<PAGE>
SMITH BARNEY
Security and Growth Fund
PROSPECTUS______________________________
___________________MARCH 23, 1995
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388 Greenwich Street
New York, New York 10013
(212) 723-9218
This Prospectus describes the Smith
Barney Security and Growth Fund (the
"Fund"), a series of Smith Barney
Principal Return Fund (the "Trust"). The
investment objectives of the Fund are
(a) to return to each shareholder on
August 31, 2005 (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 consis-
tent 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 the Fund's
investment objectives will be achieved.
The Fund may not be appropriate for
investors that do not intend to reinvest
dividends and distributions or expect to
redeem any of their shares prior to
the Maturity Date. The net asset value
per share of the Fund prior to the Matu-
rity Date can be expected to fluctuate
substantially owing to changes in pre-
vailing interest rates that will affect
the current value of the Fund's hold-
ings of zero coupon securities, as well
as changes in the value of the Fund's
other holdings. The Fund does not
anticipate engaging in a continuous
offering
of shares after the termination of the
subscription period and, thus, will not
benefit from an inflow of new capital
investments. In addition, the Fund may
experience redemptions and capital
losses prior to the Maturity Date (or in
preparation for the Fund's possible
liquidation at the Maturity Date) and
will
pay dividends and distributions
(Continued on page 2)
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT
INC.
Investment Adviser
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.
<PAGE>
SMITH BARNEY
Security and Growth Fund
PROSPECTUS (CONTINUED)
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
the
Fund's investment objectives
unachievable; thus the accomplishment of
the
Fund's investment objectives in respect
of remaining shareholders that reinvest
dividends and distributions could depend
in part on the investment decisions of
other shareholders. See "Investment
Objectives and Management Policies--Risk
Factors and Other Special
Considerations."
Shares of the Fund will be sold to the
public in an initial offering at a max-
imum offering price of $10 per share,
which includes the maximum sales charge
of 4.00% (4.17% of the net amount
invested). Smith Barney Inc. ("Smith
Bar-
ney"), the Fund's distributor, will
solicit subscriptions for shares during
a
period scheduled to end on March 23,
1995, subject to extension by agreement
between the Fund and Smith Barney. The
minimum initial investment is $1,000,
except for IRA's and other retirement
plans, for which the minimum initial
investment is $250.
This Prospectus sets forth concisely
information about the Trust and the
Fund,
including sales charges, shareholder
servicing fees and expenses. Investors
are
encouraged to read this Prospectus
carefully and retain it for future
refer-
ence.
Additional information about the Fund
is contained in a Statement of Addi-
tional Information dated March 23, 1995,
as amended or supplemented from time
to time, that is available upon request
and without charge by calling or writ-
ing the Fund at the telephone number or
address set forth above or by contact-
ing a Smith Barney Financial Consultant.
The Statement of Additional Informa-
tion has been filed with the Securities
and Exchange Commission (the "SEC") and
is incorporated by reference into this
Prospectus in its entirety.
2
<PAGE>
SMITH BARNEY
Security and Growth Fund
INTRODUCTION
The investment objectives of the Fund
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
the Fund's investment objectives will be
achieved.
As with most mutual funds, the Fund
employs various organizations to perform
necessary functions and to provide
services to their shareholders. These
orga-
nizations are carefully selected on
behalf of the Fund 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
the Fund and its shareholders are listed
below:
SMITH BARNEY INC.
("Smith Barney")....Distributor
SMITH BARNEY MUTUAL FUNDS
MANAGEMENT INC.
("Manager")....Investment Adviser
PNC BANK, NATIONAL ASSOCIATION
("PNC Bank")....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 Addi-
tional Information.
3
<PAGE>
SMITH BARNEY
Security and Growth Fund
TABLE OF CONTENTS
<TABLE>
<S>
<C>
INTRODUCTION
3
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THE FUND'S EXPENSES
5
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----------
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES 6
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----------
RISK FACTORS AND OTHER SPECIAL
CONSIDERATIONS 12
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----------
VALUATION OF SHARES
18
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----------
DIVIDENDS, DISTRIBUTIONS AND TAXES
19
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----------
PURCHASE OF SHARES
20
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----------
EXCHANGE PRIVILEGE
22
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REDEMPTION OF SHARES
25
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THE FUND'S PERFORMANCE
26
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----------
MANAGEMENT OF THE FUND
27
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DISTRIBUTOR
28
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----------
ADDITIONAL INFORMATION
29
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----------
</TABLE>
No person has been authorized to give
any information or to make any repre-
sentations in connection with this
offering other than those contained in
this
Prospectus and, if given or made, such
other information and representations
must not be relied upon as having been
authorized by the Fund or the Distribu-
tor. This Prospectus does not constitute
an offer by the Fund or the Distribu-
tor to sell or a solicitation of an
offer to buy any of the securities
offered
hereby in any jurisdiction to any person
to whom it is unlawful to make such
offer or solicitation in such
jurisdiction.
4
<PAGE>
SMITH BARNEY
Security and Growth Fund
THE FUND'S EXPENSES
The following expense table lists the
costs and expenses that an investor will
incur, either directly or indirectly, as
a shareholder of the Fund, based upon
the sales charge that may be incurred at
the time of purchase and upon the
Fund's projected operating expenses:
----------------------------------------
----------------------------------------
SHAREHOLDER TRANSACTION EXPENSES
<TABLE>
<S>
<C>
Sales charge imposed on purchases
(as a percentage of offering
price)..................................
... 4.00%
----------------------------------------
----------------------------------------
</TABLE>
ANNUAL FUND OPERATING EXPENSES
<TABLE>
<S>
<C>
(as a percentage of average net
assets)
Management
fees....................................
..................... 0.50%
Shareholder servicing
fees....................................
.......... 0.25%
Other
expenses................................
.......................... 0.20%
----------------------------------------
----------------------------------------
Total Fund Operating
Expenses................................
.......... 0.95%
</TABLE>
----------------------------------------
----------------------------------------
The nature of the services for which
the Fund pays management fees is
described under "Management of the
Fund." "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 is intended to
assist an investor in understanding the
various costs and expenses that an
investor in the Fund will bear directly
or
indirectly. These amounts are based upon
(a) payment by an investor of the ini-
tial 4.00% sales charge, (b) payment by
the Fund of operating expenses at the
levels set forth in the table above and
(c) the following assumptions:
<TABLE>
<CAPTION>
YEAR
ONE THREE FIVE TEN
----------------------------------------
---------------------------------------
<S>
<C> <C> <C> <C>
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: ............. $49 $69 $90
$152
A shareholder would pay the following
expenses on the same
investment, assuming the same annual
return and no
redemption:.............................
................ $49 $69 $90 $152
</TABLE>
5
<PAGE>
SMITH BARNEY
Security and Growth Fund
THE FUND'S EXPENSES (CONTINUED)
The example also provides a means for
the investor to compare expense levels
of funds with different fee structures
over varying investment periods. To
facilitate such comparison, all funds
are required to utilize a 5.00% annual
return assumption. However, the Fund's
actual return will vary and may be
greater or less than 5.00%. THIS EXAMPLE
SHOULD NOT BE CONSIDERED A REPRESENTA-
TION OF PAST OR FUTURE EXPENSES AND
ACTUAL EXPENSES MAY BE GREATER OR LESS
THAN
THOSE SHOWN.
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES
IN GENERAL
The investment objectives of the Fund
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 (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.
The investment objectives of the Fund
are fundamental and may not be changed
without the approval of the holders of a
majority of the outstanding voting
securities of the Fund, as defined under
the Investment Company Act of 1940, as
amended (the "1940 Act").
Although the Manager believes that the
Fund's investment strategies should be
sufficient to accomplish the Fund's
investment objectives, there can be no
assurance that they will be achieved.
Moreover, although the Fund 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, share-
holders should plan to hold their shares
until the Maturity Date and to rein-
vest 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
the Fund's zero coupon securities and
will have been taxable as ordinary
income
over the term of the Fund.
PROPOSED OPERATIONS OF THE FUND
Based on interest rates prevailing on
the date of this Prospectus, the Manager
estimates that zero coupon securities
are expected initially to represent
6
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
approximately 50% of the Fund's assets,
with the balance of the Fund's assets
invested in equity securities and other
instruments as described below. Changes
in prevailing interest rates between
that date and the time that the Fund
commences investment operations,
anticipated to be March 30, 1995 (See
"Purchase of Shares"), may cause the
Manager to adjust the proportion of the
Fund's assets invested in zero coupon
securities. The Fund's 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 Fund will not
receive any payments with respect to a
zero coupon security prior to the
maturity of that security. The Fund may
hold
zero coupon securities in excess of
those required to meet the Repayment
Objective to the extent that the Manager
deems it appropriate. As the Fund's
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, unless the Board of
Trustees and the shareholders of the
Fund approve the continuance of the
Fund, the Fund's remaining equity
investments will be sold and other
investments will mature, the liabilities
of
the Fund will be discharged or
provisions made therefore, the Fund's
shares
will be mandatorily redeemed and, within
seven days thereafter, the proceeds
will be distributed to shareholders and
the Fund thereafter will be terminated.
