SMITH BARNEY SHEARSON PRINCIPAL RETURN FUND
Two World Trade Center
New York, New York 10048
(212) 720-9218
April 1, 1994
PROSPECTUS
This Prospectus describes Smith Barney Shearson Principal Return Fund
(the "Trust") and the following series (each, a "Series" and collectively, the
"Series").
* Zeros and Appreciation Series 1996 ("Series 1996") seeks (a) to
return to each shareholder on March 1, 1996 (the "Series 1996 Maturity Date")
the principal amount of the shareholder's original investment (including any
sales charge paid) through investment of a portion of its assets in zero
coupon securities and (b) to the extent consistent with that objective, to
provide long-term appreciation of capital through investment of the balance of
its assets primarily in equity securities. There can be no assurance that
Series 1996's investment objectives will be achieved.
* Zeros and Appreciation Series 1998 ("Series 1998") seeks (a) to
return to each shareholder on August 31, 1998 (the "Series 1998 Maturity
Date") the principal amount of the shareholder's original investment
(including any sales charge paid) through investment of a portion of its
assets in zero coupon securities and (b) to the extent consistent with that
objective, to provide long-term appreciation of capital through investment of
the balance of its assets primarily in equity securities. There can be no
assurance that Series 1998's investment objectives will be achieved.
* Zeros Plus Emerging Growth Series 2000 ("Series 2000") seeks (a) to
return to each shareholder on February 28, 2000 (the "Series 2000 Maturity
Date") the principal amount of the shareholder's original investment
(including any sales charge paid) through investment of a portion of its
assets in zero coupon securities and (b) to the extent consistent with that
objective, to provide long-term appreciation of capital through investment of
the balance of its assets primarily in equity securities issued by "emerging
growth companies," which are small-to medium-sized companies that are believed
by the Series' investment adviser to show a prospect of achieving significant
profit and gain in a relatively short period of time. There can be no
assurance that Series 2000's investment objectives will be achieved.
When used herein, the term Maturity Date shall refer to the "Series 1996
Maturity Date," the "Series 1998 Maturity Date," and the "Series 2000 Maturity
Date," as applicable.
FD0266
SHARES OF SERIES 1996, SERIES 1998, AND SERIES 2000 ARE NOT CURRENTLY
BEING OFFERED FOR SALE TO NEW INVESTORS. THE NET ASSET VALUE PER
SHARE OF EACH SERIES PRIOR TO THE MATURITY DATE CAN BE EXPECTED TO FLUCTUATE
SUBSTANTIALLY OWING TO CHANGES IN PREVAILING INTEREST RATES THAT WILL AFFECT
THE CURRENT VALUE OF EACH SERIES' HOLDINGS OF ZERO COUPON SECURITIES, AS WELL
AS CHANGES IN THE VALUE OF EACH SERIES' OTHER HOLDINGS. BECAUSE THE SERIES
ARE NOT CURRENTLY ENGAGED IN A CONTINUOUS OFFERING OF SHARES, THEY ARE NOT
BENEFITING FROM AN INFLOW OF NEW CAPITAL. IN ADDITION, EACH SERIES MAY
EXPERIENCE REDEMPTIONS AND CAPITAL LOSSES PRIOR TO THE MATURITY DATE (OR IN
PREPARATION FOR EACH SERIES' LIQUIDATION AT THE MATURITY DATE) AND WILL PAY
DIVIDENDS AND DISTRIBUTIONS IN CASH TO SHAREHOLDERS WHO SO ELECT. A
DIMINUTION OF ITS ASSETS RESULTING FROM LOSSES, REDEMPTIONS AND DIVIDENDS AND
DISTRIBUTIONS PAID IN CASH COULD MAKE EACH SERIES' INVESTMENT OBJECTIVES
UNACHIEVABLE; THUS THE ACCOMPLISHMENT OF EACH SERIES' INVESTMENT OBJECTIVES IN
RESPECT TO REMAINING SHAREHOLDERS THAT REINVEST DIVIDENDS AND DISTRIBUTIONS
COULD DEPEND IN PART ON THE INVESTMENT DECISIONS OF OTHER SHAREHOLDERS. SEE
"INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES."
This Prospectus sets forth concisely information about the Trust and
each Series, including sales charges, shareholder servicing fees and expenses.
Investors are encouraged to read this Prospectus carefully and retain it for
future reference.
Additional information about the Trust and each Series is contained in a
Statement of Additional Information dated April 1, 1994, as amended or
supplemented from time to time, which is available upon request and without
charge by calling or writing the Trust at the telephone number or address set
forth above or by contacting your Smith Barney Shearson Financial Consultant.
The Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY SHEARSON INC.
Distributor
SMITH BARNEY SHEARSON ASSET MANAGEMENT
Investment Adviser
THE BOSTON COMPANY ADVISORS, INC.
Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
INTRODUCTION
The investment objectives of Series 1996 are (a) to return to each
shareholder on the Maturity Date the principal amount of the shareholder's
original investment (including any sales charge paid) through investment of a
portion of its assets in zero coupon securities and (b) to the extent
consistent with that objective, to provide long-term appreciation of capital
through investment of the balance of its assets primarily in equity
securities. There can be no assurance that Series 1996's investment
objectives will be achieved.
The investment objectives of Series 1998 are (a) to return to each
shareholder on the Maturity Date the principal amount of the shareholder's
original investment (including any sales charge paid) through investment of a
portion of its assets in zero coupon securities and (b) to the extent
consistent with that objective, to provide long-term appreciation of capital
through investment of the balance of its assets primarily in equity
securities. There can be no assurance that Series 1998's investment
objectives will be achieved.
The investment objectives of Series 2000 are (a) to return to each
shareholder on the Maturity Date the principal amount of the shareholder's
original investment (including any sales charge paid) through investment of a
portion of its assets in zero coupon securities and (b) to the extent
consistent with that objective, to provide long-term appreciation of capital
through investment of the balance of its assets primarily in equity securities
issued by "emerging growth companies," which are small-to medium-sized
companies that are believed by the Series' investment adviser to show a
prospect of achieving significant profit and gain in a relatively short period
of time. There can be no assurance that Series 2000's investment objectives
will be achieved.
As with most mutual funds, the Series employ various organizations to
perform necessary functions and to provide services to their shareholders.
These organizations are carefully selected on behalf of each Series by the
Trust's Board of Trustees, which regularly reviews the quality and scope of
their performance. The names of the organizations and the services that they
perform on behalf of each Series and its shareholders are listed below:
Smith Barney Shearson Inc.
("Smith Barney Shearson") Distributor
Smith Barney Shearson Asset Management
("Asset Management") Investment Adviser
The Boston Company Advisors, Inc.
("Boston Advisors") Administrator
Boston Safe Deposit and Trust Company
("Boston Safe") Custodian
The Shareholder Services Group, Inc.
("TSSG"), a subsidiary of First Data
Corporation Transfer Agent
More detailed information regarding these organizations and the
functions they perform is provided in this Prospectus as well as in the
Statement of Additional Information.
TABLE OF CONTENTS
Introduction.......................................3
The Series'Expenses................................4
Financial Highlights................. .............5
Investment Objectives and Management...............9
Policies
Management of the Trust...........................17
Purchase of Shares................................18
Redemption of Shares..............................18
Valuation of Shares...............................20
Exchange Privilege................................20
Dividends, Distributions and Taxes................24
The Series' Performance...........................25
Custodian and Transfer Agent......................26
Distributor.......................................26
Additional Information............................27
THE SERIES' EXPENSES
The following expense table lists the costs and expenses that an
investor will incur, either directly or indirectly, as a shareholder of each
Series, based upon the maximum sales charge that was incurred at the time of
purchase and upon each Series' operating expenses for its most recent fiscal
year:
Series..........Series..........Series
1996 ........ 1998 ....... . 2000
Shareholder Transaction Expenses
Sales charge imposed on purchases
(as a percentage of offering price)...
5.00%......... 5.00%....... 5.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees........ 0.50%..........0.50%........0.60%
Shareholder servicing fees. N/A.............0.25%........0.25%
Other expenses.....................0.27%..........0.22%........0.25%
Total Fund Operating Expenses.0.77%..........0.97%........1.10%
Management fees paid by the Trust include investment advisory fees paid
monthly to Smith Barney Shearson on behalf of Asset Management at an annual
rate equal to a percentage of the value of the relevant Series' average daily
net assets, as follows: Series 1996 - .30%; Series 1998 - .30%; and Series
2000 - .40%, and administration fees paid monthly to Boston Advisors at the
annual rate of .20% of the value of each Series' average daily net assets.
Series 1998 and Series 2000 also pay Smith Barney Shearson an annual
shareholder servicing fee equal to .25% of the value of their respective daily
net assets.
The nature of the services for which each Series pays management fees is
described under "Management of the Trust." "Other expenses" in the above
table include fees for transfer agent services, custodial fees, legal and
accounting fees, printing costs and registration fees.
Example*
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in each Series. These amounts are based upon (a)
payment by an investor of the initial 5% sales charge, (b) payment by the
Series of operating expenses at the levels set forth in the table above and
(c) the following assumptions:
.............................1 YEAR..3 YEARS..5 YEARS MATURITY
........................................................DATE
A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Series 1996 . . . . . . . . .$ 57 $ 73 $ 91 $ 110
Series 1998 . . . . . . . . $ 59 $ 79 $ 101 $ 137
Series 2000 . . . . . . . . .$ 61 $ 83 $ 108 $ 162
* This example should not be considered a representation of past or
future expenses and actual expenses may be greater or less than those shown.
Moreover, while this table assumes a 5% annual return, each Series' actual
performance will vary and may result in an actual return greater or less than
5%.
FINANCIAL HIGHLIGHTS
The following information has been audited by Coopers & Lybrand,
independent accountants, whose report thereon appears in each Series' Annual
Report for the fiscal year ended November 30, 1993. The table should be read
in conjunction with the financial statements and related notes appearing in
each Series' Annual Report, which is incorporated by reference into the
Statement of Additional Information.
For a Series 1996 share outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year
Ended Year Ended
11/30/93++ 11/30/92++ 11/30/91
11/30/90++ 11/30/89*
<S>
<C>.............<C>...............<C>...............<C>...............<C>
Net asset value, beginning
of year $11.75 $11.42 $10.77 $11.38
$9.50
Income From Investment
Operations:
Net investment income 0.53 0.54 0.62 0.55
0.63
Net realized and unrealized
gains and losses on
investments 0.31 0.95 0.84 (0.30)
1.25
Total from Investment
operations 0.84 1.49 1.46 0.25
1.88
Less Distributions:
Distribution from net ..
investment income (0.72) (0.65) (0.69) (0.63)
- -----
Distributions from net
realized capital gains (0.42) (0.51) (0.12) (0.23)
- -----
Total distributions (1.14) (1.16) (0.81) (0.86)
0.00
Net asset value, end of
year $11.45 $11.75 $11.42 $10.77
$11.38
Total Return+++ 7.85% 13.64% 14.56% 2.29%
19.79%
Ratios/Supplemental Data:
Net assets, end of year
(in 000's) $91,153 $109,011 $115,356 $121,493
$162,867
Ratios of expenses to
average net assets 0.77%+ 0.77% 0.81% 0.85%
0.84%**
Ratios of net investment
income to average net ..
assets 4.76% 4.85% 5.26% 5.21%
5.79% **
Portfolio turnover rate 20% 11% 17% 3%
32%
<FN>
* Series 1996 commenced operations on January 16,
1989.
** Annualized
+ The operating expenses ratio excludes interest
expenses. The annualized ratio
including interest expense is .78%.
The per share amounts have been calculated using
the monthly average share
method, which more appropriately presents the per
share data for this year
since use of the undistributed method does not
accord with results of
operations.
+++ Total return represents aggregate total return for
the periods indicated.
</TABLE>
For a Series 1998 share outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
11/30/93+ 11/30/92+ 11/30/91 *
<S> <C> <C> <C>
Net asset value, beginning $9.02 $8.40 $7.60
Income From Investment
Operations:
Net investment income 0.38 0.37 0.39
Net realized and unrealized
gains and losses on
investments 0.48 0.68 0.41
Total from Investment
operations 0.86 1.05 0.80
Less Distributions:
Distribution from net investment
income (0.41) (0.43) --------
Distributions from net
realized capital gains (0.09) -------- --------
Total distributions (0.50) (0.43) 0.00
Net asset value, end of year $9.38 $9.02 $8.40
Total Return+++ 9.99% 12.86% 10.53%
Ratios/Supplemental Data:
Net assets, end of year (in 000's) $136,576 $166,077 $195,956
Ratios of expenses to average
net assets 0.97% 1.01% 1.05%**
Ratios of net investment income to
average net assets 4.15% 4.39% 5.04%**
Portfolio turnover rate 17% 4% 20%
<FN>
* Series 1998 commenced operations on January 25,
1991.
** Annualized
+ Per share amounts have been calculated using the
monthly average share method,
which more appropriately presents the per share
data for this year since use
of the undistributed method does not accord with
results of operations.
++ Total return represents aggregate total return
for the periods indicated.
