As filed with the Securities and Exchange Commission on March 29, 1996
Registration No. 33-25087 811-5678
___________________________________________________________________
U.S.SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[ ] Pre-Effective Amendment No. [ X ]Post-Effective Amendment No.19
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940, as amended
Amendment No.20[ X ]
SMITH BARNEY PRINCIPAL RETURN FUND
(formerly Smith Barney Shearson Brothers Principal Return Fund)
(Exact name of Registrant as Specified in Charter)
Area Code and Telephone Number: (212)723-9218
388 Greenwich Street, New York, New York 10013
(Address of Principal Executive Office) (Zip Code)
Christina T. Sydor
Secretary
Smith Barney Principal Return Fund
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent of Service)
copies to:
Burton M. Liebert, Esq.
Willkie Farr & Gallagher
One Citicorp Center
153 East 53rd Street
New York, NY 10022
Approximate Date of Proposed Public Offering:
As soon as possible after this Post-Effective Amendment becomes effective.
It is proposed that this filing will become effective:
X Immediately upon filing pursuant to Rule 485(b)
____ on March 29, 1996 pursuant to Rule 485(b)
60 days after filing pursuant to Rule 485(a)
on _______pursuant to Rule 485(a)
The Registrant has previously filed a declaration of indefinite registration
of its shares pursuant to Rule 24f-2 under the Investment Company Act of 1940,
as amended. Registrant's Rule 24f-2 Notice for the fiscal year ended
November 30, 1995 was filed on January 17, 1996 as accession number
0000841489-96-000002.
SMITH BARNEY PRINCIPAL RETURN FUND
CONTENTS OF REGISTRATION STATEMENT
This Registration Statement contains the following pages and documents:
Front Cover
Contents Page
Cross-Reference Sheet
Part A - Prospectus
Part B - Statement of Additional Information
Part C - Other Information
Signature Page
Exhibits
SMITH BARNEY PRINCIPAL RETURN FUND
FORM N-IA CROSS REFERENCE SHEET
PURSUANT TO RULE 495(b) UNDER THE SECURITIES ACT OF 1933, AS AMENDED
Part A.
Item No. and Caption Prospectus Caption
1. Cover Page Cover Page
2. Synopsis Introduction, Series' Expenses
3. Condensed Financial Information Financial Highlights
4. General Description of Registrant Cover Page,
Introduction
Investment Objective and Policies;
Management of the Trust
Distributor; Additional Information
5. Management of the Fund Introduction; Management of
the Trust; Distributor; Additional
Information.
6. Capital Stock and Other Securities Investment Objectives
and Policies; Dividends,
Distributions and Taxes;
Additional Information
7. Purchase of Securities Being Offered Purchase of Shares;
Valuation of
Shares; Redemption of Shares;
Exchange Privilege; Minimum Account
Size; Distributor
8. Redemption or Repurchase of Shares Purchase of Shares;
Redemption of
Shares; Exchange Privilege
9. Pending Legal Proceedings Not Applicable
Part B
Item No. and Caption Statement of Additional
Information Caption
10. Cover Page Cover Page
11. Table of Contents Contents
12. General Information and History Distributor;
Organization of the Trust
13. Investment Objectives and Policies Investment Objectives
and Management
Policies
14. Management of the Fund Investment Adviser and
Administrator;Distributor
15. Control Persons and Principal Organization of the
Trust; Investment
Adviser;Distributor
16. Investment Advisory and Other Services Investment Adviser and
Administrator; Distributor and
Shareholder Servicing Agent
17. Brokerage Allocation Investment Objectives
and
Management Policies; Portfolio
Transactions
18. Capital Stock and Other Securities Investment Objectives
and
Management Policies; Redemption of
Shares Taxes;
19. Purchase, Redemption and
Pricing Securities Being Offered Purchase of Shares;
Redemption of Shares;
of Shares Valuation of Shares;
Distributor; Exchange Privilege
20. Tax Status Taxes
21. Underwriters Distributor
22. Calculations of Performance Data Performance Data
23. Financial Statements Financial Statements
SMITH BARNEY PRINCIPAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
March 29, 1996
PROSPECTUS
This Prospectus describes Smith Barney Principal Return Fund (the
"Trust") and the following series (each, a "Series" and collectively, the
"Series").