These arrangements may require the
disposition of the Fund's equity
securities
at a time when it is otherwise
disadvantageous to do so and may involve
selling
securities at a substantial loss. Before
the Maturity Date, the Trust's Board
of Trustees may consider and, if
necessary, propose for shareholder
approval,
such action other than the termination
of the Fund as the Board deems
appropriate and in the best interests of
the Fund and its shareholders,
including continuing to operate the Fund
with different investment objectives.
The Fund's portfolio may be visualized
as consisting of two portions: one, its
zero coupon securities, is expected to
increase in value, by reason of accre-
tion of interest, to equal at maturity
an amount sufficient to meet the Repay-
ment Objective; the other, its equity
securities and all other investments,
represent a variable portion of the
Fund's assets depending on the
performance
of those investments, the Fund's
expenses, the level of dividend
reinvestment
and the level of redemptions over time.
In order to facilitate the management
of the Fund's portfolios, shareholders
are urged to reinvest dividends and dis-
tributions in additional shares; these
amounts will be paid in cash only at the
specific election of a shareholder.
7
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
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 ("Government
Securities") or issued by private
corporate
issuers. The Fund, however, invests 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 invest-
ment, 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
obliga-
tions 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 origi-
nally issued security. With both zero
coupon and interest-paying securities
there is no reinvestment risk on the
principal amount of the investment.
EQUITY SECURITIES
The Fund attempts to achieve its
investment objective of long-term
capital
appreciation by investing the portion of
its assets not invested in zero cou-
pon securities primarily in equity
securities that the Manager believes
have
above-average potential for capital
growth. In selecting investments on
behalf
of the Fund, the Manager will seek to
identify companies that are experienc-
ing, or have the potential to
experience, significant growth in
earnings due
to any number of factors, including
benefiting from new products or
services,
technological developments, management
changes or other external circumstanc-
es. This significant potential for
growth is often achieved by small- or
medi-
um-sized companies, but it may also be
achieved by large seasoned, companies.
Although the Manager anticipates that
the Fund's non-zero coupon security
portfolio initially would primarily be
invested in small- to medium-sized com-
panies, it may also
8
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
be invested in the equity securities of
larger, established companies that the
Manager determines present particular
opportunities for capital growth.
ADDITIONAL INVESTMENTS AND INVESTMENT
TECHNIQUES
Although under normal circumstances the
Fund's non-zero coupon security port-
folio will consist primarily of common
stocks, the Fund may also invest in
Government Securities, convertible
securities, preferred stocks and
warrants
when the Manager perceives an
opportunity for capital growth from such
securi-
ties. When the Manager believes that a
temporary defensive investment posture
is warranted, the Fund may invest in
corporate and government bonds and notes
and money market instruments. The Fund
may, from time to time enter into
futures contracts, write call options
and purchase put options (which are
sometimes referred to as "derivatives"),
and invest in repurchase agreements
and lend its portfolio securities all as
discussed below.
Warrants; Convertible Securities. A
warrant is a security that gives the
holder the right, but not the
obligation, to subscribe for newly
created secu-
rities 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, the Fund seeks the
opportunity, through the conversion
feature, to
participate in the capital appreciation
of the common stock into which the
securities are convertible.
Lending Securities. The Fund 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 the
Fund's assets taken at value. The Fund's
loans of securities will be
collateralized by cash, letters of
credit or Gov-
ernment 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, the
Fund
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 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 possi-
ble loss of rights in the collateral
should the borrower fail financially.
Loans will be made to firms deemed by
the Manager to be of good standing and
will not be made unless, in the judgment
of the Manager, the consideration to
be earned from such loans would justify
the risk.
9
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
Repurchase Agreements. The Fund may
engage in repurchase agreement transac-
tions 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, the Fund would acquire an
underlying debt obligation for a rela-
tively short period (usually not more
than seven days) subject to an
obligation
of the seller to repurchase, and the
Fund to resell, the obligation at an
agreed price and time, thereby
determining the yield during the Fund's
holding
period. This arrangement results in a
fixed rate of return that is not subject
to market fluctuations during the Fund's
holding period. The value of the
underlying securities will be monitored
on an ongoing basis by the Manager to
ensure that the value is at least equal
at all times to the total amount of the
repurchase obligation, including
interest. The Manager also will review
on an
ongoing basis the creditworthiness of
those banks and dealers with which the
Fund may enter into repurchase
agreements to evaluate the potential
risks. The
Fund bears a risk of loss in the event
that the other party to a repurchase
agreement defaults on its obligations
and the Fund is delayed or prevented
from
exercising its rights to dispose of the
underlying securities, including the
risk of a possible decline in the value
of the underlying securities during the
period in which the Fund seeks to assert
its rights to them, the risk of incur-
ring 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, the Fund's
aggre-
gate 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 the Fund's total
assets.
Foreign Securities. The Fund may invest
up to 10% of its net assets in securi-
ties of foreign issuers. The Manager
uses the same criteria for selecting
for-
eign securities as it uses for
securities of domestic issuers. In
addition, in
selecting investments in foreign
securities, the Manager will consider
the
prospect of changes in the value of a
country's currency and the liquidity of
the investment in that country's
securities market. Investing in foreign
secu-
rities involves certain risks, including
those resulting from fluctuations in
currency exchange rates, revaluation of
currencies, future political or eco-
nomic 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
report-
ing 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
10
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
their prices more volatile than those of
securities of comparable domestic
companies. In addition, with respect to
certain foreign countries, the possi-
bility exists of expropriation,
confiscatory taxation and limitations on
the
use or removal of funds or other assets
of the Fund, including the withholding
of dividends.
Money Market Instruments. The Fund 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
Fund's expenses, anticipated redemptions
and cash payments of dividends and
distributions and to meet settlement
requirements for securities. In
addition,
when the Manager believes that, with
respect to its equity portfolio, a
tempo-
rary defensive investment posture is
warranted, the Fund may invest without
limitation in cash and money market
instruments. To the extent that it holds
cash or invests in money market
instruments, the Fund will not achieve
its
investment objective of long-term
appreciation of capital. Money market
instruments in which the Fund may invest
are: Government Securities; bank
obligations (including certificates of
deposit, time deposits and bankers'
acceptances of domestic or foreign
banks, domestic savings and loan
associa-
tions and other banking institutions
having total assets in excess of $500
million); commercial paper rated no
lower than A-2 by Standard & Poor's
Corpo-
ration 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
outstand-
ing, unsecured debt issue then rated
within the three highest rating catego-
ries; and repurchase agreements. At no
time will the Fund's investments in
bank obligations, including time
deposits, exceed 25% of its assets. In
addi-
tion, the Fund 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
the Fund.
The Fund will invest in an obligation
of a foreign bank or foreign branch of
a United States bank only if the Manager
determines that the obligation pre-
sents minimal credit risks. Obligations
of foreign banks or foreign branches
of United States banks in which the Fund
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 manda-
tory reserve requirements,
11
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
loan limitations and accounting,
auditing and financial record keeping
require
ments. In addition, less information may
be publicly available about a foreign
branch of a domestic bank than about a
domestic bank.
Government Securities in which the Fund
may invest include: direct obliga-
tions 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.
RISK FACTORS AND OTHER SPECIAL
CONSIDERATIONS
Smaller and Medium Sized Companies.
Securities of smaller and medium sized
companies (companies with a
capitalization of less than $1 billion)
may be
subject to a limited liquidity and more
volatility which could result in sig-
nificant fluctuations in the price of
their shares.
Covered Option Writing. The Fund may
write covered call options with respect
to its portfolio securities. The Fund
realizes a fee (referred to as a "premi-
um") for granting the rights evidenced
by the options. A call option embodies
the right of its purchaser to compel the
writer of the option to sell to the
option holder an underlying security at
a specified price at any time during
the option period. Thus, the purchaser
of a call option written by the Fund
has the right to purchase from the Fund
the underlying security owned by the
Fund at the agreed-upon price for a
specified time period.
Upon the exercise of a call option
written by the Fund, the Fund may suffer
a
loss equal to the excess of the
security's market value at the time of
the
option exercise over the Fund's cost of
the security, less the premium
received for writing the option.
The Fund will write only covered
options with respect to its portfolio
secu-
rities. Accordingly, whenever the Fund
writes a call option on its securities,
it will continue to own or have the
present right to acquire the underlying
security for as long as it remains
obligated as the writer of the option.
To
support its obligation to purchase the
underlying security if a call option is
exercised, the Fund will either (a)
deposit with its custodian in a
segregated
account, cash, Government Securities or
other high grade debt obligations hav-
ing a value at least equal to the
exercise price of the underlying
securities
or (b) continue to
12
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
own an equivalent number of puts of the
same "series" (that is, puts on the
same underlying security) with exercise
prices greater than those that it has
written (or, if the exercise prices of
the puts that it holds are less than
the exercise prices of those that it has
written, it will deposit the differ-
ence with its custodian in a segregated
account).