</TABLE>
For a Series 2000 share outstanding throughout each year:
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended
11/30/93++ 11/30/92+ 11/30/91 *
<S>.................................<C>...................<C>...............<C>
Net asset value, beginning $8.16 $7.57 $7.60
Income From Investment Operations:
Net investment income 0.26 0.26 0.07
Net realized and unrealized gains
and losses on investments 0.96 0.43 (0.10)
Total from Investment operations 1.22 0.69 (0.03)
Less Distributions:
Distribution from net investment
income (0.29) 0.10) -----
Distributions from net realized
capital gains (0.09) -------- -----
Total distributions (0.38) (0.10) 0.00
Net asset value, end of year $9.00 $8.16 $7.57
Total Return+++ 15.72% 9.15% (0.39)%
Ratios/Supplemental Data:
Net assets, end of year (in 000's) $96,865 $125,327 $157,425
Ratios of expenses to average
net assets 1.10% 1.15% 1.18%
Ratios of net investment income to
average net assets 3.12% 3.31% 3.56%
Portfolio turnover rate 0% 0% 2%
<FN>
* Series 2000 commenced operations on August 30, 1991.
** Annualized
+ The operating expenses ratio excludes interest expenses. The annualized ratio
including interest expense is 1.16%.
++ The per share amounts have been calculated using the monthly average share method,
which more appropriately presents the per share data for this year since use of
the undistributed method does not accord with results of operations.
+++ Total return represents aggregate total return for the periods indicated.
</TABLE>
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Set forth below is a description of the investment objectives and
policies of each Series. The investment objectives of a Series are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding voting securities of that Series, as defined under
the Investment Company Act of 1940, as amended (the "1940 Act"). There can be
no assurance that a Series will achieve its investment objectives. Additional
information about the Series' investment strategies and investment policies
appears in the Statement of Additional Information.
In General
The investment objectives of each Series is (a) to return to each
shareholder on the Maturity Date the principal amount of the shareholder's
original investment (including any sales charge paid) through investment of a
portion of its assets in zero coupon securities (the "Repayment Objective")
and (b) to the extent consistent with that objective, to provide long-term
appreciation of capital through investment of the balance of its assets
primarily in equity securities (Series 2000 - equity securities issued by
"emerging growth companies").
Although Asset Management believes that the Series' investment
strategies should be sufficient to accomplish their investment objectives,
there can be no assurance that they will be achieved. Moreover, although the
Trust is structured as an open-end investment company and shareholders may
redeem their shares at any time and may elect to receive dividends and
distributions in cash, in order to help assure the return of the full amount
of an original investment, shareholders should plan to hold their shares until
the Maturity Date and to reinvest all dividends and distributions in
additional shares. In addition, while the amount sought to be returned on the
Maturity Date to shareholders may equal or exceed the amount originally
invested, the present value of that amount may be substantially less.
Shareholders also should be aware that the amount returned as taxable on the
Maturity Date represents accretion of interest on each Series' zero coupon
securities and will have been taxable as ordinary income over the term of the
Series.
Operations of the Series
As of February 28, 1994, zero coupon securities represented
approximately 59%, 61% and 59% of Series 1996's, Series 1998's and
Series 2000's net assets, respectively, with the balance of each Series' net
assets invested in equity (Series 2000 - equity securities of emerging growth
companies) and other securities as described below. The Series' zero coupon
securities will mature within one year before the Maturity Date and their
aggregate stated principal amount is expected to be sufficient to meet the
Repayment Objective; the Series will not receive any payments with respect to
a zero coupon security prior to the maturity of that security. The Series may
hold zero coupon securities in excess of those required to meet the Repayment
Objective to the extent Asset Management deems appropriate. As each Series'
zero coupon securities mature, the proceeds will be invested in direct
obligations of the United States government with remaining maturities of one
year or less and, in any case, maturing on or prior to the Maturity Date. On
the Maturity Date, each Series' remaining equity investments will be sold and
other investments will mature, the liabilities of each Series will be
discharged or provision made therefor, each Series' shares will be mandatory
redeemed and, within seven days thereafter, the proceeds will be distributed
to shareholders and each Series' thereafter will be terminated. These
arrangements may require the disposition of the Series' equity securities at a
time when it is otherwise disadvantageous to do so and may involve selling
securities at a substantial loss. The liquidation and termination of each
Series is conditioned on the Trust's receipt of an opinion of its counsel that
all actions have been taken that are necessary to effect these transactions in
accordance with the then current position of the SEC regarding a change in the
nature of the business of a registered investment company, including (as is
required under current SEC policy) the approval by the holders of a majority
of the Trust's outstanding voting securities, as defined in the 1940 Act. If
shareholder approval is solicited but not obtained, the Board of Trustees
would consider and, if necessary, propose for shareholder approval, such other
action as it deems appropriate and in the best interests of the Trust and its
shareholders. The estimated expenses of liquidation and termination of each
Series will be accrued ratably over the entire term of the Series and will be
charged to income. These expenses are not expected to affect materially the
ordinary annual operating expenses of the Series and, accordingly, should have
no effect on the Series' ability to meet the Repayment Objective.
Each Series may satisfy redemption requests and cash payments of
dividends and distributions by liquidating a portion of its holdings of zero
coupon securities, as well as other investments, provided that the Series
would have sufficient zero coupon securities remaining to meet the Repayment
Objective.
Thus, each Series' portfolio may be visualized as consisting of two
portions: one, its zero coupon securities, is expected to increase in value,
by reason of accretion of interest, to equal at maturity an amount sufficient
to meet the Repayment Objective; the other, its equity securities and all
other investments (Series 2000 - holdings of emerging growth securities),
represent a variable portion of the Series' assets depending on the
performance of those investments, the Series' expenses, the level of dividend
reinvestment and the level of redemptions over time. In order to facilitate
the management of the Series' portfolios, shareholders are urged to reinvest
dividends and distributions in additional shares; these amounts will be paid
in cash only at the specific election of a shareholder.
Zero Coupon Securities
A zero coupon security is a debt obligation that does not entitle the
holder to any periodic payments of interest prior to maturity and therefore is
issued and traded at a discount from its face amount. Zero coupon securities
may be created by separating the interest and principal components of
securities issued or guaranteed by the United States government or one of its
agencies or instrumentalities ("U.S. government securities") or issued by
private corporate issuers. The Series, however, invest only in zero coupon
securities that are direct obligations of the United States Treasury. The
discount from face value at which zero coupon securities are purchased varies
depending on the time remaining until maturity, prevailing interest rates and
the liquidity of the security. Because the discount from face value is known
at the time of investment, investors holding zero coupon securities until
maturity know the total amount of their investment return at the time of
investment. In contrast, a portion of the total realized return from
conventional interest-paying obligations comes from the reinvestment of
periodic interest. Because the rate to be earned on these reinvestments may
be higher or lower than the rate quoted on the interest-paying obligations at
the time of the original purchase, the investor's return on reinvestments is
uncertain even if the securities are held to maturity. This uncertainty is
commonly referred to as reinvestment risk. With zero coupon securities,
however, there are no cash distributions to reinvest, so investors bear no
reinvestment risk if they hold the zero coupon securities to maturity; holders
of zero coupon securities, however, forego the possibility of reinvesting at a
higher yield than the rate paid on the originally issued security. With both
zero coupon and interest-paying securities there is no reinvestment risk on
the principal amount of the investment.
Emerging Growth Securities (Series 2000)
Series 2000 attempts to achieve its investment objective of long-term
capital appreciation by investing the portion of its assets not invested in
zero coupon securities primarily in equity securities issued by "emerging
growth companies" based in the United States, which are small - to medium-
sized companies that are believed by Asset Management to show a prospect of
achieving significant profit and gains within two to three years after their
securities are acquired by Series 2000. Although Series 2000 is not subject
to a limitation on the market capitalization of the companies in which it will
invest, the emerging growth companies in which Series 2000 will typically
invest, will have market capitalizations of less than $1 billion. A company's
stock market capitalization is calculated by multiplying the total number of
shares of its common stock outstanding by the market price per share of its
stock.
In selecting investments on behalf of Series 2000, Asset Management will
seek to identify emerging growth companies that it believes are undervalued in
the marketplace or have earnings that may be expected to grow faster than the
U.S. economy in general. These companies typically would possess one or more
of a variety of characteristics, including high quality management, new
technologies, techniques, products or services or cost-reducing measures that
give them a leading or dominant position in a major product line, a sound
financial position and a relatively high rate of return on invested capital so
that future growth can be financed from internal sources. Series 2000 also
may invest in companies, typically called "special situation companies," that
offer the possibility of accelerating earnings growth because of management
changes, capitalization or asset deployment, governmental regulations or other
external circumstances. Although Asset Management anticipates that Series
2000's non-zero coupon security portfolio primarily will be invested in
smaller companies, it may also be invested to a lesser degree in the equity
securities of medium or larger, established companies, including those
involved in special situations, that Asset Management determines present
particular opportunities for capital growth.
Series 2000's non-zero coupon security portfolio has been designed to
provide investors with significant opportunities for long-term capital
appreciation that Asset Management believes are presented by the equity
securities of small capitalization companies. Asset Management believes that
these securities are undervalued as compared, on a relative historical basis,
with equity securities of larger capitalization companies, and have tended
over time to outperform securities of larger capitalization companies.
Statistical studies have been published recently indicating that the
historical long-term returns on investments in common stocks of companies with
smaller capitalizations have been higher than the returns on those companies
with larger capitalizations. One such study, for example, compared the
performance of the 2,500 largest companies, as measured by market
capitalization, whose securities are traded on the New York Stock Exchange,
Inc. (the "NYSE"), the American Stock Exchange and on the U.S. over-the-
counter market. The study, which divided these 2,500 companies into five
groups on the basis of market capitalization, measured their performance for
the 17-year period from December 31, 1973 to December 31, 1990 and concluded
that the companies with smaller capitalizations had greater total returns for
the period than did larger capitalization companies, although acknowledging
that larger company securities had outperformed smaller company securities
over the past five years.
Additional Investments and Investment Techniques (Series 2000)
Although under normal circumstances Series 2000's non-zero coupon
security portfolio will consist primarily of common stocks of emerging growth
companies based in the United States, Series 2000 may also invest in warrants
to purchase common stocks, convertible bonds, preferred stocks and securities
of foreign issuers. When Asset Management believes that a temporary defensive
investment posture is warranted, Series 2000 may invest in corporate and
government bonds and notes and money market instruments, and from time to time
may invest in repurchase agreements and lend its portfolio securities as
discussed below.
Warrants; Convertible Securities. (Series 2000) A warrant is a security
that gives the holder the right, but not the obligation, to subscribe for
newly created securities of the issuer or a related company at a fixed price
either at a certain date or during a set period. A convertible security is a
security that may be converted either at a stated price or rate within a
specified period of time into a specified number of shares of common stock.
In investing in convertible securities, Series 2000 seeks the opportunity,
through the conversion feature, to participate in the capital appreciation of
the common stock into which the securities are convertible.
Foreign Securities. (Series 2000) Series 2000 may invest up to 10% of
its net assets in securities of foreign issuers. Investing in foreign
securities involves certain risks, including those resulting from fluctuations
in currency exchange rates, revaluation of currencies, future political or
economic developments and the possible imposition of restrictions or
prohibitions on the repatriation of foreign currencies or other foreign
governmental laws or restrictions, reduced availability of public information
concerning issuers, and, typically, the lack of uniform accounting, auditing
and financial reporting standards or other regulatory practices and
requirements comparable to those applicable to domestic companies. Moreover,
securities of many foreign companies may be less liquid and their prices more
volatile than those of securities of comparable domestic companies. In
addition, with respect to certain foreign countries, the possibility exists of
expropriation, confiscatory taxation and limitations on the use or removal of
funds or other assets of Series 2000, including the withholding of dividends.
Risk Factors and Other Special Considerations
Zero coupon securities of the type held by each Series can be sold prior
to their due date in the secondary market at their then prevailing market
value which, depending on prevailing levels of interest rates and the time
remaining to maturity, may be more or less than the securities' "accreted
value;" that is, their value based solely on the amount due at maturity and
accretion of interest to date. The market prices of zero coupon securities are
generally more volatile than the market prices of securities that pay interest
periodically and, accordingly, are likely to respond to a greater degree to
changes in interest rates than do non-zero coupon securities having similar
maturities and yields. As a result, the net asset value of shares of each
Series may fluctuate over a greater range than shares of other mutual funds
that invest in U.S. government securities having similar maturities and yields
but that make current distributions of interest. The current net asset value
of each Series attributable to zero coupon securities and other debt
instruments held by each Series generally will vary inversely with changes in
prevailing interest rates.
As a series of an open-end investment company, each Series is required
to redeem its shares upon the request of any shareholder at the net asset
value next determined after receipt of the request. However, because of the
price volatility of zero coupon securities prior to maturity, a shareholder
who redeems shares prior to the Maturity Date may realize an amount that is
greater or less than the purchase price of those shares, including any sales
charge paid. Although shares redeemed prior to the Maturity Date would no
longer be subject to the possible achievement of the Repayment Objective, the
amount originally invested in the shares not redeemed would remain subject to
the possible achievement of the Repayment Objective, provided dividends and
distributions with respect to these shares are reinvested. Thus, if each
Series is successful in achieving the Repayment Objective, the holder of those
remaining shares plus shares acquired through reinvestment of dividends and
distributions thereon ("Remaining Shares") would receive at the Maturity Date
an amount that equals or exceeds the purchase price of those shares.