* Zeros and Appreciation Series 1998 ("Series 1998") seeks (a) to
return to each shareholder on August 31, 1998 (the "Series 1998 Maturity
Date") the principal amount of the shareholder's original investment
(including any sales charge paid) through investment of a portion of its
assets in zero coupon securities and (b) to the extent consistent with that
objective, to provide long-term appreciation of capital through investment
of the balance of its assets primarily in equity securities. There can be
no assurance that Series 1998's investment objectives will be achieved.
* Zeros Plus Emerging Growth Series 2000 ("Series 2000") seeks (a) to
return to each shareholder on February 28, 2000 (the "Series 2000 Maturity
Date") the principal amount of the shareholder's original investment
(including any sales charge paid) through investment of a portion of its
assets in zero coupon securities and (b) to the extent consistent with that
objective, to provide long-term appreciation of capital through investment
of the balance of its assets primarily in equity securities issued by
"emerging growth companies," which are small-to medium-sized companies that
are believed by the Series' investment adviser to show a prospect of
achieving significant profit and gain in a relatively short period of time.
There can be no assurance that Series 2000's investment objectives will be
achieved.
* Security and Growth Fund seeks (a) to return to each shareholder on
August 31, 2005 (the "Security and Growth Fund 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.
When used herein, the term Maturity Date shall refer to the "Series
1998 Maturity Date," the "Series 2000 Maturity Date," and the "Security and
Growth Fund Maturity Date",as applicable.
FD 01103
SHARES OF SERIES 1998, SERIES 2000 AND THE SECURITY AND GROWTH FUND ARE
NOT CURRENTLY BEING OFFERED FOR SALE TO NEW INVESTORS. THE NET ASSET VALUE
PER SHARE OF EACH SERIES PRIOR TO THE MATURITY DATE CAN BE EXPECTED TO
FLUCTUATE SUBSTANTIALLY OWING TO CHANGES IN PREVAILING INTEREST RATES THAT
WILL AFFECT THE CURRENT VALUE OF EACH SERIES' HOLDINGS OF ZERO COUPON
SECURITIES, AS WELL AS CHANGES IN THE VALUE OF EACH SERIES' OTHER HOLDINGS.
BECAUSE THE SERIES ARE NOT CURRENTLY ENGAGED IN A CONTINUOUS OFFERING OF
SHARES, THEY ARE NOT BENEFITING FROM AN INFLOW OF NEW CAPITAL. IN ADDITION,
EACH SERIES MAY EXPERIENCE REDEMPTIONS AND CAPITAL LOSSES PRIOR TO THE
MATURITY DATE (OR IN PREPARATION FOR EACH SERIES' LIQUIDATION AT THE
MATURITY DATE) AND WILL PAY DIVIDENDS AND DISTRIBUTIONS IN CASH TO
SHAREHOLDERS WHO SO ELECT. A DIMINUTION OF ITS ASSETS RESULTING FROM
LOSSES, REDEMPTIONS AND DIVIDENDS AND DISTRIBUTIONS PAID IN CASH COULD MAKE
EACH SERIES' INVESTMENT OBJECTIVES UNACHIEVABLE; THUS THE ACCOMPLISHMENT OF
EACH SERIES' INVESTMENT OBJECTIVES IN RESPECT TO REMAINING SHAREHOLDERS THAT
REINVEST DIVIDENDS AND DISTRIBUTIONS COULD DEPEND IN PART ON THE INVESTMENT
DECISIONS OF OTHER SHAREHOLDERS. SEE "INVESTMENT OBJECTIVES AND MANAGEMENT
POLICIES."
This Prospectus sets forth concisely information about the Trust and
each Series, including sales charges, shareholder servicing fees and
expenses. Investors are encouraged to read this Prospectus carefully and
retain it for future reference.
Additional information about the Trust and each Series is contained in
a Statement of Additional Information dated April 1, 1996, as amended or
supplemented from time to time, which is available upon request and without
charge by calling or writing the Trust at the telephone number or address
set forth above or by contacting any Smith Barney Financial Consultant. The
Statement of Additional Information has been filed with the Securities and
Exchange Commission (the "SEC") and is incorporated by reference into this
Prospectus in its entirety.