The Fund may engage in a closing
purchase transaction to realize a
profit, to
prevent an underlying security from
being called or to unfreeze an
underlying
security (thereby permitting its sale or
the writing of a new option on the
security prior to the outstanding
option's expiration). To effect a
closing
purchase transaction, the Fund would
purchase, prior to the holder's exercise
of an option that the Fund has written,
an option of the same series as that
on which the Fund desires to terminate
its obligation. The obligation of the
Fund under an option that it has written
would be terminated by a closing pur-
chase transaction, but the Fund would
not be deemed to own an option as a
result of the transaction. There can be
no assurances that the Fund will be
able to effect closing purchase
transactions at a time when it wishes to
do
so. To facilitate closing purchase
transactions, however, the Fund
ordinarily
will write options only if a secondary
market for the options exists on domes-
tic securities exchanges or in the over-
the-counter market.
The Fund may also, for hedging
purposes, purchase put options on
securities
traded on national securities exchanges
as well as in the over-the-counter
market. The Fund may purchase put
options on particular securities in
order to
protect against a decline in the market
value of the underlying securities
below the exercise price less the
premium paid for the option. Put options
on
individual securities are intended to
protect against declines in market value
which occurs prior to the option's
expiration date. Prior to expiration,
most
options may be sold in a closing sale
transaction. Profit or loss from such a
sale will depend on whether the amount
received is more or less than the pre-
mium paid for the option plus the
related transaction cost.
The Fund may purchase options in the
over-the-counter market ("OTC options")
to the same extent that it may engage in
transactions in exchange traded
options. OTC options differ from
exchange traded options in that they are
negotiated individually and terms of the
contract are not standardized as in
the case of exchange traded options.
Moreover, because there is no clearing
corporation involved in an OTC option,
there is a risk of non-performance by
the counterparty to the option. However,
OTC options are generally much more
available for securities in a wider
range of expiration dates and exercise
prices than exchange traded options. It
is the current position of the staff
of the SEC
13
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
that OTC options (and securities
underlying the OTC options) are illiquid
securities. Accordingly, the Fund will
treat OTC options as subject to the
Fund's limitation on illiquid securities
until such time as there is a change
in the SEC's position. State securities
laws also may impose further limita-
tions.
Options on Broad-Based Domestic Stock
Indexes. The Fund may, for hedging pur-
poses only, write call options and
purchase put options on broad-based
domes-
tic stock indexes and enter into closing
transitions with respect to such
options. Options on stock indexes are
similar to options on securities except
that, rather than having the right to
take or make delivery of stock at the
specified exercise price, an option on a
stock index gives the holder the
right to receive, upon exercise of the
option, an amount of cash if the clos-
ing level of the stock index upon which
the option is based is "in the money",
i.e. the closing level of the index is
higher than the exercise price of the
option. This amount of cash is equal to
the difference between the closing
level of the index and the exercise
price of the option, expressed in
dollars
times a specified multiple. The writer
of the option is obligated, in return
for the premium received, to make
delivery of this amount. Unlike stock
options, all settlements are in cash,
and gain or loss depends on price move-
ments in the stock market generally
rather than price movements in the indi-
vidual stocks.
The effectiveness of purchasing and
writing puts and calls on stock index
options depends to a large extent on the
ability of the Manager to predict the
price movement of the stock index
selected. Therefore, whether the Fund
real-
izes a gain or loss from the purchase of
options on an index depends upon
movements in the level of stock prices
in the stock market generally. Addi-
tionally, because exercises of index
options are settled in cash, a call
writer such as the Fund cannot determine
the amount of the settlement obliga-
tions in advance and it cannot provide
in advance for, or cover, its potential
settlement obligations by acquiring and
holding the underlying securities.
When the Fund has written the call,
there is also a risk that the market may
decline between the time the Fund has a
call exercised against it, at a price
which is fixed as of the closing level
of the index on the date of exercise,
and the time the Fund is able to
exercise the closing transaction with
respect
to the long call position it holds.
Futures Contracts and Options on
Futures Contracts. A futures contract
pro-
vides for the future sale by one party
and the purchase by the other party of
a certain amount of a specified security
at a specified price, date, time and
place. The Fund may enter into futures
contracts to sell securities when the
Manager believes that the value of the
Fund's securities will decrease. An
option on a
14
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
futures contract, as contrasted with the
direct investment in a futures con-
tract, gives the purchaser the right, in
return for the premium paid, to
assume a position in a futures contract
at a specified exercise price at any
time prior to the expiration date of the
option. A call option gives the pur-
chaser of the option the right to enter
into a futures contract to buy and
obliges the writer to enter into a
futures contract to sell the underlying
securities. A put option gives a
purchaser the right to sell and obliges
the
writer to buy the underlying contract.
The Fund may enter into futures con-
tracts to purchase securities when the
Manager anticipates purchasing the
underlying securities and believes that
prices will rise before the purchases
will be made. When the Fund enters into
a futures contract to purchase an
underlying security, an amount of cash,
Government Securities or other high
grade debt securities, equal to the
market value of the contract, will be
deposited in a segregated account with
the Fund's custodian to collateralize
the position, thereby insuring that the
use of the contract is unleveraged.
The Fund will not enter into futures
contracts for speculation and will only
enter into futures contracts that are
traded on a U.S. exchange or board of
trade.
Zero Coupon Securities. Zero coupon
securities of the type held by the Fund
can be sold prior to their due date in
the secondary market at their then pre-
vailing 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 matu-
rity and accretion of interest to date.
The market prices of zero coupon secu-
rities 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
the Fund may fluctuate over a greater
range than shares of other mutual funds
that invest in Government Securities
having similar maturities and yields but
that make current distributions of
interest. The current net asset value of
the Fund attributable to zero coupon
securities and other debt instruments
held by the Fund generally will vary
inversely with changes in prevailing
interest rates.
As an open-end investment company, the
Fund 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 pur-
chase price of those shares, including
any sales charge paid. Although
15
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
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 the Fund 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
pur-
chased in this offering.
Each year the Fund will be required to
accrue an increasing amount of income
on its 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, the Fund 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
the Funds's 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
Fund,
may realize an amount that is less or
greater than the entire amount origi-
nally invested. ACCORDINGLY, THE FUND
MAY NOT BE APPROPRIATE FOR TAXABLE
INVESTORS THAT WOULD REQUIRE CASH
DISTRIBUTIONS FROM THE FUND IN ORDER TO
MEET
THEIR CURRENT TAX OBLIGATIONS RESULTING
FROM THEIR INVESTMENT.
Other Considerations. In order to
generate sufficient cash to meet
distribu-
tion requirements and other operational
needs and to redeem its shares on
request, the Fund may be required to
limit reinvestment of capital on the
dis-
position of its non-zero coupon
securities and may be required to
liquidate
some or all of its non-zero coupon
securities over time. The Fund may be
required to effect these liquidations at
a time when it is otherwise disadvan-
tageous to do so. If the Fund realizes
capital losses on dispositions of non-
zero coupon securities that are not
offset by capital gains on the
disposition
of other such securi- ties, the Fund may
be required to liquidate a dispropor-
tionate amount of its
16
<PAGE>
SMITH BARNEY
Security and Growth Fund
INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES (CONTINUED)
zero coupon securities or borrow money,
in an amount not exceeding 33 1/3% of
the Fund's total assets, to satisfy the
distribution and redemption require-
ments described above. The liquidation
of zero coupon securities and the
expenses associated with borrowing money
in these circumstances could render
the Fund unable to meet the Repayment
Objective.
INVESTMENT RESTRICTIONS
The Fund has adopted certain
fundamental investment restrictions that
may not
be changed without approval of a
majority of the Fund's outstanding
voting
securities, as defined under the 1940
Act. Included among those fundamental
restrictions are the following:
1. The Fund will not purchase
securities (other than Government
Securities) of
any issuer if, as a result of the
purchase, more than 5% of the value of
the
Fund's total assets would be invested in
the securities of the issuer, except
that up to 25% of the value of the
Fund's total assets may be invested
without
regard to this 5% limitation.
2. The Fund will not purchase more than
10% of the voting securities of any
one issuer, or more than 10% of the
securities of any class of any one
issuer,
except that this limitation is not
applicable to the Fund's investments in
Gov-
ernment Securities, and up to 25% of the
Funds' assets may be invested without
regard to these 10% limitations.
3. The Fund will not borrow money,
except that the Fund may borrow from
banks
temporarily for 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
Fund's 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 Fund, the
Fund will not make any additional
invest-
ments.
4. The Fund will not lend money to
other persons, except through purchasing
debt obligations, lending portfolio
securities and entering into repurchase
agreements.
5. The Fund 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 Government
Securities.
17
<PAGE>
SMITH BARNEY
Security and Growth Fund
VALUATION OF SHARES
A further discussion of certain of the
Fund's investment policies and other
investment restrictions adopted by the
Fund are described in the Statement of
Additional Information.
PORTFOLIO TRANSACTIONS AND TURNOVER
Securities transactions on behalf of
the Fund will be executed by a number of
brokers and dealers, including Smith
Barney and certain of its affiliated
bro-
kers, that are selected by the Manager.
