As filed with the Securities and Exchange Commission on July 30,
1999
Registration Nos. 33-47782
811-6663
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 15
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940, as amended
[X] Amendment No. 16
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)
(212) 816-6474
(Registrant's Telephone Number, including Area Code)
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: Continuous
It is proposed that this filing will become effective:
[ ] Immediately upon filing pursuant to paragraph (b)
[ ] On (date) pursuant to paragraph (b)
[ X ] 60 days after filing pursuant to paragraph (a)(1)
[ ] On (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] On (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective
date
for a previously filed post-effective amendment.
PART A - PROSPECTUS
<PAGE>
Smith Barney Mutual Funds
P R O S P E C T U S
Adjustable Rate
Government
Income Fund
Class A, B and I Shares
- --------------------------------------------------------------------------------
September 28, 1999
The Securities and Exchange Commission has not approved or disapproved these
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
<PAGE>
Adjustable Rate Government Income Fund
Contents
<TABLE>
<S> <C>
Investments, risks and performance.......................................... 2
More on the fund's investments.............................................. 7
Management.................................................................. 8
Choosing a class of shares to buy........................................... 10
Comparing the fund's classes................................................ 11
Sales charges............................................................... 12
More about deferred sales charges........................................... 13
Buying shares............................................................... 14
Exchanging shares........................................................... 15
Redeeming shares............................................................ 17
Other things to know about share transactions............................... 19
Smith Barney 401(k) and ExecChoice(TM) programs............................. 21
Dividends, distributions and taxes.......................................... 22
Share price................................................................. 23
Financial highlights........................................................ 24
</TABLE>
You should know: An investment in the fund is not a bank deposit and is not
insured or guaranteed by the FDIC or any other government agency.
Smith Barney Mutual Funds
1
<PAGE>
Investments, risks and performance
Investment objectives
The fund seeks to provide high current income and to limit the degree of fluc-
tuation of its net asset value resulting from movements in interest rates.
Principal investment strategies
Key investments The fund normally invests at least 65% of its net assets in
adjustable rate securities. The fund will also invest at least 65% of its net
assets in U.S. government securities. Many of the fund's adjustable rate secu-
rities will be U.S. government issued or guaranteed securities, debt securities
in the three to five year maturity range, mortgage backed securities and asset
backed securities. The fund may also invest in privately issued mortgage backed
securities, asset backed securities, and collateralized mortgage obligations
(CMOs) and mortgage-related derivative securities, including government
stripped mortgage backed securities (SMBS). SMBS represent the right to receive
either principal or interest payments on U.S. government mortgage backed secu-
rities. Interests in CMOs entitle the holder to specified cash flows from a
pool of mortgages. The fund's privately issued asset backed securities may rep-
resent interests in various types of underlying receivables such as home equity
loans and automobile and credit card receivables. The fund may also invest up
to 35% of its net assets in short duration corporate and U.S. government fixed
rate debt securities.
Unlike fixed rate securities, the interest rates of the fund's adjustable rate
mortgage and asset backed securities are periodically readjusted to reflect
current changes in interest rates. Readjustments typically occur between one
and 36 months. Therefore, the fund's net asset value generally will not rise or
fall inversely to changes in market interest rates as sharply as it would if
the fund invested primarily in fixed rate securities.
The fund may, from time to time, borrow money to buy additional securities. The
fund may borrow from banks or other financial institutions or through reverse
repurchase agreements. The fund may borrow up to 1/3 of the value of its total
assets.
Credit quality: The fund invests in U.S. government securities and securities
rated at the time of purchase in the two highest long-term rating categories by
a nationally recognized rating agency. The fund may invest up to 20% of its
assets in securities that are unrated but determined to be of equivalent qual-
ity by the subadviser.
Maturity: The fund's dollar weighted average life (or period until next inter-
est rate reset date) will normally be between 1 and 3 years.
Adjustable Rate Government Income Fund
2
<PAGE>
Selection process The fund's subadviser seeks to achieve low volatility of net
asset value by diversifying the fund's assets among investments the subadviser
believes will, in the aggregate, be resistant to significant fluctuations in
market value. The subadviser evaluates the attractiveness of different sectors
of the bond market and values individual securities within those sectors rela-
tive to other available securities.
In selecting individual securities for the fund's portfolio, the subadviser
takes into account various factors that may affect the fund's volatility,
including:
.Remaining time to the security's next interest rate reset date
.The security's payment characteristics
.The security's impact on the dollar weighted average life of the fund's port-
folio
Principal risks of investing in the fund
Investing in U.S. government and adjustable rate securities can bring added
benefits, but it may also involve additional risks. Investors could lose money
on their investment in the fund, or the fund may not perform as well as other
investments, if:
.The rate of prepayment of principal on mortgages or other obligations under-
lying securities in the fund's portfolio increases. During periods of
decreasing interest rates, borrowers tend to prepay as they refinance their
mortgages or other obligations at lower rates. Managers will generally be
unable to reinvest the prepayment proceeds at higher rates of return than
those anticipated for the securities whose obligations have been prepaid
.The obligors on a mortgage or other obligation underlying a privately issued
security in the fund's portfolio default on their obligation to pay principal
or interest, or the security's credit rating is downgraded by a rating organ-
ization or is perceived by the market to be less creditworthy
.Interest rates go down, since the adjustable nature of the fund's investments
makes it difficult to "lock in" a favorable rate of return in a declining
interest rate environment
.During a period of rapidly rising interest rates, the changes in the coupon
rates of the fund's adjustable rate securities temporarily lag behind changes
in market rates. You could suffer loss of principal if you sell shares of the
fund before interest rates on mortgages underlying the fund's securities are
adjusted to reflect current market rates
Smith Barney Mutual Funds
3
<PAGE>
.Interest rates increase, causing the value of the fund's fixed income securi-
ties to decline which would reduce the value of the fund's portfolio
.The manager's judgment about interest rates or the attractiveness, value or
income potential of a particular security proves to be incorrect
The fund employs leverage (i.e., borrows money) which may expose the fund to
greater risk and increase its costs. Increases and decreases in the value of
the fund's portfolio will be magnified when the fund uses leverage. The fund
will also have to pay interest on its borrowings, reducing the fund's return.
Asset backed securities are newer instruments than mortgage backed securities
and may be subject to a greater risk of default during periods of economic
downturn. Asset backed securities may be less liquid than mortgage backed secu-
rities.
Although the U.S. government guarantees principal and interest payments on
securities issued by the U.S. government and some of its agencies, this guaran-
tee does not apply to losses resulting from declines in the market value of
these securities.
Who may want to invest The fund may be an appropriate investment if you:
.Are a conservative investor seeking income rather than capital appreciation
.Are willing to sacrifice potential capital appreciation for less (but not
zero) net asset value volatility
.Are seeking a higher level of current income than typically offered by money
market funds
Adjustable Rate Government Income Fund
4
<PAGE>
Risk return bar chart
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not neces-
sarily indicate how the fund will perform in the future.
Total Return for Class A Shares
[BAR CHART APPEARS HERE]
92 93 94 95 96 97 98
This bar chart shows the performance of the fund's Class A shares for each full
calendar year since the fund's inception. Class B and I shares would have dif-
ferent performance because of their different expenses. The performance infor-
mation in the chart does not reflect sales charges, which would reduce your
return.
Quarterly returns: Highest: xx% in quarter 199X; Lowest: xx% in quarter
199X. Year to date: xx% through 6/30/99
Smith Barney Mutual Funds
5
<PAGE>
Risk return table
This table indicates the risks of investing in the fund by comparing the aver-
age annual total return of each class for the periods shown with that of the
Merrill Lynch 1-3 Year Treasury Index (Merrill Index), a broad-based index
including all U.S. Treasury notes and bonds with maturities of at least one
year and less than three years. This table assumes imposition of the maximum
sales charge applicable to the class, redemption of shares at the end of the
period, and reinvestment of distributions and dividends.
Average Annual Total Returns
Calendar Years Ended December 31, 1998
<TABLE>
<CAPTION>
Class 1 year 5 years Since inception Inception date
<S> <C> <C> <C> <C>
A 06/22/92
B 11/06/92
I 04/18/97
Merrill Index * n/a
</TABLE>
* Index comparison begins on 06/30/92.
Fee table
This table sets forth the fees and expenses you will pay if you invest in fund
shares.
Shareholder fees
<TABLE>
<CAPTION>
(paid directly from your investment) Class A Class B Class I
<S> <C> <C> <C>
Maximum sales charge (load) imposed on purchases (as
a % of offering price) None None None
Maximum deferred sales charge (load) (as a % of the
lower of net asset value at purchase or redemption) None* 5.00%** None
</TABLE>
Annual fund operating expenses
<TABLE>
<CAPTION>
(expenses deducted from fund assets) Class A Class B Class I
<S> <C> <C> <C>
Management fees 0.60% 0.60% 0.60%
Distribution and service (12b-1) fees 0.75% 0.75% 0.25%
Other expenses -- -- --
---- ---- ----
Total annual fund operating expenses -- -- --
</TABLE>
*Class A shares acquired as an exchange from another Smith Barney fund subject
to a deferred sales charge, remain subject to the original fund's deferred
sales charge while held in the fund.
**Class B shares are available only in an exchange from another Smith Barney
fund. The previously held fund's deferred sales charge will continue to apply.
Adjustable Rate Government Income Fund
6
<PAGE>
Example
This example helps you compare the costs of investing in the fund with the
costs of investing in other mutual funds. Your actual costs may be higher or
lower. The example assumes:
.You invest $10,000 in the fund for the period shown
.Your investment has a 5% return each year
.You reinvest all distributions and dividends without a sales charge
.The fund's operating expenses remain the same
Number of years you own your shares
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
Class A (with or without redemption) $ $ $ $
Class B (redemption at end of period) $ $ $ $
Class B (no redemption) $ $ $ $
Class I (with or without redemption) $ $ $ $
</TABLE>
More on the fund's investments
Derivative contracts The fund may, but need not, use derivative contracts, such
as interest rate futures contracts and options on securities and securities
indices and options on these futures to hedge against the economic impact of
adverse changes in the market value of its securities, because of changes in
interest rates. The fund may enter into interest rate transactions primarily to
hedge its portfolio of adjustable rate securities against fluctuations in
interest rates. The fund may purchase an interest rate cap as a hedge against
an increase in interest rates above the cap on an adjustable rate security held
by the fund. The fund may also purchase an interest rate floor as a hedge
against a decrease in interest rates below the floor on an adjustable rate
security.
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment based on the change in value of one or more securities
or indices. Even a small investment in derivative contracts can have a big
impact on the fund's market exposure. Therefore, using derivatives can dispro-
portionately increase losses and reduce opportunities for gains when market
prices are changing. The fund may not fully benefit from or may lose money on
derivatives if changes in their value do not correspond accurately to changes
in the value of the fund's holdings. The other parties to certain derivative
contracts present the same types of credit risk as issuers of fixed income
securities. Derivatives can also make the fund less liquid and harder to value,
especially in declining markets.
Smith Barney Mutual Funds
7
<PAGE>
Foreign securities The fund may invest up to 10% of its assets in U.S. dollar
denominated debt securities of foreign issuers. The value of the fund's foreign
securities may decline because of unfavorable government actions, political
instability or the more limited availability of accurate information about for-
eign issuers.
Defensive investing The fund may depart from its principal investment strate-
gies in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goal.
Portfolio turnover The fund engages in active and frequent trading to achieve
its principal investment strategies. As a result, a fund may realize and dis-
tribute to shareholders higher capital gains, which could increase their tax
liability. Frequent trading also increases transaction costs, which could
detract from the fund's performance.
Management
Manager The fund's investment adviser (the manager) is Smith Barney Strategy
Advisers, Inc., an affiliate of Salomon Smith Barney Inc. The manager's address
is 388 Greenwich Street, New York, New York 10013. The manager oversees the
fund's investment operations, including selecting and monitoring the
subadviser. The manager and Salomon Smith Barney are subsidiaries of Citigroup
Inc. Citigroup businesses produce a broad range of financial services--asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world.
The fund's subadviser, BlackRock Financial Management, Inc., is located at 345
Park Avenue, New York, New York 10154. BlackRock is a majority owned subsidiary
of PNC Bank Corp. As of December 31, 1998 BlackRock had assets under management
in excess of $132 billion. Keith T. Anderson and Scott M. Amero, each managing
directors of BlackRock, and Robert S. Kapito, vice chairman of BlackRock, are
responsible for the day-to-day management of the fund's portfolio. Messrs.
Anderson, Amero and Kapito have each been with BlackRock since 1988.
Management fee During the fiscal year ended May 31, 1999, the manager received
an advisory fee equal to % of the fund's average daily net assets.
Adjustable Rate Government Income Fund
8
<PAGE>
Administrator The fund's administrator is SSBC Fund Management Inc., an affili-
ate of the manager and Salomon Smith Barney Inc. For its services, the adminis-
trator received a fee during the fund's last fiscal year equal to % of the
fund's average daily net assets.
Distributor The fund has entered into an agreement with CFBDS, Inc. to distrib-
ute the fund's shares. A selling group consisting of Salomon Smith Barney and
other broker-dealers sells fund shares to the public.
Distribution plans The fund has adopted Rule 12b-1 distribution plans for its
Class A, B and I shares. Under each plan, the fund pays distribution and serv-
ice fees. These fees are an ongoing expense and, over time, may cost you more
than other types of sales charges.
Year 2000 issue Information technology experts are concerned about computer
systems' ability to process date-related information on and after January 1,
2000. This situation, commonly known as the "Year 2000" issue, could have an
adverse impact on the fund. The cost of addressing the Year 2000 issue, if sub-
stantial, could adversely affect companies and governments that issue securi-
ties held by the fund. The manager, administrator and Salomon Smith Barney are
addressing the Year 2000 issue for their systems. The fund has been informed by
other service providers that they are taking similar measures. Although the
fund does not expect the Year 2000 issue to adversely affect it, the fund can-
not guarantee that the efforts of the fund, which are limited to requesting and
receiving reports from its service providers, or the efforts of its service
providers to correct the problem will be successful.
Smith Barney Mutual Funds
9
<PAGE>
Choosing a class of shares to buy
You can choose among two classes of shares: Classes A and I. Class B shares are
only available through exchange purchases. Each class has different sales
charges and expenses, allowing you to choose the class that best meets your
needs. Which class is more beneficial to an investor depends on the amount and
intended length of investment.
You may buy shares from:
.A Salomon Smith Barney Financial Consultant
.An investment dealer in the selling group or a broker that clears through Sal-
omon Smith Barney--a dealer representative
.The fund, but only if you are investing through certain dealer representatives
Investment minimums Minimum initial and additional investment amounts vary
depending on the class of shares you buy and the nature of your investment
account.
<TABLE>
<CAPTION>
Initial Additional
Class B
Class A (exchange only) Class I All Classes
<S> <C> <C> <C> <C>
General $1,000 $1,000 $100,000 $50
IRAs, Self Employed Retirement
Plans, Uniform Gift to Minor
Accounts $250 $250 $100,000 $50
Qualified Retirement Plans* $25 $25 $100,000 $25
Simple IRAs $1 $1 n/a $1
Monthly Systematic Investment
Plans $25 n/a n/a $25
Quarterly Systematic Investment
Plans $50 n/a n/a $50
</TABLE>
*Qualified Retirement Plans are retirement plans qualified under Section
403(b)(7) or Section 401(a) of the Internal Revenue Code, including 401(k)
plans
Adjustable Rate Government Income Fund
10
<PAGE>
Comparing the fund's classes
Your Salomon Smith Barney Financial Consultant or dealer representative can
help you decide which class meets your goals. They may receive different com-
pensation depending upon which class you choose.
<TABLE>
<CAPTION>
Class A Class B Class I
<S> <C> <C> <C>
Key features .No Initial .Available only .No initial or
sales charge in an exchange deferred sales
from another charge
fund .Must invest
.No initial at least
sales charge $100,000
.Deferred .Lower annual
sales charge expenses than
based on that the other
of the fund classes
owned prior to
exchange
.Converts to
Class A after
8 years
- --------------------------------------------------------------------------
Initial sales charge None None None
- --------------------------------------------------------------------------
Deferred sales charge Class A shares Up to 5% None
acquired as an charged when
exchange from you redeem
another Smith shares. The
Barney fund charge is
subject to a reduced over
deferred sales time and there
charge, remain is no deferred
subject to the sales charge
original fund's after 6 years
deferred sales
charge while
held in the
fund.
- --------------------------------------------------------------------------
Annual distribution and 0.75% of aver- 0.75% of aver- 0.25% of aver-
service fees age daily net age daily net age daily net
assets assets assets
- --------------------------------------------------------------------------
Exchangeable into* Class A shares Class B shares No exchange
of most Smith of most Smith privilege
Barney funds Barney funds
- --------------------------------------------------------------------------
</TABLE>
*Ask your Salomon Smith Barney Financial Consultant or dealer representative or
visit the web site for the Smith Barney funds available for exchange.
Smith Barney Mutual Funds
11
<PAGE>
Sales charges
Class A shares
You buy Class A shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. Class A shares are subject to higher
ongoing distribution and service fees than Class I shares.
Class B shares
Class B shareholders may purchase additional Class B shares at net asset value
without paying an initial sales charge. However, if you redeem your Class B
shares within six years of your purchase from the previously owned fund, you
will pay a deferred sales charge. The deferred sales charge decreases as the
number of years since your purchase increases.
<TABLE>
<CAPTION>
Year after purchase 1st 2nd 3rd 4th 5th 6th through 8th
<S> <C> <C> <C> <C> <C> <C>
Deferred sales charge....................... 5% 4% 3% 2% 1% 0%
</TABLE>
Class B conversion After 8 years from purchase of the previously owned fund,
Class B shares automatically convert into Class A shares. This helps you
because Class A shares may have lower annual expenses. Your Class B shares will
convert to Class A shares as follows:
<TABLE>
<CAPTION>
Shares issued: Shares issued: Shares issued:
At initial On reinvestment of Upon exchange from
purchase dividends and another Smith Barney
distributions fund
<S> <C> <C>
Eight years after In same proportion On the date the
the as the number of shares originally
date of purchase of Class B shares acquired would have
the previously owned converting is to converted into
fund total Class B shares Class A shares
you own (excluding
shares issued as a
dividend)
</TABLE>
Class I shares
You buy Class I shares at net asset value with no initial sales charge and no
deferred sales charge when you redeem. You must meet the $100,000 initial
investment requirement.
Adjustable Rate Government Income Fund
12
<PAGE>
More about deferred sales charges
The deferred sales charge is based on the net asset value at the time of pur-
chase or redemption, whichever is less, and therefore you do not pay a sales
charge on amounts representing appreciation or depreciation.
In addition, you do not pay a deferred sales charge on:
.Shares exchanged for shares of another Smith Barney fund
.Shares representing reinvested distributions and dividends
.Shares no longer subject to the deferred sales charge
If you redeemed shares of a Smith Barney fund in the past 60 days and paid a
deferred sales charge, you may buy shares of the fund at the current net asset
value and be credited with the amount of the deferred sales charge, if you
notify your Salomon Smith Barney Financial Consultant or dealer representative.
Salomon Smith Barney receives deferred sales charges as partial compensation
for its expenses in selling shares, including the payment of compensation to
your Salomon Smith Barney Financial Consultant or dealer representative.
Deferred sales charge waivers
The deferred sales charge for each share class will generally be waived:
.On payments made through certain systematic withdrawal plans
.On certain distributions from a retirement plan
.For involuntary redemptions of small account balances
.For 12 months following the death or disability of a shareholder
If you want to learn more about additional waivers of deferred sales charges,
contact your Salomon Smith Barney Financial Consultant or dealer representative
or consult the Statement of Additional Information (SAI).
Smith Barney Mutual Funds
13
<PAGE>
Buying shares
Through a You should contact your Salomon Smith Barney Financial Con-
Salomon Smith sultant or dealer representative to open a brokerage account
Barney and make arrangements to buy shares.
Financial
Consultant or
dealer
representative
If you do not provide the following information, your order
will be rejected:
.Class of shares being bought
.Dollar amount or number of shares being bought
You should pay for your shares through your brokerage account
no later than the third business day after you place your
order. Salomon Smith Barney or your dealer representative may
charge an annual account maintenance fee.
- --------------------------------------------------------------------------------
Through the Certain investors who are clients of the selling group are
fund's eligible to buy shares directly from the fund.
transfer
agent
.Write the transfer agent at the following address:
Smith Barney Adjustable Rate Government Income Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
.Enclose a check to pay for the shares. For initial pur-
chases, complete and send an account application.
.For more information, call the transfer agent at 1-800-451-
2010.
Through a You may authorize Salomon Smith Barney, your
systematic dealer representative or the transfer agent to
investment plan transfer funds automatically from a regular bank
account, cash held in a Salomon Smith Barney
brokerage account or Smith Barney money market
fund to buy shares on a regular basis.