Nonetheless, the amount received on the Maturity Date in respect of Remaining
Shares, when combined with the amount received in respect of shares redeemed
prior to the Maturity Date, may be more or less than the aggregate purchase
price of all shares purchased in this offering.
Each year the Series will be required to accrue an increasing amount of
income on their zero coupon securities utilizing the effective interest
method. To maintain its tax status as a pass-through entity and also to avoid
imposition of excise taxes, however, each Series will be required to
distribute dividends equal to substantially all of its net investment income,
including the accrued income on its zero coupon securities for which it
receives no payments in cash prior to their maturity. Dividends of each
Series' net investment income and distributions of its short-term capital
gains will be taxable to shareholders as ordinary income for Federal income
tax purposes, whether received in cash or reinvested in additional shares. See
"Dividends, Distributions and Taxes." However, a shareholder who elects to
receive dividends and distributions in cash, instead of reinvesting these
amounts in additional shares of the Series, may realize an amount that is less
or greater than the entire amount originally invested. ACCORDINGLY, THE
SERIES MAY NOT BE APPROPRIATE FOR TAXABLE INVESTORS THAT WOULD REQUIRE CASH
DISTRIBUTIONS FROM THE SERIES IN ORDER TO MEET THEIR CURRENT TAX OBLIGATIONS
RESULTING FROM THEIR INVESTMENT.
Emerging Growth Securities (Series 2000). Securities of the kinds of
companies in which Series 2000 will invest may be subject to significant price
fluctuation and above-average risk. In addition, companies achieving a high
earnings growth rate tend to reinvest their earnings rather than distribute
them. As a result, Series 2000 is not likely to receive significant dividend
income on its portfolio of equity securities; an investment in Series 2000
should, thus, not be considered as a complete investment program and may not
be appropriate for all investors.
Other Considerations. In order to generate sufficient cash to meet
distribution requirements and other operational needs and to redeem its shares
on request, the Series may be required to limit reinvestment of capital on the
disposition of its non-zero coupon securities and may be required to liquidate
some or all of its non-zero coupon securities over time. The Series may be
required to effect these liquidations at a time when it is otherwise
disadvantageous to do so. If a Series realizes capital losses on dispositions
of non-zero coupon securities that are not offset by capital gains on the
disposition of other such securities, the Series may be required to liquidate
a disproportionate amount of its zero coupon securities or borrow money, in an
amount not exceeding 33-1/3% of the Series' total assets, to satisfy the
distribution and redemption requirements described above. The liquidation of
zero coupon securities and the expenses associated with borrowing money in
these circumstances could render the Series unable to meet the Repayment
Objective.
Equity Securities (Series 1996 and Series 1998)
Series 1996 and Series 1998 attempt to achieve their investment
objective of long-term appreciation of capital by investing the portion of
their assets not invested in zero coupon securities primarily in equity
securities, as described in the following paragraph, that are believed to
afford attractive opportunities for investment appreciation. It is expected
that Series 1996 and Series 1998's equity investments will be in domestic
companies, generally with market capitalizations in excess of $100 million.
Most of Series 1996 and Series 1998's equity investments will be listed for
trading on stock exchanges, although Series 1996 and Series 1998 may purchase
securities traded in the over-the-counter market. Asset Management will cause
Series 1996 and Series 1998 to invest in the securities of companies whose
earnings they expect to increase, companies whose securities prices are lower
than they believe justified in relation to their underlying assets or earning
power or companies in which changes that it anticipates would result in
improved operations or profitability. Series 1996 and Series 1998's equity
holdings are broadly invested among different industries. In analyzing
securities for investment, Asset Management considers many different factors,
including past growth records, management capability, future earnings
prospects and technological innovation, as well as general market and economic
factors that can influence the price of securities.
Under normal market conditions, the bulk of Series 1996 and Series
1998's non-zero coupon security portfolios consists of common stocks, but they
also may contain other equity securities, limited to preferred stocks and debt
securities convertible into common stocks. However, when Asset Management
believes that a temporary defensive investment posture is warranted, Series
1996 and Series 1998 may invest in debt obligations, preferred securities or
short-term money market instruments and may engage in repurchase agreement
transactions with respect to money market instruments. Series 1996 and Series
1998 do not intend to purchase warrants or rights but may receive these
securities as part of a unit distributed to holders of a class of securities
held by Series 1996 and Series 1998. Preferred securities and convertible
securities will be selected on the basis of their equity characteristics, and
ratings by statistical rating organizations generally will not be a factor in
the selection process.
Lending Securities
Each Series is authorized to lend securities it holds to brokers,
dealers and other financial organizations. These loans, if and when made, may
not exceed 33-1/3% of each Series' assets taken at value. A Series' loans of
securities will be collateralized by cash, letters of credit or U.S government
securities that are maintained at all times in a segregated account with the
Trust's custodian in an amount at least equal to the current market value of
the loaned securities. By lending its portfolio securities, a Series will
seek to generate income by continuing to receive interest on the loaned
securities, by investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when U. S.
government securities are used as collateral. The risks in lending portfolio
securities, as with other extensions of secured credit, consist of possible
delays in receiving additional collateral or in the recovery of the securities
or possible loss of rights in the collateral should the borrower fail
financially. Loans will be made to firms deemed by Asset Management to be of
good standing and will not be made unless, in the judgment of Asset
Management, the consideration to be earned from such loans would justify the
risk.
Money Market Instruments
Each Series may hold at any time up to 10% of the value of its assets in
cash and money market instruments in order to cover the Series' expenses,
anticipated redemptions and cash payments of dividends and distributions and
to meet settlement requirements for securities. In addition, when Asset
Management believes that, with respect to its equity portfolio, a temporary
defensive investment posture is warranted, a Series may invest without
limitation in cash and money market instruments. To the extent that it holds
cash or invests in money market instruments, a Series will not achieve its
investment objective of long-term appreciation of capital. Money market
instruments in which the Series may invest are: 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 A-2 by Standard & Poor's
Corporation or Prime-2 by Moody's Investors Service, Inc. or the equivalent
from another major rating service or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements. At no time will a Series' investments
in bank obligations, including time deposits, exceed 25% of its assets. In
addition, a Series will not invest in time deposits maturing in more than
seven days if, as a result, its holdings of those time deposits would exceed
5% of Series 1996's and Series 1998's net assets and 10% of Series 2000's net
assets.
A Series will invest in an obligation of a foreign bank or foreign
branch of a United States bank only if Asset Management determines that the
obligation presents minimal credit risks. Obligations of foreign banks or
foreign branches of United States banks in which a Series will invest may be
traded in the United States or outside the United States, but will be
denominated in U.S. dollars. These obligations entail risks that are
different from those of investments in obligations of United States banks.
These risks include foreign economic and political developments, foreign
governmental restrictions that may adversely affect 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 recordkeeping requirements. In
addition, less information may be publicly available about a foreign branch of
a domestic bank than about a domestic bank.
U.S. government securities in which a Series may invest include: direct
obligations of the United States Treasury, and obligations issued or
guaranteed by United States government, its agencies and instrumentalities,
including instruments that are supported by the full faith and credit of the
United States; instruments that are supported by the right of the issuer to
borrow from the United States Treasury; and instruments that are supported
solely by the credit of the instrumentality.
Repurchase Agreements
Each Series may engage in repurchase agreement transactions with certain
banks which are the issuers of instruments acceptable for purchase by the Fund
and with certain dealers on the Federal Reserve Bank of New York's list of
reporting dealers. Under the terms of a typical repurchase agreement, a Series
would acquire an underlying debt obligation for a relatively short period
(usually not more than seven days) subject to an obligation of the seller to
repurchase, and the Series to resell, the obligation at an agreed price and
time, thereby determining the yield during the Series' holding period. This
arrangement results in a fixed rate of return that is not subject to market
fluctuations during the Series' holding period. The value of the underlying
securities will be monitored on an ongoing basis by Asset Management or Boston
Advisors to ensure that the value is at least equal at all times to the total
amount of the repurchase obligation, including interest. Boston Advisors or
Asset Management also will review on an ongoing basis the creditworthiness of
those banks and dealers with which the Series may enter into repurchase
agreements to evaluate the potential risks. The Series bear a risk of loss in
the event that the other party to a repurchase agreement defaults on its
obligations and the Series is delayed or prevented from exercising its rights
to dispose of the underlying securities, including the risk of a possible
decline in the value of the underlying securities during the period in which
the Series 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. At any one time, Series 2000's aggregate
holdings of repurchase agreements having a duration of more than five business
days and securities lacking readily available market quotations will not
exceed 10% of Series 2000's total assets.
Investment Restrictions
The Trust has adopted certain fundamental investment restrictions that
may not be changed without approval of a majority of the Trust's outstanding
voting securities. Included among those fundamental restrictions are the
following:
1. A Series will not purchase securities (other than U.S. government
securities) of any issuer if, as a result of the purchase, more than 5% of the
value of the Series' total assets would be invested in the securities of the
issuer, except that up to 25% of the value of the Series' total assets may be
invested without regard to this 5% limitation.
2. A Series will not purchase more than 10% of the voting securities of
any one issuer, or more than 10% of the securities of any class of any one
issuer, except that this limitation is not applicable to a Series' investments
in U.S. government securities, and up to .25% of a Series' assets may be
invested without regard to these 10% limitations.
3. A Series will not borrow money, except that a Series may borrow from
banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests and cash payments of dividends and
distributions that might otherwise require the untimely disposition of
securities, in an amount not to exceed 33-1/3% of the value of the Series'
total assets (including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the total assets of the Series,
the Series will not make any additional investments.
4. A Series will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
5. A Series will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, except that this
restriction does not apply to investments in U.S. government securities.
Certain other investment restrictions adopted by the Series are
described in the Statement of Additional Information.
Portfolio Transactions and Turnover
Securities transactions on behalf of the Series will be executed by a
number of brokers and dealers, including Smith Barney Shearson and certain of
its affiliated brokers, that are selected by Asset Management. The Series may
use Smith Barney Shearson or a Smith Barney Shearson affiliated broker in
connection with a purchase or sale of securities when Asset Management
believes that the charge for the transaction does not exceed usual and
customary levels.
The Trust cannot accurately predict any Series' portfolio turnover rate,
but anticipates that its annual turnover will not exceed 50%.
MANAGEMENT OF THE TRUST
Board of Trustees
Overall responsibility for management and supervision of the Trust and
the Series rests with the Board of Trustees. The Trustees approve all
significant agreements between the Trust and the persons or companies that
furnish services to the Trust and the Series, including agreements with its
investment adviser, administrator, custodian and transfer agent. The day-to-
day operations of the Series are delegated to the Series' investment adviser
and administrator. The Statement of Additional Information contains general
background information regarding each of the Trust's Trustees and the
executive officers of each Series.
Investment Adviser--Asset Management
Asset Management, located at Two World Trade Center, New York, New York
10048, serves as the Fund's investment adviser. Asset Management (through its
predecessors) has been in the investment counseling business since 1940 and
renders investment advice to a wide variety of individual, institutional and
investment company clients and has aggregate assets under management as of
February 28, 1994, in excess of $10.1 billion.
Subject to the supervision and direction of the Trust's Board of
Trustees, Asset Management manages each Series' portfolio in accordance with
the Series' stated investment objectives and policies, makes investment
decisions for the Series, places orders to purchase and sell securities, and
employs professional portfolio managers and securities analysts who provide
research services to the Series.
Portfolio Management
Harold L. Williamson, Jr., Vice Chairman of Asset Management, has served
as Vice President and Investment Officer of Series 1996 and Series 1998 since
the Series' commencement of operations, and manages the day-to-day operations
of Series 1996 and Series 1998, including making all investment decisions.
Richard Freeman, Executive Vice President of Asset Management, has
served as Vice President and Investment Officer of Series 2000 since the
Series' commencement of operations, and manages the day-to-day operations of
Series 2000, including making all investment decisions.
Mr. Williamson's and Mr. Freeman's management discussion and analysis,
and additional performance information regarding each Series during the fiscal
year ended November 30, 1993, are included in the Series' Annual Report dated
November 30, 1993. A copy of each Series' Annual Report may be obtained upon
request without charge from your Smith Barney Shearson Financial Consultant or
by writing or calling the Fund at the address or phone number listed on page
one of this Prospectus.
Administrator--Boston Advisors
Boston Advisors, located at One Boston Place, Boston, Massachusetts
02108, serves as the Fund's administrator. Boston Advisors provides
investment management, investment advisory and/or administrative services to
investment companies which had aggregate assets under management as of
February 28, 1994 in excess of $92.5 billion.
Boston Advisors calculates the net asset value of the Series' shares and
generally assists in all aspects of the Series' administration and operation.
PURCHASE OF SHARES
Shares of the Series are not currently being offered for sale to new
investors, although each Series, upon at least 30 days' notice to
shareholders, may commence a continuous offering if the Board of Trustees
determines it to be in the best interests of that Series and its shareholders.