The Fund may use Smith Barney or a
Smith Barney affiliated broker in
connection with a purchase or sale of
securi-
ties when the Manager believes that the
charge for the transaction does not
exceed usual and customary levels.
The Trust cannot accurately predict the
Fund's portfolio turnover rate, but
anticipates that its annual turnover
will not exceed 50%.
The Fund's 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, Memo-
rial 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.
The Fund's 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 Fund's net
assets by the total number of its shares
outstanding. Generally, the Fund's
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 gener-
ally valued at the preceding closing
values of the securities on their
respec-
tive 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 primar-
ily 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 cur-
rent 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
18
<PAGE>
SMITH BARNEY
Security and Growth Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES
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
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,
thereaf-
ter, 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, the Manager may consult with
an independent pricing service retained
by the Trust. Further information
regarding the Fund's valuation policies
is
contained in the Statement of Additional
Information.
DIVIDENDS AND DISTRIBUTIONS
Dividends from net investment income of
the Fund and distributions of net
realized capital gains of the Fund, if
any, will be distributed annually after
the close of the fiscal year in which
they are earned. Dividends and distribu-
tions will be reinvested automatically
for each shareholder's account at net
asset value in additional shares of the
Fund, unless the shareholder instructs
the Fund to pay all dividends and
distributions in cash and to credit the
amounts to his or her Smith Barney
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 AT THE MATU-
RITY DATE.
TAXES
The Fund has qualified and intends to
continue to qualify each year as a reg-
ulated investment company for Federal
income tax purposes. The requirements
for qualification may cause the Fund to
restrict the extent of its short-term
trading. If the Fund so qualifies, it
will not be subject to Federal income
tax on its net investment income and net
realized capital gains that it dis-
tributes to shareholders, so long as it
meets certain distribution require-
ments. See "Investment Objectives and
Management Policies." In addition, the
Fund is subject to a nondeductible
excise tax of 4% of the amount by which
the
Fund fails to distribute specified
percentages of its investment income and
capital gains. The Fund may 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 Fund's shareholders. Dividends
19
<PAGE>
SMITH BARNEY
Security and Growth Fund
DIVIDENDS, DISTRIBUTIONS AND TAXES
(CONTINUED)
declared by the Fund in October,
November or December of any calendar
year and
payable to shareholders of record on a
specified date in such a month and not
paid until January of the following year
are deemed to have been received by
each shareholder on December 31 of such
calendar year and to have been paid by
the Fund not later than such December
31.
Dividends of the Fund's 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
sharehold-
ers as such, whether received in cash or
reinvested, and regardless of how
long a shareholder has held shares of
the Fund. 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 distribu-
tions will be mailed annually. These
statements will set out the amount of
the
Fund's dividends eligible for the
dividends-received deduction for
corporate
shareholders. Furthermore, shareholders
will receive, as appropriate, various
written notices after the close of the
Fund's taxable year regarding the tax
status of certain dividends and
distributions that were paid (or that
are
treated as having been paid) by the Fund
to its shareholders during the pre-
ceding taxable year, including the
amount of dividends that represent
interest
derived from Government Securities.
Shareholders should consult their own
tax advisors as to the state and local
tax consequences of investing in the
Fund and should be aware that some
juris-
dictions may not treat income derived
from the Fund's holdings of Government
Securities as exempt from state and
local income taxes.
PURCHASE OF SHARES
Shares of the Fund may be purchased
through the Fund's distributor, Smith
Barney, a broker that clears securities
transactions through Smith Barney on a
fully disclosed basis (an "Introducing
Broker") or an investment dealer in the
selling group. No maintenance fee will
be charged in connection with a broker
age account through which an investor or
an investment dealer in the selling
group through which an investor
purchases shares.
20
<PAGE>
SMITH BARNEY
Security and Growth Fund
PURCHASE OF SHARES (CONTINUED)
Smith Barney will solicit subscriptions
for shares of the Fund during a
period scheduled to end on March 23,
1995 subject to change by agreement
between the Trust and Smith Barney (the
"Subscription Period"). On the fifth
business day after termination of the
Subscription Period, or on such other
day as may be agreed by the Trust and
Smith Barney, subscription for shares
will be payable, shares will be issued
and the Fund will commence investment
operations. The Trust and Smith Barney
reserve the right to withdraw, cancel
or modify the initial offering of shares
without notice and the Trust reserves
the right to refuse any order for shares
in whole or in part. The Trust does
not anticipate the Fund's engaging in a
continuous offering of Fund shares
after the termination of the
Subscription Period, although the Fund,
upon at
least 30 days' notice to shareholders,
may commence a continuous offering if
the Trust's Board of Trustees determines
it to be in the best interests of the
Fund and its shareholders.
The minimum purchase during the
Subscription Period is 100 shares except
for
IRAs and other retirement plans for
which the minimum is 25 shares. There
are
no minimum investment requirements for
employees of Travelers and its subsidi-
aries including Smith Barney, Trustees
of the Trust and their spouse and chil-
dren. The Fund reserves the right at any
time to vary the initial and subse-
quent investment minimums. Shares
certificates are issued only upon
written
request to the Fund's transfer agent.
Shares of the Fund will be offered to
investors during the Subscription
Period at a net asset value of $9.60 per
share, plus a sales charge of 4.00%
of the offering price.
INITIAL SALES CHARGE WAIVERS
Purchases of shares may be made at net
asset value without a sales charge in
the following circumstance: (a) sales of
shares to Trustees of the Trust and
employees of Travelers and its
subsidiaries, or to the spouses and
children of
such persons (including the surviving
spouse of a deceased Trustee or employ-
ee, and retired Trustees or employees),
or sales to any trust, pension, prof-
it-sharing or other benefit plan for
such persons provided such sales are
made
upon the assurance of the purchaser that
the purchase is made for investment
purposes and that the securities will
not be resold except through redemption
or repurchase; (b) offers of shares to
any other investment company in connec-
tion with the combination of such
company with the fund by merger,
acquisition
of
21
<PAGE>
SMITH BARNEY
Security and Growth Fund
EXCHANGE PRIVILEGE
assets or otherwise; (c) purchases of
shares by any client of a newly employed
Smith Barney Financial Consultant (for a
period up to 90 days from the com-
mencement of the Financial Consultant's
employment with Smith Barney), on the
condition the purchase of shares is made
with the proceeds of the redemption of
shares of a mutual fund which (i) was
sponsored by the Financial Consultant's
prior employer, (ii) was sold to the
client by the Financial Consultant and
(iii) was subject to a sales charge; and
(d) accounts managed by registered
investment advisory subsidiaries of
Travelers. In order to obtain such dis-
counts, the purchaser must provide
sufficient information at the time of
pur-
chase to permit verification that the
purchase would qualify for the elimina-
tion of the sales charge.
Beginning one year after the date on
which shares of the Fund were originally
purchased, shareholders of the Fund may
exchange their shares for Class A
shares in the following funds of the
Smith Barney Mutual Funds, to the extent
shares are offered for sale in the
shareholder's state of residence.
Exchanges
of shares are subject to minimum
investment requirements and any other
require-
ments of the fund into which exchanges
are made and a sales charge differential
may apply.
FUND NAME
Growth Funds
Smith Barney Aggressive Growth Fund
Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund
Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Special Equities Fund
Smith Barney Telecommunications
Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc.-Income and
Growth Portfolio
Smith Barney Funds, Inc.-Utility
Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return
Fund
Smith Barney Strategic Investors
Fund
Smith Barney Utilities Fund
22
<PAGE>
SMITH BARNEY
Security and Growth Fund
EXCHANGE PRIVILEGE (CONTINUED)
Taxable Fixed-Income Funds
Smith Barney Adjustable Rate
Government Income Fund
Smith Barney Diversified Strategic
Income Fund
Smith Barney Funds, Inc.-Income
Return Account Portfolio
Smith Barney Funds, Inc.-Monthly
Payment Government Portfolio
Smith Barney Funds, Inc.-Short-Term
U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc.-U.S.
Government Securities Portfolio
Smith Barney Government Securities
Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond
Fund
Smith Barney Managed Governments
Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund
Inc.
Smith Barney California Municipals
Fund Inc.
Smith Barney Florida Municipals Fund
Smith Barney Intermediate Maturity
California Municipals Fund
Smith Barney Intermediate Maturity
New York Municipals Fund
Smith Barney Limited Maturity
Municipals Fund
Smith Barney Managed Municipals Fund
Inc.
Smith Barney Massachusetts
Municipals Fund
Smith Barney Muni Funds-California
Portfolio
Smith Barney Muni Funds-Florida
Limited Term Portfolio
Smith Barney Muni Funds-Florida
Portfolio
Smith Barney Muni Funds-Georgia
Portfolio
Smith Barney Muni Funds-Limited Term
Portfolio
Smith Barney Muni Funds-National
Portfolio
Smith Barney Muni Funds-New Jersey
Portfolio
Smith Barney Muni Funds-New York
Portfolio
Smith Barney Muni Funds-Ohio
Portfolio
Smith Barney Muni Funds-Pennsylvania
Portfolio
Smith Barney New Jersey Municipals
Fund Inc.