- Amounts transferred should be at least: $25
monthly or $50 quarterly
- If you do not have sufficient funds in your
account on a transfer date, Salomon Smith
Barney, your dealer representative or the
transfer agent may charge you a fee
For more information, contact your Salomon Smith
Barney Financial Consultant, dealer
representative or the transfer agent or consult
the SAI.
For more information, contact your Salomon Smith Barney
Financial Consultant, dealer representative or the transfer
agent or consult the SAI.
Adjustable Rate Government Income Fund
14
<PAGE>
Exchanging shares
Smith Barney You should contact your Salomon Smith Barney Financial Con-
offers a sultant or dealer representative to exchange into other Smith
distinctive Barney funds. Be sure to read the prospectus of the Smith
family of Barney fund you are exchanging into. An exchange is a taxable
funds transaction. Class I shares are not available for exchange.
tailored to
help meet the .You may exchange shares only for shares of the same class of
varying needs another Smith Barney fund. Not all Smith Barney funds offer
of both large all classes.
and small .Not all Smith Barney funds may be offered in your state of
investors. residence. Contact your Salomon Smith Barney Financial
Consultant, dealer representative or the transfer agent.
.You must meet the minimum investment amount for each fund
.If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with
signed stock powers (documents transferring ownership of
certificates) before the exchange is effective.
.The fund may suspend or terminate your exchange privilege if
you engage in an excessive pattern of exchanges.
Smith Barney Mutual Funds
15
<PAGE>
Additional Class A shares of the fund may be subject to a sales charge
sales charges differential upon the exchange of such shares for Class A
shares of another Smith Barney fund sold with a sales charge.
The sales charge differential is the sales charge rate appli-
cable to purchases of shares of the mutual fund being
acquired in the exchange. To the extent the fund shares
relinquished in the exchange are attributable to predecessor
shares for which a sales charge was paid, the sales charge
differential does not apply. For purposes of the exchange
privilege, shares obtained through automatic reinvestment of
dividends and capital gain distributions are treated as hav-
ing paid the same sales charges applicable to the shares in
which the dividends or distributions were paid; however,
except in the case of the Smith Barney 401(k) and
ExecChoice(TM) Program, if no sales charge was imposed upon
the initial purchase of shares, any shares obtained through
automatic reinvestment will be subject to a sales charge dif-
ferential upon exchange
Your deferred sales charge (if any) will continue to be mea-
sured from the date of your original purchase. If the fund
you exchange into has a higher deferred sales charge, you
will be subject to that charge. If you exchange at any time
into a fund with a lower charge, the sales charge will not be
reduced.
- --------------------------------------------------------------------------------
By telephone If you do not have a brokerage account, you may be eligible
to exchange shares through the transfer agent. You must com-
plete an authorization form to authorize telephone transfers.
If eligible, you may make telephone exchanges on any day the
New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 5:00 p.m. (Eastern
time). Requests received after the close of regular trading
on the Exchange are priced at the net asset value next deter-
mined.
You can make telephone exchanges only between accounts that
have identical registrations.
- --------------------------------------------------------------------------------
By mail If you do not have a Salomon Smith Barney brokerage account,
contact your dealer representative or write to the transfer
agent at the address on the opposite page.
Adjustable Rate Government Income Fund
16
<PAGE>
Redeeming shares
Generally Contact your Salomon Smith Barney Financial Consultant or
dealer representative to redeem shares of the fund.
If you hold share certificates, the transfer agent must
receive the certificates endorsed for transfer or with signed
stock powers before the redemption is effective.
If the shares are held by a fiduciary or corporation, other
documents may be required.
Your redemption proceeds will be sent within three business
days after your request is received in good order. However,
if you recently purchased your shares by check, your redemp-
tion proceeds will not be sent to you until your original
check clears, which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your
redemption proceeds will be placed in your account and not
reinvested without your specific instruction. In other cases,
unless you direct otherwise, your redemption proceeds will be
paid by check mailed to your address of record.
- --------------------------------------------------------------------------------
By mail For accounts held directly at the fund, send written requests
to the transfer agent at the following address:
Smith Barney Adjustable Rate Government Income Fund
(Specify class of shares)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
Your written request must provide the following:
.Your account number
.The class of shares and the dollar amount or number of
shares to be redeemed
.Signatures of each owner exactly as the account is regis-
tered
Smith Barney Mutual Funds
17
<PAGE>
By telephone If you do not have a brokerage account, you may be eligible
to redeem shares (except those held in retirement plans) in
amounts up to $10,000 per day through the transfer agent. You
must complete an authorization form to authorize telephone
redemptions. If eligible, you may request redemptions by tel-
ephone on any day the New York Stock Exchange is open. Call
the transfer agent at 1-800-451-2010 between 9:00 a.m. and
5:00 p.m. (Eastern time). Requests received after the close
of regular trading on the Exchange are priced at the net
asset value next determined.
Your redemption proceeds can be sent by check to your address
of record or by wire transfer to a bank account designated on
your authorization form. You must submit a new authorization
form to change the bank account designated to receive wire
transfers and you may be asked to provide certain other docu-
ments.
- -------------------------------------------------------------------------------
Automatic You can arrange for the automatic redemption
cash of a portion of your shares on a monthly or
withdrawal quarterly basis. To qualify you must own
plans shares of the fund with a value of at least
$10,000 ($5,000 for retirement plan accounts)
and each automatic redemption must be at
least $50. If your shares are subject to a
deferred sales charge, the sales charge will
be waived if your automatic payments do not
exceed 1% per month of the value of your
shares subject to a deferred sales charge.
The following conditions apply:
- Your shares must not be represented by
certificates
- All dividends and distributions must be
reinvested
For more information, contact your Salomon
Smith Barney Financial Consultant or dealer
representative or consult the SAI.
For more information, contact your Salomon Smith Barney
Financial Consultant or dealer representative or consult the
SAI.
Adjustable Rate Government Income Fund
18
<PAGE>
Other things to know about share transactions
When you buy, exchange or redeem shares, your request must be in good order.
This means you have provided the following information, without which your
request will not be processed:
.Name of the fund
.Account number
.Class of shares being bought, exchanged or redeemed
.Dollar amount or number of shares being bought, exchanged or redeemed
.Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or redemp-
tion request is genuine by recording calls, asking the caller to provide a per-
sonal identification number for the account, sending you a written confirmation
or requiring other confirmation procedures from time to time.
Signature guarantees To be in good order, your redemption request must include
a signature guarantee if you:
.Are redeeming over $10,000 of shares
.Are sending signed share certificates or stock powers to the transfer agent
.Instruct the transfer agent to mail the check to an address different from the
one on your account
.Changed your account registration
.Want the check paid to someone other than the account owner(s)
.Are transferring the redemption proceeds to an account with a different regis-
tration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
The fund has the right to:
.Suspend the offering of shares
.Waive or change minimum and additional investment amounts
.Reject any purchase or exchange order
.Change, revoke or suspend the exchange privilege
.Suspend telephone transactions
Smith Barney Mutual Funds
19
<PAGE>
.Suspend or postpone redemptions of shares on any day when trading on the New
York Stock Exchange is restricted, or as otherwise permitted by the Securi-
ties and Exchange Commission
.Pay redemption proceeds by giving you securities. You may pay transaction
costs to dispose of the securities
Small account balances If your account falls below $500 because of a redemption
of fund shares, the fund may ask you to bring your account up to $500. If your
account is still below $500 after 60 days, the fund may close your account and
send you the redemption proceeds.
Excessive exchange transactions The manager may determine that a pattern of
frequent exchanges is detrimental to the fund's performance and other share-
holders. If so, the fund may limit additional purchases and/or exchanges by the
shareholder.
Share certificates The fund does not issue share certificates unless a written
request signed by all registered owners is made to the transfer agent. If you
hold share certificates it will take longer to exchange or redeem shares.
Adjustable Rate Government Income Fund
20
<PAGE>
Smith Barney 401(k) and ExecChoice(TM) programs
You may be eligible to participate in the Smith Barney 401(k) program or the
Smith Barney ExecChoice(TM) program. The fund offers Class A shares to partici-
pating plans as investment alternatives under the programs. You can meet mini-
mum investment and exchange amounts by combining the plan's investments in any
of the Smith Barney mutual funds.
There are no sales charges when you buy or sell shares and the class of shares
you may purchase depends on the amount of your initial investment. Once a class
of shares is chosen, all additional purchases must be of the same class.
.Class A shares may be purchased by plans investing at least $1 million.
For more information, call your Salomon Smith Barney Financial Consultant or
the transfer agent, or consult the SAI.
Smith Barney Mutual Funds
21
<PAGE>
Dividends, distributions, and taxes
Dividends The fund's policy is to declare daily dividends from its net invest-
ment income. Dividends from income are paid monthly. The fund generally makes
capital gain distributions, if any, once a year, typically in December. The
fund may pay additional distributions and dividends at other times if necessary
for the fund to avoid a federal tax. Capital gain distributions and dividends
are reinvested in additional fund shares of the same class you hold. The fund
expects distributions to be primarily from income. You do not pay a sales
charge on reinvested distributions or dividends. Alternatively, you can
instruct your Salomon Smith Barney Financial Consultant, dealer representative
or the transfer agent to have your distributions and/or dividends paid in cash.
You can change your choice at any time to be effective as of the next distribu-
tion or dividend, except that any change given to the transfer agent less than
five days before the payment date will not be effective until the next distri-
bution or dividend.
Taxes In general, redeeming shares, exchanging shares and receiving distribu-
tions (whether in cash or additional shares) are all taxable events.
<TABLE>
<CAPTION>
Transaction Federal tax status
<S> <C>
Redemption or exchange of shares Usually capital gain or loss;
long-term only if shares owned
more than one year
Long-term capital gain distributions Long-term capital gain
Short-term capital gain distributions Ordinary income
Dividends Ordinary income
</TABLE>
Long-term capital gain distributions are taxable to you as long-term capital
gain regardless of how long you have owned your shares. You may want to avoid
buying shares when the fund is about to declare a long-term capital gain dis-
tribution or a dividend, because it will be taxable to you even though it may
actually be a return of a portion of your investment.
After the end of each year, the fund will provide you with information about
the distributions and dividends you received and any redemptions of shares dur-
ing the previous year. If you do not provide the fund with your correct tax-
payer identification number and any required certifications, you may be subject
to back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special
tax rules may apply, you should consult your tax adviser about your investment
in the fund.
Adjustable Rate Government Income Fund
22
<PAGE>
Share price
You may buy, exchange or redeem shares at their net asset value, plus any
applicable sales charge, next determined after receipt of your request in good
order. The fund's net asset value is the value of its assets minus its liabili-
ties. Net asset value is calculated separately for each class of shares. The
fund calculates its net asset value every day the New York Stock Exchange is
open. The Exchange is closed on certain holidays listed in the SAI. This calcu-
lation is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern time).
The fund generally values its portfolio securities based on market prices or
quotations. When reliable market prices or quotations are not readily avail-
able, or when the value of a security has been materially affected by events
occurring after a foreign exchange closes, the fund may price those securities
at fair value. Fair value is determined in accordance with procedures approved
by the fund's board. A fund that uses fair value to price securities may value
those securities higher or lower than another fund using market quotations to
price the same securities.
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 approxi-
mates fair value. Corporate debt securities, mortgage-backed securities and
asset backed securities 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.
In order to buy, redeem or exchange shares at that day's price, you must place
your order with your Salomon Smith Barney Financial Consultant or dealer repre-
sentative before the New York Stock Exchange closes. If the Exchange closes
early, you must place your order prior to the actual closing time. Otherwise,
you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders
to buy, exchange or redeem shares to the fund's agent before the agent's close
of business.
Smith Barney Mutual Funds
23
<PAGE>
Financial highlights
The financial highlights tables are intended to help you understand the perfor-
mance of each class for the past 5 years (or since inception if less than 5
years). Certain information reflects financial results for a single share.
Total return represents the rate that a shareholder would have earned (or lost)
on a fund share assuming reinvestment of all dividends and distributions. The
information in the following tables for the four years ended May 31, 1999, was
audited by KPMG LLP, independent auditors. The information for the fiscal
years ended May 31, 1993 through May 31, 1995 has been audited by other audi-
tors. KPMG LLP's report, along with the fund's financial statements, is
included in the annual report (available upon request).
For a Class A share of capital stock outstanding throughout each year ended
May 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995(/1/)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $9.84 $9.84 $9.88 $9.78
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) 0.49 0.43 0.56 0.47
Net realized and unrealized gain (loss) 0.04 0.08 (0.04) 0.13
- ------------------------------------------------------------------------------
Total income (loss) from operations 0.53 0.51 0.52 0.60
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.50) (0.46) (0.56) (0.49)
Net realized gains -- -- -- (0.01)
Capital (0.01) (0.05) -- --
- ------------------------------------------------------------------------------
Total distributions (0.51) (0.51) (0.56) (0.50)
- ------------------------------------------------------------------------------
Net asset value, end of year $9.86 $9.84 $9.84 $9.88
- ------------------------------------------------------------------------------
Total return 5.57% 5.31% 5.48% 6.39%
- ------------------------------------------------------------------------------
Net assets, end of year (000)'s $108 $124 $156 $174
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses(/2/) 1.57% 1.69% 1.58% 1.60%
Net investment income 4.94 4.42 5.66 4.94
- ------------------------------------------------------------------------------
Portfolio turnover rate 242% 288% 273% 524%
- ------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts calculated using the monthly average shares method.
(/2/) For the years ended May 31, 1998, 1997, 1996 and 1995, the annualized
expense ratios were calculated excluding interest expense. The ratios
including interest expense were 3.34%, 3.09%, 3.10% and 2.47% annualized,
respectively.
Adjustable Rate Government Income Fund
24
<PAGE>
For a Class B share of capital stock outstanding throughout each year ended
May 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996 1995(/1/)
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of year $ $9.82 $9.84 $9.88 $9.78
- ------------------------------------------------------------------------------
Income (loss) from operations:
Net investment income (loss) 0.49 0.39 0.56 0.47
Net realized and unrealized gain (loss) 0.04 0.10 (0.04) 0.13
- ------------------------------------------------------------------------------
Total income (loss) from operations 0.53 0.49 0.52 0.60
- ------------------------------------------------------------------------------
Less distributions from:
Net investment income (0.50) (0.46) (0.56) (0.49)
Net realized gains -- -- -- (0.01)
Capital (0.01) (0.05) -- --
- ------------------------------------------------------------------------------
Total distributions (0.51) (0.51) (0.56) (0.50)
- ------------------------------------------------------------------------------
Net asset value, end of year $9.84 $9.82 $9.84 $9.88
- ------------------------------------------------------------------------------
Total return 5.56% 5.10% 5.48% 6.39%
- ------------------------------------------------------------------------------
Net assets, end of year (000,000)'s $2 $3 $6 $5
- ------------------------------------------------------------------------------
Ratios to average net assets:
Expenses 1.63% 1.71% 1.60% 1.63%
Net investment income (loss) 5.03 4.32 5.64 4.92
- ------------------------------------------------------------------------------
Portfolio turnover rate 242% 288% 273% 524%
- ------------------------------------------------------------------------------
</TABLE>
(/1/) Per share amounts calculated using the monthly average shares method.
(/2/) For the years ended May 31, 1999, 1998, 1997, 1996 and 1995, the
annualized expense ratios were calculated excluding interest expense. The
ratios including interest expense were , 3.40%, 3.11%, 3.12% and 2.49%,
respectively.
Smith Barney Mutual Funds
25
<PAGE>
For a Class I share of capital stock outstanding throughout each year ended
May 31:
<TABLE>
<CAPTION>
1999 1998 1997(/1/)
- ----------------------------------------------------
<S> <C> <C> <C>
Net asset value,
beginning of year $ $9.85 $9.79
- ----------------------------------------------------
Income (loss) from
operations:
Net investment income
(loss) 0.55 0.10
Net realized and
unrealized gain (loss) 0.04 0.02
- ----------------------------------------------------
Total income (loss) from
operations 0.59 0.12
- ----------------------------------------------------
Less distributions from:
Net investment income (0.56) (0.06)
Net realized gains -- --
Capital (0.01) (0.00)(/3/)
- ----------------------------------------------------
Total distributions (0.57) (0.06)
- ----------------------------------------------------
Net asset value, end of
year $9.87 $9.85
- ----------------------------------------------------
Total return 6.12% 1.20%(/4/)
- ----------------------------------------------------
Net assets, end of year
(000)'s $3.0 $2.4
- ----------------------------------------------------
Ratios to average net
assets:
Expenses(/2/) 1.07% 1.10%(/5/)
Net investment income
(loss) 5.45 5.60(/5/)
- ----------------------------------------------------
Portfolio turnover rate 242% 288%
- ----------------------------------------------------
</TABLE>
(/1/) For the period from April 18, 1997 (inception date) to May 31, 1997.
(/2/) For the years ended May 31, 1999, 1998 and the period ended May 31, 1997,
the annualized expense ratios were calculated excluding interest expense.
The ratios including interest expense were , 2.84% and 2.50%, respec-
tively.
(/3/) Amount represents less than 0.01 per share.
(/4/) Not annualized.
(/5/) Annualized.
Adjustable Rate Government Income Fund
26
<PAGE>
(This page is intentionally left blank.)
<PAGE>
SalomonSmithBarney
----------------------------
A member of citigroup [LOGO]
Adjustable Rate Government Income Fund
Shareholder reports Annual and semiannual reports to shareholders provide addi-
tional information about the fund's investments. These reports discuss the mar-
ket conditions and investment strategies that affected the fund's performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
Statement of additional information The statement of additional information
provides more detailed information about the fund and is incorporated by refer-
ence into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative, by calling the fund
at 1-800-451-2010, or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
Visit our web site Our web site is located at www.smithbarney.com
You can also review and copy the fund's shareholder reports, prospectus and
statement of additional information at the Securities and Exchange Commission's
Public Reference Room in Washington, D.C. You can get copies of these materials
for a duplicating fee by writing to the Public Reference Section of the Commis-
sion, Washington, D.C. 20549-6009. Information about the public reference room
may be obtained by calling 1-800-SEC-0330. You can get the same information
free from the Commission's Internet web site at http:www.sec.gov
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. Neither the fund nor the distributor is
offering to sell shares of the fund to any person to whom the fund may not law-
fully sell its shares.
SM Salomon Smith Barney is a service mark of Salomon Smith Barney Inc.
(Investment Company Act
file no. 811-06663)
FD0249 9/99
PART B - STATEMENT OF ADDITIONAL INFORMATION
Smith Barney
Adjustable Rate Government Income Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional
Information
September 28, 1999
This Statement of Additional Information (SAI) expands upon and
supplements the information contained in the current prospectus of
Smith Barney Adjustable Rate Government Income Fund, dated
September 28, 1999, as amended or supplemented from time to time,
and should be read in conjunction with the prospectus. The
prospectus may be obtained from your Salomon Smith Barney
Financial Consultant or by writing or calling the fund at the
address or telephone number set forth above. This SAI, although
not in itself a prospectus, is incorporated by reference into the
prospectus in its entirety.
TABLE OF CONTENTS
Management of the Fund 2
Trustees and Officers of the Fund 2
Investment Objectives and Management Policies 6
Risk Factors 21
Investment Restrictions 23
Portfolio Transactions 24
Portfolio Turnover 25
Purchase of Shares 26
IRA and Other Prototype Retirement Plans 26
Redemption of Shares 28
Distributor 31
Determination of Net Asset Value 33
Exchange Privilege 33
Performance Data 34
Dividends, Distributions and Taxes 36
Additional Information About the Fund 37
Financial Statements 39
Appendix A A-1
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
Salomon Smith Barney Inc.
("Smith Barney")
Distributor
SSBC Funds Management, Inc. ("SSBC")
Investment Adviser
and Administrator
BlackRock Financial Management, Inc.
("BlackRock")
Sub-Investment
Adviser
PNC Bank, National Association ("PNC Bank")
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 SAI.
TRUSTEES AND OFFICERS OF THE FUND
Overall responsibility for management and supervision of the fund
rests with the fund's board of trustees. The board of trustees
approves 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 investment activities of the fund have been delegated to SSBC
and BlackRock.
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.
Allan J. Bloostein, Trustee (Age 69). President of Allan J.
Bloostein Associates, a consulting firm; Director of CVS
Corporation, a drug store chain, and Taubman Centers Inc., a real
estate development company; Retired Vice Chairman and Director of
The May Department Stores Company; His address is 425 Park Avenue,
New York, New York 10022.
Martin Brody, Trustee (Age 77). Consultant, HMK Associates;
Retired Vice Chairman of the Board of Restaurant Associates
Corporation. Director of Jaclyn, Inc., an apparel design and
manufacturing company. His address is c/o HMK Associates, 30
Columbia Turnpike, Florham Park, New Jersey 07932.
