market on
the exchange (or in that class or series of options) would cease
to exist, although outstanding options
on the exchange that had been issued by the Clearing Corporation
as a result of trades on the exchange
would continue to be exercisable in accordance with their terms.
The Fund may enter into over-the-counter option transactions ("OTC
options"), which are two-party
contracts with prices and terms negotiated between the buyer and seller.
In the absence of a change of
position of the staff of the SEC, the Fund will treat OTC options and
the assets used as cover for written
OTC options as illiquid securities. If an OTC option is sold by the
Fund to a primary U.S. Government
securities dealer recognized by the Federal Reserve Bank of New York
and the Fund has the conditional
contractual right to repurchase the OTC option from the dealer at the
predetermined price, then the Fund
will treat as illiquid the amount of the underlying securities as is
equal to the repurchase price less the
amount by which the option is "in-the-money" (that is, the current
market value of the underlying
security minus the option's strike price). The repurchase price
with the primary dealers is typically a
formula price that is generally based on a multiple of the premium
received for the option, plus the
amount by which the option is "in-the-money."
PURCHASING OPTIONS. The Fund may purchase put options to hedge
against a decline in the
market value of its holdings. By buying a put, the Fund has a right
to sell the underlying security at the
exercise price, thus limiting the Fund's risk of loss through a
decline in the market value of the security
until the put option expires. The amount of any appreciation in the
value of the underlying security will
be offset partially by the amount of the premium paid for the put
option and any related transaction costs.
Prior to its expiration, a put option may be sold in a closing sale
transaction and profit or loss from the sale
will depend on whether the amount received is more or less than the
premium paid for the put option plus
the related transaction costs. A closing sale transaction cancels out
the Fund's expiration of the option it
has purchased. In certain circumstances, the Fund may purchase call
options on securities held in its
portfolio on which it has written call options or that it intends
to purchase. The Fund may purchase
either exchange-traded or OTC options.
FUTURES AND FINANCIAL FUTURES. As described in the Prospectus, the
Fund is authorized to
engage in transactions in financial futures contracts and related
options on these futures contracts. A
futures contract is an agreement between two parties to buy and sell a
security or, in the case of an index-
based futures contract, to make and accept a cash settlement for a set
price on a future date. The Fund may
assume both "long" and "short" positions with respect to futures
contracts. A long position involves
entering into a futures contract to buy a security, whereas a short
position involves entering into a futures
contract to sell a security. A majority of transactions in futures
contracts, however, do not result in the
actual delivery of the underlying instrument or cash settlement,
but are settled through liquidation,
that is, by entering into an offsetting transaction. Futures contracts
have been designed by boards of trade
that have been designated "contracts markets" by the Commodity Futures
Trading Commission.
The purchase or sale of a futures contract, unlike the purchase or sale
of a security, contemplates no price
or premium being paid or received. Instead, an amount of cash or
securities acceptable to the broker and
the relevant contract market, which varies, but is generally about 5%
of the contract amount, must be
deposited with the broker. This amount is known as "initial
margin" and represents a "good faith"
deposit assuring the performance of both the purchaser and seller
under the futures contract. Subsequent
payments to and from the borrower, called "variation margin," are
required to be made daily as the price
of the futures contract fluctuates making the long and short positions
in the futures contracts more or less
valuable, a process known as "marking to the market." At any time
prior to the settlement date of the
futures contract, the position may be closed out by taking an opposite
position that will operate to
terminate the position in the futures contract. A final determination
of variation margin is then made,
additional cash is required to be paid or released by the broker
and the purchaser realizes a loss or
gain. In addition, a nominal commission is paid on each completed sale
transaction.
ADDITIONAL RISK FACTORS IN OPTIONS AND FUTURES TRANSACTIONS
Utilization of futures transactions to hedge the Fund's portfolio will
involve the risk of imperfect
correlation in movements in the prices of futures contracts and
movements in the price of the security
that is the subject of the hedge. If the price of the futures contract
moves more or less than the price of the
security, the Fund will experience a gain or loss that would not be
completely offset by movements in the
price of the security that is the subject of the hedge.