Smith Barney New York Municipals
Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
23
<PAGE>
SMITH BARNEY
Security and Growth Fund
EXCHANGE PRIVILEGE (CONTINUED)
International Funds
Smith Barney Precious Metals and
Minerals Fund
Smith Barney World Funds, Inc.-
Emerging Markets Portfolio
Smith Barney World Funds, Inc.-
European Portfolio
Smith Barney World Funds, Inc.-
Global Government Bond Portfolio
Smith Barney World Funds, Inc.-
International Balanced Portfolio
Smith Barney World Funds, Inc.-
International Equity Portfolio
Smith Barney World Funds, Inc.-
Pacific Portfolio
Money Market Funds
Smith Barney Money Funds, Inc.-Cash
Portfolio
Smith Barney Money Funds, Inc.-
Government Portfolio
Smith Barney Money Funds, Inc.-
Retirement Portfolio
Smith Barney Municipal Money Market
Fund, Inc.
Smith Barney Muni Funds-California
Money Market Portfolio
Smith Barney Muni Funds-New York
Money Market Portfolio
Shares of the Fund will be subject to
the appropriate "sales charge differen-
tial" upon the exchange of such shares
for Class A shares of another fund of
the Smith Barney Mutual Funds sold with
a sales charge in excess of the sales
charge imposed by the Fund. The "sales
charge differential" is limited to a
percentage rate no greater than the
excess of the sales charge rate
applicable
to purchases of shares of the fund being
acquired in the exchange over the
sales charge rate actually paid on the
fund shares relinquished in the
exchange. For purposes of the exchange
privilege, shares obtained through auto-
matic reinvestment of dividends and
capital gains distributions are treated
as
having paid the same sales charges
applicable to the shares on which the
divi-
dends or distributions were paid;
however, if no sales charge was imposed
upon
the initial purchase of the shares, any
shares obtained through automatic rein-
vestment will be subject to a sales
charge differential upon exchange.
Exchanges will be processed at the net
asset value next determined, plus any
applicable sales charge differential.
Redemption procedures discussed below
are
also applicable for exchanging shares,
and exchanges will be made upon receipt
of all supporting documents in proper
form. If the account registration of the
shares of the fund being acquired is
identical to the registration of the
shares of the fund exchanged, no
signature guarantee is required. A
capital
gain or loss for tax purposes will be
realized upon the exchange, depending
upon the cost or other basis of shares
redeemed. Before exchanging shares,
investors should read the current
prospectus describing the shares to be
acquired. The Fund reserves the right to
modify or discontinue exchange privi-
leges upon 60 days' prior notice to
shareholders.
24
<PAGE>
SMITH BARNEY
Security and Growth Fund
REDEMPTION OF SHARES
Shareholders may redeem their shares
without charge on any day that the Fund
calculates its net asset value. See
"Valuation of Shares." 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.
Redemption proceeds will be remitted on
or before the seventh day following
receipt of proper tender. The Fund
anticipates that, in accordance with
regu-
latory changes, beginning on or about
June 1, 1995, payment will be made on
the third business day after receipt of
proper tender. Generally, these funds
will not be invested for the
shareholder's benefit without specific
instruc-
tion and Smith Barney will benefit from
the use of temporarily uninvested
funds.
Although shares of the Fund 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, the Fund may pay any
portion of a redemption in excess of the
lesser of $250,000 or 1% of the Fund's
net assets by distribution in kind of
securities from the Fund's 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
distri-
bution and such disposition.
Shares held by Smith Barney as
custodian must be redeemed by submitting
a
written request to a Smith Barney
Financial Consultant. Shares other than
those held by Smith Barney as custodian
may be redeemed through an investor's
Financial Consultant, Introducing Broker
or dealer in the selling group or by
submitting a written request to:
Smith Barney Security
and Growth Fund
c/o The Shareholder
Services Group, Inc.
P.O.
Box 9134
Boston,
Massachusetts 02205-9134
25
<PAGE>
SMITH BARNEY
Security and Growth Fund
REDEMPTION OF SHARES (CONTINUED)
A written redemption request must (a)
state the number or dollar amount of
shares to be redeemed, (b) identify the
shareholder's account number and (c) be
signed by each registered owner exactly
as the shares are registered. If the
shares to be redeemed were issued in
certificate form, the certificates must
be
endorsed for transfer (or be accompanied
by an endorsed stock power) and must
be submitted to TSSG together with the
redemption request. Any signature
appearing on a redemption request, share
certificate or stock power must be
guaranteed by an eligible guarantor
institution, such as a domestic bank,
sav-
ings and loan institution, domestic
credit union, member bank of the Federal
Reserve System or a member firm of a
national securities exchange. TSSG may
require additional supporting documents
for redemptions made by corporations,
executors, administrators, trustees or
guardians. A redemption request will not
be deemed to be properly received until
the Trust's transfer agent receives all
required documents in proper form.
THE FUND'S PERFORMANCE
From time to time, the Trust may
advertise the Fund's "average annual
total
return" over various periods of time.
Such total return figures show the aver-
age percentage change in value of an
investment in the Fund from the
beginning
date of the measuring period to the end
of the measuring period. These figures
reflect changes in the price of the
Fund's shares and assume that any income
dividends and/or capital gains
distributions made by the Fund during
the period
were reinvested in shares of the Fund.
Figures will be given for the recent
one-, and five-year periods, or for the
life of the Fund 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 Fund's average annual
total return for any one year in the
period might have been greater or less
than the average for the entire period.
The series also may use "aggregate"
total return figures for various
periods,
representing the cumulative change in
value of an investment in the Fund for
the specific period (again reflecting
changes in the Fund's share prices and
assuming reinvestment of dividends and
distributions). Aggregate total return
may be calculated either with or without
the effect of the maximum 4.00% sales
charge and may be shown by means of
schedules, charts or graphs, and may
indi-
cate subtotals of the various components
of total return (i.e., change in value
of initial investment, income dividends
and capital gains distributions).
26
<PAGE>
SMITH BARNEY
Security and Growth Fund
THE FUND'S PERFORMANCE (CONTINUED)
In reports or other communications to
shareholders or in advertising materi-
al, the Trust may compare the Fund's
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
serv-
ices which monitor the performance of
mutual funds or other industry or finan-
cial publications such as Barron's,
Business Week, Forbes, Fortune, Institu-
tional Investor, Investors Daily,
Kiplinger's Personal Finance, Money,
Morn-
ingstar Mutual Fund Values, The New York
Times, The Wall Street Journal, or
USA Today. Any given performance
comparison should not be considered as
repre-
sentative of the Fund's 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 Fund, including
total return figures, to their Smith
Barney Financial Consultant.
MANAGEMENT OF THE FUND
BOARD OF TRUSTEES
Overall responsibility for management
and supervision of the Trust and the
Fund rests with the Board of Trustees.
The Trustees approve all significant
agreements between the Trust and the
persons or companies that furnish serv-
ices to the Trust and the Fund,
including agreements with its investment
adviser, custodian and transfer agent.
The day-to-day operations of the Fund
are delegated to the Fund's investment
adviser. The Statement of Additional
Information contains general background
information regarding each of the
Trust's Trustees and the executive
officers of the Fund.
MANAGER
The Manager, located at 388 Greenwich
Street, New York, New York 10013,
serves as the Fund's investment adviser.
The Manager is a wholly owned subsid-
iary of Smith Barney Holdings Inc.
("Holdings"). Holdings is a wholly owned
subsidiary of The Travelers Inc.
("Travelers"), a diversified financial
serv-
ices holding company engaged, through
its subsidiaries, principally in four
business segments: Investment Services,
Consumer Finance Services, Life Insur-
ance Services and Property & Casualty
Insurance Services. The Manager renders
investment advice to investment
companies that had aggregate assets
under man-
agement as of December 31, 1994 in
excess of $50.4 billion.
27
<PAGE>
SMITH BARNEY
Security and Growth Fund
MANAGEMENT OF THE FUND (CONTINUED)
Subject to the supervision and
direction of the Trust's Board of
Trustees,
the Manager manages the Fund's portfolio
in accordance with the Fund's stated
investment objectives and policies,
makes investment decisions for the Fund,
places orders to purchase and sell
securities, and employs professional
port-
folio managers and securities analysts
who provide research services to the
Fund.
PORTFOLIO MANAGEMENT
John G. Goode, President and Chief
Executive Officer of Davis Skaggs
Invest-
ment Management, a division of the
Manager, serves as Vice President of the
Fund and manages the day-to-day
operations of the Fund, including making
all
investment decisions.
Management's discussion and analysis,
and additional performance information
regarding the Fund during the fiscal
year ending November 30, 1995 will be
included in the Annual Report dated
November 30, 1995. A copy of the Annual
Report may be obtained upon request and
without charge from a Smith Barney
Financial Consultant or by writing or
calling the Fund at the address or phone
number listed on page one of this
Prospectus.