Dwight B. Crane, Trustee (Age 61). Professor, Harvard Business
School; Director of Peer Review Analysis Inc. His address is c/o
Harvard Business School, Soldiers Field Road, Boston,
Massachusetts 02163.
Robert A. Frankel, Trustee (Age 72). Managing Partner of Robert
A. Frankel Management Consultants. Former Corporate Vice President
of The Reader's Digest Association, Inc. His address is 102 Grand
Street, Croton-on-Hudson, New York 10520
William R. Hutchinson, Director (Age 56). Group Vice President,
Mergers and Acquisitions, BP AMOCO p.l.c., formerly Vice
President, Financial Operations of AMOCO Corporation; Director of
Associated Bank and Associated Banc-Corporation. His address is
c/o AMOCO Corporation, 200 E. Randolph Drive, Chicago, Illinois
60601.
*Heath B. McLendon, (Age 65). President, Chairman of the Board
and Chief Executive Officer. Managing Director of Salomon Smith
Barney and President of SSBC and Travelers Investment Adviser,
Inc. ("TIA"); Director or Trustee of 64 investment companies
associated with Citigroup Inc. ("Citigroup"); Former Chairman of
the Board of SSBC, Inc. His address is 388 Greenwich Street, New
York, New York 10013.
Scott M. Amero, (Age 36) Portfolio Manager. Managing Director of
BlackRock Financial Management. His address is 345 Park Avenue,
New York, New York 10154.
Keith T. Anderson, (Age 40) Portfolio Manager. Managing Director
of BlackRock Financial Management. His address is 345 Park Avenue,
New York, New York 10154.
Robert S. Kapito, (Age 42) Portfolio Manager. Vice Chairman of
BlackRock Financial Management. His address is 345 Park Avenue,
New York, New York 10154.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 41).
Managing Director of Salomon Smith Barney; Treasurer of 59
investment companies associated with Citigroup. Director and
Senior Vice President of SSBC and TIA; His address is 388
Greenwich Street, New York New York 10013.
Christina T. Sydor, (Age 48) Secretary. Managing Director of
Salomon Smith Barney; General Counsel and Secretary of SSBC and
TIA; Secretary of 59 investment companies associated with
Citigroup. Her address is 388 Greenwich Street, New York, New
York 10013.
Paul Brook, (Age 45) Controller. Director of Salomon Smith
Barney; Controller or Assistant Treasurer of 43 investment
companies associated with Citigroup; from 1997 - 1998 Managing
Director of AMT Capital Services Inc.; prior to 1997 Partner with
Ernst & Young LLP. His address is 388 Greenwich Street, New York,
New York 10013.
As of September ___, 1999, the trustees and officers of the fund
as a group beneficially owned less than 1% of the outstanding
shares of the fund. As of September ____, 1999, to the knowledge
of the fund and the board, the following shareholders or "group"
(as that term is used in Section 13(d) of the Securities Act of
1934) beneficially owned more than 5% of the outstanding shares of
the fund:
Class A Shares
Name and Address
Number of Shares
Percent of Total
Outstanding
Shares
Class B Shares
Name and Address
Number of Shares
Percent of Total
Outstanding
Shares
Class I Shares
Name and Address
Number of Shares
Percent of Total
Outstanding
Shares
REMUNERATION
No director, officer or employee of Salomon Smith Barney,
BlackRock or SSBC 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 Salomon Smith Barney, BlackRock, SSBC, 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, 1999 such travel
expenses totaled $3,678.
The following table sets forth the compensation paid by the fund
to each person who was a trustee during the fund's last fiscal
year:
TRUSTEE
Aggregate
Compensation
From the
Fund
For Fiscal
Year Ended
5/31/99
Pension or
Retirement
Benefits
Accrued as
Part of
Fund Expenses
Total
Compensation
From Fund
and Fund
Complex for
Calendar
Year Ended
12/31/98
Total Number of
Funds for Which
Trustee Serves
Within
Fund Complex
as of 9/30/99
Allan J.
Bloostein
$3,350
$0
$85,850
18
Martin Brody
$2,850
0
$119,814
20
Dwight Crane
$3,100
0
$133,850
23
Robert A.
Frankel
$3,250
0
$65,900
9
William R.
Hutchinson
$3,100
0
$35,750
7
Heath B.
McLendon*
- -
0
- -
64
* Designates an "interested person" of the fund.
Upon attainment of age 80, fund trustees are required to change
to emeritus status. Trustees Emeritus are entitled to serve in
emeritus status for a maximum of 10 years, during which time
they are paid 50% of the annual retainer fee and meeting fees
otherwise applicable to fund trustees, together with reasonable
out-of-pocket expenses for each meeting attended. During the
last fiscal year, aggregate compensation paid to Charles
Barber, a Trustee Emeritus, totaled $______, who elected to
defer the payment of all the compensation due to him from the
fund.
INVESTMENT ADVISER, SUB-INVESTMENT ADVISER AND ADMINISTRATOR
INVESTMENT ADVISER AND ADMINISTRATOR
SSBC located at 388 Greenwich Street, New York, New York 10013,
serves as the fund's investment adviser and administrator. In its
capacity as the fund's investment adviser, subject to the
supervision and direction of the fund's board of trustees, SSBC is
generally responsible for furnishing, or causing to be furnished
to the fund, investment management services. Included among the
specific services provided by SSBC 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 SSBC. SSBC
provides investment management, investment advisory and/or
administrative services to individual, institutional and
investment company clients that had aggregate assets under
management, as of August 31, 1999, in excess of $___ billion. For
the fiscal year ended May 31, 1999, SSBC received fees in an
amount equal to 0.40% of the fund's average daily net assets for
the investment advisory services provided. As the fund's
administrator, SSBC calculates the net asset value of the fund's
shares and generally assists in all aspects of the fund's
administration and operation. SSBC receives a fee for services
provided to the fund as administrator that is accrued daily and
paid monthly at the annual rate of 0.20% of the value of the
fund's average daily net assets.
Certain of the services provided to, and the fees paid by, the
fund under its agreements with BlackRock and SSBC are described in
the prospectus. For the fiscal years ended May 31, 1997, 1998 and
1999, such fees (for investment advisory and administration
services) amounted to $869,373, $708,254 and $________,
respectively. In addition to providing the services described in
the prospectus, SSBC 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. SSBC, is a wholly owned
subsidiary of Salomon Smith Barney Holdings Inc. ("Holdings").
Holdings is a wholly owned subsidiary of Citigroup Inc. SSBC pays
BlackRock a fee for services provided by BlackRock to the fund,
which is accrued daily and paid monthly, at the annual rate of
0.20% of the value of the fund's average daily net assets. The
fund pays no direct fee to BlackRock. BlackRock and SSBC each pay
the salaries of all officers and employees it employs who provide
services to the fund, and SSBC maintains office facilities for the
fund. BlackRock and SSBC bear all expenses in connection with the
performance of their respective services under their agreements
with the fund.
SUB-INVESTMENT ADVISER -- BLACKROCK
Under the terms of the sub-investment advisory agreement among
SSBC, the fund and BlackRock, SSBC employs BlackRock as the fund's
sub-investment adviser. BlackRock is an indirect subsidiary of PNC
Bank Corp. In December 1997, PNC Bank announced the strategic
consolidation of its various asset management firms under
BlackRock, Inc., which maintains its principal offices at 345 Park
Avenue, New York, New York 10154. BlackRock has served as
investment adviser to fixed income investors in the United States
and overseas, and had assets under management in excess of $___
billion as of June 30, 1999. Some of the other asset management
firms, which historically have provided liquidity management and
domestic and international equity management services, merged with
and into BlackRock in March 1998 as part of the firm's expansion
from a fixed income investment manager to a multi-product
investment adviser.
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 SSBC, 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. SSBC pays BlackRock a fee for
services provided by BlackRock to the fund that is accrued daily
and paid monthly at the annual rate of 0.20% 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 investment activities of the fund.
Management's discussion and analysis, and additional performance
information regarding the fund during the fiscal year ended May
31, 1999, 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 Salomon Smith Barney Financial Consultant or by
writing or calling the fund at the address or phone number listed
above.
SSBC receives a fee for services provided to the fund that is
accrued daily and paid monthly at the annual rate of 0.20% of the
value of the fund's average daily net assets.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The investment objectives of the fund are to seek to provide high
current income and to limit the degree of fluctuation of its net
asset value resulting from movements in interest rates. These
investment objectives may not be changed without the approval of
the holders of a majority of the fund's outstanding shares. No
assurance can be given that the fund will be able to achieve its
investment objectives. The prospectus discusses the investment
objectives of the fund and the principal policies to be employed
to achieve those objectives. Supplemental information is set out
below concerning the types of securities and other instruments in
which the fund may invest, the investment policies and strategies
that the fund may utilize, and certain risks attendant to those
investments, policies and strategies.
In seeking to achieve its investment objectives, the fund will
invest principally in 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, and 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 instruments,
fixed rate and adjustable rate mortgage-backed securities
("MBSs"), asset-backed securities ("ABSs") and corporate debt
securities rated within the two highest long-term debt categories
by a nationally recognized statistical rating organization (an
"NRSRO"), such as those rated Aa by Moody's Investors Service,
Inc. ("Moody's") or AA by Standard & Poor's Ratings Group ("S&P")
and money market instruments with 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 foregoing policies as to ratings of portfolio
securities will be applicable at the time 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, 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.
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.
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. 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 collateral backing MBSs and
ABSs is usually held by an independent bailee, custodian or
trustee on behalf of the holders of the related MBSs or ABSs. The
holder of the related MBSs or ABSs (such as the fund) will have
either an ownership interest or security interest in the
underlying collateral and can exercise its rights to it through
the bailee, custodian or trustee.
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 rates of prepayments
will generally affect the yield to maturity of the security.
Indices. The key determinant of the interest rates paid on
Adjustable Rate Securities is the interest rate index chosen (and
the spread, above or below the interest rate of the index,
required to be paid on the security). Certain indices are tied to
the interest rate paid on specified securities, such as one-,
three-or five-year U.S. Treasury securities, whereas other indices
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 indices tied to specific types of
securities. The COFI is dependent upon, among other things, the
origination dates and maturities of the member institutions'
liabilities. Consequently, the COFI may not reflect the average
prevailing market interest rates on new liabilities of similar
maturities, and may not move in the same direction as prevailing
interest rates since, as longer term deposits or borrowings mature
and are renewed at market interest rates, the COFI will rise or
fall depending upon the differential between the prior and the new
rates on the deposits and borrowings. In addition, associations
in the thrift industry in recent years have caused and may
continue to cause the cost of funds of thrift institutions to
change for reasons unrelated to changes in general interest rate
levels. Any movement in the COFI as compared to other indices
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 indices, in a
period of rising interest rates any increase may produce a higher
yield later than would be produced by the other indices. 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 indices. In addition, to the extent that
the COFI may lag behind other indices 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 indices. In a
period of declining interest rates, securities based on the COFI
may reflect a higher market value than would securities based on
other indices.
The interest rates paid on Adjustable Rate Securities are
generally readjusted periodically to an increment over the chosen
interest rate index. Such readjustments occur at intervals ranging
from one to 36 months. The degree of volatility in the market
value of the Adjustable Rate Securities in the fund's portfolio
will be a function of the frequency of the adjustment period, the
applicable index and the degree of volatility in the applicable
index. It will also be a function of the maximum increase or
decrease of the interest rate adjustment on any one adjustment
date, in any one year and over the life of the securities. These
maximum increases and decreases are typically referred to as
"caps" and "floors," respectively. The fund will not seek to
maintain an overall average cap or floor, although BlackRock will
consider caps or floors in selecting Adjustable Rate Securities
for the fund.
The adjustable interest rate feature underlying the Adjustable
Rate Securities in which the fund invests generally will act as a
buffer to reduce sharp changes in the fund's net asset value in
response to normal interest rate fluctuations. As the interest
rates on the mortgages underlying the fund's MBSs are reset
periodically, yields of portfolio securities will gradually align
themselves to reflect changes in market rates and should cause the
net asset value of the fund to fluctuate less dramatically than it
would if the fund invested in more traditional long-term, fixed
rate debt securities. During periods of rapidly rising interest
rates, however, changes in the coupon rate may temporarily lag
behind changes in the market rate, possibly resulting in a lower
net asset value until the coupon resets to market rates. Thus,
investors could suffer some principal loss if they sell their
shares of the fund before the interest rates on the underlying
mortgages are adjusted to reflect current market rates.
Unlike fixed rate mortgages, which generally decline in value
during periods of rising interest rates, the fund's MBSs will
allow the fund to participate in increases in interest rates
through periodic adjustments in the coupons of the underlying
mortgages, resulting in both higher current yields and lower price
fluctuations. In addition, if prepayments of principal are made on
the underlying mortgages during periods of rising interest rates,
the fund generally will be able to reinvest those amounts in
securities with a higher current rate of return. The fund will not
benefit from increases in interest rates to the extent that
interest rates rise to the point at which they cause the current
coupon of Adjustable Rate Securities to exceed the maximum
allowable caps. The fund's net asset value could vary to the
extent that current yields on Adjustable Rate Securities are
different from market yields during interim periods between the
coupon reset dates.
MBSs. Three basic types of MBSs are currently available for
investments:
(a) those issued or guaranteed by the United States Government or
one of its agencies or instrumentalities, primarily consisting of
securities either guaranteed by the Government National Mortgage
Association or issued by the Federal National Mortgage Association
or the Federal Home Loan Mortgage Corporation; (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.
MBSs and ABSs issued by Nongovernmental Entities. Certain of the
MBSs, as well as certain of the ABSs, in which the fund may invest
will be issued by private issuers. Such MBSs and ABSs may take a
form similar to the pass-through MBSs issued by agencies or
instrumentalities of the United States, 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.
Credit Enhancements. Credit enhancements for certain MBSs and
ABSs issued by nongovernmental entities typically are provided by
external entities such as banks or financial institutions or by
the structure of a transaction itself. Credit enhancements
provided for certain MBSs and ABSs issued by non-governmental
entities typically take one of two forms, (a) liquidity protection
or (b) protection against losses resulting from ultimate default
by an obligor on the underlying assets. Liquidity protection
refers to the provision of advances, generally by the entity
administering the pool of assets, to ensure that the receipt of
payments on the underlying pool occurs in a timely fashion.
Protection against losses resulting from default ensures ultimate
payment of the obligations on at least a portion of the assets in
the pool. This protection may be provided through guarantees,
insurance policies or letters of credit obtained by the issuer or
sponsor from third parties, through various means of structuring
the transaction or through a combination of these approaches. The
degree of credit support provided for each issue is generally
based on historical information with respect to the level of
credit risk associated with the underlying assets. Delinquencies
or losses in excess of those anticipated could adversely affect
the return on an investment in a security. The fund will not pay
any additional fees for credit support, although the existence of
credit support may increase the price of a security. BlackRock
will monitor, on an ongoing basis, the creditworthiness of the
providers of credit enhancement for such MBSs and ABSs held by the
fund.
Examples of such credit support arising out of the structure of
the transaction include "senior-subordinated securities" (multiple
class securities with one or more classes being senior to other
subordinated 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.
Collateralized Mortgage Obligations. 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 as
"Mortgage Assets"). Multi-class pass-through securities are equity
interests in a trust composed of Mortgage Assets. Payments of
principal of and interest on the Mortgage Assets, and any
reinvestment income on the Mortgage Assets, provide the funds to
pay debt service on the CMOs or make scheduled distributions on
the multi-class pass-through securities. CMOs may be issued by
agencies or instrumentalities of the United States government, or
by private originators of, or investors in, mortgage loans,
including depository institutions, mortgage banks, investment
banks and special purpose subsidiaries of these types of
institutions.
In a CMO, a series of bonds or certificates is issued in multiple
classes. Each class of CMOs, often referred to as a "tranche," is
issued at a specific fixed or floating coupon rate and has a
stated maturity or final distribution date. Principal prepayments
on the Mortgage Assets may cause the CMOs to be retired
substantially earlier than their stated maturities or final
distribution dates. Interest is paid or accrues on all classes of
the CMOs on a monthly, quarterly or semi-annual basis. The
principal of and interest on the Mortgage Assets may be allocated
among the several classes of a CMO series in a number of different
ways. Generally, the purpose of the allocation of the cash flow of
a CMO to the various classes is to obtain a more predictable cash
flow to the individual tranches than exists with the underlying
collateral of the CMO. As a general rule, the more predictable the
cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to
prevailing market yields on MBSs.
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 for
ABSs are similar to those used for MBSs; through the use of trusts
and special purpose corporations, various types of receivables
(such as 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 backed
by the full faith and credit of the United States. These ABSs may
include pass-through securities collateralized by SBA guaranteed
loans whose interest rates adjust in much the same fashion as
described above with respect to ARMs. These loans generally
include commercial loans such as working capital loans and
equipment loans. The underlying loans are originally made by
private lenders and are guaranteed in part by the SBA, the
guaranteed portion of the loans constituting the underlying
financial assets in these ABSs. In general, the collateral
supporting ABSs is of shorter maturity than mortgage loans and may
be less likely to experience substantial prepayments. Like MBSs,
ABSs are often backed by a pool of assets representing the
obligations of a number of different parties. Currently, pass-
through securities collateralized by SBA guaranteed loans and home
equity loans are the most prevalent ABSs that are Adjustable Rate
Securities.
ABSs are relatively new and untested instruments and may be
subject to greater risk of default during periods of economic
downturn than other securities, including MBSs, which 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 Agencies or Instrumentalities. MBSs issued or
guaranteed by agencies or instrumentalities of the United States
government are generally considered to be of higher quality than
those issued or guaranteed by non-governmental entities.
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.
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, and 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. FNMA guarantees timely payment of
principal and interest on FNMA MBSs. The obligations of FNMA are
not backed by the full faith and credit of the United States.
Nevertheless, because of the relationship between FNMA to the
United States, MBSs issued by FNMA are generally considered to be
high quality securities with minimal credit risk.
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.
FHLMC 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. The obligations of FHLMC are not
backed by the full faith and credit of the United States.
Nevertheless, because of the relationship of FHLMC to the United
States, MBSs issued by FHLMC are generally considered to be high
quality securities with minimal credit risk.
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.
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 3, 6, 12, 13,
36 or 60 scheduled monthly payments. Thereafter, the interest
rates are subject to periodic adjustment based on changes in a
designated benchmark index.
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 bills, certificates of
indebtedness, notes and bonds that differ in their interest rates,
maturities and dates of issuance. 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. 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
securities when yields on those securities are attractive, to
enhance portfolio liquidity or for a combination of both of these
purposes. 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 interest coupons or that are
certificates representing interests in the stripped debt
obligations and coupons. A zero coupon security is purchased at a
discount from its face amount, and 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 discount approximates the total
amount of interest the security might accrue and compound over the
period until maturity or the particular interest payment date at a
rate reflecting the market rate of the securities at the time of
issuance or purchase. Zero coupon securities 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.
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 does not obtain the 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 although
the holder receives no interest payments in cash on the security
during the year. 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.
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.
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
SMBSs contemplates one class (the principal-only or "PO" class)
receiving some of the interest and most of the principal from the
underlying assets, and the other class (the interest-only or "IO"
class) receiving most of the interest and the remainder of the
principal. In the most extreme case, the IO class receives all of
the interest, while the PO class receives all of the principal.
Although the fund may purchase securities of a PO class, it is
more likely to purchase the securities of an IO class.
Although IO class SMBSs individually have greater market
volatility than Adjustable Rate Securities, the fund will seek to
combine investments in IOs with other investments that have
offsetting price patterns. The value of IOs varies with a direct
correlation to changes in interest rates, whereas the value of
fixed rate MBSs, like that of other fixed rate debt securities,
varies inversely with interest rate fluctuations. Therefore,
active management of IOs in combination with fixed rate MBSs is
intended to add incremental yield from changes in market rates
while not materially increasing the volatility of the fund's net
asset value.
The yield to maturity of an IO class is extremely sensitive to the
rate of principal payments (including prepayments) on the related
underlying assets, and a rapid rate of principal payments in
excess of that considered in pricing the securities will have a
material adverse effect on an IO security's yield to maturity. If
the underlying mortgage assets experience greater than anticipated
payments of principal, the fund may fail to recoup fully its
initial investment in IOs. The sensitivity of an IO that
represents the interest portion of a particular class as opposed
to the interest portion of an entire pool to interest rate
fluctuations may be increased because of the characteristics of
the principal portion to which they relate.
Corporate Debt Securities. The fund may purchase corporate debt
securities rated within the two highest categories for long-term
debt obligations by an NRSRO, or, if unrated, deemed to be of
comparable credit quality by BlackRock. These debt securities may
have adjustable or fixed rates of interest and in certain
instances may be secured by assets of the issuer. Adjustable rate
corporate debt securities may have features similar to those of
adjustable rate MBSs, but corporate debt securities, unlike MBSs,
are not subject to prepayment risk other than through contractual
call provisions that generally impose a penalty for prepayment.