REDEMPTION OF SHARES
Shareholders may redeem their shares without charge on any day that the
Series calculates its net asset value. See "Net Asset Value." Redemption
requests received in proper form prior to the close of regular trading on the
NYSE are priced at the net asset value per share determined on that day.
Redemption requests received after the close of regular trading on the NYSE
are priced at the net asset value as next determined.
The Series normally transmit redemption proceeds for credit to the
shareholder's account at Smith Barney Shearson or to a broker that clears
securities transactions through Smith Barney Shearson on a fully disclosed
basis (an "Introducing Broker") at no charge within seven days after receipt
of a redemption request. Generally, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney Shearson
will benefit from the use of temporarily uninvested funds.
Although shares of the Series may be redeemed as described above, a
shareholder who redeems prior to the Maturity Date may realize an amount that
is less or greater than the entire amount of his or her investment. See
"Investment Objectives and Management Policies."
If the Fund's Board of Trustees determines that it would be detrimental
to the best interests of remaining shareholders to make a redemption payment
wholly in cash, a Series may pay any portion of a redemption in excess of the
lesser of $250,000 or 1% of the Series' net assets by distribution in kind of
securities from a Series' portfolio in lieu of cash in conformity with SEC
rules. Portfolio securities issued in a redemption in kind will be readily
marketable, although a shareholder that receives a distribution in kind of
securities may incur transaction costs in the disposition of those securities
and could experience a loss on the securities between the time of such
distribution and such disposition.
A Series' account that is reduced by a shareholder to a value of $500 or
less is subject to involuntary redemption by that Series.
A Series' shares may be redeemed in one of the following ways:
Redemption Through Smith Barney Shearson
Redemption requests may be made through Smith Barney Shearson or an
Introducing Broker. A shareholder desiring to redeem Series shares
represented by certificates must present the certificates to Smith Barney
Shearson or an Introducing Broker endorsed for transfer (or accompanied by an
endorsed stock power), signed exactly as the shares are registered.
Redemption By Mail
Shares may be redeemed by submitting a written request for redemption
to:
Smith Barney Shearson Principal Return Fund
(specify the Series)
c/o The Shareholder Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to the Trust's transfer agent must (a)
state the number of shares to be redeemed, (b) identify the Series from which
the shares are to be redeemed (c) identify the shareholder's account number
and (d) be signed by each registered owner exactly as the shares are
registered. If the shares to be redeemed were issued in certificate form, the
certificates must be endorsed for transfer (or be accompanied by an endorsed
stock power) and must be submitted to the Trust's transfer agent together with
a redemption request. Any signature appearing on a redemption request, share
certificate or stock power must be guaranteed by a domestic bank, savings and
loan institution, domestic credit union, member bank of the Federal Reserve
System or a member firm of a national securities exchange. The Trust's
transfer agent may require additional supporting documents for redemptions
made by corporations, executors, administrators, trustees or guardians. A
redemption request will not be deemed to be properly received until the
Trust's transfer agent receives all required documents in proper form.
VALUATION OF SHARES
The Series' net asset value per share is calculated on each day, Monday
through Friday, except on days on which the NYSE is closed. The NYSE currently
is scheduled to be closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday, respectively.
A Series' net asset value per share is determined as of the close of
regular trading on the NYSE and is computed by dividing the value of the
Series' net assets by the total number of its shares outstanding. Generally,
the Series' investments are valued at market value or, in the absence of a
market value, at fair value as determined by or under the direction of the
Trust's Board of Trustees. Securities that are primarily traded on non-U.S.
exchanges are generally valued at the preceding closing values of the
securities on their respective exchanges, except that when an occurrence
subsequent to the time that a non-U.S. security is valued is likely to have
changed the value, then the fair value of those securities will be determined
by consideration of other factors by or under the direction of the Board of
Trustees. A security that is primarily traded on a U.S. or non-U.S. stock
exchange is valued at the last sale price on that exchange or, if there were
no sales during the day, at the current quoted bid price. In cases in which
securities are traded on more than one exchange, the securities are valued on
the exchange designated by or under the authority of the Board of Trustees as
the primary market. Unlisted non-U.S. securities are valued at the mean
between the last available bid and offer price prior to the time of valuation.
U.S. over-the-counter securities will be valued on the basis of the bid price
at the close of business on each day. Any assets or liabilities initially
expressed in terms of non-U.S. currencies will be converted into U.S. dollar
values based on a formula prescribed by the Trust or, if the information
required by the formula is unavailable, as determined in good faith by the
Board of Trustees. Investments in U. S. government securities (other than
short-term securities) are valued at the quoted bid price in the over-the-
counter market. Short-term investments that mature in 60 days or less are
valued at amortized cost (which involves valuing an investment at its cost
initially and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates on
the market value of the investment) when the Board of Trustees determines that
amortized cost reflects fair value of the investment. In carrying out the
Board's valuation policies, Boston Advisors, as administrator, may consult
with an independent pricing service retained by the Trust. Further
information regarding the Series' valuation policies is contained in the
Statement of Additional Information.
EXCHANGE PRIVILEGE
Shareholders in the Trust may exchange their shares for Class A
shares in the following funds in the Smith Barney Shearson Group of Funds
without payment of any exchange fee, to the extent shares are offered for sale
in the shareholder's state of residence.
Municipal Bond Funds
* SMITH BARNEY SHEARSON LIMITED MATURITY MUNICIPALS FUND, an
intermediate-term municipal bond fund investing in investment
grade obligations;
* SMITH BARNEY SHEARSON MANAGED MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund;
* SMITH BARNEY SHEARSON TAX-EXEMPT INCOME FUND, an intermediate- and
long-term municipal bond fund investing in medium and lower rated securities;
* SMITH BARNEY SHEARSON ARIZONA MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for Arizona
investors;
* SMITH BARNEY SHEARSON INTERMEDIATE MATURITY CALIFORNIA MUNICIPALS
FUND, an intermediate-term municipal bond fund designed for California
investors;
* SMITH BARNEY SHEARSON CALIFORNIA MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for California
investors;
* SMITH BARNEY SHEARSON FLORIDA MUNICIPALS FUND, an intermediate-
and long-term municipal bond fund designed for Florida investors;
* SMITH BARNEY SHEARSON MASSACHUSETTS MUNICIPALS FUND, an
intermediate and long-term municipal bond fund designed for Massachusetts
investors;
* SMITH BARNEY SHEARSON NEW JERSEY MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for New Jersey
investors;
* SMITH BARNEY SHEARSON LIMITED MATURITY NEW YORK MUNICIPALS FUND,
an intermediate-term municipal bond fund designed for New York investors;
* SMITH BARNEY SHEARSON NEW YORK MUNICIPALS FUND INC., an
intermediate- and long-term municipal bond fund designed for New York
investors;
Income Funds
* SMITH BARNEY SHEARSON ADJUSTABLE RATE GOVERNMENT INCOME FUND,
seeks high current income while limiting the degree of fluctuation in net
asset value resulting from movement in interest rates;
* SMITH BARNEY SHEARSON WORLDWIDE PRIME ASSETS FUND, invests in a
portfolio of high quality debt securities that may be denominated in U.S.
dollars or selected foreign currencies and that have remaining maturities of
not more than one year;
* SMITH BARNEY SHEARSON SHORT-TERM WORLD INCOME FUND, an income fund
investing in high quality, short-term debt securities denominated in U.S.
dollars as well as a range of foreign currencies;
* SMITH BARNEY SHEARSON LIMITED MATURITY TREASURY FUND, invests
exclusively in securities issued by the United States Treasury and other U.S.
government securities;
* SMITH BARNEY SHEARSON DIVERSIFIED STRATEGIC INCOME FUND, seeks
high current income primarily by allocating and reallocating its assets among
various types of fixed-income securities;
* SMITH BARNEY SHEARSON MANAGED GOVERNMENTS FUND INC., an income
fund investing in obligations issued or guaranteed by the U.S. government and
its agencies and instrumentalities with emphasis on mortgage-backed government
securities;
* SMITH BARNEY SHEARSON GOVERNMENT SECURITIES FUND, seeks a high
current return by investing in U.S. government securities;
* SMITH BARNEY SHEARSON INVESTMENT GRADE BOND FUND, seeks maximum
current income consistent with prudent investment management and preservation
of capital by investing in corporate bonds;
* SMITH BARNEY SHEARSON HIGH INCOME FUND, seeks high current income
by investing in high-yielding corporate bonds, debentures and notes;
* SMITH BARNEY SHEARSON GLOBAL BOND FUND, seeks current income and
capital appreciation by investing in bonds, debentures and notes of foreign
and domestic issuers;
Growth and Income Funds
* SMITH BARNEY SHEARSON CONVERTIBLE FUND, seeks current income and
capital appreciation by investing in convertible securities;
* SMITH BARNEY SHEARSON UTILITIES FUND, seeks total return by
investing in equity and debt securities of utilities companies;
* SMITH BARNEY SHEARSON STRATEGIC INVESTORS FUND, seeks high total
return consisting of current income and capital appreciation by investing in a
combination of equity, fixed-income and money market securities;
* SMITH BARNEY SHEARSON PREMIUM TOTAL RETURN FUND, seeks total
return by investing in dividend-paying common stocks;
* SMITH BARNEY SHEARSON GROWTH AND INCOME FUND, seeks income and
long-term capital growth by investing in income producing equity securities;
Growth Funds
* SMITH BARNEY SHEARSON APPRECIATION FUND INC., an equity fund
seeking long-term appreciation of capital;
* SMITH BARNEY SHEARSON FUNDAMENTAL VALUE FUND INC., an equity fund
seeking long-term capital growth with current income as a secondary objective;
* SMITH BARNEY SHEARSON SECTOR ANALYSIS FUND, seeks capital
appreciation by following a sector strategy;
* SMITH BARNEY SHEARSON TELECOMMUNICATIONS GROWTH FUND, an equity
fund seeking capital appreciation, with income as a secondary consideration;
* SMITH BARNEY SHEARSON AGGRESSIVE GROWTH FUND INC., an equity fund
seeking above-average capital growth;
* SMITH BARNEY SHEARSON SPECIAL EQUITIES FUND, seeks long-term
capital appreciation by investing in equity securities primarily of emerging
growth companies;
* SMITH BARNEY SHEARSON GLOBAL OPPORTUNITIES FUND, an equity fund
seeking long-term capital growth by investing principally in common stocks of
United States and foreign issuers;
* SMITH BARNEY SHEARSON EUROPEAN FUND, seeks long-term capital
appreciation by investing primarily in securities of issuers based in European
countries;
* SMITH BARNEY SHEARSON PRECIOUS METALS AND MINERALS FUND INC., a
long-term, capital appreciation fund investing primarily in precious metal and
mineral-related companies and gold bullion;
Money Market Funds
* SMITH BARNEY SHEARSON DAILY DIVIDEND FUND INC., invests in a
diversified portfolio of high quality money market instruments;
* SMITH BARNEY SHEARSON GOVERNMENT AND AGENCIES FUND INC., invests
in short-term U.S. government and agency securities;
* SMITH BARNEY SHEARSON MUNICIPAL MONEY MARKET FUND INC., invests in
short-term, high quality municipal obligations;
* SMITH BARNEY SHEARSON CALIFORNIA MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality California municipal obligations;
* SMITH BARNEY SHEARSON NEW YORK MUNICIPAL MONEY MARKET FUND,
invests in short-term, high quality New York municipal obligations;
Shareholders of a Series may exchange their shares for Class A shares of
those funds listed above without payment of an exchange fee. In addition,
Smith Barney Shearson receives an annual service fee ranging from .15% to .25%
of the value of average daily net assets attributable to the Class A shares of
each fund described above except those listed under money market funds.
The exchange of shares of one fund for shares of another fund is treated
for Federal income tax purposes as a sale of the shares given in exchange by
the shareholder. Therefore, an exchanging shareholder may realize a taxable
gain or loss in connection with an exchange.
Shareholders exercising the exchange privilege with any other fund in
the Smith Barney Shearson Group of Funds should review the prospectus of that
fund carefully prior to making an exchange. Smith Barney Shearson reserves the
right to reject any exchange requested. The exchange privilege may be modified
or terminated at any time after notification. For further information
regarding the exchange privilege, or to obtain current prospectuses for funds
in the Smith Barney Shearson Group of Funds, shareholders should contact their
Smith Barney Shearson Financial Consultants.
A SHAREHOLDER WHO EXCHANGES SHARES PRIOR TO THE MATURITY DATE MAY REALIZE AN
AMOUNT THAT IS LESS OR GREATER THAN THE ENTIRE AMOUNT OF HIS OR HER
INVESTMENT. SEE "INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES." MOREOVER,
BECAUSE EACH SERIES IS NOT ENGAGING IN A CONTINUOUS OFFERING OF SHARES, A
SHAREHOLDER WHO EXCHANGES HIS OR HER SERIES SHARES WILL NOT BE ABLE TO EFFECT
A FURTHER EXCHANGE BACK INTO THAT SERIES.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
Dividends from net investment income of each Series and distributions of
net realized capital gains of each Series, if any, will be distributed
annually after the close of the fiscal year in which they are earned.