DISTRIBUTOR
DISTRIBUTOR AND SHAREHOLDER SERVICING
AGENT--SMITH BARNEY
Smith Barney, which serves as the
Trust's distributor and shareholder
servic-
ing agent for the Fund, is located at
388 Greenwich Street, New York, New York
10013. Pursuant to a Shareholder
Services Plan (the "Plan") adopted with
respect to the Fund, 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 Fund's sole shareholder prior
to the Fund's initial public offering,
Smith Barney, as shareholder servicing
agent, is paid an annual fee by the
Fund. The fee will be calculated at the
annual rate of 0.25% of the value of
the average daily net assets of the Fund
and is used by Smith Barney to cover
payments to Smith Barney Financial
Consultants who provide support services
to
shareholders of the Fund, including, but
not limited to, office space and
equipment, telephone facilities,
responding to routine inquiries
regarding the
Fund and its operations, processing
shareholder transactions, forwarding and
collecting proxy materials, dividend
payment elections and providing any
other
shareholder services not otherwise
provided by TSSG. The Board of Trustees
evaluates the appropriateness of the
Plan and its payment terms on a continu-
ing basis and in doing so consid
28
<PAGE>
SMITH BARNEY
Security and Growth Fund
ADDITIONAL INFORMATION
ers all relevant factors, including the
nature, extent and quality of services
generally provided to shareholders.
The Trust was organized on October 18,
1988 under the laws of the Common-
wealth 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 the Fund having a $.001 per
share par value. When matters are sub-
mitted for shareholder vote,
shareholders of the Fund 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 and the
Trust will assist shareholders in
calling such a meeting as required by
the
1940 Act.
PNC Bank, located at 17th and Chestnut
Streets, Philadelphia, Pennsylvania
19103, serves as custodian of the Fund's
investments.
The Shareholder Services Group, Inc.
serves as the Trust's transfer agent and
is located at Exchange Place, Boston,
Massachusetts, 02109.
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 Fund at the end of the period
covered. In an effort to reduce the
Fund's
printing and mailing costs, the Fund
plans to consolidate the mailing of its
semi-annual and annual reports by
household. This consolidation means that
a
household having multiple accounts with
the identical address of record will
receive a single copy of each report. In
addition, the Fund also plans to con-
solidate 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.
29
<PAGE>
(This page has been
left blank intentionally.)
<PAGE>
----------------------------------------
----------------------------------------
SMITH BARNEY
A member of TravelersGroup[LOGO]
--------------
Smith Barney
Security
And
Growth Fund
388 Greenwich Street
New York, New York 10013
FD0861 B5
SMITH BARNEY PRINCIPAL RETURN
FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
This Statement of Additional Information
supplements the information contained in the current
Prospectus dated March 23, 1995, as amended or
supplemented from time to time, of the Smith Barney
Security and Growth Fund (the "Fund"), a series of
Smith Barney Principal Return Fund (the "Trust"), and
should be read in conjunction with that Prospectus.
The Prospectus may be obtained from your Smith
Barney 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
(See in the Prospectus "Management of the Fund")
2
Investment Objectives and Management Policies
5
Purchase of Shares 13
Redemption of Shares 13
Valuation of Shares 14
Exchange Privilege 14
Determination of Performance 15
(See in the Prospectus "The Fund's 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 Fund. These organizations are as
follows:
Name Service
Smith Barney Inc.
("Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc.
(the "Manager") Investment Adviser
PNC Bank, National Association
("PNC Bank") 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 Fund 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 (age 56). 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 (age 71). Private
investor. His address is 273 Montgomery Avenue,
Bala Cynwyd, Pennsylvania 19004.
Alger B. Chapman, Trustee (age 65).
Chairman and Chief Executive Officer of the Chicago
Board of Options Exchange. His address is Chicago
Board of Options Exchange, 400 South LaSalle
Street, Chicago, Illinois 60605.
Dwight B. Crane, Trustee (age 57).
Professor, Graduate School of Business
Administration, Harvard University; a Director of Peer
Review Analysis, Inc. His address is Graduate
School of Business Administration, Harvard
University, Boston, Massachusetts 02163.
Frank G. Hubbard, Trustee (age 59).
Corporate Vice President, Materials of Huls America,
Inc. His address is 80 Centennial Avenue P.O. Box
456, Piscataway, New Jersey 08855-0456.
Allan R. Johnson, Trustee (age 80). 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 (age 63). He also performs this function
for other mutual funds of the Smith Barney Mutual Funds.
Managing Director of Smith Barney; President of the Manager;
Chairman of Smith Barney 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 388 Greenwich Street,
New York, New York 10013.
Ken Miller, Trustee (age 54). President of
Young Stuff Apparel Group, Inc. His address is 1407
Broadway, 6th Floor, New York, New York 10018.
John F. White, Trustee (age 79). 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.
Jessica M. Bibliowicz, President (age 35). She
also performs this function for other mutual funds of the Smith
Barney Mutual Funds. Executive Vice President of Smith
Barney; prior to 1994, Director of Sales and Marketing for
Prudential Mutual Funds; prior to 1990, First Vice President of
Asset Management Division of Shearson Lehman Brothers.
Her address is 388 Greenwich Street, New York, New York
10013.
Harry D. Cohen, Vice President and
Investment Officer (age 54). Managing Director of Smith
Barney; prior to July 1993, Executive Vice President of
Shearson Lehman Brothers. His address is 388 Greenwich
Street, New York, New York 10013.
Susan C. Fulenwider, Vice President and
Investment Officer (age 39). Vice President of Smith Barney;
prior to July 1993, Vice President of Shearson Asset
Management. Her address is 388 Greenwich Street, New
York, New York 10013.
Richard A. Freeman, Vice President and
Investment Officer (age 41). Managing Director of Smith
Barney; prior to July 1993, Executive Vice President of
Shearson Asset Management. His address is 388 Greenwich
Street, New York, New York 10013.
John C. Goode, Vice President and Investment
Officer (age ). President and Chief Executive Officer of Davis
Skaggs Investment Management, a division of the Manager;
prior to July 1993, Vice President of Shearson Asset
Management. His address is 388 Greenwich Street, New
York, New York 10013.
Lewis E. Daidone, Senior Vice President and
Treasurer (age 37). Managing Director of Smith Barney. His
address is 388 Greenwich Street, New York, New York
10013.
Christina T. Sydor, Secretary (age 43).
Managing Director of Smith Barney. Her address is 388
Greenwich Street, New York, New York 10013.
Each of the Trustees serves as a trustee, general
partner and/or director of other mutual funds for which Smith
Barney serves as distributor. As of January 30, 1995, Trustees
and officers of the Fund, as a group, owned less than 1% of the
outstanding shares of beneficial interest of the Fund.
No director, officer or employee of Smith Barney, the
Manager 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 or any of its affiliates a fee of $4,000 per annum
plus $500 per meeting attended and reimburses them for travel
and out-of-pocket expenses. For the fiscal year ended
November 30, 1994, the Trustees were paid the following
compensation:
T
r
u
s
t
e
e
*
A
g
g
r
e
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a
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o
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e
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u
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e
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s
a
t
i
o
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r
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e
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m
i
t
h
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u
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u
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l
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u
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d
s
P
a
u
l
R
.
A
d
e
s
(
7
)
5
,
0
0
0
4
2
,
7
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0
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e
r
b
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t
B
a
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g
(
1
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)
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,
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7
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,
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.
C
h
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m
a
n
(
4
)
-
-
-
3
4
,
1
2
5
D
w
i
g
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t
B
.
C
r
a
n
e
(
2
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)
-
-
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,
9
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F
r
a
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.
H
u
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(
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)
-
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(
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e
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.
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(
2
9
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-
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-
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K
e
n
M
i
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r
(
8
)
5
,
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J
o
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.
W
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i
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(
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)
5
,
0
0
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7
2
,
2
5
0
* Number of trusteeships/directorships held
with other mutual funds in the Smith Barney
Mutual Funds family.
Investment Adviser and Administrator
The Manager serves as the Fund's investment adviser
under the terms of a written agreement with the Trust (the
"Advisory Agreement") which will become effective on the date
that the Fund commences operations. The Manager is a wholly
owned subsidiary of Smith Barney Holdings Inc. ("Holdings"),
which is in turn a wholly owned subsidiary of The Travelers Inc.
("Travelers"). The Advisory Agreement for the Fund was first
approved by the Board of Trustees, including a majority of the
Trustees who are not "interested persons" of the Trust or Smith
Barney on January 26, 1995. Certain of the services provided
to, and fees paid by, the Fund under the Advisory Agreement
are described in the Prospectus. The Manager pays the salaries
of all officers and employees who are employed by both it and
the Trust and maintains office facilities for the Trust. The
Manager bears all expenses in connection with the performance
of its services under the Advisory Agreements. In addition to
providing investment advisory services, the Manager, pursuant
to the Advisory Agreement, furnishes the Fund with statistical
and research data, clerical help and accounting, data procissing,
bookkeeping, internal auditing and legal services and certain
other services required by the Fund; prepares reports to the
Fund's shareholders; and prepares tax returns and reports to
and filings with the Securities and Exchange Commission (the
"SEC") and state Blue Sky authorities.