Fixed rate debt securities may also be subject to call provisions.
Foreign Securities. The fund may invest up to 10% of its total
assets in U.S. dollar-denominated foreign securities, including
MBSs and ABSs issued by foreign entities, although under current
market conditions the fund does not expect to invest in foreign
securities.
Investments in foreign securities involve certain risks not
ordinarily associated with investments in securities of domestic
issuers. These risks include fluctuations in foreign exchange
rates, future political and economic developments, and the
possible imposition of exchange controls or other foreign
governmental laws or restrictions.
Municipal Obligations. The fund may invest up to 5% of its total
assets in obligations issued by state and local governments,
political subdivisions, agencies and public authorities
("Municipal Obligations"). Any Municipal Obligation that is backed
directly or indirectly by U.S. Treasury securities or the full
faith and credit of the United States government will be
considered by BlackRock to have the highest rating.
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. Other illiquid securities include 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. The fund will also treat POs and IOs
as illiquid securities except for POs and IOs issued by U.S.
governmental agencies and instrumentalities, whose liquidities are
monitored by BlackRock subject to the supervision of SSBC and the
fund's board of trustees.
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"). 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 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.
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 SSBC 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.
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 NRSRO, 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 obligations issued or guaranteed by U.S. agencies
and instrumentalities that are supported solely by the credit of
the agency or 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.
Repurchase Agreements. The fund may enter into 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.
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.
The value of the securities underlying a repurchase agreement of
the fund will be monitored on an ongoing basis by BlackRock or
SSBC to ensure that the value is at least equal at all times to
the total amount of the repurchase obligation, including interest.
BlackRock or SSBC will also monitor, on an ongoing basis to
evaluate potential risks, the creditworthiness of the banks and
dealers with which the fund enters into repurchase agreements.
Reverse Repurchase Agreements. The fund may enter into reverse
repurchase agreement transactions with member banks on the Federal
Reserve Bank of New York's list of reporting dealers. A reverse
repurchase agreement, which is considered a borrowing by the fund,
involves a sale by the fund of securities that it holds
concurrently with an agreement by the fund to repurchase the same
securities at an agreed-upon price and date. The fund typically
will invest the proceeds of a reverse repurchase agreement in
money market instruments or repurchase agreements maturing not
later than the expiration of the reverse repurchase agreement. The
fund will enter into a reverse repurchase agreement for these
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 Bank, in which the fund will maintain cash, U.S. government
securities or other liquid high grade debt obligations equal in
value to its obligations with respect to reverse repurchase
agreements.
Dollar Roll Transactions. To take advantage of attractive
financing opportunities in the mortgage market and to enhance
current income, the fund may enter into dollar roll transactions.
A dollar roll transaction, which is considered a borrowing by the
fund, involves a sale by the fund of a security to a financial
institution, such as a bank or broker-dealer, concurrently with an
agreement by the fund to repurchase a similar security from the
institution at a later date at an agreed-upon price. The
securities that are repurchased will bear the same interest rate
as those sold, but generally will be collateralized by different
pools of mortgages with different prepayment histories than those
sold. During the period between the sale and repurchase, the fund
will not be entitled to receive interest and principal payments on
the securities sold. Proceeds of the sale will be invested in
additional instruments for the fund, and the income from these
investments, together with any additional fee income received on
the sale, will generate income for the fund exceeding the yield on
the securities sold. Dollar roll transactions involve the risk
that the market value of the securities sold by the fund may
decline below the repurchase price of those securities. At the
time that the fund enters into a dollar roll transaction, it will
place in a segregated account maintained with its custodian, PNC
Bank, cash or other liquid securities having a value equal to the
repurchase price and will subsequently monitor the account to
ensure that its value is maintained.
When-Issued and Delayed Delivery Transactions. The fund may
purchase or sell securities on a when-issued or delayed delivery
basis. When-issued or delayed delivery transactions arise when
securities are purchased or sold by the fund with payment and
delivery taking place in the future in order to secure what is
considered to be an advantageous price and yield to the fund at
the time of entering into the transaction. PNC Bank will maintain,
in a segregated account of the fund, cash or liquid securities
that are marked to market daily, pursuant to guidelines
established by the Trustees. PNC Bank will also segregate
securities sold on a delayed basis. The payment obligations and
the interest rates that will be received are each fixed at the
time the fund enters into the commitment and no interest accrues
to the fund until settlement. Thus, it is possible that the market
value at the time of settlement could be higher or lower than the
purchase price if the general level of interest rates has changed.
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. To generate income, the fund may
lend portfolio securities to brokers, dealers and other financial
organizations. These loans, if and when made, are currently
subject to a limitation whereby they may not exceed 33 1/3% of the
value of the fund's total assets. The fund will not lend
securities to Salomon Smith Barney 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.
Borrowing. The fund may borrow from banks for temporary or
emergency (not leveraging) purposes and enter into reverse
repurchase agreements or dollar rolls in an aggregate amount equal
to up to 33 1/3% of the value of its total assets (computed at the
time the loan is made). The fund may pledge up to 33 1/3% of its
total assets to secure these borrowings. Under normal market
conditions, the fund expects to engage in borrowing with respect
to approximately 10% of its total assets. If the fund's asset
coverage for borrowings falls below 300%, the fund will take
prompt action to reduce its borrowings.
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 may 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.
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. This is distinguished from a
"naked short," in which the fund does not own or have the right to
acquire the security sold.
To complete a short sale, the fund must arrange through a broker
to borrow the securities to be delivered to the buyer. The
proceeds received by the fund from the short sale are retained by
the broker until the fund replaces the borrowed securities. In
borrowing the securities to be delivered to the buyer, the fund
becomes obligated to replace the securities borrowed at their
market price at the time of replacement, whatever that price may
be. The fund may have to pay a premium to borrow the securities
and must pay any dividends or interest payable on the securities
until they are replaced.
The fund's obligation to replace the securities borrowed in
connection with a short sale will be secured by collateral
deposited with the broker, which collateral consists of cash or
U.S. government securities. In addition, the fund will place in a
segregated account with PNC Bank an amount of cash, U.S.
government securities or other liquid securities 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.
Interest Rate Transactions, Options and Futures. 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 is authorized to engage in transactions involving over-
the-counter options ("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 SSBC and the fund's board of
trustees.
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.
Although these strategies entail risks (as discussed 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.
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.
Interest Rate Hedging Transactions. 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 "counterparties." 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.
Interest Rate Swaps. The fund may enter into interest rate swaps,
which are "derivative" transactions involving 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. 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
securities having an aggregate net asset value at least equal to
the accrued excess will be maintained by the fund in a segregated
account with PNC Bank. 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 ("NRSRO") 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 another 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 price and for a specified time 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 to profit
from any potential 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
liquid securities with PNC Bank 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, New York Stock Exchange, Inc.
("NYSE") and various regional stock exchanges. 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. 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 are
traded on 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.
Futures Contracts and Options on Futures Contracts. The fund may
enter into interest rate futures contracts on U.S. government
securities and MBSs. A futures contract on securities, other than
GNMAs which are cash settled, is an agreement to purchase or sell
an agreed amount of securities at a set price for delivery on an
agreed future date. The fund may purchase a futures contract as a
hedge against an anticipated decline in interest rates, and
resulting increase in market price, of securities the fund intends
to acquire. The fund may sell a futures contract as a hedge
against an anticipated increase in interest rates, and resulting
decline in market price, of securities the fund owns.
The fund may purchase call and put options on futures contracts on
U.S. government securities and MBSs that are traded on U.S.
commodity exchanges. An option on a futures contract gives the
purchaser the right, in return for the premium paid, to assume a
position in a futures contract (a long position if the option is a
call and short position if the option is a put) at a specified
exercise price at any time during the option exercise period. The
writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a
call and a long position if the option is a put). Upon the
exercise of the option, the assumption of offsetting futures
positions by the writer and holder of the option will be
accompanied by delivery of the accumulated cash balance in the
writer's futures margin account that represents the amount by
which the market price of the futures contract at exercise
exceeds, in the case of a call, or is less than, in the case of a
put, the exercise price of the option on the futures contract.
The fund 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).
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 below.
Ratings as Investment Criteria. In general, the ratings of NRSROs
such as Moody's and 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.
RISK FACTORS
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. 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 the premium paid.
If MBSs or ABSs are bought at a discount, however, both scheduled
payments of principal and unscheduled prepayments will increase
current and total returns and will accelerate the recognition of
income which, when distributed to shareholders, will be taxable as
ordinary income. BlackRock will consider remaining maturities or
estimated average lives of MBSs and ABSs in selecting them for the
fund.
ABSs may present certain risks not relevant to MBSs. Although ABSs
are a growing sector of the financial markets, they are relatively
new instruments and may be subject to a greater risk of default
during periods of economic downturn than MBSs. In addition, assets
underlying ABSs such as credit card receivables are generally
unsecured, and debtors are entitled to the protection of various
state and federal consumer protection laws, some of which provide
a right of set-off that may reduce the balance owed. Finally, the
market for ABS may not be as liquid as that for MBSs.
The interest rate reset features of Adjustable Rate Securities
held by the fund will reduce the effect on the net asset value of
fund shares caused by changes in market interest rates. The market
value of Adjustable Rate Securities and, therefore, the fund's net
asset value, however, may vary to the extent that the current
interest rate on the securities differs from market interest rates
during periods between interest reset dates. The longer the
adjustment intervals on Adjustable Rate Securities held by the
fund, the greater the potential for fluctuations in the fund's net
asset value.
Investors in the fund will receive increased income as a result of
upward adjustments of the interest rates on Adjustable Rate
Securities held by the fund in response to market interest rates.
The fund and its shareholders will not benefit, however, from
increases in market interest rates once those rates rise to the
point at which they cause the rates on the Adjustable Rate
Securities to reach their maximum adjustment rate, annual or
lifetime caps. Because of their interest rate adjustment feature,
Adjustable Rate Securities are not an effective means of "locking-
in" attractive rates for periods in excess of the adjustment
period. In addition, mortgagors on loans underlying MBSs with
respect to which the underlying mortgage assets carry no agency or
instrumentality guarantee are often qualified for the loans on the
basis of the original payment amounts; the mortgagor's income may
not be sufficient to enable it to continue making its loan
payments as the payments increase, resulting in a greater
likelihood of default.
Any benefits to the fund and its shareholders from an increase in
the fund's net asset value caused by declining market interest
rates is reduced by the potential for increased prepayments and a
decline in the interest rates paid on Adjustable Rate Securities
held by the fund. When market rates decline significantly, the
prepayment rate on Adjustable Rate Securities is likely to
increase as borrowers refinance with fixed rate mortgage loans,
thereby decreasing the capital appreciation potential of
Adjustable Rate Securities. As a result, the fund should not be
viewed as consistent with an objective of seeking capital
appreciation.
Options and Futures Markets. Participation in the options or
futures markets involves investment risks and transaction costs to
which the fund would not be subject absent the use of these
strategies. If BlackRock's predictions of movements in the
direction of the securities and interest rate markets are not
accurate, the adverse consequences to the fund may leave the fund
in a worse position than if options or futures strategies were not
used. Risks inherent in the use of options, futures contracts and
options on futures contracts include: (a) dependence on
BlackRock's ability to predict correctly movements in the
direction of interest rates and securities prices; (b) imperfect
correlation between the price of options and futures contracts and
options on futures contracts and movements in the prices of the
securities being hedged; and (c) the skills needed to use these
strategies being different from those needed to select portfolio
securities. In addition, positions in futures contracts and
options on futures contracts may be closed out only on the
exchange or board of trade on which they were entered into, and no
assurance can be given that an active market will exist for a
particular contract or option at a particular time.
Lending Portfolio Securities. In lending securities to brokers,
dealers and other financial organizations, the fund will be
subject to risks, which, like those associated with other
extensions of credit, include the possible delays in realizing on,
or loss of, 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 in or prevented from
exercising its rights to dispose of the underlying securities,
including the risk of a possible decline in the value of the
underlying securities during the period in which the fund seeks to
assert its rights to them, the risk of incurring expenses
associated with asserting those rights and the risk of losing all
or a part of the income from the agreement.
A reverse repurchase agreement involves the risk that the market
value of the securities retained by the fund may decline below the
price of the securities the fund has sold but is obligated to
repurchase under the agreement. In the event the buyer of
securities under a reverse repurchase agreement files for
bankruptcy or becomes insolvent, the fund's use of the proceeds of
the agreement may be restricted pending a determination by the
party, or its trustee or receiver, whether to enforce the fund's
obligation to repurchase the securities.
When-Issued and Delayed Delivery Transactions. Securities
purchased on a when-issued or delayed delivery basis may expose
the fund to risk because the securities may experience
fluctuations in value prior to their delivery. Purchasing when-
issued or delayed delivery securities can involve the additional
risk that the yield available in the market when the delivery
takes place may be higher than that obtained in the transaction
itself.
Short Sales. If the price of the security sold short increases
between the time of the short sale and the time the fund replaces
the borrowed security, the fund will incur a loss; conversely, if
the price declines, the fund will realize a capital gain. Although
the fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited in
respect to a "naked" short.
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."
Year 2000. The investment management and administration services
provided to the fund by SSBC and the services provided to
shareholders by Salomon Smith Barney depend on the smooth
functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact
on the fund's operations, including the handling of securities
trades, pricing and account services. SSBC and Salomon Smith
Barney have advised the fund that they have been reviewing all of
their computer systems and actively working on necessary changes
to their systems to prepare for the year 2000 and expect that
their systems will be compliant before that date. In addition,
SSBC has been advised by the fund's custodian, transfer agent and
accounting service agent that they are also in the process of
modifying their systems with the same goal. There can, however, be
no assurance that SSBC, Salomon Smith Barney or any other service
provider will be successful, or that interaction with other non-
complying computer systems will not impair fund services at that
time.
In addition, the ability of issuers to make timely payments of
interest and principal or to continue their operations or services
may be impaired by the inadequate preparation of their computer
systems for the year 2000. This may adversely affect the market
values of securities of specific issuers or of securities
generally if the inadequacy of preparation is perceived as
widespread or as affecting trading markets.
INVESTMENT RESTRICTIONS
The fund is subject to certain restrictions and policies that are
"fundamental," which means that they may not be changed without a
"vote of a majority of the outstanding voting securities" of the
fund, as defined under the 1940 Act. The fund is subject to other
restrictions and policies that are "non-fundamental" and which may
be changed by the fund's board of trustees without shareholder
approval, subject to any applicable disclosure requirements.
Fundamental Policies. Without the approval of a majority of its
outstanding voting securities, the fund may not:
1. issue "senior securities" as defined in the 1940 Act and the
rules, regulations and orders thereunder, except as
permitted under the 1940 Act and the rules, regulations and
orders thereunder.
2. invest more than 25% of its total assets in securities, the
issuers of which conduct their principal business activities
in the same industry. For purposes of this limitation,
securities of the U.S. government (including its agencies
and instrumentalities) and securities of state or municipal
governments and their political subdivisions are not
considered to be issued by members of any industry.
3. borrow money, except that (a) the fund may borrow from banks
for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might
otherwise require the untimely disposition of securities,
and (b) the fund may, to the extent consistent with its
investment policies, enter into reverse repurchase
agreements, forward roll transactions and similar investment
strategies and techniques. To the extent that it engages in
transactions described in (a) and (b), the fund will be
limited so that no more than 331/3% of the value of its
total assets (including the amount borrowed), valued at the
lesser of cost or market, less liabilities (not including
the amount borrowed) valued at the time the borrowing is
made, is derived from such transactions.
4. make loans. This restriction does not apply to: (a) the
purchase of debt obligations in which the fund may invest
consistent with its investment objectives and policies; (b)
repurchase agreements; and (c) loans of its portfolio
securities, to the fullest extent permitted under the 1940
Act.
5. engage in the business of underwriting securities issued by
other persons, except to the extent that the fund may
technically be deemed to be an underwriter under the 1933
Act in disposing of portfolio securities.
6. purchase or sell real estate, real estate mortgages,
commodities or commodity contracts, but this restriction
shall not prevent the fund from (a) investing in securities
of issuers engaged in the real estate business or the
business of investing in real estate (including interests in
limited partnerships owning or otherwise engaging in the
real estate business or the business of investing in real
estate) and securities which are secured by real estate or
interests therein; (b) holding or selling real estate
received in connection with securities it holds or held; (c)
trading in futures contracts and options on futures
contracts (including options on currencies to the extent
consistent with the fund's investment objective and
policies); and (d) investing in real estate investment trust
securities.
7. invest in a manner that would cause the fund to fail to be a
"diversified company" under the Act and the rules,
regulations and orders thereunder.
8. 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.
9. 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.
Nonfundamental Policies. As a nonfundamental policy, the fund may
not:
1. purchase or otherwise acquire any security if, as a result,
more than 15% of its net assets would be invested in
securities that are illiquid.
2. write or purchase puts, calls, straddles, spreads or
combinations of those transactions, except as consistent
with the fund's investment objectives and policies.
3. 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
such securities.
4. 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.
5. make investments for the purpose of exercising control or
management.
6. invest in securities of another investment company except as
permitted by Section 12(d)(1) of the 1940 Act or as part of
a merger, consolidation, or acquisition of substantially all
of the assets.
7. 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 BlackRock or SSBC
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.
All of the foregoing restrictions stated in terms of percentages
will apply at the time an investment is made; a subsequent
increase or decrease in the percentage that may result from
changes in values or net assets will not result in a violation of
the restriction.
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 SSBC or BlackRock, and the fees of
SSBC and BlackRock are not reduced as a consequence of their
receipt of the supplemental information. The information may be
useful to SSBC 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 SSBC and
BlackRock in carrying out their obligations to the fund.
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.
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.
For the fiscal years ended May 31, 1997, 1998 and 1999, the fund
incurred no brokerage commissions.
The fund will not purchase securities, including U.S. government
securities, during the existence of any underwriting or selling
group relating to the offering of the securities, of which Salomon
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 high
turnover rate (i.e., in excess of 100%). The fund has no fixed
policy with respect to portfolio turnover, but does not expect to
trade in securities for short-term gain. The fund's annual
portfolio turnover rate will not be a factor preventing a sale or
purchase when BlackRock believes investment considerations warrant
such sale or purchase. Since the fund's inception, the fund's
annual portfolio turnover rate has exceeded 200% in each fiscal
year. Annual turnover at this rate means that the fund's portfolio
securities are replaced more than 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.
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, 1997, 1998 and 1999, the fund's
portfolio turnover rate was 288%, 242% and _____%, respectively.
PURCHASE OF SHARES
GENERAL
Purchases of fund shares must be made through a brokerage account
maintained with Salomon 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 or Class
I shares. Salomon Smith Barney and other broker/dealers may
charge their customers an annual account maintenance fee in
connection with a brokerage account through which an investor
purchases or holds shares. Accounts held directly at First Data
are not subject to a maintenance fee.
Investors in Class A and Class B (through Exchange Purchases)
shares may open an account in the fund by making an initial
investment of at least $1,000 for each account, or $250 for an IRA
or a Self-employed Retirement Plan, in the fund. Investors in
Class I shares may open an account by making an initial investment
of $100,000. Subsequent investments of at least $50 may be made
for all classes. For participants in retirement plans qualified
under Section 403(b)(7) or Section 401(a) of the Code, the minimum
initial investment requirement for Class A and Class B shares and
the subsequent investment requirement for all Classes in the fund
is $25. For shareholders purchasing shares of the fund through the
Systematic Investment Plan, 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 Citigroup and its subsidiaries,
including Salomon Smith Barney, unitholders who invest
distributions from a Unit Investment Trust ("UIT") sponsored by
Salomon Smith Barney, and directors or trustees of any Citigroup-
affiliated funds, including 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. Shares
purchased will be held in the shareholder's account by the fund's
transfer agent, First Data. Share certificates are issued only
upon a shareholder's written request to First Data.
The minimum initial and subsequent investment requirements in the
fund for an account established under the Uniform Gift to Minors
Act is $250 and the subsequent investment requirement is $50.
The minimum initial and subsequent investment requirements in the
fund for an account established under the Simple IRA and the Easy
Simple IRA Programs is $1. Exchange investments will have a $1
minimum.
Purchase orders received by the fund or Salomon 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 Salomon Smith Barney prior to Salomon Smith Barney's close of
business (the "trade date"). For shares purchased through Salomon
Smith Barney or Introducing Brokers purchasing through Salomon
Smith Barney, payment for fund shares is due on the third business
day after the trade date (the "settlement date"). In all other
cases, payment must be made with the purchase order.