SMITH BARNEY INC.
Distributor
SMITH BARNEY MUTUAL FUNDS MANAGEMENT INC.
Investment Adviser and Administrator
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
INTRODUCTION
The investment objectives of Series 1998 are (a) to return to each
shareholder on the Maturity Date the principal amount of the shareholder's
original investment (including any sales charge paid) through investment of
a portion of its assets in zero coupon securities and (b) to the extent
consistent with that objective, to provide long-term appreciation of capital
through investment of the balance of its assets primarily in equity
securities. There can be no assurance that Series 1998's investment
objectives will be achieved.
The investment objectives of Series 2000 are (a) to return to each
shareholder on the Maturity Date the principal amount of the shareholder's
original investment (including any sales charge paid) through investment of
a portion of its assets in zero coupon securities and (b) to the extent
consistent with that objective, to provide long-term appreciation of capital
through investment of the balance of its assets primarily in equity
securities issued by "emerging growth companies," which are small- to
medium-sized companies that are believed by the Series' investment adviser
to show a prospect of achieving significant profit and gain in a relatively
short period of time. There can be no assurance that Series 2000's
investment objectives will be achieved.
The investment objectives of the Security and Growth 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 ot 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 Series employ various organizations to
perform necessary functions and to provide services to their shareholders.
These organizations are carefully selected on behalf of each Series by the
Trust's Board of Trustees, which regularly reviews the quality and scope of
their performance. The names of the organizations and the services that
they perform on behalf of each Series and its shareholders are listed below:
Smith Barney Inc.
("Smith Barney") Distributor
Smith Barney Mutual Funds Management Inc. Investment Adviser and
("SBMFM") Administrator
PNC Bank, National Association
("PNC") Custodian
First Data Investor Services Group, Inc.
("FDISG"). Transfer Agent
More detailed information regarding these organizations and the
functions they perform is provided in this Prospectus as well as in the
Statement of Additional Information.
TABLE OF CONTENTS
Introduction 3
The Series' Expenses 4
Financial Highlights 5
Investment Objectives and Management
Policies 9
Management of the Trust 20
Purchase of Shares 21
Redemption of Shares 21
Minimum Account Size 23
Valuation of Shares 23
Exchange Privilege 24
Dividends, Distributions and Taxes 26
The Series' Performance 28
Custodian and Transfer Agent 28
Distributor 29
Additional Information 29
THE SERIES' EXPENSES
The following expense table lists the costs and expenses that an
investor will incur, either directly or indirectly, as a shareholder of each
Series, based upon the maximum sales charge that was incurred at the time of
purchase and upon each Series' operating expenses for its most recent fiscal
year:
Series Series Security and
1998 2000
Growth Fund
Shareholder Transaction Expenses
Sales charge imposed on purchases
(as a percentage of offering price)....... 5.00%
5.00% 4.00%
Annual Fund Operating Expenses
(as a percentage of average net assets)
Management fees........................... 0.50%
0.60% 0.50%
Shareholder Servicing fees................ 0.25%
0.25% 0.25% Other
expenses............................. 0.30%
0.32% 0.27%
Total Fund Operating Expenses........... 1.05%
1.17% 1.02%
Management fees paid by the Trust include investment advisory fees paid
monthly to SBMFM at an annual rate equal to a percentage of the value of the
relevant Series' average daily net assets, as follows: Series 1998 - .30%;
Series 2000 - .40%, and the Security and Growth Fund - .50%. Series 1998,
Series 2000 and the Security and Growth Fund also pay SBMFM an
administration fee paid monthly at the annual rate of .20% of the value of
each Series' average daily net assets. Each Series also pay Smith Barney an
annual shareholder servicing fee equal to .25% of the value of their
respective daily net assets.
The nature of the services for which each Series pays management fees
is described under "Management of the Trust." "Other expenses" in the above
table include fees for transfer agent services, custodial fees, legal and
accounting fees, printing costs and registration fees.