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.
KPMG Peat Marwick LLP, 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
the Fund 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 Fund may invest, the investment policies and portfolio
strategies that the Fund 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
Fund 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, the Fund may hold at any
time up to 10% of the value of its assets in cash and money
market instruments. In addition, when the Manager believes
that opportunities for capital appreciation do not appear
attractive, the Fund 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 Fund 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 Fund will invest in
obligations issued by such an instrumentality only if the Manager
determines that the credit risk with respect to the instrumentality
does not make its securities unsuitable for investment by the
Fund.
Repurchase Agreements
The Fund 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 the Fund's 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 the Fund 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, the Manager,
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 Fund enters into repurchase agreements.
Options on Securities
The Fund may write covered call options and may also
purchase put options and enter into closing transactions.
The principal reason for writing covered call options on
securities is to attempt to realize, through the receipt of
premiums, a greater return than would be realized on the
securities alone. In return for a premium, the writer of a
covered call option forfeits the right to any appreciation in the
value of the underlying security above the strike price for the life
of the option (or until a closing purchase transaction can be
effected). Nevertheless, the call writer retains the risk of a
decline in the price of the underlying security. Similarly, the
principal reason for writing covered put options is to realize
income in the form of premiums. The writer of a covered put
option accepts the risk of a decline in the price of the underlying
security. The size of the premiums the Fund may receive amy
be adversely affected as new or existing institutions, including
other investment companies, engage in or increase their option-
writing activities.
Options written by the Fund will normally have
expiration dates between one and six months from the date
written. The exercise price of the options may be below, equal
to, or above the current market values of the underlying
securities at the times the options are written. In the case of call
options, these exercise prices are referred to as "in-the-money,"
"at-the-money" and "out-of-the-money," respectively.
The Fund may write (a) in-the-money call options when
the Manager expects the price of the underlying security to
remain flat or decline moderately during the option period, (b)
at-the-money call options when the Manager expects the price
of the underlying security to remain flat or advance moderately
during the option period and (c) out-of-the-money call options
when the Manager expects that the price of the security may
increase but not above a price equal to the sum of the exercise
price plus the premiums received from writing the call option.
In any of the preceding situations, if the market price of the
underlying security declines and the security is sold at this lower
price, the amount of any realized loss will offset wholly or in
part by the premium received. Out-of-the-money, at-the-
money and in-the-money put options (the reverse of call options
as to the relation of exercise price to market price) may be
utilized in the same market environments as such call options are
used in equivalent transactions.
So long as the obligation of the Fund as the writer of an
option continues, the Fund may be assigned an exercise notice
by the broker-dealer through which the option was sold,
requiring it to deliver, in the case of a call, or take delivery of, in
the case of a put, the underlying security against payment of the
exercise price. This obligation terminates when the option
expires or the Fund effects a closing purchase transaction. The
Fund can no longer effect a closing purchase transaction with
respect to an option once it has been assigned an exercise
notice. To secure its obligation to deliver the underlying security
when it writes a call option, or to pay for the underlying security
when it writes a put option, the Fund will be required to deposit
in escrow the underlying security or to other assets in
accordance with the rules of the Options Clearing Corporation
("Clearing Corporation") or similar clearing corporation and the
securities exchange on which the option is written.
An option position may be closed out only where there
exists a secondary market for an option of the same series on a
recognized securities exchanges or in the over-the-counter
market. The Fund expects to wirte options only on national
securities exchanges or in the over-th-counter market. the Fund
may purchase put options issued by the clearing Corporation or
in the over-the-counter market.
The Fund may realize a profit or loss upon entering into
a closing transaction. In cases in which the Fund has written an
option, it will realize a profit if the cost of the closing purchase
transaction is less than the premium received upon writing the
original option and will incur a loss if the cost of the closing
purchase transaction exceeds the premium received upon
writing the original option. Similarly, when the Fund has
purchased an option and engages in a closing sale transaction,
whether it recognizes a profit or loss will depend upon whether
the amount received in the closing sale transaction is more or
less than the premium the Fund initially paid for the original
option plus the related transaction costs.
Although the Fund generally will purchase or write only
those options for which the Manager believes there is an active
secondary market so as to facilitate closing transactions, there is
no assurance that sufficient trading interest to create a liquid
secondary market on a securities exchange will exist for any
particular option or at any particular time, and for some options
no such secondary market may exist. A liquid secondary
market in an option may cease to exist for a variety of reasons.
In the past, for example, higher than anticipated trading activity
or order flow, or other unforeseen events, have at times
rendered certain of the facilities of the Clearing Corporation and
national securities exchanges inadequate and resulted in the
institution of special procedures, such as trading rotations,
restrictions on certain types of orders or trading halts or
suspensions in one or more options. There can be no assurance
that similar events, or events that may otherwise interfere with
the timely execution of customers' orders, will not recur. In
such event, it might not be possible to effect closing transactions
in particular options. If, as a covered call option writer, the
Fund is unable to effect a closing purchase transaction in a
secondary market, it will not be able to sell the underlying
security until the option expires or it delivers the underlying
security upon exercise.
Securities exchanges generally have established
limitations governing the maximum number of calls and puts of
each class which may be held or written, or exercised within
certain periods, by an investor or group of investors acting in
concert (regardless of whether the options are written ont he
same or different securities exchanges or are held, written or
exercised in one or more accounts or through one or more
brokers). It is possible that the Fund and other clients of the
Manager and certain of their affiliates may be considered to be
such a group. A securities exchange may order the liquidation
of positions found to be in violation of these limits, and it may
impose certain other sanctions.
In the case of options written by the Fund that are
deemed covered by virtue of the Fund's holding convertible or
exchangeable preferred stock or debt securities, the time
required to convert for exchange and obtain physical delivery of
the underlying common stocks with respect to which the Fund
has written options may exceed the time within which the Fund
must make delivery in accordance with an exercise notice. In
these instances, the Fund may purchase or temporarily borrow
the underlying securities for purposes of physical delivery. By
so doing, the fund will not bear any market risk because the
Fund will have the absolute right to receive from the issuer of
the underlying security an equal number of shares to replace the
borrowed stock, but the Fund may incur additional transaction
costs or interest expenses in connection with any such purchase
or borrowing.
Although the Manager will attempt to take appropriate
measures to minimize the risks relating to the Fund's writing of
call options and purchasing of put and call options, there can be
no assurance that the Fund will succeed in its option-writing
program.
Stock Index Options
The Fund may purchase put and call options and write
call options on domestic stock indexes listed on domestic
exchanges in order to realize its investment objective of capital
appreciation or for the purpose of hedging its portfolio. A
stock index fluctuates with changes in the market values of the
stocks included in the index. Some stock index options are
based on a broad marked index such as the New York Stock
Exchange Composite Index o the Canadian Market Portfolio
Index, or a narrower market index such as the Standard &
Poor's 100. indexes also are based on an industry or market
segment such as the American Stock Exchange Oil and Gas
Index or the Computer and Business Equipment Index.
Options on stock indexes are generally similar to
options on stock except that the delivery requirements are
different. Instead of giving the right to take or make delivery of
stock at a specified price, an option on a stock index gives the
right to receive a cash "exercise settlement amount" equal to (a)
the amount, if any, by which the fixed exercise price of the
option exceeds (in the case of a put) or is less than (in the case
of a call) the closing value of the underlying index on the date of
exercise, multiplied by (b) a fixed "index multiplier." Receipt of
this cash amount will depend upon the closing level of the stock
index upon which the option is based being greater than, in the
case of a call, or less than, in the case of a put, the exercise
price of the option. The amount of cash received will be equal
to such difference between the closing price of the index and the
exercise price of the option expressed in dollars or a foreign
currency, as the case may be, times a specified multiple. The
writer of the option is obligated, in return for the premium
received, to make delivery of this amount. The writer may
offset its position in stock index options prior to expiration by
entering into a closing transaction on an exchange or it may let
the option expire unexercised.
The effectiveness of purchasing or writing stock index
options as a hedging technique will depend upon the extent to
which price movements in the portion of the securities portfolio
of the Fund correlate with price movements of the stock index
selected. Because the value of an index option depends upon
movements in the level of the index rather than the of a
particular stock, whether the Fund will realize a gain or loss
from the purchase or writing of options on an index depends
upon movements in the level of stock prices in the stock market
generally or, int he case of certain indexes, in an industry or
market segment, rather than movements in the price of a
particular stock. Accordingly, successful use by the Fund of
options on stock indexes will be subject to the Manager's
ability to predict correctly movements int he direction of the
stock market
Warrants
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 Fund is authorized to lend its securities to
brokers, dealers and other financial organizations, it will not lend
securities to its distributor, Smith Barney, or its affiliates unless
the Fund applies for and receive specific authority to do so from
the SEC. These loans, if and when made, may not exceed 33-
1/3% of the Fund's assets taken at value. The Fund's loans of
securities will be collateralized by cash, letters of credit or U.S
government securities 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, the Fund 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 the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its
income by continuing to receive interest on the loaned securities
as well as by either investing the cash collateral in short-term
instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as
collateral. Requirements of the SEC, which may be subject to
future modifications, currently provide that the following
conditions must be met whenever the Fund's portfolio securities
are loaned: (a) the Fund 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 Fund must be able to terminate the loan at any time; (d) the
Fund 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
Fund may pay only reasonable custodian fees in connection
with the loan; and (f) voting rights on the loaned securities may
pass to the borrower; 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 Fund's
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 Fund, 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 Fund 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 Fund:
1. The Fund will not purchase securities (other
than U. S. government securities) of any issuer if, as a result of
the purchase, more than 5% of the value of the Fund's total
assets would be invested in the securities of the issuer, except
that up to 25% of the value of the Fund's total assets may be
invested without regard to this 5% limitation.