Determination of Public Offering Price. The fund offers three
classes of shares. 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 next
determined. Class B shares are offered for exchange with Class B
shares of other funds in the Salomon Smith Barney Group of Mutual
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 I shares are available only to investors
meeting an initial investment minimum of $100,000 and are sold at
net asset value with no initial sales charge or CDSC.
IRA AND OTHER PROTOTYPE RETIREMENT PLANS
Copies of the following plans with custody or trust agreements
have been approved by the Internal Revenue Service and are
available from the fund or Smith Barney; investors should consult
with their own tax or retirement planning advisors prior to the
establishment of a plan.
IRA, Rollover IRA and Simplified Employee Pension - IRA. The
Small Business Job Protection Act of 1996 changed the eligibility
requirements for participants in Individual Retirement Accounts
("IRAs"). If you or your spouse have earned income, each of you
may establish an IRA and make maximum annual contributions equal
to the lesser of earned income or $2,000. As a result of this
legislation, married couples where one spouse is non-working may
contribute a total of $4,000 annually to their IRAs.
The Taxpayer Relief Act of 1997 changed the requirements for
determining whether or not you are eligible to make a deductible
IRA contribution. If you are considered an active participant in
an employer-sponsored retirement plan, you may still be eligible
for a full or partial deduction depending upon your combined
adjusted gross income ("AGI"). The rules applicable to so-called
"Roth IRAs" differ from those described above. A Rollover IRA is
available to defer taxes on lump sum payments and other qualifying
rollover amounts (no maximum) received from another retirement
plan.
An employer who has established a Simplified Employee Pension -
IRA ("SEP-IRA") on behalf of eligible employees may make a maximum
annual contribution to each participant's account of 15% (up to
$24,000) of each participant's compensation.
Paired Defined Contribution Prototype. Corporations (including
Subchapter S corporations) and non-corporate entities may purchase
shares of the fund through the Smith Barney Prototype Paired
Defined Contribution Plan. The prototype permits adoption of
profit-sharing provisions, money purchase pension provisions, or
both, to provide benefits for eligible employees and their
beneficiaries. The prototype provides for a maximum annual tax
deductible contribution on behalf of each Participant of up to 25%
of compensation, but not to exceed $30,000 (provided that a money
purchase pension plan or both a profit-sharing plan and a money
purchase pension plan are adopted thereunder).
SYSTEMATIC INVESTMENT PLAN
Class A and Class I 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, Salomon Smith Barney or First Data is authorized through
preauthorized transfers of at least $25 on a monthly basis or at
least $50 on a quarterly basis 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 and Class I 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 and Class I shares of the
fund through the Systematic Investment Plan on 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 Salomon Smith Barney or First Data. The Systematic
Investment Plan also authorizes Salomon Smith Barney to apply cash
held in the shareholder's Salomon Smith Barney brokerage account
or redeem the shareholder's shares of a Salomon Smith Barney money
market fund to make additions to the account. Additional
information is available from the fund or a Salomon 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 Class B shares (other than Class B Dividend
Shares) owned by the shareholder.
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 redemption.
The amount of any CDSC will be paid to Salomon Smith Barney.
WAIVERS OF CDSC
The CDSC will be waived on: (a) exchanges (see "Exchange
Privilege"); (b) automatic cash withdrawals in amounts equal to or
less than 1.00% per month of the value of the shareholder's shares
at the time the withdrawal plan commences (see "Automatic Cash
Withdrawal Plan") (provided, however, that automatic cash
withdrawals in amounts equal to or less than 2.00% per month of
the value of the shareholder's shares will be permitted for
withdrawal plans that were established prior to November 7, 1994);
(c) redemptions of shares within 12 months following the death or
disability of the shareholder; (d) redemption of shares made in
connection with qualified distributions from retirement plans or
IRAs upon the attainment of age 59 1/2; (e) involuntary
redemptions; and (f) redemptions of shares to effect 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 Salomon 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 Salomon
Smith Barney in the case of shareholders who are also Salomon
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.
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.
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.
The fund is required to redeem the shares of the fund tendered to
it, as described below, at a redemption price equal to the 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
Salomon Smith Barney, or if the shareholder's account is not with
Salomon Smith Barney, from the shareholder directly. The
redemption proceeds will be remitted on or before the third
business day following receipt of proper tender, except on any
days on which the NYSE is closed or as permitted under the 1940
Act in extraordinary circumstances. Generally, if the redemption
proceeds are remitted to a Salomon Smith Barney brokerage account,
these funds will not be invested for the shareholder's benefit
without specific instruction and Salomon 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 Salomon Smith Barney as custodian must be redeemed
by submitting a written request to a Salomon Smith Barney
Financial Consultant. Shares other than those held by Salomon
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 or I (please specify)
c/o First Data Investor Services Group, Inc.
P.O. Box 5128
Westborough, Massachusetts 01581-5128
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 share
certificate, stock power or written redemption request in excess
of $10,000 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
firm of a national securities exchange. Written redemption
requests of $10,000 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. First Data may require additional supporting
documents for redemptions made by corporations, executors,
administrators, trustees or guardians. A redemption request will
not be deemed properly received until First Data receives all
required documents in proper form.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM. Shareholders who do
not have a Salomon 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.)
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 relationship
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 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.
Distributions In Kind. If the 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 the 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 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 Salomon 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 First 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 Salomon Smith Barney Financial
Consultant.
CONTINGENT DEFERRED SALES CHARGE, CLASS B SHARES
Class B shares, which may be acquired only upon an exchange with
another fund in the Salomon 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 Salomon Smith Barney is imposed on any redemption of
Class B shares that causes the 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 predecessor of those shares) that
were exchanged for Class B shares of the fund ("purchase
payments") during the preceding five years. No charge is imposed
to the extent that the net asset value of the Class B shares
redeemed does not exceed (a) the current net asset value of Class
B shares purchased through reinvestment of dividends or capital
gains distributions, plus (b) the current net asset value of Class
B shares acquired in an exchange that were originally purchased
more than five years prior to the redemption, plus (c) increases
in the net asset value of the shareholder's Class B shares above
the purchase payments made during the preceding five years.
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. 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. 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
Salomon 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.
DISTRIBUTOR
CFBDS, Inc., located at 20 Milk Street, Boston, Massachusetts
02109-5408, serves as the fund's distributor on a best efforts
basis pursuant to a written agreement dated October 8, 1998 (the
"CFBDS Distribution Agreement") which was approved by the trust's
board of trustees, including the independent trustees, on July 13,
1998. Prior to the merger of Travelers Group Inc. and Citicorp
Inc. on October 8, 1998, Salomon Smith Barney served as the
trust's distributor. The fund offers its shares on a continuous
basis.
When payment is made by the investor before settlement date,
unless otherwise noted by the investor, the funds will be held as
a free credit balance in the investor's brokerage account and
Salomon Smith Barney may benefit from the temporary use of the
funds. The investor may designate another use for the funds prior
to settlement date, such as an investment in a money market fund
(other than Smith Barney Exchange Reserve fund) of the Smith
Barney Mutual Funds. If the investor instructs the distributor 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 Smith Barney money market
fund, and affiliates of Salomon Smith Barney that serve the funds
in an investment advisory or administrative capacity will benefit
from the fact they are receiving investment management fees from
both such investment companies for managing these assets computed
on the basis of their average daily net assets. The trust's board
of trustees has been advised of the benefits to Salomon Smith
Barney resulting from these settlement procedures and will take
such benefits into consideration when reviewing the Advisory,
Administration and Distribution Agreements for continuance.
For the fiscal year ended May 31, 1999, CFBDS and its
predecessor, Salomon Smith Barney incurred following distribution
expenses for the fund:
Adverti
sing
Printing
and
Mailing
of
Prospect
uses
Support
Service
s
Salomon
Smith
Barney
Financial
Consultant
s
Interest
Expense
Total
$
$
$
$
$
$
Distribution Arrangements. Shares of the fund are distributed on
a best efforts basis by the Distributor pursuant to the
Distribution Agreement. To compensate CFBDS and its predecessor,
Salomon Smith Barney for the services provided and for the
expenses borne 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
CFBDS a service fee, accrued daily and paid monthly, calculated at
the annual rate of 0.25% of the value of the fund's average daily
net assets attributable to Class A, Class B and Class I shares.
In addition, Salomon Smith Barney is also paid an annual
distribution fee with respect to Class A and Class B shares at the
rate of 0.50% of the value of the average daily net assets
attributable to each respective class of shares.
Commissions on Class A Shares. For the 1997 and 1998 fiscal
years, the aggregate dollar amount of commissions on Class A
shares, all of which was paid to Salomon Smith Barney, is as
follows:
Class A
Fiscal Year
Ended
5/31/97
Fiscal Year
Ended 5/31/98
$
$
For the period June 1, 1998 through October 7, 1998 and for the
period October 8, 1998 through May 31, 1999, the aggregate dollar
amounts of commissions on Class A shares, are as follows:
Class A
6/1/98
through
10/07/98*
10/8/98 through
5/31/99**
$
$
* The entire amount was paid to Salomon Smith Barney.
** The following amounts were paid to Salomon Smith Barney:
$_______.
Salomon Smith Barney currently 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 fiscal
years ending May 31, 1997, 1998 and 1999, Salomon Smith Barney
received $20,000, $7,000 and $_______, respectively, in CDSCs on
the redemption of the fund's Class B (and previous Class C
shares).
The following service and distribution fees were incurred
pursuant to the Plan during the periods indicated:
Distribution Plan Fees
Fiscal Year
Ended 5/31/99
Fiscal Year
Ended 5/31/98
Fiscal Year
Ended 5/31/97*
Class A
$
$840,792
$1,045,571
Class B
$
21,458
39,076
Class I
$
7,689
583
* Distribution Plan fees for the former Class C shares were
$321 in 1997.
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 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 such class of the fund (as
defined in the 1940 Act). Pursuant to the Plan, Salomon 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.
DETERMINATION OF NET ASSET VALUE
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 net asset value 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 in less are
valued at amortized cost where the board has determined that
amortized cost approximates 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. In carrying
out valuation policies adopted by the fund's board of trustees,
SSBC, 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 and Class B 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. Exchange of Class A and Class B shares are subject to
minimum investment requirements and all shares are subject to the
other requirements of the fund into which exchanges are made.
Class I shares do not have exchange privileges.
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 Smith Barney Mutual Funds, on the basis
of relative net asset value per share at the time of exchange, as
follows:
Class 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.
Class A shares of any fund sold without a sales charge may be
exchanged for Class A shares of any of the other funds, but any
applicable sales charge will apply, including any shares obtained
through automatic reinvestments. This does not apply to the Smith
Barney 401(k) Program and ExecChoice (TM) Programs.
Class B. 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.
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 net
asset value next determined 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.
In the event a Class B shareholder (unless such shareholder was a
Class B shareholder of the Short-Term World Income Fund on July
15, 1994) wishes to exchange all or a portion of his or her shares
in any of the funds imposing a CDSC, the exchanged Class B shares
will be subject to that CDSC. Upon the exchange, the newly
acquired Class B shares will be deemed to have been purchased on
the date the Class B shares of the fund that have been exchanged
were acquired.
Additional Information Regarding the Exchange Privilege.
Excessive exchange transactions can be detrimental to the fund's
performance and its shareholders. SSBC 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,
SSBC 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 other Smith
Barney Mutual funds then 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.
Exchanges will be processed at the net asset value next
determined. Redemption procedures discussed below are also
applicable for exchange 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. An exchange involves a
redemption of shares, which is a taxable transaction for
shareholders that are subject to tax. 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.
PERFORMANCE DATA
From time to time the fund may advertise 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 the
respective classes of 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 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
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 a class's current
return to yields published for other investment companies and
other investment vehicles. The fund may also include comparative
performance information in advertising or marketing its shares.
Such performance information may include data from Lipper
Analytical Services, Inc. and other financial publications.
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, 1999 was
____%, ____% and ____% with respect to its Class A, Class B and
Class I 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.
Over the life of the fund, the average annual returns for Class A,
Class B and Class I shares were ____%, ____% and ____%,
respectively, without deduction of any CDSC.
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, 1999, the fund's total returns
for Class A, Class B and Class I shares were ____%, ____% and
____%, respectively, without deduction of any CDSC. Over the life
of the fund, the aggregate total returns for Class A, Class B and
Class I shares were _____%, _____% and ____%, respectively,
without deduction of any CDSC.
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.
DIVIDENDS, DISTRIBUTIONS AND 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 Subchapter M of 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 net investment income (including,
for this purpose, any excess of its net short-term capital gain
over its long-term capital loss) for a taxable year, it will not
be liable for federal income taxes to the extent that its 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 it has held
the investment for more than one year and will be a short-term
capital gain or loss if the fund has held the investment for one
year or less. The fund's transactions in options and futures
contracts are subject to special tax rules that may affect the
amount, timing and character of its gains and losses and,
accordingly, of its distributions to shareholders. In addition,
as a general rule, a shareholder's gain or loss on a redemption or
other transaction that is treated as a sale of shares of the fund
held by the shareholder as capital assets 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. If a shareholder receives a long-term capital gain
distribution on any distribution and sells that share when it has
been held for six months or less, a loss on the sale will be long-
term to the extent of the capital gain distribution. Shareholders
of the fund will receive 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.
Dividends paid from net investment income and net short-term
capital gain are subject to federal income tax as ordinary income.
Distributions, if any, from net long-term capital gain are taxable
as long-term capital gains, regardless of the length of time a
shareholder has owned fund shares.
Shareholders are required to pay tax on all taxable distributions,
even if those distributions are automatically reinvested in
additional fund shares. None of the dividends paid by the fund
will qualify for the corporate dividends received deduction.
Dividends consisting of interest from U.S. government securities
may be exempt from state and local income taxes. The fund will
inform shareholders of the source and tax status of all
distributions promptly after the close of each calendar year.
The fund is required to withhold ("backup withholding") 31% of all
dividends, capital gain distributions, and the proceeds of any
redemption, regardless of whether gain or loss is realized upon
the redemption, for shareholders who do not provide the fund with
a correct taxpayer identification number (social security or
employer identification number and any required certifications).
Withholding also is required from dividends and capital gain
distributions to shareholders who otherwise are subject to backup
withholding. Any tax withheld as a result of backup withholding
does not constitute an additional tax, and may be claimed as a
credit on the shareholders' federal income tax return.
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.
ADDITIONAL INFORMATION ABOUT THE FUND
Counsel. Willkie Farr & Gallagher serves as counsel for the fund.
The trustees who are not "interested persons" of the fund have
selected Stroock & Stroock & Lavan LLP, as their counsel.
Auditors. KPMG LLP, 345 Park Avenue, New York, 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, 2000.
Custodian. PNC Bank, 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 Bank is authorized to establish separate accounts
and appoint securities depositories as sub-custodians of assets
owned by the fund. For its custody services, PNC Bank 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 Bank is also reimbursed by the fund
for out-of-pocket expenses, including the costs of any sub-
custodians.
Transfer Agent. 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 based upon the net asset value of the fund during the
year. First Data is also reimbursed by the fund for out-of-pocket
expenses.
Other information about certain banking laws. The Glass-Steagall
Act prohibits certain financial institutions, such as Citibank,
from underwriting securities of open-end investment companies,
such as the fund. Citibank believes that its services under the
management agreements and the activities performed by it or its
affiliates as service agents are not underwriting and are
consistent with the Glass-Steagall Act and other relevant federal
and state laws. However, there is no controlling precedent
regarding the performance of the combination of investment
advisory, shareholder servicing and administrative activities by
banks. State laws on this issue may differ from applicable
federal law, and banks and financial institutions may be required
to register as dealers pursuant to state securities laws. Changes
in either federal or state statutes or regulations, or in their
interpretations, could prevent Citibank or its affiliates from
continuing to perform those services. If Citibank or its
affiliates were to be prevented from acting as the manager or
service agent, the fund would seek alternative means for obtaining
these services. The fund does not expect that shareholders would
suffer any adverse financial consequences as a result of any such
occurrence.
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 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.
Voting Rights. 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
board of 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.
Annual Reports. The fund sends to each of its shareholders a
semi-annual report and an audited annual report, each of which
includes a list of the investment securities held by the fund at
the end of the period covered. In an effort to reduce the fund's
printing and mailing costs, the fund plans to consolidate the
mailing of its semi-annual and annual reports by household. This
consolidation means that a household having multiple accounts with
the identical address of record will receive a single copy of each
report. In addition, the fund also plans to consolidate the
mailing of its prospectus so that a shareholder having multiple
accounts (that is, individual, IRA and/or Self-Employed Retirement
Plan accounts) will receive a single prospectus annually. When
the fund's annual report is combined with the prospectus into a
single document, the fund will mail the combined document to each
shareholder to comply with legal requirements. Any shareholder
who does not want this consolidation to apply to his or her
account should contact his or her Salomon Smith Barney Financial
Consultant or the fund's transfer agent.
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 involuntary liquidation.
FINANCIAL STATEMENTS
The fund's Annual Report for the fiscal year ended May 31, 1999 is
incorporated herein by reference in its entirety. The Annual
Report was filed on ______________, 1999, accession number 91155-
99_____________.
APPENDIX A
Description of S&P and Moody's ratings:
S&P Ratings for Municipal Bonds
S&P's Municipal Bond ratings cover obligations of states and
political subdivisions. Ratings are assigned to general
obligation and revenue bonds. General obligation bonds are
usually secured by all resources available to the municipality and
the factors outlined in the rating definitions below are weighed
in determining the rating. Because revenue bonds in general are
payable from specifically pledged revenues, the essential element
in the security for a revenue bond is the quantity and quality of
the pledged revenues available to pay debt service.
Although an appraisal of most of the same factors that bear on the
quality of general obligation bond credit is usually appropriate
in the rating analysis of a revenue bond, other factors are
important, including particularly the competitive position of the
municipal enterprise under review and the basic security
covenants. Although a rating reflects S&P's judgment as to the
issuer's capacity for the timely payment of debt service, in
certain instances it may also reflect a mechanism or procedure for
an assured and prompt cure of a default, should one occur, i.e.,
an insurance program, Federal or state guarantee or the automatic
withholding and use of state aid to pay the defaulted debt
service.
AAA
Prime - These are obligations of the highest quality. They have
the strongest capacity for timely payment of debt service.
General Obligation Bonds - In a period of economic stress, the
issuers will suffer the smallest declines in income and will be
least susceptible to autonomous decline. Debt burden is moderate.
A strong revenue structure appears more than adequate to meet
future expenditure requirements. Quality of management appears
superior.
Revenue Bonds - Debt service coverage has been, and is expected to
remain, substantial. Stability of the pledged revenues is also
exceptionally strong, due to the competitive position of the
municipal enterprise or to the nature of the revenues. Basic
security provisions (including rate covenant, earnings test for
issuance of additional bonds, and debt service reserve
requirements) are rigorous. There is evidence of superior
management.
AA
High Grade - The investment characteristics of general obligation
and revenue bonds in this group are only slightly less marked than
those of the prime quality issues. Bonds rated "AA" have the
second strongest capacity for payment of debt service.
A
Good Grade - Principal and interest payments on bonds in this
category are regarded as safe. This rating describes the third
strongest capacity for payment of debt service. It differs from
the two higher ratings because:
General Obligation Bonds - There is some weakness, either in the
local economic base, in debt burden, in the balance between
revenues and expenditures, or in quality of management. Under
certain adverse circumstances, any one such weakness might impair
the ability of the issuer to meet debt obligations at some future
date.
Revenue Bonds - Debt service coverage is good, but not
exceptional. Stability of the pledged revenues could show some
variations because of increased competition or economic influences
on revenues. Basic security provisions, while satisfactory, are
less stringent. Management performance appears adequate.
BBB
Medium Grade - Of the investment grade ratings, this is the
lowest.
General Obligation Bonds - Under certain adverse conditions,
several of the above factors could contribute to a lesser capacity
for payment of debt service. The difference between "A" and "BBB"
ratings is that the latter shows more than one fundamental
weakness, or one very substantial fundamental weakness, whereas
the former shows only one deficiency among the factors considered.
Revenue Bonds - Debt coverage is only fair. Stability of the
pledged revenues could show substantial variations, with the
revenue flow possibly being subject to erosion over time. Basic
security provisions are no more than adequate. Management
performance could be stronger.
BB, B, CCC and CC
Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominately speculative with respect to capacity to pay interest
and repay principal in accordance with the terms of the
obligation. BB indicates the lowest degree of speculation and CC
the highest degree of speculation. While such bonds will likely
have some quality and protective characteristics, these are
outweighed by large uncertainties or major risk exposures to
adverse conditions.
C
The rating C is reserved for income bonds on which no interest is
being paid.
D
Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or
a minus sign, which is used to show relative standing within the
major rating categories, except in the AAA-Prime Grade category.