Example*
The following example demonstrates the projected dollar amount of total
cumulative expenses that would be incurred over various periods with respect
to a hypothetical investment in each Series. These amounts are based upon
(a) payment by an investor of the initial sales charge, (b) payment by the
Series of operating expenses at the levels set forth in the table above and
(c) the following assumptions:
1 YEAR 3 YEARS 5 YEARS MATURITY
DATE **
A shareholder would pay the following expenses on a
$1,000 investment, assuming (1) 5% annual
return and (2) redemption at the end of each
time period
Series 1998. . . . . . . . . . . . . . . . . . . . . . .. $60 N/A
N/A $ 90
Series 2000. . . . . . . . . . . . . . . . . . . . $61 $85
$111 $115
Security and Growth Fund................................ $50
$71 $ 94 $160
* 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, a Series' actual
return will vary and may be greater or less than 5.00%. This example should
not be considered a representation of past or future expenses and actual
expenses may be greater or less than those shown.
** Ten Year amount for the Security and Growth Fund.
FINANCIAL HIGHLIGHTS
The following information for the fiscal year ended November 30, 1995
has been audited by KPMG Peat Marwick LLP, independent auditors, whose
report thereon appears in the Series' Annual Report for the fiscal year
ended November 30, 1995. The information set out below should be read in
conjunction with the financial statements and related notes that also appear
in the Series' Annual Report, which is incorporated by reference into the
Statement of Additional Information.
For a Series 1998 share of beneficial interest outstanding throughout each
period
1995
1994
1993
1992
1991(1)
Net Asset Value, Beginning of Period
$7.75
$9.38
$9.02
$8.40
$7.60
Income (Loss) From Operations:
Net investment income
0.36
0.41
0.38
0.37
0.39
Net realized and unrealized gain
(loss)
1.03
(0.70)
0.48
0.68
0.41
Total Income(Loss) From operations
1.39
(0.29)
0.86
1.05
0.80
Less distributions From:
Net investment income
(0.40)
(0.45)
(0.40)
(0.43)
- --
Net realized gains
(0.83)
(0.89)
(0.10)
- --
- --
Total distributions
(1.23)
(1.34)
(0.50)
(0.43)
- --
Net Asset Value, End of Period
$7.91
$7.75
$9.38
$9.02
$8.40
Total Return
19.93%
(3.69)%
9.99%
12.86%
10.53%++
Net Assets, End of Period (000s)
$98,513
$101,388
$136,576
$166,077
$195,95
6
Ratios to Average Net Assets:
Expenses
1.05%
1.01%
0.97%
1.01%
1.05%+
Net investment income
4.59
4.47
4.15
4.39
5.04+
Portfolio Turnover Rate
13%
10%
17%
4%
20%
Average commissions paid on
equity security transactions(2)
$0.06
- --
- --
- --
- --
(1) For the period from January 25, 1991 (commencement of operations) to
November 30, 1991.
(2) New SEC disclosure guidelines require that average commissions be
calculated for the current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
For a Series 2000 share of beneficial interest outstanding throughout each
period:
1995
1994
1993
1992
1991(1)
Net Asset Value, Beginning of Period
$8.15
$9.00
$8.16
$7.57
$7.60
Income (Loss) From Operations:
Net investment income
0.27
0.27
0.26
0.26
0.07
Net realized and unrealized gain
(loss)
1.48
(0.28)
0.96
0.43
(0.10)
Total Income (Loss) From Operations
1.75
(0.01)
1.22
0.69
(0.03)
Less Distributions From:
Net investment income
(0.27)
(0.34)
(0.29)
(0.10)
--
Net realized gains
(0.35)
(0.50)
(0.09)
- --
--
Total Distributions
(0.62)
(0.84)
(0.38)
(0.10)
--
Net Asset Value, End of Period
$9.28
$8.15
$9.00
$8.16
$7.57
Total Return
22.17%
(0.20)%
15.72%
9.15%
(0.39)%++
Net Assets, End of Period (000s)
$76,563
$74,751
$96,865
$125,32
7
$157,425
Ratios to Average Net Assets:
Expenses (2)
1.17%
1.15%
1.10%
1.15%
1.18%+
Net investment income
3.12
3.27
3.12
3.31
3.56+
Portfolio Turnover Rate
6%
1%
0%
0%
2%
Average commissions paid on
equity security transactions(3)
$0.06
--
--
- --
--
(1) For the period from August 30, 1991 (commencement of operations) to
November 30, 1991.