Dividends and distributions will be reinvested automatically for each
shareholder's account at net asset value in additional shares of a Series,
unless the shareholder instructs the Series to pay all dividends and
distributions in cash and to credit the amounts to his or her Smith Barney
Shearson brokerage account.
A SHAREHOLDER WHO ELECTS TO RECEIVE DIVIDENDS AND DISTRIBUTIONS IN CASH MAY
REALIZE AN AMOUNT THAT IS GREATER OR LESS THAN THE ENTIRE AMOUNT OF HIS OR HER
INVESTMENT.
Taxes
Each Series of the Trust has qualified and intends to continue to
qualify each year as a regulated investment company for Federal income tax
purposes. The requirements for qualification may cause a Series to restrict
the extent of its short-term trading. If a Series so qualifies, it will not be
subject to Federal income tax on its net investment income and net realized
capital gains that it distributes to shareholders, so long as it meets certain
distribution requirements. See "Investment Objectives and Management
Policies." In addition, each Series is subject to a nondeductible excise tax
of 4% of the amount by which the Series fails to distribute specified
percentages of its investment income and capital gains. The Series intend to
pay dividends and distributions more frequently than stated above in order to
avoid application of the excise tax, if the additional distributions are
otherwise determined to be in the best interests of the Series' shareholders.
Dividends declared by a Series in October, November or December of any
calendar year and payable to shareholders of record on a specified date in
such a month are deemed to have been received by each shareholder on December
31 of such calendar year and to have been paid by a Series not later than such
December 31, provided that such dividend is actually paid by the Series during
January of the following year.
Dividends of each Series' investment income and distributions of its
short-term capital gains will be taxable to shareholders as ordinary income
for Federal income tax purposes, whether received in cash or reinvested in
additional shares. Distributions of long-term capital gains will be taxable to
shareholders as such, whether received in cash or reinvested, and regardless
of how long a shareholder has held shares of the Series. In general, only
dividends that represent the dividends received from U.S. corporations may,
subject to certain limitations, qualify for the Federal dividends-received
deduction for corporate shareholders.
Statements as to the tax status of each shareholder's dividends and
distributions will be mailed annually. These statements will set out the
amount of each Series' dividends eligible for the dividends-received deduction
for corporate shareholders. Furthermore, shareholders will receive, as
appropriate, various written notices after the close of the Series' taxable
year regarding the tax status of certain dividends and distributions that were
paid (or that are treated as having been paid) by the Series to its
shareholders during the preceding taxable year, including the amount of
dividends that represent interest derived from U.S. government securities.
Shareholders should consult their own tax advisors as to the state and
local tax consequences of investing in a Series and should be aware that some
jurisdictions may not treat income derived from a Series' holdings of U.S.
government securities as exempt from state and local income taxes.
THE SERIES' PERFORMANCE
From time to time, the Trust may advertise each Series' "average annual
total return" over various periods of time. Such total return figures show
the average percentage change in value of an investment in a Series from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the Series' shares and assume
that any income dividends and/or capital gains distributions made by a Series
during the period were reinvested in shares of the Series. Figures will be
given for the recent one-, and five-year periods, or for the life of the
Series to the extent that it has not been in existence for any such periods,
and may be given for other periods as well, such as on a year-by-year basis.
When considering average annual total return figures for periods longer than
one year, it is important to note that the Series' average annual total return
for any one year in the period might have been greater or less than the
average for the entire period. A Series also may use "aggregate" total return
figures for various periods, representing the cumulative change in value of an
investment in a Series for the specific period (again reflecting changes in
the Series' share prices and assuming reinvestment of dividends and
distributions). Aggregate total return may be calculated either with or
without the effect of the maximum 5% sales charge and may be shown by means of
schedules, charts or graphs, and may indicate subtotals of the various
components of total return (i.e., change in value of initial investment,
income dividends and capital gains distributions).
In reports or other communications to shareholders or in advertising
material, the Trust may compare the Series' performance with the Standard &
Poor's Index of 500 Common Stocks, the Russell 2000 Index, the Dow Jones
Industrial Average, the Value-Line Composite Geometric Index; or with that of
other mutual funds as listed in the rankings prepared by Lipper Analytical
Services, Inc., with studies prepared by independent organizations such as
Ibbotson Associates or Wilshire Associates Incorporated, or similar
independent services which monitor the performance of mutual funds or other
industry or financial publications such as Barron's, Business Week, Forbes,
Fortune, Institutional Investor, Investors Daily, Kiplinger's Personal
Finance, Money, Morningstar Mutual Fund Values, The New York Times,
The Wall Street Journal, or USA Today. Any given performance comparison
should not be considered as representative of the Series' performance for any
future period. The Statement of Additional Information contains a description
of the methods used to determine total return. Shareholders may make
inquiries regarding the Series, including total return figures, to their Smith
Barney Shearson Financial Consultant.
CUSTODIAN AND TRANSFER AGENT
Boston Safe, located at One Boston Place, Boston, Massachusetts 02108,
serves as custodian of the Trust's investments. Boston Safe is an indirect
wholly owned subsidiary of Mellon Bank Corporation.
TSSG serves as the Trust's transfer agent and is located at Exchange
Place, Boston, Massachusetts, 02109.
DISTRIBUTOR
Distributor and Shareholder Servicing Agent--Smith Barney Shearson
Smith Barney Shearson, which serves as the Trust's distributor and
shareholder servicing agent for Series 1998 and Series 2000, is located at 388
Greenwich Street, New York, New York 10013, and is one of the leading full-
line investment firms serving the U.S. and foreign securities and commodities
markets. Pursuant to a Shareholder Services Plan (the "Plan") adopted with
respect to the Series 1998 and Series 2000, by vote of a majority of the
Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust as defined in the 1940 Act and who have no
direct or indirect financial interest in the operation of the Plan or any
agreement relating to it, as well as by the Series' sole shareholder prior to
Series 1998 and Series 2000's initial public offering, Smith Barney Shearson,
as shareholder servicing agent, is paid an annual fee by the respective
Series. The annual fee will be calculated at the annual rate of .25% of the
value of the average daily net assets of the respective Series and is used by
Smith Barney Shearson to cover payments to Smith Barney Shearson Financial
Consultants who provide support services to shareholders of the Series,
including, but not limited to, office space and equipment, telephone
facilities, responding to routine inquiries regarding the Series and its
operations, processing shareholder transactions, forwarding and collecting
proxy materials, dividend payment elections and providing any other
shareholder services not otherwise provided by the Trust's transfer agent. The
Board of Trustees evaluates the appropriateness of the Plan and its payment
terms on a continuing basis and in doing so considers all relevant factors,
including the nature, extent and quality of services generally provided to
shareholders.
ADDITIONAL INFORMATION
The Trust was organized on October 18, 1988 under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." On November 18, 1988, August 27, 1990 and July
30, 1993, the Trust changed its name from SLH Secured Capital Fund to SLH
Principal Return Fund, Shearson Lehman Brothers Principal Return Fund and
Smith Barney Shearson Principal Return Fund, respectively. The Trust offers
shares of beneficial interest of each Series having a $.001 per share par
value. When matters are submitted for shareholder vote, shareholders of each
Series will have one vote for each full share owned and a proportionate,
fractional vote for any fractional share held. Generally shares of the Trust
vote by individual Series on all matters except (a) matters affecting only the
interests of one or more of the Series, in which case only shares of the
affected Series would be entitled to vote or (b) when the 1940 Act requires
that shares of the Series be voted in the aggregate. There normally will be
no annual meetings 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. Shareholders of record of no less than
two-thirds of the outstanding shares of the Trust 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. A meeting will be called for the purpose of voting
on the removal of a Trustee at the written request of holders of 10% of the
Trust's outstanding shares.
The Trust sends its shareholders a semi-annual report and an audited
annual report, each of which includes a listing of the investment securities
held by the Series at the end of the period covered. In an effort to reduce
each Series' printing and mailing costs, each Series 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, each Series also plans to consolidate the mailing of its Prospectus
so that a shareholder having multiple accounts will receive a single
Prospectus annually. Any shareholder who does not want this consolidation to
apply to his or her account should contact his or her Financial Consultant or
the Trust's transfer agent. Shareholders may make inquiries regarding the
Trust to their Smith Barney Shearson Financial Consultant.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
TRUST'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF THE
TRUST'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH, OR
TO ANY PERSON TO WHOM, THE OFFER MAY NOT LAWFULLY BE MADE.
SMITH BARNEY SHEARSON PRINCIPAL RETURN FUND
Two World Trade Center
New York, New York 10048
(212) 720-9218
Statement of Additional Information
April 1, 1994
This Statement of Additional Information supplements the information
contained in the current Prospectus dated April 1, 1994, as amended or
supplemented from time to time, of the Zeros and Appreciation Series 1996
("Series 1996"), Zeros and Appreciation Series 1998 ("Series 1998") and Zeros
Plus Emerging Growth Series 2000 ("Series 2000"), (collectively the "Series"),
of Shearson Lehman Brothers Principal Return Fund (the "Trust"), and should be
read in conjunction with that Prospectus. The Prospectus may be obtained from
your Smith Barney Shearson Financial Consultant or by writing or calling the
Trust at the address or telephone number set forth above. This Statement of
Additional Information, although not in itself a prospectus, is incorporated
by reference into the Prospectus in its entirety.
- ------------------------------------------------------------------
CONTENTS
For ease of reference, the same section headings are used in both the
Prospectus and the Statement of Additional Information, except where noted
below.
Management of the Trust 2
Investment Objectives and Management Policies 5
Redemption of Shares 13
Valuation of Shares 14
Exchange Privilege 14
Determination of Performance 15
(See in the Prospectus "The Series' Performance")
Taxes 16
(See in the Prospectus "Dividends, Distributions and Taxes")
Distributor 18
Custodian and Transfer Agent (See in the Prospectus
"Additional Information")
19
Organization of the Trust 19
Financial Statements 20
MANAGEMENT OF THE TRUST
The executive officers of the Trust are employees of certain of the
organizations that provide services to the Series. These organizations are as
follows:
Name Service
Smith Barney Shearson Inc.
("Smith Barney Shearson) Distributor
Smith Barney Shearson Asset Management
("Asset Management) Investment Adviser
The Boston Company Advisors, Inc.
("Boston Advisors) Administrator
Boston Safe Deposit and Trust Company
("Boston Safe) Custodian
The Shareholder Services Group, Inc.("TSSG"), a
subsidiary of First Data Corporation Transfer Agent
These organizations and the functions that they perform for the Series
are discussed in the Prospectus and in this Statement of Additional
Information.
Trustees and Executive Officers of the Trust
The names of the Trustees and executive officers of the Trust, together
with information as to their principal business occupations for the past five
years, are set forth below. Each Trustee who is an "interested person" of the
Trust, as defined in the Investment Company Act of 1940, as amended (the "1940
Act"), is indicated by an asterisk.
Trustees
Paul R. Ades, Trustee. Partner in the law firm of Murov & Ades. His address
is 272 South Wellwood Avenue, P.O. Box 504, Lindenhurst, New York 11757.
Herbert Barg, Trustee. Private investor. His address is 273 Montgomery
Avenue, Bala Cynwyd, Pennsylvania 19004.
Allan R. Johnson, Trustee. Retired. former Chairman, Retail Division of
BATUS, Inc., and Chairman and Chief Executive Officer of Saks Fifth Avenue,
Inc. His address is 2 Sutton Place South, New York, New York 10022.
* Heath B. McLendon, Chairman of the Board and Investment Officer. Executive
Vice President of Smith Barney Shearson; Chairman of Smith Barney Shearson
Strategy Advisers Inc.; prior to July 1993, Senior Executive Vice President of
Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"); Vice Chairman of
Shearson Asset Management, a member of the Asset Management Group of Shearson
Lehman Brothers; a Director of PanAgora Asset Management, Inc. and PanAgora
Asset Management Limited. His address is Two World Trade Center, New York, New
York 10048.
Ken Miller, Trustee. President of Young Stuff Apparel Group, Inc. His address
is 1407 Broadway, 6th Floor, New York, New York 10018.
John F. White, Trustee. President Emeritus of The Cooper Union for the
Advancement of Science and Art; Special Assistant to the President of the
Aspen Institute. His address is Crows Nest Road, P. O. Box 754, Tuxedo Park,
New York, New York 10987.
Stephen J. Treadway, President. Executive Vice President and Director of
Smith Barney Shearson; Director and President of Mutual Management Corp.and
Smith, Barney Advisors, Inc. and Trustee of Corporate Realty Income Trust I.
His address is 1345 Avenue of the Americas New York, New York 10105.
Richard P. Roelofs, Executive Vice President. Managing Director of Smith
Barney Shearson and President of Smith Barney Shearson Strategy Advisers Inc.;
prior to July 1993, Senior Vice President of Shearson Lehman Brothers; Vice
President of Shearson Lehman Investment Strategy Advisors Inc., an investment
advisory affiliate of Shearson Lehman Brothers. His address is Two World
Trade Center, New York, New York 10048.
Harry D. Cohen, Vice President and Investment Officer. President and Director
of Asset Management; prior to July 1993, Executive Vice President of Shearson
Lehman Brothers. His address is Two World Trade Center, New York, New York
10048.