S&P Ratings for Municipal Notes
Municipal notes with maturities of three years or less are usually
given note ratings (designated SP-1, -2 or -3) by S&P to
distinguish more clearly the credit quality of notes as compared
to bonds. Notes rated SP-1 have a very strong or strong capacity
to pay principal and interest. Those issues determined to possess
overwhelming safety characteristics are given the designation of
SP-1+. Notes rated SP-2 have a satisfactory capacity to pay
principal and interest.
Moody's Ratings for Municipal Bonds
Aaa
Bonds that are Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally
referred to as "gilt edge." Interest payments are protected by a
large or by an exceptionally stable margin and principal is
secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to
impair the fundamentally strong position of such issues.
Aa
Bonds that are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are
generally known as high grade bonds. They are rated lower than
the best bonds because margins of protection may not be as large
as in Aaa securities or fluctuation of protective elements may be
of greater amplitude or there may be other elements present which
make the long-term risks appear somewhat larger than in Aaa
securities.
A
Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium-grade
obligations. Factors giving security to principal and interest
are considered adequate, but elements may be present which suggest
a susceptibility to impairment sometime in the future.
Baa
Bonds that are rated Baa are considered as medium-grade
obligations, i.e., they are neither highly protected nor poorly
secured; interest payments and principal security appear adequate
for the present but certain protective elements may be lacking or
may be characteristically unreliable over any great length of
time. Such bonds lack outstanding investment characteristics and
in fact have speculative characteristics as well.
Ba
Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate
and thereby not well safeguarded during both good and bad times
over the future. Uncertainty of position characterizes bonds in
this class.
B
Bonds that are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal
payments or of maintenance of other terms of the contract over any
long period of time may be small.
Caa
Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect
to principal or interest.
Ca
Bonds that are rated Ca represent obligations that are speculative
in a high degree. These issues are often in default or have other
marked short-comings.
C
Bonds that are rated C are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects
of ever attaining any real investment standing.
Moody's Ratings for Municipal Notes
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG) and for
variable rate demand obligations are designated Variable Moody's
Investment Grade (VMIG). This distinction is in recognition of
the differences between short- and long-term credit risk. Loans
bearing the designation MIG 1 or VMIG 1 are of the best quality,
enjoying strong protection by established cash flows of funds for
their servicing, from established and broad-based access to the
market for refinancing, or both. Loans bearing the designation
MIG 2 or VMIG 2 are of high quality, with margins of protection
ample although not as large as the preceding group. Loans bearing
the designation MIG 3 or VMIG 3 are of favorable quality, with all
security elements accounted for but lacking the undeniable
strength of the preceding grades. Liquidity and cash flow may be
narrow and market access for refinancing is likely to be less well
established.
Description of S&P A-1+ and A-1 Commercial Paper Rating
The rating A-1+ is the highest, and A-1 the second highest,
commercial paper rating assigned by S&P. Paper rated A-1+ must
have either the direct credit support of an issuer or guarantor
that possesses excellent long-term operating and financial
strengths combined with strong liquidity characteristics
(typically, such issuers or guarantors would display credit
quality characteristics which would warrant a senior bond rating
of "AA-" or higher), or the direct credit support of an issuer or
guarantor that possesses above-average long-term fundamental
operating and financing capabilities combined with ongoing
excellent liquidity characteristics. Paper rated A-1 by S&P has
the following characteristics: liquidity ratios are adequate to
meet cash requirements; long-term senior debt is rated "A" or
better; the issuer has access to at least two additional channels
of borrowing; basic earnings and cash flow have an upward trend
with allowance made for unusual circumstances; typically, the
issuer's industry is well established and the issuer has a strong
position within the industry; and the reliability and quality of
management are unquestioned.
Description of Moody's Prime-1 Commercial Paper Rating
The rating Prime-1 is the highest commercial paper rating assigned
by Moody's. Among the factors considered by Moody's in assigning
ratings are the following: (1) evaluation of the management of the
issuer; (2) economic evaluation of the issuer's industry or
industries and an appraisal of speculative-type risks which may be
inherent in certain areas; (3) evaluation of the issuer's products
in relation to competition and customer acceptance; (4) liquidity;
(5) amount and quality of long-term debt; (6) trend of earnings
over a period of ten years; (7) financial strength of a parent
company and the relationships which exist with the issuer; and (8)
recognition by the management of obligations which may be present
or may arise as a result of public interest questions and
preparations to meet such obligations.
G:\legal\funds\arms\1999\secdocs\SAI999 56
G:\legal\funds\arms\1999\secdocs\SAI999 A-5
PART C - FORM N-1A
Item 23. Exhibits
(a)(1) 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").
(a)(2) Amendment No. 1 to First Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 5.
(a)(3) Amendment No. 2 to First Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 9 to the Registration Statement filed October 1,
1995.
(a)(4) Amendment No. 3 to First Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 12 to the Registration Statement filed on March 14,
1997 ("Post-Effective Amendment No. 12")
(a)(5) Amendment No. 4 to First Amended and Restated Master
Trust Agreement is incorporated by reference to Post-Effective
Amendment No. 12
(b) 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").
(c) Registrant's form of share certificate for Class A, B, C,
and I shares is incorporated by reference to Post-Effective
Amendment No. 2 to the Registration Statement filed August 14,
1992 ("Post-Effective Amendment No. 2").
(d)(1) Advisory Agreement between the Registrant and SSBC
Fund Management Inc. (formerly, Smith Barney Strategy Advisers
Inc. and Smith Barney Shearson Strategy Advisers Inc.) is
incorporated by reference to Post-Effective Amendment No. 5.
(d)(2) 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.
(e)(1) 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.
(e)(2) Distribution Agreement between the Registrant and
CFBDS, Inc. is incorporated is filed herewith.
(e)(3) Selling group Agreement between the Registrant and
CFBDS, Inc. is incorporated is filed herewith.
(f) Not Applicable.
(g) Custody Agreement between the Registrant and PNC Bank,
National Association is incorporated by reference to Post-
Effective Amendment No. 9.
(h)(1) Transfer Agency Agreement between the Registrant and
First Data Investor Services Group, Inc. (formerly The
Shareholder Services Group, Inc.) is incorporated by reference to
Pre-Effective Amendment No. 1.
(h)(2) Administration Agreement dated June 1, 1994 between
the Registrant and SSBC Fund Management Inc. (formerly, Smith
Barney Mutual Funds Management Inc. and Smith, Barney Advisers,
Inc.) is incorporated by reference to Post-Effective Amendment
No. 6 to the Registration Statement as filed July 29, 1994
("Post-Effective Amendment No. 6")
(i) Opinion of Counsel is incorporated by reference to Pre-
Effective Amendment No. 1.
(j) Consent of Independent Auditors to be filed by amendment.
(k) Not Applicable.
(l) Purchase Agreement between the Registrant and Shearson
Lehman Brothers Inc. is incorporated by reference to Pre-
Effective Amendment No. 1.
(m)(1) Amended Services and Distribution Plan pursuant to
Rule 12b-1 dated February 25, 1997 is incorporated by reference
to Post-Effective Amendment No. 12.
(m)(2) Form of Amended and Restated Shareholder services and
distribution plan pursuant to Rule 12b-1 for the Registrant is
filed herewith.
.
(n) Financial Data Statement to be filed by amendment.
(o)(1) Amended Plan pursuant to Rule 18f-3 under the
Investment Company Act of 1940 is incorporated by reference to
Post-Effective Amendment No. 14.
Item 24. Persons Controlled by or Under Common Control with
Registrant
None.
Item 25. Indemnification
The response to this item is incorporated by reference to
Pre-Effective Amendment No. 1.
Item 26. Business and Other Connections of Investment Adviser
Investment Adviser - SSBC Fund Management Inc. ("SSBC")(formerly
Mutual Management Corp.)
SSBC was incorporated under the laws of the State of Delaware in
December 1968. SSBC is a wholly owned subsidiary of Salomon
Smith Barney Holdings Inc. (formerly Smith Barney Holdings Inc.),
which in turn is a wholly owned subsidiary of Citigroup Inc.
("Citigroup"). SSBC is registered as an investment adviser under
the Investment Advisers Act of 1940 (the "Advisers Act").
The list required by this Item 26 of officers and Trustees of
SSBC 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 SSBC pursuant to the Advisers Act (SEC File No. 801-
8314).
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 27. Principal Underwriters
(a) CFBDS, Inc., ("CFBDS") the Registrant's Distributor,
is also the distributor for the following Smith Barney
funds: Concert Investment Series, Consulting Group Capital
Markets Funds, Greenwich Street Series Fund, Smith Barney
Adjustable Rate Government Income Fund, Smith Barney
Aggressive Growth Fund Inc., Smith Barney Appreciation Fund
Inc., Smith Barney Arizona Municipals Fund Inc., Smith
Barney California Municipals Fund Inc., Smith Barney
Concert Allocation Series Inc., Smith Barney Equity Funds,
Smith Barney Fundamental Value Fund Inc., Smith Barney
Funds, Inc., Smith Barney Income Funds, Smith Barney
Institutional Cash Management Fund, Inc., Smith Barney
Investment Funds Inc., Smith Barney Investment Trust, Smith
Barney Managed Governments Fund Inc., Smith Barney Managed
Municipals Fund Inc., Smith Barney Massachusetts Municipals
Fund, Smith Barney Money Funds, Inc., Smith Barney Muni
Funds, Smith Barney Municipal Money Market Fund, Inc.,
Smith Barney New Jersey Municipals Fund Inc., Smith Barney
Oregon Municipals Fund Inc., Smith Barney Principal Return
Fund, Smith Barney Small Cap Blend Fund, Inc., Smith Barney
Telecommunications Trust, Smith Barney Variable Account
Funds, Smith Barney World Funds, Inc., Travelers Series
Fund Inc., and various series of unit investment trusts.
CFBDS also serves as the distributor for the following
funds: The Travelers Fund UL for Variable Annuities, The
Travelers Fund VA for Variable Annuities, The Travelers
Fund BD for Variable Annuities, The Travelers Fund BD II
for Variable Annuities, The Travelers Fund BD III for
Variable Annuities, The Travelers Fund BD IV for Variable
Annuities, The Travelers Fund ABD for Variable Annuities,
The Travelers Fund ABD II for Variable Annuities, The
Travelers Separate Account PF for Variable Annuities, The
Travelers Separate Account PF II for Variable Annuities,
The Travelers Separate Account QP for Variable Annuities,
The Travelers Separate Account TM for Variable Annuities,
The Travelers Separate Account TM II for Variable
Annuities, The Travelers Separate Account Five for Variable
Annuities, The Travelers Separate Account Six for Variable
Annuities, The Travelers Separate Account Seven for
Variable Annuities, The Travelers Separate Account Eight
for Variable Annuities, The Travelers Fund UL for Variable
Annuities, The Travelers Fund UL II for Variable Annuities,
The Travelers Variable Life Insurance Separate Account One,
The Travelers Variable Life Insurance Separate Account Two,
The Travelers Variable Life Insurance Separate Account
Three, The Travelers Variable Life Insurance Separate
Account Four, The Travelers Separate Account MGA, The
Travelers Separate Account MGA II, The Travelers Growth and
Income Stock Account for Variable Annuities, The Travelers
Quality Bond Account for Variable Annuities, The Travelers
Money Market Account for Variable Annuities, The Travelers
Timed Growth and Income Stock Account for Variable
Annuities, The Travelers Timed Short-Term Bond Account for
Variable Annuities, The Travelers Timed Aggressive Stock
Account for Variable Annuities, The Travelers Timed Bond
Account for Variable Annuities.
In addition, CFBDS, the Registrant's Distributor, is also
the distributor for CitiFunds Multi-State Tax Free Trust,
CitiFunds Premium Trust, CitiFunds Institutional Trust,
CitiFunds Tax Free Reserves, CitiFunds Trust I, CitiFunds
Trust II, CitiFunds Trust III, CitiFunds International
Trust, CitiFunds Fixed Income Trust, CitiSelect VIP Folio
200, CitiSelect VIP Folio 300, CitiSelect VIP Folio 400,
CitiSelect VIP Folio 500, CitiFunds Small Cap Growth VIP
Portfolio. CFBDS is also the placement agent for Large Cap
Value Portfolio, Small Cap Value Portfolio, International
Portfolio, Foreign Bond Portfolio, Intermediate Income
Portfolio, Short-Term Portfolio, Growth & Income Portfolio,
U.S. Fixed Income Portfolio, Large Cap Growth Portfolio,
Small Cap Growth Portfolio, International Equity Portfolio,
Balanced Portfolio, Government Income Portfolio, Tax Free
Reserves Portfolio, Cash Reserves Portfolio and U.S.
Treasury Reserves Portfolio.
In addition, CFBDS is also the distributor for the
following Salomon Brothers funds: Salomon Brothers
Opportunity Fund Inc., Salomon Brothers Investors Fund
Inc., Salomon Brothers Capital Fund Inc., Salomon Brothers
Series Funds Inc., Salomon Brothers Institutional Series
Funds Inc., Salomon Brothers Variable Series Funds Inc.
In addition, CFBDS is also the distributor for the
Centurion Funds, Inc.
(b) The information required by this Item 27 with respect
to each director and officer of CFBDS is incorporated by
reference to Schedule A of Form BD filed by CFBDS pursuant
to the Securities and Exchange Act of 1934 (File No. 8-
32417).
(c) Not applicable.
Item 28. Location of Accounts and Records
(1) Salomon Smith Barney Inc.
388 Greenwich Street, 22nd Floor
New York, New York 10013
. (2) Salomon Smith Adjustable Rate Government Fund
388 Greenwich Street, 22nd Floor
New York, New York 10013
(3) SSBC Fund Management Inc.
388 Greenwich Street, 22nd Floor
New York, New York 10013
(4) BlackRock Financial Management Inc.
345 Park Avenue, 31st Floor
New York, New York 10154
(5) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, Pennsylvania
(6) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
(7) CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Item 29. Management Services
Not Applicable.
Item 30. Undertakings
Not Applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933,
as amended, and the Investment Company Act of 1940, as amended,
the Registrant, has duly caused this Post-Effective Amendment to
its Registration Statement to be signed on its behalf by the
undersigned, and where applicable, the true and lawful attorney-
in-fact, thereunto duly authorized, all in the City of New York,
State of New York on the 30th day of July, 1999.
SMITH BARNEY ADJUSTABLE RATE
GOVERNMENT INCOME FUND
By: /s/ Heath B. McLendon
Heath B. McLendon, Chairman of the Board,
President and 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 Power of Attorney has been signed below by the following
persons in the capacities and on the dates indicated.
Signature Title Date
/s/Heath B. McLendon
Heath B. McLendon Chairman of the Board, 7/30/99
President and Chief
Executive Officer
/s/ Lewis E. Daidone
Lewis E. Daidone Senior Vice President
7/30/99
and Treasurer (Chief
Financial and Accounting Officer)
/s/Allan J. Bloostein*
Allan J. Bloostein Trustee
7/30/99
/s/ Martin Brody* Trustee
7/30/99
Martin Brody
/s/Dwight B. Crane* Trustee
Dwight B. Crane 7/30/99
/s/ Robert A. Frankel* Trustee
Robert A. Frankel 7/30/99
/s/ William R. Hutchinson* Trustee
7/30/99
William R. Hutchinson
* Signed by Heath McLendon, their duly authorized attorney-in-
fact, pursuant to power of attorney filed with Post Effective No
12.
Exhibit Index
(e)(2) Distribution Agreement between the Registrant and
CFBDS, Inc. is incorporated is filed herewith.
(e)(3) Selling group Agreement between the Registrant and
CFBDS, Inc. is incorporated is filed herewith.
(j) Consent of Independent auditors to be filed by amendment
(m)(2) Form of Amended and Restated Shareholder services and
distribution plan pursuant to Rule 12b-1 for the registrant is
filed herewith.
(n) Financial Data Statement to be filed by amendment
SMITH BARNEY ADJUSTABLE RATE GOVERNMENT INCOME FUND
DISTRIBUTION AGREEMENT
October 8, 1998
CFBDS, Inc.
21 Milk Street
Boston, MA 02109
Dear Sirs:
This is to confirm that, in consideration of the agreements
hereinafter contained, the above-named investment company (the
"Fund") has agreed that you shall be, for the period of this
Agreement, the non-exclusive principal underwriter and distributor
of shares of the Fund and each Series of the Fund set forth on
Exhibit A hereto, as such Exhibit may be revised from time to time
(each, including any shares of the Fund not designated by series,
a "Series"). For purposes of this Agreement, the term "Shares"
shall mean shares of the each Series, or one or more Series, as
the context may require.
1. Services as Principal Underwriter and Distributor
1.1 You will act as agent for the distribution of
Shares covered by, and in accordance with, the registration
statement, prospectus and statement of additional information then
in effect under the Securities Act of 1933, as amended (the "1933
Act"), and the Investment Company Act of 1940, as amended (the
"1940 Act"), and will transmit or cause to be transmitted promptly
any orders received by you or those with whom you have sales or
servicing agreements for purchase or redemption of Shares to the
Transfer and Dividend Disbursing Agent for the Fund of which the
Fund has notified you in writing.
1.2 You agree to use your best efforts to solicit
orders for the sale of Shares. It is contemplated that you will
enter into sales or servicing agreements with registered
securities dealers and banks and into servicing agreements with
financial institutions and other industry professionals, such as
investment advisers, accountants and estate planning firms. In
entering into such agreements, you will act only on your own
behalf as principal underwriter and distributor. You will not be
responsible for making any distribution plan or service fee
payments pursuant to any plans the Fund may adopt or agreements it
may enter into.
1.3 You shall act as principal underwriter and
distributor of Shares in compliance with all applicable laws,
rules, and regulations, including, without limitation, all rules
and regulations made or adopted from time to time by the
Securities and Exchange Commission (the "SEC") pursuant to the
1933 Act or the 1940 Act or by any securities association
registered under the Securities Exchange Act of 1934, as amended.
1.4 Whenever in their judgment such action is
warranted for any reason, including, without limitation, market,
economic or political conditions, the Fund's officers may decline
to accept any orders for, or make any sales of, any Shares until
such time as those officers deem it advisable to accept such
orders and to make such sales and the Fund shall advise you
promptly of such determination.
2. Duties of the Fund
2.1 The Fund agrees to pay all costs and expenses in
connection with the registration of Shares under the 1933 Act, and
all expenses in connection with maintaining facilities for the
issue and transfer of Shares and for supplying information, prices
and other data to be furnished by the Fund hereunder, and all
expenses in connection with the preparation and printing of the
Fund's prospectuses and statements of additional information for
regulatory purposes and for distribution to shareholders; provided
however, that nothing contained herein shall be deemed to require
the Fund to pay any of the costs of advertising or marketing the
sale of Shares.
2.2 The Fund agrees to execute any and all documents
and to furnish any and all information and otherwise to take any
other actions that may be reasonably necessary in the discretion
of the Fund's officers in connection with the qualification of
Shares for sale in such states and other U.S. jurisdictions as the
Fund may approve and designate to you from time to time, and the
Fund agrees to pay all expenses that may be incurred in connection
with such qualification. You shall pay all expenses connected
with your own qualification as a securities broker or dealer under
state or Federal laws and, except as otherwise specifically
provided in this Agreement, all other expenses incurred by you in
connection with the sale of Shares as contemplated in this
Agreement.
2.3 The Fund shall furnish you from time to time, for
use in connection with the sale of Shares, such information
reports with respect to the Fund or any relevant Series and the
Shares as you may reasonably request, all of which shall be signed
by one or more of the Fund's duly authorized officers; and the
Fund warrants that the statements contained in any such reports,
when so signed by the Fund's officers, shall be true and correct.
The Fund also shall furnish you upon request with (a) the reports
of annual audits of the financial statements of the Fund for each
Series made by independent certified public accountants
retained by the Fund for such purpose; (b) semi-annual unaudited
financial statements pertaining to each Series; (c) quarterly
earnings statements prepared by the Fund; (d) a monthly itemized
list of the securities in each Series' portfolio; (e) monthly
balance sheets as soon as practicable after the end of each month;
(f) the current net asset value and offering price per share for
each Series on each day such net asset value is computed and (g)
from time to time such additional information regarding the
financial condition of each Series of the Fund as you may
reasonably request.
3. Representations and Warranties
The Fund represents to you that all registration statements,
prospectuses and statements of additional information filed by the
Fund with the SEC under the 1933 Act and the 1940 Act with respect
to the Shares have been prepared in conformity with the
requirements of said Acts and the rules and regulations of the SEC
thereunder. As used in this Agreement, the terms "registration
statement", "prospectus" and "statement of additional information"
shall mean any registration statement, prospectus and statement of
additional information filed by the Fund with the SEC and any
amendments and supplements thereto filed by the Fund with the SEC.