Prior to exercise or expiration, an exchange-traded option position can
only be terminated by entering into
a closing purchase or sale transaction. Such a transaction requires a
secondary market on an exchange for
call or put options of the same series. The Fund will enter into an
option or futures transaction on an
exchange only if a liquid secondary market appears to exist for the
options or futures. No assurance can be
given that a liquid secondary market will exist for any particular
call or put option or futures contract at
any specific time. Thus, it may not be possible to close an option or
futures position. In the case of a
futures position or an option on a futures position written by the Fund,
in the event of adverse price
movements, the Fund would continue to be required to make daily cash
payments of variation margin. In
such situations, if the Fund has insufficient cash, it may have to
sell portfolio securities to meet daily
variation margin requirements at a time when it may be disadvantageous
to do so. In addition, the Fund
may be required to take or make delivery of the currency underlying
futures contracts it holds. The
inability to close options and futures positions also could have an
adverse effect on the Fund's ability
to hedge effectively its portfolio. The risk also exists of a loss by
the Fund of margin deposits in the event
of bankruptcy of a broker with which the Fund has an open position in a
futures contract or related option.
The exchanges on which the Fund intends to conduct options transactions
have generally established
limitations governing the maximum number of call or put options on the
same underlying currency
(whether or not covered) that may be written by a single investor,
whether acting alone or in concert
with others (regardless of whether the options are written on the
same or different exchanges or are
held or written on one or more accounts or through one or more brokers).
"Trading limits" are imposed on
the maximum number of contracts that any person may trade on a
particular trading day. An exchange
may order the liquidation of positions found to be in violation of
these limits and it may impose other
sanctions or restrictions. BlackRock does not believe that these
trading and position limits will have any
adverse effect on the portfolio strategies for hedging the Fund's
portfolio.
RATINGS AS INVESTMENT CRITERIA
In general, the ratings of Moody's Investors Service, Inc. ("Moody's")
and Standard & Poor's Corporation
("S&P") represent the opinions of those agencies as to the quality of
debt obligations that they rate. These
ratings, however, are relative and subjective, are not absolute
standards of quality and do not evaluate the
market risk of securities. An issue of debt obligations may, subsequent
to its purchase by the Fund, cease
to be rated or its ratings may be reduced below the minimum required
for purchase by the Fund. Neither
event will require the sale of the debt obligation by the Fund, but
BlackRock will consider the event in its
determination of whether the Fund should continue to hold the
obligation. In addition, to the extent that the
ratings change as a result of changes in rating organizations or their
rating systems or as a result of a
corporate restructuring of Moody's and S&P, BlackRock will attempt
to use comparable ratings as
standards for the Fund's investments.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 15 below have been
adopted by the Fund as fundamental
policies. Under the 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 of the Fund's officers or Trustees or any officer or director of
Strategy Advisers, BlackRock or
SBMFM 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 year ended May 31, 1996, the Fund incurred total
brokerage commissions of $23,686, of
which $16,485 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 years ended May 31, 1994, 1995 and 1996, the Fund's
portfolio turnover rate was 525%,
524%, and 273 %, 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 at 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 any Fund who
owns shares of the Fund with a value of at least $10,000 and who wishes
to receive specific amounts of
cash monthly or quarterly. Withdrawals of at least $50 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 1.00% per
month of the value of a shareholder's shares at the time the Withdrawal
Plan commences. (With respect to
Withdrawal Plans in effect prior to November 7, 1994, any applicable
CDSC will be waived on amounts
withdrawn that do not exceed 2.00% per month of the value of a
shareholder's shares at the time the
Withdrawal Plan commences.) To the extent that withdrawals exceed
dividends, distributions and
appreciation of a shareholder's investment in a Fund, 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. Furthermore, as it generally would
not be advantageous to a
shareholder to make additional investments in the Fund at the same time
he or she is participating in the
Withdrawal Plan, purchases by such shareholders in amounts of less than
$5,000 ordinarily will not be
permitted.
Shareholders of a Fund who wish to participate in the Withdrawal Plan
and who hold their shares of the
Fund in certificate form must deposit their share certificates with
First Data as agent for Withdrawal Plan
members. All dividends and distributions on shares in the Withdrawal
Plan are reinvested automatically at
net asset value in additional shares of the Fund involved. Withdrawal
Plans should be set up with a Smith
Barney Financial Consultant. A shareholder who purchases shares
directly through First Data may
continue to do so and applications for participation in the Withdrawal
Plan must be received by Fisrt Data
no later than the eighth day of the month to be eligible for
participation beginning with that month's
withdrawal. For additional information, shareholders should contact a
Smith Barney Financial Consultant.