(2) For the year ended November 30, 1992, the expense ratio excludes interest
expense.
The expense ratio including interest expense was 1.16%
(3) New SEC disclosure guidelines require that average commissions be
calculated for the current year only.
++Total return is not annualized, as it may not be representative of the total
return for the year.
+ Annualized.
For a Security and Growth Fund share of beneficial interest outstanding
throughout the period:
1995(1)
Net asset value, Beginning of Period
$9.60
Income From Operations:
Net investment income
0.28
Net realized and unrealized gain
0.94
Total Income From Operations
1.22
Less Distributions From:
Net investment income
--
Net realized gains
(0.14)
Total Distributions
(0.14)
Net Asset Value, End of Period
$10.68
Total Return
12.70%++
Net Assets, End of Period (000s)
$309,822
Ratios to Average Net Assets:
Expenses
1.02%+
Net investment income
4.07+
Portfolio Turnover Rate
25.50%
Average commissions paid on
equity security transactions(2)
$0.06
(1) For the period from March 30, 1995 (commencement of operations) to
November 30, 1995
(2) New SEC disclosure guidelines require that average commissions be
calculated for the current year only.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
Set forth below is a description of the investment objectives and
policies of each Series. The investment objectives of a Series are
fundamental and may not be changed without the approval of the holders of a
majority of the outstanding voting securities of that Series, as defined
under the Investment Company Act of 1940, as amended (the "1940 Act").
There can be no assurance that a Series will achieve its investment
objectives. Additional information about the Series' investment strategies
and investment policies appears in the Statement of Additional Information.
In General
The investment objectives of each Series is (a) to return to each
shareholder on the Maturity Date the principal amount of the shareholder's
original investment (including any sales charge paid) through investment of
a portion of its assets in zero coupon securities (the "Repayment
Objective") and (b) to the extent consistent with that objective, to provide
long-term appreciation of capital through investment of the balance of its
assets primarily in equity securities (in the case of Series 2000, equity
securities issued by "emerging growth companies").
Although SBMFM believes that the Series' investment strategies should
be sufficient to accomplish their investment objectives, there can be no
assurance that they will be achieved. Moreover, although the Trust is
structured as an open-end investment company and shareholders may redeem
their shares at any time and may elect to receive dividends and
distributions in cash, in order to help assure the return of the full amount
of an original investment, shareholders should plan to hold their shares
until the Maturity Date and to reinvest all dividends and distributions in
additional shares. In addition, while the amount sought to be returned on
the Maturity Date to shareholders may equal or exceed the amount originally
invested, the present value of that amount may be substantially less.
Shareholders also should be aware that the amount returned as taxable on the
Maturity Date represents accretion of interest on each Series' zero coupon
securities and will have been taxable as ordinary income over the term of
the Series.
Operations of the Series
As of February 28, 1996, zero coupon securities represented
approximately 61%, 56%, 54%, of Series 1998's, Series 2000's, and Security
and Growth Fund's, net assets, respectively, with the balance of each
Series' net assets invested in equity (in the case of Series 2000, equity
securities of emerging growth companies) and other securities as described
below. The Series' zero coupon securities will mature within one year before
the Maturity Date and their aggregate stated principal amount is expected to
be sufficient to meet the Repayment Objective; the Series will not receive
any payments with respect to a zero coupon security prior to the maturity of
that security. The Series may hold zero coupon securities in excess of those
required to meet the Repayment Objective to the extent SBMFM deems
appropriate. As each Series' zero coupon securities mature, the proceeds
will be invested in direct obligations of the United States government with
remaining maturities of one year or less and, in any case, maturing on or
prior to the Maturity Date. On the Maturity Date, each Series' remaining
equity investments will be sold and other investments will mature, the
liabilities of each Series will be discharged or provision made therefor,
each Series' shares will be mandatorily redeemed and, within seven days
thereafter, the proceeds will be distributed to shareholders and each
Series' thereafter will be terminated. These arrangements may require the
disposition of the Series' equity securities at a time when it is otherwise
disadvantageous to do so and may involve selling securities at a substantial
loss. The liquidation and termination of each Series is conditioned on the
Trust's receipt of an opinion of its counsel that all actions have been
taken that are necessary to effect these transactions in accordance with the
then current position of the SEC regarding a change in the nature of the
business of a registered investment company, including (as is required under
current SEC policy) the approval by the holders of a majority of the Trust's
outstanding voting securities, as defined in the 1940 Act. If shareholder
approval is solicited but not obtained, the Board of Trustees would consider
and, if necessary, propose for shareholder approval, such other action as it
deems appropriate and in the best interests of the Trust and its
shareholders. The estimated expenses of liquidation and termination of each
Series will be accrued ratably over the entire term of the Series and will
be charged to income. These expenses are not expected to affect materially
the ordinary annual operating expenses of the Series and, accordingly,
should have no effect on the Series' ability to meet the Repayment
Objective.