2. The Fund will not purchase more than 10% of
the voting securities of any one issuer, or more than 10% of the
securities of any class of any one issuer, except that this
limitation is not applicable to the Fund's investments in U. S.
government securities, and up to 25% of the Fund's assets may
be invested without regard to these 10% limitations.
3. The Fund will not borrow money, except that it
may borrow from banks temporarily for 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 Fund's
total assets (including the amount borrowed) at the time the
borrowing is made. Whenever borrowings exceed 5% of the
value of its total assets, the Fund will not make any additional
investments.
4. The Fund will not lend money to other persons,
except through purchasing debt obligations, lending portfolio
securities and entering into repurchase agreements.
5. The Fund 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. The Fund will not underwrite the securities of
other issuers, except insofar as the Fund 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. The Fund will not purchase or sell real estate,
interests in real estate limited partnerships or interests in real
estate, except that the Fund 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. The Fund will not purchase or sell commodities
or commodities futures contracts.
9. The Fund will not sell securities short.
10. The Fund will not purchase securities on
margin, except that the Fund may obtain any short-term credits
necessary for the clearance of purchases and sales of securities.
11. The Fund will not pledge, hypothecate,
mortgage or encumber in any other way more than 10% of its
assets.
12. The Fund will not invest in oil, gas, mineral
leases or other mineral exploration or development programs,
except that the Fund may invest in the securities of companies
that invest in or sponsor those programs.
13. The Fund 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. The Fund will not write or sell put options,
naked call options, straddles or combinations of those options,
except that the Fund may, for hedging purposes only, (i) write
call options and purchase put options on broad-based domestic
stock indexes and enter into closing transactions with respect to
such options; and (ii) write or purchase options on futures
contracts.
15. The Fund will not purchase any security, except
U.S. government securities, if as a result of the purchase, the
Fund 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. The Fund will not make investments for the
purpose of exercising control or management of any other
issuer.
17. The Fund will not purchase or retain securities
of any company if any of the Trust's officers or Trustees, or any
officer or director of the Manager, individually owns more than
.5% of the outstanding securities of the company and together
they own beneficially more than 5% of the securities.
18. The Fund will not invest in warrants, if as a
result, more than 2% of the value of the Fund's net assets would
be invested in warrants that are not listed on a recognized
United States stock exchange, or more than 5% of the Fund's
net assets would be invested in warrants regardless of whether
they are listed on such an exchange.
19. The Fund 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, including securities
exempt from registration pursuant to Rule 144A of the 1933
Act ("restricted securities"), or purchase instruments lacking
readily available market quotations ("illiquid instruments"), if as a
result of the purchase the Fund's 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 10% of the
Fund'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 Fund intends not to seek profits through short-term
trading of its securities. Nevertheless, the Fund will not consider
portfolio turnover rate a limiting factor in making investment
decisions. The Fund cannot accurately predict its portfolio
turnover rate, but anticipate that its annual turnover rates will not
exceed 50%. The turnover rates would be 100% if all of the
Fund's securities that are included in the computation of
turnover were replaced once during a period of one year. The
Fund's 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.
Portfolio Transactions
Decisions to buy and sell securities for the Fund are
made by the Manager, subject to the overall review of the
Trust's Board of Trustees. Although investment decisions for
the Fund are made independently from those of the other
accounts managed by the Manager, investments of the type
made by the Fund also may be made by those accounts. When
the Fund and one or more other accounts managed by the
Manager 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 the Manager to be
equitable to each. In some cases, this procedure may adversely
affect the price paid or received by the Fund or the size of the
position obtained or disposed of by the Fund.
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 Manager seeks the best overall terms available in
selecting brokers or dealers to execute transactions on behalf of
the Fund. In assessing the best overall terms available for any
transaction, the Manager 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, the Manager 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 Fund
and/or other accounts over which the Manager or its affiliates
exercise investment discretion. The fees under the Fund's
Advisory Agreement are not reduced by reason of the Manager
receiving brokerage and research services. The Fund's Board
of Trustees will periodically review the commissions paid by the
Fund to determine if the commissions paid over representative
periods of time were reasonable in relation to the benefits
inuring to the Fund.
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 Fund may be executed
through Smith Barney and other affiliated broker-dealers if, in
the judgment of the Manager, 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 Fund 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 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 to effect such
transactions; and (b) Smith Barney 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 Fund normally utilizes is restricted, or an
emergency as determined by the SEC exists, so that disposal of
the Fund's 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 Fund's
shareholders.
VALUATION OF SHARES
As noted in the Prospectus, the Fund's net asset value
will not be calculated on certain holidays. On those days,
securities held by the Fund may nevertheless be actively traded,
and the value of the Fund's shares could be significantly
affected.
EXCHANGE PRIVILEGE
Beginning one year after the date on which shares of the
Fund were purchased, shareholders of the Fund may exchange
their shares for Class A shares of certain other funds of the
Smith Barney Mutual Funds, as indicated in the Prospectus, to
the extent such shares are offered for sale in the shareholder's
state of residence.
A shareholder who has redeemed shares of the Fund,
through the exchange privilege or otherwise, will not be able to
purchase new shares in the Fund.
The exchange privilege enables shareholders in any of
the funds of the Smith Barney Mutual 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 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, plus any
applicable sales charge differential, and the proceeds are
immediately invested, at a price as described above, in shares
of the fund being acquired. Smith Barney reserves the right to
reject any exchange request. The exchange privilege may be
modified or terminated at any time after notice to shareholders.
DETERMINATION OF PERFORMANCE
From time to time, the Trust may quote a Fund's
performance in terms of its total return in reports or other
communications to shareholders. The Fund's performance will
vary from time to time depending upon market conditions, the
composition of its portfolio and its operating expenses.
Average Total Return
The Fund's "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
Aggregate Total Return
The Fund's aggregate total return figures represent the
cumulative change in the value of an investment in the Fund for a
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 Fund's 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 Fund's 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 Fund with
certain bank deposits or other investments that pay a fixed yield
for a stated period of time. Investors comparing the Fund's
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 the Fund.
Tax Status of the Trust and its Shareholders
The Fund 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 Fund must meet
certain requirements set forth in the Code. The Fund 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
Fund's business of investing in stock or securities. The Fund
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 Fund. 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 Fund.
Dividends of investment income (but not distributions of
capital gain) from the Fund 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 Fund from domestic corporations. If
securities held by the Fund are considered to be "debt-
financed" (generally, acquired with borrowed funds) or are held
by the Fund for less than 46 days (91 days in the case of certain
preferred stock), the portion of the dividends paid by the Fund
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 the Fund 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 the Fund 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 Fund's 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 Fund acquired the stock.
Capital Gains. In general, a shareholder who redeems
or exchanges his or her Fund 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 the Fund 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 the Fund's 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 Fund's Investments
Zero Coupon Securities. The Fund 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 Fund will
be required to accrue as income a portion of this original issue
discount even though the Fund will receive no cash payment of
interest with respect to these securities. In addition, if the Fund
acquires a security at a discount that resulted from fluctuations
in prevailing interest rates ("market discount"), the Fund may
elect to include in income each year a portion of this market
discount.
The Fund 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, the
Fund may be required in some years to distribute an amount
greater than the total cash income the Fund actually receives. In
order to make the required distribution in such a year, the Fund
may be required to borrow or to liquidate securities. The
amount of actual cash that the Fund 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 Fund's
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 the Fund will generally be long-term capital gain
or loss if the Fund 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 the
Fund 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 SERVICING
AGENT -
SMITH BARNEY
Smith Barney serves as the Fund's distributor pursuant
to a written agreement (the "Distribution Agreement") with the
Trust. To compensate Smith Barney 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, with respect to the Fund, a fee,
accrued daily and paid monthly, calculated at the annual rate of
0.25% of the value of the Fund's average daily net assets.
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 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
Fund on not more than 30 days' written notice to any other
party to the Plan. Pursuant to the Plan, Smith Barney will
provide the Board of Trustees periodic reports of amounts
expended under the Plan and the purpose for which such
expenditures were made.
CUSTODIAN AND TRANSFER AGENT
PNC Bank is located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103 and serves as the custodian
of the Trust pursuant to a custodian agreement. Under the
custodian agreement, PNC Bank holds the Fund's portfolio
securities and keeps all necessary accounts and records. For
its services, PNC Bank 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 Fund
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 Fund.
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.
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