Harold L. Williamson, Jr., Vice President and Investment Officer. Vice
Chairman and a Director of Asset Management; prior to July 1993, Vice Chairman
and a Director of Shearson Asset Management. His address is Two World Trade
Center, New York, New York 10048.
Susan C. Fulenwider, Vice President and Investment Officer. Vice President of
Asset Management; prior to July 1993, Vice President of Shearson Asset
Management. Her address is Two World Trade Center, New York, New York 10048.
Richard A. Freeman, Vice President and Investment Officer. Executive Vice
President of Asset Management; prior to July 1993, Executive Vice President of
Shearson Asset Management. His address is Two World Trade Center, New York,
New York 10048.
Vincent Nave, Treasurer. Senior Vice President of Boston Advisors and Boston
Safe. His address is One Exchange Place, Boston, Massachusetts 02109.
Francis J. McNamara, III, Secretary. Senior Vice President and General
Counsel of Boston Advisors; prior to June 1989, Vice President and Associate
Counsel of Boston Advisors. His address is One Exchange Place, Boston,
Massachusetts 02109.
Each of the Trustees serves as a trustee, general partner and/or
director of other mutual funds for which Smith Barney Shearson serves as
distributor. As of February 28, 1994, Trustees and officers of the Series,
as a group, owned less than 1% of the outstanding shares of beneficial
interest of each Series.
No director, officer or employee of Smith Barney Shearson, Asset
Management, Boston Advisors or any of their affiliates will receive any
compensation from the Trust for serving as an officer or Trustee. The Trust
pays each Trustee who is not a director, officer or employee of Smith Barney
Shearson, Boston Advisors or any of their affiliates a fee of $2,000 per annum
plus $500 per meeting attended and reimburses them for travel and out-of-
pocket expenses. For the fiscal year ended November 30, 1993, such fees and
expenses for the Trust totalled $24,835.
Investment Adviser and Administrator
Asset Management serves as the Series' investment adviser under the
terms of a written agreement for each Series (the "Advisory Agreement").
Asset Management is a division of Smith Barney Advisers, Inc. Smith Barney
Advisers, Inc., is a wholly owned subsidiary of Smith Barney Shearson Holdings
Inc. ("Holdings"), which is in turn a wholly owned subsidiary of The Travelers
Inc. (formerly known as Primerica Corporation) ("Travelers"). The Advisory
Agreements for all Series were first approved by the Board of Trustees,
including a majority of the Trustees who are not "interested persons" of the
Trust or Smith Barney Shearson on April 7, 1993. Certain of the services
provided to, and fees paid by, the Series under the Advisory and
Administration Agreements are described in the Prospectus. Asset Management
pays the salaries of all officers and employees who are employed by both it
and the Trust and maintains office facilities for the Trust. Asset Management
bears all expenses in connection with the performance of its services under
the Advisory Agreements. Boston Advisors serves as the administrator of the
Series pursuant to a written agreement for each Series (the "Administration
Agreements"). Boston Advisors is a wholly owned subsidiary of The Boston
Company, Inc., which is in turn an indirect wholly owned subsidiary of Mellon
Bank Corporation ("Mellon"). The Administration Agreements were most recently
approved for all Series by the Board of Trustees, including a majority of the
Trustees who are not "interested persons" of the Series or Smith Barney
Shearson, on July 15, 1993. As administrator, Boston Advisors pays the
salaries of all officers and employees who are employed by both it and the
Trust and maintains office facilities for the Trust. Boston Advisors also
furnishes the Series with statistical and research data, clerical help and
accounting, data processing, bookkeeping, internal auditing and legal services
and certain other services required by the Series; prepares reports to the
Series' shareholders; and prepares tax returns and reports to and filings with
the Securities and Exchange Commission (the "SEC") and state Blue Sky
authorities. Boston Advisors bears all expenses in connection with the
performance of its services under the Administration Agreements.
For the fiscal years ended November 30, 1993, 1992 and 1991, the Series
paid investment advisory and sub-investment advisory and administration fees
to Asset Management and Boston Advisors as follows:
Series 1996 Series `1998* Series 2000**
Fiscal Year Ended Fiscal Year Ended Fiscal Year Ended
1993 1992 1991 1993 1992 1991 1993 1992 1991
Advisory $305,538 $341,700 $360,028 $461,542 $544,508 $451,534
$436,813 $572,017
Fees $166,427
Sub-Investment $203,692 $227,800 $240,019 $307,695 $636,010 $361,023
$218,406 $286,008
$ 83,218
Advisory and
Administration
Fees
* Series 1998 commenced operations on January 25, 1991.
** Series 2000 commenced operations on August 30, 1991.
Asset Management and Boston Advisors have agreed that if in any fiscal
year the aggregate expenses of a Series (including fees payable pursuant to
the Advisory Agreements, but excluding interest, taxes, brokerage and
extraordinary expenses) exceed the expense limitation of any state having
jurisdiction over the Series, Asset Management and Boston Advisors will reduce
their fees from the Series by the proportion of the excess expense equal to
the proportion that their respective fees bear to the aggregate of fees paid
by the Series for investment advice and administration, to the extent required
by state law. A fee reduction, if any, will be estimated and reconciled on a
monthly basis. The most restrictive state expense limitation applicable to
each Series would require a reduction of fees in any year in which expenses
subject to the limitation exceed 2.5% of a Series' first $30 million of
average daily net assets, 2.0% of the next $70 million of average daily net
assets and 1.5% of the remaining average daily net assets. No such fee
reductions were required for the 1993, 1992 and 1991 fiscal years.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Trust. Stroock &
Stroock & Lavan serves as counsel to the Trustees who are not "interested
persons" of the Trust.
Coopers & Lybrand, independent accountants, One Post Office Square,
Boston, Massachusetts 02109, have been selected as auditors of the Trust and
render an opinion on the Trust's financial statements annually.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectus discusses the investment objectives of each Series and
the policies to be employed to achieve those objectives. Set forth below is
supplemental information concerning certain of the securities and other
instruments in which the Series may invest, the investment policies and
portfolio strategies that the Series may utilize and certain risks involved
with those investments, policies and strategies.
Zero Coupon Securities
There are currently two basic types of zero coupon securities, those
created by separating the interest and principal components of a previously
issued interest-paying security and those originally issued in the form of a
face amount only security paying no interest. Zero coupon securities of the
United States government and certain of its agencies and instrumentalities and
of private corporate issuers are currently available, although the Series will
purchase only those that represent direct obligations of the United States
government.
Zero coupon securities of the United States government that are
currently available are called Separate Trading of Registered Interest and
Principal of Securities ("STRIPS") or Coupon Under Book-Entry Safekeeping
("CUBES"). STRIPS and CUBES are issued under programs introduced by the United
States Treasury and are direct obligations of the United States government.
The United States government does not issue zero coupon securities directly.
The STRIPS program, which is ongoing, is designed to facilitate the secondary
market stripping of selected treasury notes and bonds into individual interest
and principal components. Under the program, the United States Treasury
continues to sell its notes and bonds through its customary auction process.
However, a purchaser of those notes and bonds who has access to a book-entry
account at a Federal Reserve Bank (the "Federal Reserve") may separate the
specified treasury notes and bonds into individual interest and principal
components. The selected treasury securities may thereafter be maintained in
the book-entry system operated by the Federal Reserve in a manner that permits
the separate trading and ownership of the interest and principal payments. The
Federal Reserve does not charge a fee for this service; however, the book-
entry transfer of interest or principal components is subject to the same fee
schedule generally applicable to the transfer of treasury securities.
Under the program, in order for a book-entry treasury security to be
separated into its component parts, the face amount of the security must be an
amount which, based on the stated interest rate of the security, will produce
a semi-annual interest payment of $1,000 or a multiple of $1,000. Once a book-
entry security has been separated, each interest and principal component may
be maintained and transferred in multiples of $1,000 regardless of the face
amount initially required for separation of the resulting amount required for
each interest payment.
CUBES, like STRIPS, are direct obligations of the United States
government. CUBES are coupons that have previously been physically stripped
from treasury notes and bonds, but which were deposited with the Federal
Reserve and are now carried and transferable in book-entry form only. Only
stripped treasury coupons maturing on or after January 15, 1988, that were
stripped prior to January 5, 1987, were eligible for conversion to book-entry
form under the CUBES program. Investment banks may also strip treasury
securities and sell them under proprietary names. These securities may not be
as liquid as STRIPS and CUBES and the Series have no present intention of
investing in these instruments.
STRIPS and CUBES are purchased at a discount from $1,000. Absent a
default by the United States government, a purchaser will receive face value
for each of the STRIPS and CUBES provided that the STRIPS and CUBES are held
to their due date. While STRIPS and CUBES can be purchased on any business
day, they all currently come due on February 15, May 15, August 15 or November
15 in any given year.
Money Market Instruments
As noted in the Prospectus, each Series may hold at any time up to 10%
of the value of its assets in cash and money market instruments. In addition,
when Asset Management believes that opportunities for capital appreciation do
not appear attractive, each Series may, notwithstanding its investment
objective, take a temporary defensive posture with respect to its equity
securities and invest without limitation in cash and money market instruments.
Among the money market instruments in which the Series may invest are
obligations of the United States government and its agencies and
instrumentalities ("U.S. government securities"); certain bank obligations;
commercial paper; and repurchase agreements involving U.S. government
securities.
U. S. government securities. U.S. government securities include debt
obligations of varying maturities issued or guaranteed by the United States
government or its agencies or instrumentalities. Direct obligations of the
United States Treasury include a variety of securities that differ in their
interest rates, maturities and dates of issuance.
U.S government securities include not only direct obligations of the
United States Treasury, but also include securities issued or guaranteed by
the Federal Housing Administration, Federal Financing Bank, Export-Import
Bank of the United States, Small Business Administration, Government National
Mortgage Association, General Services Administration, Federal Home Loan
Banks, Federal Home Loan Mortgage Corporation, Federal National Mortgage
Association, Maritime Administration, Tennessee Valley Authority, Resolution
Trust Corporation, District of Columbia Armory Board, Student Loan Marketing
Association and various institutions that previously were or currently are
part of the Farm Credit System (which has been undergoing a reorganization
since 1987). Because the United States government is not obligated by law to
provide support to an instrumentality that it sponsors, the Series will invest
in obligations issued by such an instrumentality only if Asset Management
determines that the credit risk with respect to the instrumentality does not
make its securities unsuitable for investment by the Series.
Repurchase Agreements. Each Series may enter into repurchase agreements
with certain banks which are the issuers of instruments acceptable for
purchase by the Fund 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 price on an agreed 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 seller, including possible delays or
restrictions on a Series' ability to dispose of the underlying securities, the
risk of a possible decline in the value of the underlying securities during
the period in which a Series seeks to assert its rights to them, the risk of
incurring expenses associated with asserting these rights and the risk of
losing all or part of the income from the agreement. In evaluating these
potential risks, Asset Management or Boston Advisors, acting under the
supervision of the Board of Trustees, and on an ongoing basis, monitors (a)
the value of the collateral underlying each repurchase agreement to ensure
that the value is at least equal to the total amount of the purchase
obligation, including interest, and (b) the creditworthiness of the banks and
dealers with which the Series enters into repurchase agreements.
Warrants (Series 2000)
Because a warrant does not carry with it the right to dividends or
voting rights with respect to securities that the warrant holder is entitled
to purchase, and because it does not represent any rights to the assets of the
issuer, a warrant may be considered more speculative than certain other types
of investments. In addition, the value of a warrant does not necessarily
change with the value of the underlying securities and a warrant ceases to
have value if it is not exercised by its expiration date.
Convertible Securities
Convertible securities are fixed-income securities that may be converted
at either a stated price or stated rate into underlying shares of common
stock. Convertible securities have general characteristics similar to both
fixed-income and equity securities. Although to a lesser extent than with
fixed-income securities generally, the market value of convertible securities
tends to decline as interest rates increase and, conversely, tends to increase
as interest rates decline. In addition, because of the conversion feature,
the market value of convertible securities tends to vary with fluctuations in
the market value of the underlying common stocks and, therefore, also will
react to variations in the general market for equity securities. A unique
feature of convertible securities is that as the market price of the
underlying common stock declines, convertible securities tend to trade
increasingly on a yield basis, and so may not experience market value declines
to the same extent as the underlying common stock. When the market price of
the underlying common stock increases, the prices of the convertible
securities tend to rise as a reflection of the value of the underlying common
stock. While no securities investments are without risk, investments in
convertible securities generally entail less risk than investments in common
stock of the same issuer.
As fixed-income securities, convertible securities are investments that
provide for a stable stream of income with generally higher yields than common
stocks. Of course, like all fixed-income securities, there can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. Convertible securities, however, generally
offer lower interest or dividend yields than non-convertible securities of
similar quality because of the potential for capital appreciation. A
convertible security, in addition to providing fixed income, offers the
potential for capital appreciation through the conversion feature, which
enables the holder to benefit from increases in the market price of the
underlying common stock. There can be no assurance of capital appreciation,
however, because securities prices fluctuate.
Convertible securities generally are subordinated to other similar but
non-convertible securities of the same issuer, although convertible bonds, as
corporate debt obligations, enjoy seniority in right of payment to all equity
securities, and convertible preferred stock is senior to common stock, of the
same issuer. Because of the subordination feature, however, convertible
securities typically have lower ratings than similar non-convertible
securities.