Each Series may satisfy redemption requests and cash payments of
dividends and distributions by liquidating a portion of its holdings of zero
coupon securities, as well as other investments, provided that the Series
would have sufficient zero coupon securities remaining to meet the Repayment
Objective.
Thus, each Series' portfolio may be visualized as consisting of two
portions: one, its zero coupon securities, which are expected to increase
in value by reason of accretion of interest to equal at maturity an amount
sufficient to meet the Repayment Objective; the other, its equity securities
and all other investments (in the case of Series 2000, holdings of emerging
growth securities), which represent a variable portion of the Series' assets
depending on the performance of those investments, the Series' expenses, the
level of dividend reinvestment and the level of redemptions over time. In
order to facilitate the management of the Series' portfolios, shareholders
are urged to reinvest dividends and distributions in additional shares;
these amounts will be paid in cash only at the specific election of a
shareholder.
Zero Coupon Securities
A zero coupon security is a debt obligation that does not entitle the
holder to any periodic payments of interest prior to maturity and therefore
is issued and traded at a discount from its face amount. Zero coupon
securities may be created by separating the interest and principal
components of securities issued or guaranteed by the United States
government or one of its agencies or instrumentalities ("U.S. government
securities") or issued by private corporate issuers. The Series, however,
invest only in zero coupon securities that are direct obligations of the
United States Treasury. The discount from face value at which zero coupon
securities are purchased varies depending on the time remaining until
maturity, prevailing interest rates and the liquidity of the security.
Because the discount from face value is known at the time of investment,
investors holding zero coupon securities until maturity know the total
amount of their investment return at the time of investment. In contrast, a
portion of the total realized return from conventional interest-paying
obligations comes from the reinvestment of periodic interest. Because the
rate to be earned on these reinvestments may be higher or lower than the
rate quoted on the interest-paying obligations at the time of the original
purchase, the investor's return on reinvestments is uncertain even if the
securities are held to maturity. This uncertainty is commonly referred to
as reinvestment risk. With zero coupon securities, however, there are no
cash distributions to reinvest, so investors bear no reinvestment risk if
they hold the zero coupon securities to maturity; holders of zero coupon
securities, however, forego the possibility of reinvesting at a higher yield
than the rate paid on the originally issued security. With both zero coupon
and interest-paying securities, there is no reinvestment risk on the
principal amount of the investment.
Equity Securities (Series 1998 and Security and Growth Fund)
Series 1998 attempts to achieve its investment objective of long-term
appreciation of capital by investing the portion of their assets not
invested in zero coupon securities primarily in equity securities, as
described in the following paragraph, that are believed to afford attractive
opportunities for investment appreciation. It is expected that Series 1998's
equity investments will be in domestic companies, generally with market
capitalizations in excess of $100 million. Most of Series 1998's equity
investments will be listed for trading on stock exchanges, although Series
1998 may purchase securities traded in the over-the-counter market. SBMFM
will cause Series 1998 to invest in the securities of companies whose
earnings they expect to increase, companies whose securities prices are
lower than they believe justified in relation to their underlying assets or
earning power or companies in which changes that it anticipates would result
in improved operations or profitability. Series 1998's equity holdings are
broadly invested among different industries. In analyzing securities for
investment, SBMFM considers many different factors, including past growth
records, management capability, future earnings prospects and technological
innovation, as well as general market and economic factors that can
influence the price of securities.