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 years ending May 31, 1995 and 1996 received
$8,410 and $11,000, 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 Smith Barney
money market fund (other than Smith Barney Money Market Fund). If the
investor instructs Smith Barney
to invest the funds in a Smith Barney money market fund, 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 years ended May 31, 1994, 1995 and
1996, the Fund incurred service fees
of $949,117, $529,180 and $1,292,490, respectively. For the fiscal
years ended May 31, 1994, 1995 and
1996, the Fund incurred distribution fees of $1,898,235, $1,058,362, and
$27,668, respectively, before the
deduction of the maximum contingent deferred sales charge.
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, SBMFM, 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 the 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 First Data 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, 1996 was 8.30%,
8.10% and 5.98% 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 year ended May 31, 1996, the Fund's average annual total
returns for Class A, Class B and
Class C shares were 5.48%, 5.48%, and 5.49%, respectively, before
deduction of the maximum contingent
deferred sales charge. Over the life of the Fund, the average annual
returns for Class A, Class B and
Class C shares were 4.51%, 4.61% and 4.52% respectively, before
deduction of the maximum contingent
deferred sales charge with waiver.
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 year ended May 31, 1996, the Fund's total returns for
Class A, Class B and Class C shares
were 5.48%, 5.48%, and 5.27%, respectively, before deduction of the
maximum contingent deferred sales
charges. Over the life of the Fund, the aggregate total returns for
Class A, Class B and Class C shares
were 18.98%, 17.45% and 14.28%, respectively, before the deduction of
maximum contingent deferred
sales 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 18.86%, 17.34% and 14.28%, respectively, before deduction of
maximum contingent deferred sales
charge.
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, located at 17th and Chestnut Streets, Philadelphia, Pennsylvania,
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.
First Data, located at Exchange Place, Boston, Massachusetts 02109,
serves as the Fund's transfer agent.
For its services as transfer agent, First Data receives fees charged to
the Fund at an annual rate based upon
the number of shareholder accounts maintained for the Fund during the
year. First Data 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 First Data,
the Fund's transfer agent. First
Data 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 year ended May 31, 1996 is
incorporated herein by reference in its
entirety.
Smith Barney
Adjustable Rate
Government Income
Fund
Statement of
Additional Information
September 30, 1996
Smith Barney
Adjustable Rate Government Income Fund
388 Greenwich Street
New York, NY 10013
...................................Fund ........................
SMITH BARNEY
A Member of Travelers
Group
g:\funds\arms\1996\edgar\armssai.996
26
g:\funds\arms\1996\edgar\armssai.996
g:\funds\arms\1996\edgar\armssai.996
PART C - FORM N-1A
Item 24. Financial Statements and Exhibits
(a) Financial Statements
(b) Exhibits
(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 incorporated by reference to Post-Effective Amendment No. 9
.
(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 incorporated by reference to Post-Effective Amendment No.
9.
(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 incorporated by reference to Post-Effective
Amendment
No. 9.
(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 incorporated by reference to Post-Effective Amendment No. 9.
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 August 31,
1996
Shares representing Class A- 4882
beneficial interests,
par value $.001 per Class B - 212
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.
("SBMFM"),which was incorporated under the laws of the
State of Delaware in 1968. SBMFM 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 SBMFM,
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
SBMFM 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) First Data Investor 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. 10 is being
filed
solely for the purposes specified in Rule 485(b)(1)(vii) and no
material event has occurred since September 29, 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
09/30/96
Chief Executive Officer
and Trustee
/s/ Lewis E. Daidone
Lewis E. Daidone Treasurer
09/30/96
Chief Financial Officer
/s/ Charles F. Barber*
Charles F. Barber Trustee
09/30/96
/s/ Allan J. Bloostein*
Allan J. Bloostein Trustee
09/30/96
/s/ Martin Brody* Trustee
09/30/96
Martin Brody
/s/ Dwight B. Crane*
Dwight B. Crane Trustee
09/30/96
* Signed by Heath B. McLendon, their duly authorized attorney-in-fact,
pursuant to power of attorney incorporated by reference to Post-
Effective
Amendment No. 2.
/s/ Heath B. McLendon
Heath B. McLendon
Independent Auditors' Consent
To the Shareholders and Board of Trustees of the
Smith Barney Adjustable Rate Government Income Fund;
We consent to the use of our report dated July 24, 1996, incorporated
herein by reference, and to the references to our firm under the
headings "Financial Highlights" in the Prospectus and "Counsel and
Auditors" in the Statement of Additional Information.
KPMG Peat Marwick LLP
September 30, 1996
New York, New York
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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