Preferred Stock
Preferred stocks, like debt obligations, are generally fixed-income
securities. Shareholders of preferred stocks normally have the right to
receive dividends at a fixed rate when and as declared by the issuer's board
of directors, but do not participate in other amounts available for
distribution by the issuing corporation. Dividends on the preferred stock may
be cumulative, and all cumulative dividends usually must be paid prior to
common shareholders receiving any dividends. Preferred stock dividends must
be paid before common stock dividends and, for that reason, preferred stocks
generally entail less risk than common stocks. Upon liquidation, preferred
stocks are entitled to a specified liquidation preference, which is generally
the same as the par or stated value, and are senior in right of payment to
common stock. Preferred stocks are, however, equity securities in the sense
that they do not represent a liability of the issuer and, therefore, do not
offer as great a degree of protection of capital or assurance of continued
income as investments in corporate debt securities. In addition, preferred
stocks are subordinated in right of payment to all debt obligations and
creditors of the issuer, and convertible preferred stocks may be subordinated
to other preferred stock of the same issuer.
Lending Portfolio Securities
Although the Series are authorized to lend their securities to brokers,
dealers and other financial organizations, they will not lend securities to
their distributor, Smith Barney Shearson, or its affiliates unless the Series
apply for and receive specific authority to do so from the SEC. These loans,
if and when made, may not exceed 33-1/3% of a Series' assets taken at value.
The Series' loans of securities will be collateralized by cash, letters of
credit or U.S government securities that will be maintained at all times in an
amount at least equal to the current market value of the loaned securities.
From time to time, a Series may pay a part of the interest earned from the
investment of collateral received for securities loaned to: (a) the borrower
and/or (b) a third party that is unaffiliated with that Series and that is
acting as a "finder."
By lending its securities, a Series 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. Requirements of the SEC, which may be subject to future
modifications, currently provide that the following conditions must be met
whenever a Series' portfolio securities are loaned: (a) the Series must
receive at least 100% cash collateral or equivalent securities from the
borrower; (b) the borrower must increase such collateral whenever the market
value of the securities rises above the level of such collateral; (c) the
Series must be able to terminate the loan at any time; (d) the Series must
receive reasonable interest on the loan, as well as an amount equal to any
dividends, interest or other distributions on the loaned securities and any
increase in market value; (e) the Series may pay only reasonable custodian
fees in connection with the loan; and (f) voting rights on the loaned
securities may pass to the borrower; however, if a material event adversely
affecting the investment in the loaned securities occurs, the Board of
Trustees must terminate the loan and regain the Series' right to vote the
securities.
Investment Restrictions
The investment restrictions recited in the Prospectus and those numbered
1 through 8 below have been adopted by the Trust as fundamental policies.
Under the 1940 Act, a fundamental policy may not be changed without the vote
of a majority of the outstanding voting securities of the Series, as defined
in the 1940 Act. "Majority" means the lesser of (a) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the outstanding
shares of the Series are present or represented by proxy, or (b) more than 50%
of the outstanding shares. Investment restrictions 9 through 19 may be
changed by vote of a majority of the Board of Trustees at any time.
Under the investment restrictions adopted by the Series:
1. A Series will not purchase securities (other than U. S. government
securities) of any issuer if, as a result of the purchase, more than 5% of the
value of a Series' total assets would be invested in the securities of the
issuer, except that up to 25% of the value of a Series' total assets may be
invested without regard to this 5% limitation.
2. A Series will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any one
issuer, except that this limitation is not applicable to a Series' investments
in U. S. government securities, and up to 25% of a Series' assets may be
invested without regard to these 10% limitations.
3. A Series will not borrow money, except that a Series may borrow
from banks for temporary or emergency (not leveraging) purposes, including the
meeting of redemption requests and cash payments of dividends and
distributions that might otherwise require the untimely disposition of
securities, in an amount not to exceed 33-1/3% of the value of a Series' total
assets (including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the total assets of a Series, a
Series will not make any additional investments.
4. A Series will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
5. A Series will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, except that this
restriction does not apply to investments in U. S. government securities.
6. A Series will not underwrite the securities of other issuers,
except insofar as a Series may be deemed to be an underwriter under the
Securities Act of 1933, as amended, (the "1933 Act") in disposing of its
portfolio securities.
7. A Series will not purchase or sell real estate, interests in real
estate limited partnerships or interests in real estate, except that a Series
may purchase and sell securities that are secured by real estate and may
purchase securities issued by companies that invest or deal in real estate.
8. A Series will not purchase or sell commodities or commodities
futures contracts.
9. A Series will not sell securities short.
10. A Series will not purchase securities on margin, except that a
Series may obtain any short-term credits necessary for the clearance of
purchases and sales of securities.
11. A Series will not pledge, hypothecate, mortgage or encumber in any
other way more than 10% of its assets.
12. A Series will not invest in oil, gas, mineral leases or other
mineral exploration or development programs, except that a Series may invest
in the securities of companies that invest in or sponsor those programs.
13. A Series will not invest in securities of other investment
companies registered or required to be registered under the 1940 Act, except
as the securities may be acquired as part of a merger, consolidation,
reorganization, acquisition of assets or an offer of exchange.
14. A Series will not write or sell put options, call options,
straddles or combinations of those options.
15. A Series will not purchase any security, except U.S. government
securities, if as a result of the purchase, the Series would then have more
than 5% of its total assets invested in securities of companies (including
predecessor companies) that have been in continuous operation for fewer than
three years. (For purposes of this limitation, issuers include predecessors,
sponsors, controlling persons, general partners, guarantors and originators of
underlying assets which may have less than three years of continuous operation
or relevant business experience.)
16. A Series will not make investments for the purpose of exercising
control or management of any other issuer.
17. A Series will not purchase or retain securities of any company, if
to the knowledge of the Trust, any of the Trust's officers or Trustees, or any
officer or director of Asset Management or of Boston Advisors, individually
owns more than .5% of the outstanding securities of the company and together
they own beneficially more than 5% of the securities.
18. A Series will not invest in warrants, if as a result, more than 2%
of the value of a Series' net assets would be invested in warrants that are
not listed on a recognized United States stock exchange, or more than 5% of a
Series' net assets would be invested in warrants regardless of whether they
are listed on such an exchange.
19. A Series will not invest in time deposits maturing in more than
seven days, enter into repurchase agreements having a duration of more than
seven days, purchase securities that may not be sold without first being
registered under the 1933 Act, as amended ("restricted securities"), or
purchase instruments lacking readily available market quotations ("illiquid
instruments"), if as a result of the purchase a Series' aggregate holdings of
time deposits maturing in more than seven days, repurchase agreements having a
duration of more than seven days, restricted securities and illiquid
instruments exceed 5% of Series 1996's or Series 1998's net assets, or 10% of
Series 2000's net assets.
The Trust may make commitments more restrictive than the restrictions
listed above so as to permit the sale of its shares in certain states. Should
the Trust determine that any commitment is no longer in the best interests of
the Trust and its shareholders, the Trust will revoke the commitment by
terminating the sale of shares in the relevant state. The percentage
limitations set forth above apply at the time of purchase of securities.
Portfolio Turnover
The Series intend not to seek profits through short-term trading of
their securities. Nevertheless, a Series will not consider portfolio turnover
rate a limiting factor in making investment decisions. The Series cannot
accurately predict their portfolio turnover rate, but anticipate that their
annual turnover rates will not exceed 50%. The turnover rates would be 100%
if all of a Series' securities that are included in the computation of
turnover were replaced once during a period of one year. The Series' turnover
rate is calculated by dividing the lesser of purchases or sales of portfolio
securities for the year by the monthly average value of portfolio securities.
Securities with remaining maturities of one year or less on the date of
acquisition are excluded from the calculation. For the fiscal years ended
November 30, 1993and 1992, the Series' portfolio turnover rates were as
follows:
1993 1992
Series 1996 20% 11%
Series 1998 17% 4%
Series 2000 0 % 0%
Portfolio Transactions
Decisions to buy and sell securities for the Series are made by Asset
Management, subject to the overall review of the Trust's Board of Trustees.
Although investment decisions for a Series are made independently from those
of the other accounts managed by Asset Management, investments of the type
made by a Series also may be made by those accounts. When a Series and one or
more other accounts managed by Asset Management are prepared to invest in, or
desire to dispose of, the same security, available investments or
opportunities for sales will be allocated in a manner believed by Asset
Management to be equitable to each. In some cases, this procedure may
adversely affect the price paid or received by a Series or the size of the
position obtained or disposed of by the Series.
Transactions on United States stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. No
stated commission is generally applicable to securities traded in over-the-
counter markets, but the prices of those securities include undisclosed
commissions or mark-ups. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those cases in which better
prices and executions may be obtained elsewhere. The cost of securities
purchased from underwriters includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. U. S. government securities are
generally purchased from underwriters or dealers, although certain newly
issued U. S government securities may be purchased directly from the United
States Treasury or from the issuing agency or instrumentality. The following
table sets forth certain information regarding the Series' payment of
brokerage commissions:
Fiscal Year Ended Series Series Series
November 1996 1998 2000
Total Brokerage Commissions
1991 $46,989 $114,450 $76,908
1992 $36,372 $ 43,412 $22,080
1993 $56,490 .$ 82,248 $30,396
Commissions Paid to
Smith Barney Shearson
1991 $24,645 $64,284 $11,700
1992 $ 7,650 $ 8,004 $ 3,480
1993 $ 6,510 .$ 8,880 $ 9,636
% of Total Brokerage
Commissions paid to Smith
Barney Shearson
1993 12% 11% 32%
Fiscal Year Ended
Series Series Series
November 1996 1998 2000
% of Total Transactions involving
Commissions paid to Smith
Barney Shearson
1993 12% 10% 17%
Series 1998 paid a larger dollar amount of brokerage commissions during the
1991 fiscal period in comparison to the 1992 fiscal year primarily as a result
of its purchase of securities involving the payment of commissions with the
proceeds of its initial offering of shares, which ended in early 1991. Since
that time, primarily because it has not engaged in a continuous offering of
its shares, Series 1998 has effected fewer transactions involving the payment
of commissions.
Asset Management seeks the best overall terms available in selecting
brokers or dealers to execute transactions on behalf of the Series. In
assessing the best overall terms available for any transaction, Asset
Management will consider factors it deems relevant, including the breadth of
the market in the security, the price of the security, the financial condition
and execution capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing basis. In
addition, Asset Management is authorized in selecting brokers or dealers to
execute a particular transaction and in evaluating the best overall terms
available to consider the brokerage and research services (as those terms are
defined in Section 28(e) of the Securities Exchange Act of 1934) provided to
the Series and/or other accounts over which Asset Management or its affiliates
exercise investment discretion. The fees under the Series' Advisory
Agreements are not reduced by reason of Asset Management receiving brokerage
and research services. The Fund's Board of Trustees will periodically review
the commissions paid by the Series to determine if the commissions paid over
representative periods of time were reasonable in relation to the benefits
inuring to the Series.
In accordance with Section 17(e) of the 1940 Act and Rule 17e-1 under
the 1940 Act, the Trust's Board of Trustees has determined that transactions
for the Series may be executed through Smith Barney Shearson and other
affiliated broker-dealers if, in the judgment of Asset Management, the use of
an affiliated broker-dealer is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers and if, in the
transaction, the affiliated broker-dealer charges the Series a rate
consistent with that charged to comparable unaffiliated customers in similar
transactions. In addition, under the rules recently adopted by the SEC, Smith
Barney Shearson may directly execute such transactions for the Fund on the
floor of any national securities exchange, provided: (a) the Board of Trustees
has expressly authorized Smith Barney Shearson to effect such transactions;
and (b) Smith Barney Shearson annually advises the Fund of the aggregate
compensation it earned on such transactions.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment
postponed (a) for any period during which the New York Stock Exchange, Inc.
(the "NYSE") is closed (other than for customary weekend and holiday
closings), (b) when trading in markets the Series normally utilizes is
restricted, or an emergency as determined by the SEC exists, so that disposal
of the Series' investments or determination of its net asset value is not
reasonably practicable or (c) for such other periods as the SEC by order may
permit for protection of the Series' shareholders.
VALUATION OF SHARES
As noted in the Prospectus, the Series' net asset value will not be
calculated on certain holidays. On those days, securities held by the Series
may nevertheless be actively traded, and the value of the Series' shares could
be significantly affected.
EXCHANGE PRIVILEGE
Shareholders of the Fund may exchange their shares for Class A shares of
certain other funds in the Smith Barney Shearson Group of Funds, as indicated
in the Prospectus, to the extent such shares are offered for sale in the
shareholder's state of residence.
Except as noted below, shareholders of any fund in the Smith Barney
Shearson Group of Funds may exchange all or part of their shares for shares of
the same class of other funds in the Smith Barney Shearson Group of Funds, as
listed in the Prospectus, on the basis of relative net asset value per share
at the time of exchange as follows:
A. Class A shares of any fund purchased with a sales charge may be
exchanged for shares of any of the other funds and the sales
charge differential, if any, will be applied. Class A shares of
any fund may be exchanged without a sales charge for shares of the funds that
are offered without a sales charge. Class A shares of any fund
purchased without a sales charge may be exchanged for shares sold
with a sales charge, and the appropriate sales charge differential
will be applied.