The Fund represents and warrants to you that any registration
statement, prospectus and statement of additional information,
when such registration statement becomes effective and as such
prospectus and statement of additional information are amended or
supplemented, will include at the time of such effectiveness,
amendment or supplement all statements required to be contained
therein in conformance with the 1933 Act, the 1940 Act and the
rules and regulations of the SEC; that all statements of material
fact contained in any registration statement, prospectus or
statement of additional information will be true and correct when
such registration statement becomes effective; and that neither
any registration statement nor any prospectus or statement of
additional information when such registration statement becomes
effective will include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading to a
purchaser of the Fund's Shares. The Fund may, but shall not be
obligated to, propose from time to time such amendment or
amendments to any registration statement and such supplement or
supplements to any prospectus or statement of additional
information as, in the light of future developments, may, in the
opinion of the Fund, be necessary or advisable. If the Fund shall
not propose such amendment or amendments and/or supplement or
supplements within fifteen days after receipt by the Fund of a
written request from you to do so, you may, at your option,
terminate this Agreement or decline to make offers of the Fund's
Shares until such amendments are made. The Fund shall not file
any amendment to any registration statement or supplement to any
prospectus or statement of additional information without giving
you reasonable notice thereof in advance; provided, however, that
nothing contained in this Agreement shall in any way limit the
Fund's right to file at any time such amendments to any
registration statement and/or supplements to any prospectus or
statement of additional information, of whatever character, as the
Fund may deem advisable, such right being in all respects absolute
and unconditional.
4. Indemnification
4.1 The Fund authorizes you to use any prospectus or
statement of additional information furnished by the Fund from
time to time, in connection with the sale of Shares. The Fund
agrees to indemnify, defend and hold you, your several officers
and directors, and any person who controls you within the meaning
of Section 15 of the 1933 Act, free and harmless from and against
any and all claims, demands, liabilities and expenses (including
the cost of investigating or defending such claims, demands or
liabilities and any such counsel fees incurred in connection
therewith) which you, your officers and directors, or any such
controlling person, may incur under the 1933 Act or under common
law or otherwise, arising out of or based upon any untrue
statement, or alleged untrue statement, of a material fact
contained in any registration statement, any prospectus or any
statement of additional information or arising out of or based
upon any omission, or alleged omission, to state a material fact
required to be stated in any registration statement, any
prospectus or any statement of additional information or necessary
to make the statements in any of them not misleading; provided,
however, that the Fund's agreement to indemnify you, your officers
or directors, and any such controlling person shall not be deemed
to cover any claims, demands, liabilities or expenses arising out
of any statements or representations made by you or your
representatives or agents other than such statements and
representations as are contained in any prospectus or statement of
additional information and in such financial and other statements
as are furnished to you pursuant to paragraph 2.3 of this
Agreement; and further provided that the Fund's agreement to
indemnify you and the Fund's representations and warranties herein
before set forth in paragraph 3 of this Agreement shall not be
deemed to cover any liability to the Fund or its shareholders to
which you would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence in the performance of
your duties, or by reason of your reckless disregard of your
obligations and duties under this Agreement. The Fund's agreement
to indemnify you, your officers and directors, and any such
controlling person, as aforesaid, is expressly conditioned upon
the Fund's being notified of any action brought against you, your
officers or directors, or any such controlling person, such
notification to be given by letter or by telegram addressed to the
Fund at its principal office in New York, New York and sent to the
Fund by the person against whom such action is brought, within ten
days after the summons or other first legal process shall have
been served. The failure so to notify the Fund of any such action
shall not relieve the Fund from any liability that the Fund may
have to the person against whom such action is brought by reason
of any such untrue, or alleged untrue, statement or omission, or
alleged omission, otherwise than on account of the Fund's
indemnity agreement contained in this paragraph 4.1. The Fund
will be entitled to assume the defense of any suit brought to
enforce any such claim, demand or liability, but, in such case,
such defense shall be conducted by counsel of good standing chosen
by the Fund. In the event the Fund elects to assume the defense
of any such suit and retains counsel of good standing, the
defendant or defendants in such suit shall bear the fees and
expenses of any additional counsel retained by any of them; but if
the Fund does not elect to assume the defense of any such suit,
the Fund will reimburse you, your officers and directors, or the
controlling person or persons named as defendant or defendants in
such suit, for the fees and expenses of any counsel retained by
you or them. The Fund's indemnification agreement contained in
this paragraph 4.1 and the Fund's representations and warranties
in this Agreement shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of
you, your officers and directors, or any controlling person, and
shall survive the delivery of any of the Fund's Shares. This
agreement of indemnity will inure exclusively to your benefit, to
the benefit of your several officers and directors, and their
respective estates, and to the benefit of the controlling persons
and their successors. The Fund agrees to notify you promptly of
the commencement of any litigation or proceedings against the Fund
or any of its officers or Board members in connection with the
issuance and sale of any of the Fund's Shares.
4.2 You agree to indemnify, defend and hold the Fund,
its several officers and Board members, and any person who
controls the Fund within the meaning of Section 15 of the 1933
Act, free and harmless from and against any and all claims,
demands, liabilities and expenses (including the costs of
investigating or defending such claims, demands or liabilities and
any counsel fees incurred in connection therewith) that the Fund,
its officers or Board members or any such controlling person may
incur under the 1933 Act, or under common law or otherwise, but
only to the extent that such liability or expense incurred by the
Fund, its officers or Board members, or such controlling person
resulting from such claims or demands shall arise out of or be
based upon (a) any unauthorized sales literature, advertisements,
information, statements or representations or (b) any untrue, or
alleged untrue, statement of a material fact contained in
information furnished in writing by you to the Fund and used in
the answers to any of the items of the registration statement or
in the corresponding statements made in the prospectus or
statement of additional information, or shall arise out of or be
based upon any omission, or alleged omission, to state a material
fact in connection with such information furnished in writing by
you to the Fund and required to be stated in such answers or
necessary to make such information not misleading. Your agreement
to indemnify the Fund, its officers or Board members, and any such
controlling person, as aforesaid, is expressly conditioned upon
your being notified of any action brought against the Fund, its
officers or Board members, or any such controlling person, such
notification to be given by letter or telegram addressed to you at
your principal office in Boston, Massachusetts and sent to you by
the person against whom such action is brought, within ten days
after the summons or other first legal process shall have been
served. You shall have the right to control the defense of such
action, with counsel of your own choosing, satisfactory to the
Fund, if such action is based solely upon such alleged
misstatement or omission on your part or with the Fund's consent,
and in any event the Fund, its officers or Board members or such
controlling person shall each have the right to participate in the
defense or preparation of the defense of any such action with
counsel of its own choosing reasonably acceptable to you but shall
not have the right to settle any such action without your consent,
which will not be unreasonably withheld. The failure to so notify
you of any such action shall not relieve you from any liability
that you may have to the Fund, its officers or Board members, or
to such controlling person by reason of any such untrue, or
alleged untrue, statement or omission, or alleged omission,
otherwise than on account of your indemnity agreement contained in
this paragraph 4.2. You agree to notify the Fund promptly of the
commencement of any litigation or proceedings against you or any
of your officers or directors in connection with the issuance and
sale of any of the Fund's Shares.
5. Effectiveness of Registration
No Shares shall be offered by either you or the Fund under
any of the provisions of this Agreement and no orders for the
purchase or sale of such Shares under this Agreement shall be
accepted by the Fund if and so long as the effectiveness of the
registration statement then in effect or any necessary amendments
thereto shall be suspended under any of the provisions of the 1933
Act, or if and so long as a current prospectus as required by
Section 5(b) (2) of the 1933 Act is not on file with the SEC;
provided, however, that nothing contained in this paragraph 5
shall in any way restrict or have an application to or bearing
upon the Fund's obligation to repurchase its Shares from any
shareholder in accordance with the provisions of the Fund's
prospectus, statement of additional information or charter
documents, as amended from time to time.
6. Offering Price
Shares of any class of any Series of the Fund offered for
sale by you shall be offered for sale at a price per share (the
"offering price") equal to (a) their net asset value (determined
in the manner set forth in the Fund's charter documents and the
then-current prospectus and statement of additional information)
plus (b) a sales charge, if applicable, which shall be the
percentage of the offering price of such Shares as set forth in
the Fund's then-current prospectus relating to such Series. In
addition to or in lieu of any sales charge applicable at the time
of sale, Shares of any class of any Series of the Fund offered for
sale by you may be subject to a contingent deferred sales charge
as set forth in the Fund's then-current prospectus and statement
of additional information. You shall be entitled to receive any
sales charge levied at the time of sale in respect of the Shares
without remitting any portion to the Fund. Any payments to a
broker or dealer through whom you sell Shares shall be governed by
a separate agreement between you and such broker or dealer and the
Fund's then-current prospectus and statement of additional
information
7. Notice to You
The Fund agrees to advise you immediately in writing:
(a) of any request by the SEC
for amendments to the registration
statement, prospectus or statement of
additional information then in effect
or for additional information;
(b) in the event of the issuance
by the SEC of any stop order suspending
the effectiveness of the registration
statement, prospectus or statement of
additional information then in effect
or the initiation of any proceeding for
that purpose;
(c) of the happening of any
event that makes untrue any statement
of a material fact made in the
registration statement, prospectus or
statement of additional information
then in effect or that requires the
making of a change in such registration
statement, prospectus or statement of
additional
information in order to make the
statements therein not misleading; and
(d) of all actions of the SEC
with respect to any amendment to the
registration statement, or any
supplement to the prospectus or
statement of additional information
which may from time to time be filed
with the SEC.
8. Term of the Agreement
This Agreement shall become effective on the date hereof,
shall have an initial term of one year from the date hereof, and
shall continue for successive annual periods thereafter so long as
such continuance is specifically approved at least annually by (a)
the Fund's Board or (b) by a vote of a majority (as defined in the
1940 Act) of the Fund's outstanding voting securities, provided
that in either event the continuance is also approved by a
majority of the Board members of the Fund who are not interested
persons (as defined in the 1940 Act) of any party to this
Agreement, by vote cast in person at a meeting called for the
purpose of voting on such approval. This Agreement is terminable,
without penalty, on 30 days' notice by the Fund's Board or by vote
of holders of a majority of the relevant Series outstanding voting
securities, or on 90 days' notice by you. This Agreement will
also terminate automatically, as to the relevant Series, in the
event of its assignment (as defined in the 1940 Act and the rules
and regulations thereunder).
9. Arbitration
Any claim, controversy, dispute or deadlock arising
under this Agreement (collectively, a "Dispute") shall be settled
by arbitration administered under the rules of the American
Arbitration Association ("AAA") in New York, New York. Any
arbitration and award of the arbitrators, or a majority of them,
shall be final and the judgment upon the award rendered may be
entered in any state or federal court having jurisdiction. No
punitive damages are to be awarded.
10. Miscellaneous
So long as you act as a principal underwriter and
distributor of Shares, you shall not perform any services for any
entity other than investment companies advised or administered by
Citigroup Inc. or its subsidiaries. The Fund recognizes that the
persons employed by you to assist in the performance of your
duties under this Agreement may not devote their full time to such
service and nothing contained in this Agreement shall be deemed to
limit or restrict your or any of your affiliates right to engage
in and devote time and attention to other businesses or to render
services of whatever kind or nature. This Agreement and the
terms and conditions set forth herein shall be governed by, and
construed in accordance with, the laws of the State of New York.
11. Limitation of Liability (Massachusetts business
trusts only)
The Fund and you agree that the obligations of the Fund
under this Agreement shall not be binding upon any of the
Trustees, shareholders, nominees, officers, employees or agents,
whether past, present or future, of the Fund, individually, but
are binding only upon the assets and property of the Fund, as
provided in the Master Trust Agreement. The execution and
delivery of this Agreement have been authorized by the Trustees
and signed by an authorized officer of the Fund, acting as such,
and neither such authorization by such Trustees nor such execution
and delivery by such officer shall be deemed to have been made by
any of them individually or to impose any liability on any of them
personally, but shall bind only the trust property of the Fund as
provided in its Master Trust Agreement.
If the foregoing is in accordance with your understanding,
kindly indicate your acceptance of this Agreement by signing and
returning to us the enclosed copy, whereupon this Agreement will
become binding on you.
Very truly yours,
SMITH BARNEY ADJUSTABLE RATE
GOVERNMENT INCOME FUND
By: _____________________
Authorized Officer
Accepted:
CFBDS, INC.
By: __________________________
Authorized Officer
Page: 3
SMITH BARNEY MUTUAL FUNDS
BROKER DEALER CONTRACT
CFBDS, Inc.
21 Milk Street
Boston, Massachusetts 02109
Salomon Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
We, CFBDS, Inc. ("CFBDS"), have agreements
with certain investment companies for which Mutual
Management Corp. serves as investment adviser and/or
administrator (each a "Fund") pursuant to which we act
as nonexclusive principal underwriter and distributor
for the sale of shares of capital stock ("shares") of
the various series of such Funds, and as such have the
right to distribute shares for resale. Each Fund is
an open-end investment company registered under the
Investment Company Act of 1940, as amended (the "1940
Act") and the shares being offered to the public are
registered under the Securities Act of 1933, as
amended (the "1933 Act"). Each series of each Fund
covered by a Distribution Agreement from time to time
is referred to in this agreement as a "Series" and
collectively as the "Series." The term "Prospectus",
as used herein, refers to the prospectus and related
statement of additional information (the "Statement of
Additional Information") incorporated therein by
reference (as amended or supplemented) on file with
the Securities and Exchange Commission at the time in
question. As a broker in the capacity of principal
underwriter and distributor for the Trust, we offer to
sell to you, as a broker or dealer, shares of each
Fund upon the following terms and conditions:
1. PRIVATE In all sales to the public
you shall act as broker for your customers or as
dealer for your own account, and in no transaction
shall you have any authority to act as agent for the
Trust, for us or for any other dealer. tc " In all
sales to the public you shall act as dealer for your
own account, and in no transaction shall you have any
authority to act as agent for the Fund, for us or for
any other dealer."
2. PRIVATE Orders received from you
will be accepted through us only at the public
offering price per share (i.e. the net asset value per
share plus the applicable front-end sales charge, if
any) applicable to each order, and all orders for
redemption of any shares shall be executed at the net
asset value per share less any contingent deferred
sales charge, if any, in each case as set forth in the
Prospectus. You will be entitled to receive and
retain any contingent deferred sales charge amounts in
partial consideration of your payment to financial
consultants of commission amounts at the time of sale
and we will obligate any other brokers with whom we
enter into similar agreements to pay such amounts
directly to you. The procedure relating to the
handling of orders shall be subject to paragraph 4
hereof and instructions which we or the Fund shall
forward from time to time to you. All orders are
subject to acceptance or rejection by the applicable
Fund or us in the sole discretion of either. The
minimum initial purchase and the minimum subsequent
purchase of any shares shall be as set forth in the
Prospectus pertaining to the relevant Series. tc "
Orders received from you will be accepted through us
only at the public offering price per share (i.e. the
net asset value per share plus the applicable sales
charge, if any) applicable to each order, and all
orders for redemption of any Fund shares shall be
executed at the net asset value per share less any
contingent deferred sales charge, if any, in each case
as set forth in the Prospectus. The procedure
relating to the handling of orders shall be subject to
paragraph 4 hereof and instructions which we or the
Fund shall forward from time to time to you. All
orders are subject to acceptance or rejection by
Salomon or the Fund in the sole discretion of either.
The minimum initial purchase and the minimum
subsequent purchase shall be as set forth in the
Prospectus of the Fund."
3. PRIVATE You shall not place orders
for any shares unless you have already received
purchase orders for those shares at the applicable
public offering price and subject to the terms hereof.
You agree that you will not offer or sell any shares
except under circumstances that will result in
compliance with the applicable Federal and state
securities laws, the applicable rules and regulations
thereunder and the rules and regulations of applicable
regulatory agencies or authorities and that in
connection with sales and offers to sell shares you
will furnish to each person to whom any such sale or
offer is made, a copy of the Prospectus and, upon
request, the Statement of Additional Information, and
will not furnish to any person any information
relating to shares which is inconsistent in any
respect with the information contained in the
Prospectus or Statement of Additional Information (as
then amended or supplemented). You shall not furnish
or cause to be furnished to any person or display or
publish any information or materials relating to the
shares (including, without limitation, promotional
materials and sales literature, advertisements, press
releases, announcements, statements, posters, signs or
other similar material), except such information and
materials as may be furnished to you by or on behalf
of us or the Funds, and such other information and
materials as may be approved in writing by or on
behalf of us or the Funds. tc " You shall not place
orders for any shares unless you have already received
purchase orders for those shares at the applicable
public offering price and subject to the terms hereof
and of the Distribution Contract. You agree that you
will not"
4. PRIVATE As a broker dealer, you are
hereby authorized (i) to place orders directly with
the applicable Fund or Series for shares subject to
the applicable terms and conditions governing the
placement of orders by us set forth in the Prospectus
and (ii) to tender shares directly to each Fund or its
agent for redemption subject to the applicable terms
and conditions governing the redemption of shares
applicable to us set forth in the Prospectus. tc " As
a dealer, you are hereby authorized (i) to place
orders directly with the Fund for shares to be resold
by us to you subject to the applicable terms and
conditions governing the placement of orders by us set
forth in the Prospectus and the Distribution Contract
and (ii) to tender shares directly to the Fund or its
agent for redemption subject to the applicable terms
and conditions governing the redemption of shares
applicable to us set forth in the Prospectus and the
Distribution Agreement."
5. PRIVATE You shall not withhold
placing orders received from your customers so as to
profit yourself as a result of such withholding, e.g.,
by a change in the "net asset value" from that used in
determining the offering price to your customers. tc "
You shall not withhold placing orders received from
your customers so as to profit yourself as a result of
such withholding, e.g., by a change in the \"net asset
value\" from that used in determining the offering
price to your customers."
6. PRIVATE In determining the amount
of any sales concession payable to you hereunder, we
reserve the right to exclude any sales which we
reasonably determine are not made in accordance with
the terms of the Prospectus and the provisions of this
Agreement. Unless at the time of transmitting an
order we advise you or the transfer agent to the
contrary, the shares ordered will be deemed to be the
total holdings of the specified investor. tc " In
determining the amount of any sales concession payable
to you hereunder, we reserve the right to exclude any
sales which we reasonably determine are not made in
accordance with the terms of the Prospectus and the
provisions of this Agreement. Unless at the time of
transmitting an order we advise you or the transfer
agent to the contrary, the shares ordered will be
deemed to be the total holdings of the specified
investor."
7. PRIVATE (a) You agree that payment
for orders from you for the purchase of shares will be
made in accordance with the terms of the Prospectus.
On or before the business day following the settlement
date of each purchase order for shares, you shall
transfer same day funds to an account designated by us
with the transfer agent in an amount equal to the
public offering price on the date of purchase of the
shares being purchased less your sales concession, if
any, with respect to such purchase order determined in
accordance with the Prospectus. If payment for any
purchase order is not received in accordance with the
terms of the Prospectus, we reserve the right, without
notice, to cancel the sale and to hold you responsible
for any loss sustained as a result thereof. tc " (a)
You agree that payment for orders from you for the
purchase of shares will be made in accordance with the
terms of the Prospectus. On or before the business
day following the settlement date of each purchase
order for shares, you shall transfer same day funds to
an account designated by us with the transfer agent an
amount equal to the public offering price on the date
of purchase of the shares being purchased less your
sales concession, if any, with respect to such
purchase order determined in accordance with the
Prospectus. If payment for any purchase order is not
received in accordance with the terms of the
Prospectus, we reserve the right, without notice, to
cancel the sale and to hold you responsible for any
loss sustained as a result thereof."
(b) PRIVATE If any shares sold under the
terms of this Agreement are sold with a sales charge
and are redeemed or are tendered for redemption within
seven (7) business days after confirmation of your
purchase order for such shares: (i) you shall
forthwith refund to us the full sales concession
received by you on the sale; and (ii) we shall
forthwith pay to the applicable Series our portion of
the sales charge on the sale which has been retained
by us, if any, and shall also pay to the applicable
Series the amount refunded by you. tc " If any shares
sold under the terms of this Agreement are sold with a
sales charge and are redeemed or are tendered for
redemption within seven (7) business days after
confirmation of your purchase order for such shares\:
(i) you shall forthwith refund to us the full sales
concession received by you on the sale; and (ii) we
shall forthwith pay to the applicable Series our
portion of the sales charge on the sale which has been
retained by us, if any, and shall also pay to the
Series the amount refunded by you."
(c) PRIVATE We will not be obligated to
pay or cause to be paid to you any ongoing trail
commission or shareholder service fees with respect to
shares of the Series purchased through you and held by
or for your customers, which you shall collect
directly from the Funds. tc " We will pay you an
ongoing trail commission with respect to holdings by
you of shares of the Funds at such rates and in such
manner as may be described in the Prospectus."