B. Class A shares of any fund acquired by a previous exchange of
shares purchased with a sales charge may be exchanged for Class A
shares of any of the funds, and the sales charge differential, if
any, will be applied.
A shareholder who has redeemed shares of the Series, through the
exchange privilege or otherwise, will not be able to purchase new shares in
the Series. Dealers other than Smith Barney Shearson must notify TSSG, the
Trust's transfer agent, of the investor's prior ownership of shares of High
Income Fund, a series of Smith Barney Shearson Income Funds and the account
number in order to accomplish an exchange of shares of High Income Fund under
paragraph B above.
The exchange privilege enables shareholders in any of the funds in the
Smith Barney Shearson Group of Funds to acquire shares in a fund with a
different investment objective when they believe that a shift between funds is
an appropriate investment decision. This privilege is available to
shareholders residing in any state in which the fund's shares being acquired
may legally be sold. Prior to any exchange, the investor should obtain and
review a copy of the current prospectus of each fund into which an exchange is
to be made. Prospectuses may be obtained from your Smith Barney Shearson
Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds are immediately invested, at
a price as described above, in shares of the fund being acquired. Smith
Barney Shearson reserves the right to reject any exchange request. The
exchange privilege may be modified or terminated at any time after notice to
shareholders.
DETERMINATION OF PERFORMANCE
From time to time, the Trust may quote a Series' performance in terms of
its total return in reports or other communications to shareholders. The
Series' performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Average Total Return
The Series' "average annual total return" figures are computed according
to a formula prescribed by the SEC. The formula can be 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 the 1-, 5- or 10-
year period (or fractional portion thereof), assuming reinvestment of all
dividends and distributions
The Series' average annual total returns were as follows for the periods
indicated:
Per Annum for Period
One Year from Commencement of
Period Ended Operations through
Name of Series 11/30/93 11/30/93
Series 1996 (1) 2.46% 10.61%
Series 1998 (2) 4.49% 9.74%
Series 2000 (3) 9.93% 8.23%
______________________________
(1) Series 1996 commenced operations on January 16, 1989.
(2) Series 1998 commenced operations on January 25, 1991.
(3) Series 2000 commenced operations on August 30, 1991.
These total return figures assume that the maximum 5% sales charge has been
deducted from the investment at the time of purchase.
Aggregate Total Return
The Series' aggregate total return figures shown below represent the
cumulative change in the value of an investment in a Series for the specified
period and are 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 the
1-, 5- or 10-year period at the end of
the 1-, 5- or 10 year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions.
The Series' aggregate total returns were as follows for the periods indicated:
One Year Period From One Year Period From
Period Ended Commencement of Period Ended Commencement of
11/30/93* Operations 11/30/93** Operations
through 11/30/93 through 11/30/93
Name of Portfolio 11/30/93 **
Series 1996 (1) 7.85% 72.05% 2.46% 63.45%
Series 1998 (2) 9.99% 37.19% 4.49% 30.33%
Series 2000 (3) 15.72% 25.81% 9.93% 19.51%
* Figures do not include the effect of the maximum 5% sales charge.
** Figures include the effect of the maximum 5% sales charge.
(1) Series 1996 commenced operations on January 16, 1989.
(2) Series 1998 commenced operations on January 25, 1991.
(3) Series 2000 commenced operations on August 30, 1991.
These total return figures assume that the maximum 5% sales charge has
been deducted from the investment at the time of purchase.
A Series' performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Series' 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 Series with certain bank deposits or
other investments that pay a fixed yield for a stated period of time.
Investors comparing the Series' performance with that of other mutual funds
should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Trust and its shareholders. The summary is not intended
as a substitute for individual tax planning, and investors are urged to
consult their own tax advisors as to the Federal, state and local income tax
consequences of an investment in a Series.
Tax Status of the Trust and its Shareholders
Each of the Series has qualified and intends to continue to qualify each
year as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company,
the Series must meet certain requirements set forth in the Code. Each Series
is required to earn at least 90% of its gross income from (a) interest, (b)
dividends, (c) payments with respect to securities loans, (d) gains from the
sale or other disposition of stock or securities and (e) other income derived
with respect to the Series' business of investing in stock or securities.
Each Series also must earn less than 30% of its gross income from the sale or
other disposition of stock or securities held for less than three months.
Legislation currently pending before the U.S. Congress would repeal the
requirement that a regulated investment company must derive less than 30% of
its gross income from the sale or other disposition of assets described
above that are held for less than three months. However, it is impossible to
predict whether this legislation will become law and, if it is so enacted,
what form it will eventually take.
Dividends of net investment income and distributions of net realized
short-term capital gains will be taxable to shareholders as ordinary income
for Federal income tax purposes, whether received in cash or reinvested in
additional shares of the Series. Distributions of long-term capital gains
will be taxable to shareholders as long-term gain, whether paid in cash or
reinvested in additional shares, and regardless of the length of time that the
shareholder has held his or her shares of the Series.
Dividends of investment income (but not distributions of capital gain)
from the Series generally will qualify for the Federal dividends-received
deduction for corporate shareholders to the extent that the dividends do not
exceed the aggregate amount of dividends received by the Series from domestic
corporations. If securities held by the Series are considered to be "debt-
financed" (generally, acquired with borrowed funds) or are held by the Series
for less than 46 days (91 days in the case of certain preferred stock), the
portion of the dividends paid by the Series that corresponds to the dividends
paid with respect to the debt-financed securities or securities that have not
been held for the requisite period will not be eligible for the corporate
dividends-received deduction.
Foreign countries may impose withholding and other taxes on dividends
and interest paid to a Series with respect to investments in foreign
securities. Certain foreign countries, however, have entered into tax
conventions with the United States to reduce or eliminate such taxes.
If a Series is the holder of record of any stock on the record date for
any dividends payable with respect to the stock, the dividends are included in
the Series' gross income not as of the date received but as of the later of
(a) the date on which the stock became ex-dividend with respect to the
dividends (that is the date on which a buyer of the stock would not be
entitled to receive the declared, but unpaid, dividends) or (b) the date on
which the Series acquired the stock.
Capital Gains. In general, a shareholder who redeems or exchanges his
or her Series shares will recognize long-term capital gain or loss if the
shares have been held for more than one year, and will recognize short-term
capital gain or loss if the shares have been held for one year or less. If a
shareholder receives a distribution taxable as long-term capital gain with
respect to shares of a Series and redeems or exchanges the shares before he or
she has held them for more than six months, however, any loss on the
redemption or exchange that is less than or equal to the amount of the
distribution will be treated as a long-term capital loss.
Backup Withholding. If a shareholder fails to furnish a correct
taxpayer identification number, fails to report fully dividend or interest
income, or fails to certify that he or she has provided a correct taxpayer
identification number and that he or she is not subject to "backup
withholding," then the shareholder may be subject to a 31% backup withholding
tax with respect to (a) dividends and distributions and (b) the proceeds of
any redemptions of a Series' shares. An individual's taxpayer identification
number is his or her social security number. The backup withholding tax is
not an additional tax and may be credited against a shareholder's regular
Federal income tax liability.
Taxation of the Series' Investments
Zero Coupon Securities. The Series will invest in zero coupon
securities having an original issue discount (that is, the discount
represented by the excess of the stated redemption price at maturity over the
issue price). Each year, the Series will be required to accrue as income a
portion of this original issue discount even though the Series will receive no
cash payment of interest with respect to these securities. In addition, if
the Series acquires a security at a discount that resulted from fluctuations
in prevailing interest rates ("market discount"), the Series may elect to
include in income each year a portion of this market discount.
The Series will be required to distribute substantially all of its
income (including accrued original issue and market discount) in order to
qualify for "pass-through" Federal income tax treatment and also in order to
avoid the imposition of the 4% excise tax described in the Prospectus.
Therefore, a Series may be required in some years to distribute an amount
greater than the total cash income the Series actually receives. In order to
make the required distribution in such a year, a Series may be required to
borrow or to liquidate securities. The amount of actual cash that a Series
would have to distribute, and thus the degree to which securities would need
to be liquidated, would depend upon the number of shareholders who chose not
to have their dividends reinvested. Capital losses resulting from the
liquidation of securities can only be used to offset capital gains and cannot
be used to reduce the Series' ordinary income. These capital losses may be
carried forward for eight years.
Capital Gains Distributions. Gain or loss on the sale of a security by
a Series will generally be long-term capital gain or loss if the Series has
held the security for more than one year. Gain or loss on the sale of a
security held for one year or less will generally be short-term capital gain
or loss. Generally, if a Series acquires a debt security at a discount, any
gain on the sale or redemption of the security will be taxable as ordinary
income to the extent that the gain reflects accrued market discount.
DISTRIBUTOR AND SHAREHOLDER DISTRIBUTOR SERVICING AGENT -
SMITH BARNEY SHEARSON
Smith Barney Shearson serves as the Series' distributor pursuant to a
written agreement (the "Distribution Agreement") with the Trust. To
compensate Smith Barney Shearson for the services it provides and for the
expenses it bears, the Trust has adopted a Shareholder Services Plan (the
"Plan"). Under the Plan, the Trust pays Smith Barney Shearson, with respect
to Series 1998 and Series 2000, a fee, accrued daily and paid monthly,
calculated at the annual rate of .25% of the value of the respective Series'
average daily net assets. Under its terms, the Plan continues from year to
year, provided that its continuance is approved annually by vote of the
Trust's Board of Trustees, including a majority of the Trustees who are not
interested persons of the Trust and who have no direct or indirect financial
interest in the operation of the Plan (the "Independent Trustees"). The Plan
may not be amended to increase materially the amount to be spent for the
services provided by Smith Barney Shearson without shareholder approval, and
all material amendments of the Plan also must be approved by the Trustees in
the manner described above. The Plan may be terminated at any time, without
penalty, by vote of a majority of the Independent Trustees or by a vote of a
majority of the outstanding voting securities (as defined in the 1940 Act) of
the relevant Series on not more than 30 days' written notice to any other
party to the Plan. Pursuant to the Plan, Smith Barney Shearson will provide
the Board of Trustees periodic reports of amounts expended under the Plan and
the purpose for which such expenditures were made. For the fiscal year ended
November 30, 1993, Shearson Lehman Brothers, the Trust's distributor prior to
Smith Barney Shearson, was paid $384,618 and $273,008 in shareholder servicing
fees for Series 1998 and Series 2000, respectively. For the fiscal period from
commencement of operations on * through November 30,
1993, Shearson Lehman Brothers, accrued $1,289,669 and $734,535 in Series 1998
and Series 2000, respectively, for shareholder servicing fees.
_____________________
* Series 1998 - January 25, 1991
Series 2000 - August 30, 1991
CUSTODIAN AND TRANSFER AGENT
Boston Safe, a wholly owned subsidiary of The Boston Company, Inc., is
located at One Boston Place, Boston, Massachusetts 02108, and serves as the
custodian of the Trust pursuant to a custodian agreement. Under the custodian
agreement, Boston Safe holds the Trust's portfolio securities and keeps all
necessary accounts and records. For its services, Boston Safe receives a
monthly fee based upon the month-end market value of securities held in
custody and also receives securities transaction charges. The assets of the
Trust are held under bank custodianship in compliance with the 1940 Act.
TSSG is located at Exchange Place, Boston, Massachusetts 02109, and
serves as the Trust's transfer agent. Under the transfer agency agreement,
TSSG maintains the shareholder account records for the Trust, handles certain
communications between shareholders and the Trust, distributes dividends and
distributions payable by the Trust and produces statements with respect to
account activity for the Trust and its shareholders. For these services, TSSG
receives a monthly fee computed on the basis of the number of shareholder
accounts TSSG maintains for the Trust during the month and is reimbursed for
out-of-pocket expenses.
ORGANIZATION OF THE TRUST
The Trust is organized as an unincorporated business trust under the
laws of the Commonwealth of Massachusetts pursuant to a Master Trust Agreement
dated October 18, 1988, as amended (the "Trust Agreement"). Under the Trust
Agreement, the Trustees have authority to issue an unlimited number of shares
of beneficial interest with a par value of $.001 per share.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
The Trust has been structured, and will be operated in such a way, so as to
ensure as much as possible, that shareholders will not be liable for
obligations of the Series. The Trust Agreement disclaims shareholder liability
for acts or obligations of the Trust, and requires that notice of the
disclaimer be given in each agreement, obligation or instrument entered into
or executed by the Trust or a Trustee. The Trust Agreement also provides for
indemnification from the Trust's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust would be unable to
meet its obligations, a possibility that the Trust's management believes is
remote. Upon payment of any liability incurred by the Trust, the shareholder
paying the liability will be entitled to reimbursement from the general assets
of the Trust. The Trustees intend to conduct the operations of the Trust and
each of its series in such a way so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Trust.
FINANCIAL STATEMENTS
An Annual Report for each Series for the fiscal year ended November 30,
1993 accompanies this Statement of Additional Information and is incorporated
herein by reference in their entirety.
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