(d) PRIVATE Certificates evidencing
shares shall be available only upon request. Upon
payment for shares in accordance with paragraph 7(a)
above, the transfer agent will issue and transmit to
you or your customer a confirmation statement
evidencing the purchase of such shares. Any
transaction in uncertificated shares, including
purchases, transfers, redemptions and repurchases,
shall be effected and evidenced by book-entry on the
records of the transfer agent. tc " Certificates
evidencing shares shall be available only upon
request. Upon payment for shares in accordance with
paragraph 7(a) above, the transfer agent will issue
and transmit to you a confirmation statement
evidencing the purchase of such shares. Any
transaction in uncertificated shares, including
purchases, transfers, redemptions and repurchases,
shall be effected and evidenced by book-entry on the
records of the transfer agent."
8. PRIVATE No person is authorized to
make any representations concerning shares except
those contained in the current Prospectus and
Statement of Additional Information and in printed
information subsequently issued by us or the Funds as
information supplemental to the Prospectus and the
Statement of Additional Information. In purchasing or
offering shares pursuant to this Agreement you shall
rely solely on the representations contained in the
Prospectus, the Statement of Additional Information
and the supplemental information above mentioned. tc "
No person is authorized to make any representations
concerning shares except those contained in the
current Prospectus and Statement of Additional
Information and in printed information subsequently
issued by us or the Fund as information supplemental
to the Prospectus and the Statement of Additional
Information. In purchasing sor offering shares
pursuant to this Agreement you shall rely solely on
the representations contained in the Prospectus, the
Statement of Additional Information and the
supplemental information above mentioned."
9. PRIVATE You agree to deliver to
each purchaser making a purchase of shares from or
through you a copy of the Prospectus at or prior to
the time of offering or sale, and, upon request, the
Statement of Additional Information. You may instruct
the transfer agent to register shares purchased in
your name and account as nominee for your customers.
You agree thereafter to deliver to any purchaser whose
shares you or your nominee are holding as record
holder copies of the annual and interim reports and
proxy solicitation materials and any other information
and materials relating to the Trust and prepared by or
on behalf of us, the Funds or the investment adviser,
custodian, transfer agent or dividend disbursing agent
for distribution to beneficial holders of shares. The
Funds shall be responsible for the costs associated
with forwarding such reports, materials and other
information and shall reimburse you in full for such
costs. You further agree to make reasonable efforts
to endeavor to obtain proxies from such purchasers
whose shares you or your nominee are holding as record
holder. You further agree to obtain from each
customer to whom you sell shares any taxpayer
identification number certification required under
Section 3406 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations promulgated
thereunder, and to provide us or our designee with
timely written notice of any failure to obtain such
taxpayer identification number certification in order
to enable the implementation of any required backup
withholding in accordance with Section 3406 of the
Code and the regulations thereunder. Additional
copies of the Prospectus, Statement of Additional
Information, annual or interim reports, proxy
solicitation materials and any such other information
and materials relating to the Trust will be supplied
to you in reasonable quantities upon request. tc "
You agree to deliver to each purchaser making a
purchase of shares from you a copy of the Prospectus
at or prior to the time of offering or sale, and, upon
request, the Statement of Additional Information. You
may instruct the transfer agent to register shares
purchased in your name and account as nominee for your
customers. You agree thereafter to deliver to any
purchaser whose shares you are holding as record
holder copies of the annual and interim reports and
proxy solicitation materials and any other information
and materials relating to the Fund and prepared by or
on behalf of us, the Fund or its investment adviser,
custodian, transfer agent or dividend disbursing agent
for distribution to such customer. The Fund shall be
responsible for the costs associated with forwarding
such reports, materials and other information and
shall reimburse you in full for such costs. You
further agree to make reasonable efforts to endeavor
to obtain proxies from such purchasers whose shares
you are holding as record holder. You further agree
to obtain from each customer to whom you sell shares
any taxpayer identification number certification
required under Section 3406 of the Internal Revenue
Code of 1986, as amended (the \"Code\"), and the
regulations promulgated thereunder, and to provide us
or our designee with timely written notice of any
failure to obtain such taxpayer identification number
certification in order to enable the implementation of
any required backup withholding in accordance with
Section 3406 of the Code and the regulations
thereunder. Additional copies of the Prospectus,
Statement of Additional Information, annual or interim
reports, proxy solicitation materials and any such
other information and materials relating to the Fund
will be supplied to you in reasonable quantities upon
request."
10. PRIVATE (a) In accordance with the
terms of the Prospectus, a reduced sales charge may be
available to customers, depending on the amount of the
investment or proposed investment. In each case where
a reduced sales charge is applicable, you agree to
furnish to the transfer agent sufficient information
to permit confirmation of qualification for a reduced
sales charge, and acceptance of the purchase order is
subject to such confirmation. Reduced sales charges
may be modified or terminated at any time in the sole
discretion of each Fund. tc " (a) In accordance
with the terms of the Prospectus, a reduced sales
charge may be available to customers, depending on the
amount of the investment. In each case where a
reduced sales charge is applicable, you agree to
furnish to the transfer agent sufficient information
to permit confirmation of qualification for a reduced
sales charge, and acceptance of the purchase order is
subject to such confirmation. Reduced sales charges
may be modified or terminated at any time in the sole
discretion of the Fund."
(b) PRIVATE You acknowledge that
certain classes of investors may be entitled to
purchase shares at net asset value without a sales
charge as provided in the Prospectus and Statement of
Additional Information. tc " You acknowledge that
certain classes of investors may be entitled to
purchase shares at net asset value without a sales
charge as provided in the Prospectus and Statement of
Additional Information."
(c) PRIVATE You agree to advise us
promptly as to the amount of any and all sales by you
qualifying for a reduced sales charge or no sales
charge. tc " You agree to advise us promptly as to
the amount of any and all sales by you qualifying for
a reduced sales charge or no sales charge."
(d) PRIVATE Exchanges (i.e., the
investment of the proceeds from the liquidation of
shares of one Series in the shares of another Series,
each of which is managed by the same or an affiliated
investment adviser) shall, where available, be made in
accordance with the terms of each Prospectus. tc "
Exchanges (i.e., the investment of the proceeds from
the liquidation of shares of one fund in the shares of
another fund, each of which is managed by the Fund's
investment adviser) shall, where available, be made in
accordance with the terms of each Prospectus."
11. PRIVATE We and each Fund reserve
the right in our discretion, without notice, to
suspend sales or withdraw the offering of any shares
entirely. Each party hereto has the right to cancel
the portions of this Agreement to which it is party
upon notice to the other parties; provided, however,
that no cancellation shall affect any party's
obligations hereunder with respect to any transactions
or activities occurring prior to the effective time of
cancellation. We reserve the right to amend this
Agreement in any respect effective on notice to
you. tc " We reserve the right in our discretion,
without notice, to suspend sales or withdraw the
offering of shares entirely. Each party hereto has
the right to cancel this agreement upon notice to the
other part parties; provided; however, that no
cancellation shall affect any party's obligations
hereunder with respect to any transactions or
activities occurring prior to the effective time of
cancellation. We reserve the right to amend this
Agreement in any respect effective on notice to you."
12. PRIVATE We shall have full authority
to take such action as we may deem advisable in respect
of all matters pertaining to the continuous offering of
shares. We shall be under no liability to you except for
lack of good faith and for obligations expressly assumed
by us herein. Nothing contained in this paragraph 12 is
intended to operate as, and the provisions of this
paragraph 12 shall not in any way whatsoever constitute a
waiver by you of compliance with, any provisions of the
1933 Act or of the rules and regulations of the
Securities and Exchange Commission issued thereunder.
tc " We shall have full authority to take such action
as we may deem advisable in respect of all matters
pertaining to the continuous offering of shares. We
shall be under no liability to you except for lack of
good faith and for obligations expressly assumed by us
herein. Nothing contained in this paragraph 12 is
intended to operate as, and the provisions of this
paragraph 12 shall not in any way whatsoever constitute a
waiver by you of compliance with, any provisions of the
1933 Act or of the rules and regulations of the
Securities and Exchange Commission issued thereunder."
13. PRIVATE You agree that: (a) you
shall not effect any transactions (including, without
limitation, any purchases and tc " You agree that\:
(a) you shall not effect any transactions (including,
without limitation, any purchases and" redemptions)
in any shares registered in the name of, or
beneficially owned by, any customer unless such
customer has granted you full right, power and
authority to effect such transactions on his behalf,
(b) we shall have full authority to act upon your
express instructions to sell, repurchase or exchange
shares through us on behalf of your customers under
the terms and conditions provided in the Prospectus
and (c) we, the Funds, the investment adviser, the
administrator, the transfer agent and our and their
respective officers, directors or trustees, agents,
employees and affiliates shall not be liable for, and
shall be fully indemnified and held harmless by you
from and against, any and all claims, demands,
liabilities and expenses (including, without
limitation, reasonable attorneys' fees) which may be
incurred by us or any of the foregoing persons
entitled to indemnification from you hereunder arising
out of or in connection with (i) the execution of any
transactions in shares registered in the name of, or
beneficially owned by, any customer in reliance upon
any oral or written instructions believed to be
genuine and to have been given by or on behalf of you,
(ii) any statements or representations that you or
your employees or representatives make concerning the
Funds that are inconsistent with the applicable Fund's
Prospectus, (iii) any written materials used by you or
your employees or representatives in connection with
making offers or sales of shares that were not
furnished by us, the Funds or the investment adviser
or an affiliate thereof and (iv) any sale of shares of
a Fund where the Fund or its shares were not properly
registered or qualified for sale in any state, any
U.S. territory or the District of Columbia, when we
have indicated to you that the Fund or its shares were
not properly registered or qualified. The
indemnification agreement contained in this Paragraph
13 shall survive the termination of this Agreement.
14. PRIVATE You represent that: (a) you
are a member in good standing of the National
Association of Securities Dealers, Inc. (the "NASD"),
or, if a foreign dealer who is not eligible for
membership in the NASD, that (i) you will not make any
sales of shares in, or to nationals of, the United
States of America, its territories or its possessions,
and (ii) in making any sales of shares you will comply
with the NASD's Conduct Rules and (b) you are a member
in good standing of the Securities Investor Protection
Corporation ("SIPC"). You agree that you will provide
us with timely written notice of any change in your
NASD or SIPC status. tc " You represent that you are
a member in good standing of the National Association
of Securities Dealers, Inc. (the \"NASD\"), or, if a
foreign dealer who is not eligible for membership in
the NASD, that (a) you will not make any sales of
shares in, or to nationals of, the United States of
America, its territories or its possessions, and (b)
in making any sales of shares you will comply with the
NASD's Rules of Fair Practice."
15. PRIVATE We shall inform you as to
the states or other jurisdictions in which the Fund has
advised us that shares have been qualified for sale
under, or are exempt from the requirements of, the
respective securities laws of such states, but we
assume no responsibility or obligation as to your
qualification to sell shares in any jurisdiction.
16. Any claim, controversy, dispute or
deadlock arising under this Agreement (collectively, a
"Dispute") shall be settled by arbitration administered
under the rules of the American Arbitration Association
("AAA") in New York, New York. Any arbitration and
award of the arbitrators, or a majority of them, shall
be final and the judgment upon the award rendered may
be entered in any state or federal court having
jurisdiction. No punitive damages are to be awarded.
17. PRIVATE All communications to us
should be sent, postage prepaid, to 21 Milk Street,
Boston, Massachusetts 02109 Attention: Philip
Coolidge. Any notice to you shall be duly given if
mailed, telegraphed or telecopied to you at the
address specified by you below. Communications
regarding placement of orders for shares should be
sent, postage prepaid, to First Data Investor Services
Group, Inc., P.O. Box 5128, Westborough, Massachusetts
01581-5128. tc " All communications to us should be
sent, postage prepaid, to 7 World Trade Center, New
York, New York 10048. Attention\: Robert J. Leonard.
Any notice to you shall be duly given if mailed,
telegraphed or telecopied to you at the address
specified by you below. Communications regarding
placement of orders for shares should be sent, postage
prepaid, to The Shareholder Services Group, Inc., P.O.
Box 9109, Boston, Massachusetts 02205-9109."
18. PRIVATE This Agreement shall be
binding upon both parties hereto when signed by us and
accepted by you in the space provided below tc " This
Agreement shall be binding upon both parties hereto
when signed by us and accepted by you in the space
provided below until July 14, 1995 or such earlier
date upon negotiation of section 3 and 12 of this
agreement. " .
19. PRIVATE This Agreement and the
terms and conditions set forth herein shall be
governed by, and construed in accordance with, the
laws of the State of New York. tc " This Agreement and
the terms and conditions set forth herein shall be
governed by, and construed in accordance with, the
laws of the State of New York."
CFBDS, INC.
By:/s/
(Authorized
Signature)
Accepted:
Firm Name:
Address:
Accepted By (signature):
Name (print):
Title: Date:
u:\legal\funds\arms\1999\secdocs\dealagr
FORM OF
AMENDED AND RESTATED
SHAREHOLDER SERVICES AND DISTRIBUTION PLAN PRIVATE
This Amended and Restated Shareholder Services and Distribution
Plan (the "Plan") is adopted in accordance with Rule 12b-1 (the
"Rule") under the Investment Company Act of 1940, as amended (the
"1940 Act"), by [Name of Fund], a [business trust organized under
the laws of the Commonwealth of Massachusetts (the "Trust") on
behalf of its sub-trust] / [a corporation organized under the laws
of the State of Maryland (the "Fund")], subject to the following
terms and conditions:
Section 1. Annual Fee.
(a) Service Fee for Class A shares. The [Trust/Fund] will pay
to Smith Barney Inc., a corporation organized under the
laws of the State of Delaware ("Smith Barney"), a service
fee under the Plan at an annual rate of [ %] of the
average daily net assets of the Fund attributable to the
Class A shares sold and not redeemed (the "Class A
Service Fee").
(b) Service Fee for Class B shares. The [Trust/Fund] will pay
to Smith Barney a service fee under the Plan at the
annual rate of [ %] of the average daily net assets of
the Fund attributable to the Class B shares sold and not
redeemed (the "Class B Service Fee").
(c) Distribution Fee for Class B shares. In addition to the
Class B Service Fee, the [Trust/Fund] will pay Smith
Barney a distribution fee under the Plan at the annual
rate of [ %] of the average daily net assets of the
Fund attributable to the Class B shares sold and not
redeemed (the "Class B Distribution Fee").
(d) Service Fee for Class L shares. The [Trust/Fund] will
pay to Smith Barney a service fee under the plan at the
annual rate of [ %] of the average daily net assets of
the Fund attributable to the Class L shares sold and not
redeemed (the "Class L Service Fee").
(e) Distribution Fee for Class L shares. In addition to the
Class L Service Fee, the [Trust/Fund] will pay Smith
Barney a distribution fee under the Plan at the annual
rate of [ %] of the average daily net assets of the
Fund attributable to the Class L shares sold and not
redeemed (the "Class L Distribution Fee").
(f) Payment of Fees. The Service Fees and Distribution Fees
will be calculated daily and paid monthly by the
[Trust/Fund] with respect to the foregoing classes of the
Fund's shares (each a "Class" and together, the
"Classes") at the annual rates indicated above.
Section 2. Expenses Covered by the Plan.
With respect to expenses incurred by each Class, its respective
Service Fee and/or Distribution Fee may be used by Smith Barney
for: (a) costs of printing and distributing the [Trust's/Fund's]
prospectuses, statements of additional information and reports to
prospective investors in the [Trust/Fund]; (b) costs involved in
preparing, printing and distributing sales literature pertaining
to the [Trust/Fund]; (c) an allocation of overhead and other
branch office distribution-related expenses of Smith Barney; (d)
payments made to, and expenses of, Smith Barney's financial
consultants and other persons who provide support services to
[Trust/Fund] shareholders in connection with the distribution of
the [Trust's/Fund's] shares, including but not limited to, office
space and equipment, telephone facilities, answering routine
inquires regarding the [Trust/Fund] and its operation, processing
shareholder transactions, forwarding and collecting proxy
material, changing dividend payment elections and providing any
other shareholder services not otherwise provided by the
[Trust's/Fund's] transfer agent; and (e) accruals for interest on
the amount of the foregoing expenses that exceed the Distribution
Fee for that Class and, in the case of Class B and Class L shares,
any contingent deferred sales charges received by Smith Barney;
provided, however, that (i) the Distribution Fee for a particular
Class may be used by Smith Barney only to cover expenses primarily
intended to result in the sale of shares of that Class, including,
without limitation, payments to the financial consultants of Smith
Barney and other persons as compensation for the sale of the
shares, and (ii) the Service Fees are intended to be used by Smith
Barney primarily to pay its financial consultants for servicing
shareholder accounts, including a continuing fee to each such
financial consultant, which fee shall begin to accrue immediately
after the sale of such shares.
Section 3. Approval by Shareholders
The Plan will not take effect, and no fees will be payable
in accordance with Section 1 of
the Plan, with respect to a Class until the Plan has been approved
by a vote of at least a majority
of the outstanding voting securities of the Class. The Plan will
be deemed to have been approved
with respect to a Class so long as a majority of the outstanding
voting securities of the Class votes
for the approval of the Plan, notwithstanding that: (a) the Plan
has not been approved by a majority of the outstanding voting
securities of any other Class, or (b) the Plan has not been
approved by a majority of the outstanding voting securities of the
[Trust/Fund].
Section 4. Approval by [Trustees/Directors.]
Neither the Plan nor any related agreements will take effect
until approved by a majority vote of both (a) the Board of
[Trustees/Directors] and (b) those [Trustees/Directors] who are
not interested persons of the [Trust/Fund] and who have no direct
or indirect financial interest in the operation of the Plan or in
any agreements related to it (the "Qualified
[Trustees/Directors]"), cast in person at a meeting called for the
purpose of voting on the Plan and the related agreements.
Section 5. Continuance of the Plan.
The Plan will continue in effect with respect to each Class
until [ , 1999] and thereafter for successive twelve-month
periods with respect to each Class; provided, however, that such
continuance is specifically approved at least annually by the
[Trustees/Directors] of the [Trust/Fund] and by a majority of the
Qualified [Trustees/Directors].
Section 6. Termination.
The Plan may be terminated at any time with respect to a Class
(i) by the [Trust/Fund] without the payment of any penalty, by the
vote of a majority of the outstanding voting securities of such
Class or (ii) by a majority vote of the Qualified
[Trustees/Directors]. The Plan may remain in effect with respect
to a particular Class even if the Plan has been terminated in
accordance with this Section 6 with respect to any other Class.
Section 7. Amendments.
The Plan may not be amended with respect to any Class so as to
increase materially the amounts of the fees described in Section 1
above, unless the amendment is approved by a vote of holders of at
least a majority of the outstanding voting securities of that
Class. No material amendment to the Plan may be made unless
approved by the [Trust's/Fund's] Board of [Trustees/Directors] in
the manner described in Section 4 above.
Section 8. Selection of Certain [Trustees/Directors].
While the Plan is in effect, the selection and nomination of
the [Trust's/Fund's] [Trustees/Directors] who are not interested
persons of the [Trust/Fund] will be committed to the discretion of
the [Trustees/Directors] then in office who are not interested
persons of the [Trust/Fund].
Section 9. Written Reports
In each year during which the Plan remains in effect, any
person authorized to direct the disposition of monies paid or
payable by the Fund pursuant to the Plan or any related agreement
will prepare and furnish to the [Trust's/Fund's] Board of
[Trustees/Directors] and the Board will review, at least
quarterly, written reports complying with the requirements of the
Rule, which set out the amounts expended under the Plan and the
purposes for which those expenditures were made.
Section 10. Preservation of Materials.
The [Trust/Fund] will preserve copies of the Plan, any
agreement relating to the Plan and any report made pursuant to
Section 9 above, for a period of not less than six years (the
first two years in an easily accessible place) from the date of
the Plan, agreement or report.
Section 11. Meanings of Certain Terms.
As used in the Plan, the terms "interested person" and
"majority of the outstanding voting securities" will be deemed to
have the same meaning that those terms have under the rules and
regulations under the 1940 Act, subject to any exemption that may
be granted to the [Trust/Fund] under the 1940 Act, by the
Securities and Exchange Commission.
Section 12. Limitation of Liability. (Massachusetts business
trusts only)
The obligations of the Trust under this Agreement shall not
be binding upon any of the Trustees, shareholders, nominees,
officers, employees or agents, whether past, present or future, of
the Trust, individually, but are binding only upon the assets and
property of the Trust, as provided in the Master Trust Agreement.
The execution of this Plan has been authorized by the Trustees and
signed by an authorized officer of the Trust, acting as such, and
neither such authorization by such Trustees nor such execution by
such officer shall be deemed to have been made by any of them
individually or to impose any liability on any of them personally,
but shall bind only the trust property of the Trust as provided in
its Master Trust Agreement.
IN WITNESS WHEREOF, the Fund has executed the Plan as of July
_____, 1998.
[NAME OF TRUST/FUND] On behalf of
By:
____________________________________
Heath B. McLendon
Chairman of the Board
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