The Security and Growth Fund attempts to achieve its investment objective
of long-term capital appreciation by investing the portion ot its assets not
invested in zero coupon securities primarily in equity securities that SBMFM
believes have above-average potential for capital growth. In selecting
investments on behalf of the Security and Growth Fund, SBMFM will seek to
identify companies that are experiencing, 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 chanages or other external circumstances. This significant
potential for growth is often achieved by small- or medium-sized companies,
but it may also be achieved by large seasoned, companies. Although SBMFM
anticipates that the Security and Growth Fund's non-zero coupon security
portfolio initially would primarily be invested in small- to medium-sized
companies, it may also be invested in the equity securities of larger,
established companies that SBMFM determines present particular opportunities
for capital growth.
Under normal market conditions, the bulk of Series 1998's and the
Security and Growth Fund's non-zero coupon security portfolios consist of
common stocks, but they also may contain other equity securities, limited to
preferred stocks and debt securities convertible into common stocks.
However, when SBMFM believes that a temporary defensive investment posture
is warranted, Series 1998, and the Security and Growth Fund may invest in
debt obligations, preferred securities or short-term money market
instruments and may engage in repurchase agreement transactions with respect
to money market instruments. Series 1998 does not intend to purchase
warrants or rights but may receive these securities as part of a unit
distributed to holders of a class of securities held by Series 1998.
Preferred securities and convertible securities will be selected on the
basis of their equity characteristics, and ratings by statistical rating
organizations generally will not be a factor in the selection process.
Emerging Growth Securities (Series 2000)
Series 2000 attempts to achieve its investment objective of long-term
capital appreciation by investing the portion of its assets not invested in
zero coupon securities primarily in equity securities issued by "emerging
growth companies" based in the United States, which are small - to medium-
sized companies that are believed by SBMFM to show a prospect of achieving
significant profit and gains within two to three years after their
securities are acquired by Series 2000. Although Series 2000 is not subject
to a limitation on the market capitalization of the companies in which it
will invest, the emerging growth companies in which Series 2000 will
typically invest, will have market capitalizations of less than $1 billion.
A company's stock market capitalization is calculated by multiplying the
total number of shares of its common stock outstanding by the market price
per share of its stock.
In selecting investments on behalf of Series 2000, SBMFM will seek to
identify emerging growth companies that it believes are undervalued in the
marketplace or have earnings that may be expected to grow faster than the
U.S. economy in general. These companies typically would possess one or
more of a variety of characteristics, including high quality management, new
technologies, techniques, products or services or cost-reducing measures
that give them a leading or dominant position in a major product line, a
sound financial position and a relatively high rate of return on invested
capital so that future growth can be financed from internal sources. Series
2000 also may invest in companies, typically called "special situation
companies," that offer the possibility of accelerating earnings growth
because of management changes, capitalization or asset deployment,
governmental regulations or other external circumstances. Although SBMFM
anticipates that Series 2000's non-zero coupon security portfolio primarily
will be invested in smaller companies, it may also be invested to a lesser
degree in the equity securities of medium or larger, established companies,
including those involved in special situations, that SBMFM determines
present particular opportunities for capital growth.
Series 2000's non-zero coupon security portfolio has been designed to
provide investors with significant opportunities for long-term capital
appreciation that SBMFM believes are presented by the equity securities of
small capitalization companies. SBMFM believes that these securities are
undervalued as compared, on a relative historical basis, with equity
securities of larger capitalization companies, and have tended over time to
outperform securities of larger capitalization companies. Statistical
studies have been published recently indicating that the historical long-
term returns on investments in common stocks of companies with smaller
capitalizations have been higher than the returns on those companies with
larger capitalizations. One such study, for example, compared the
performance of the 2,500 largest companies, as measured by market
capitalization, whose securities are traded on the New York Stock Exchange,
Inc. (the "NYSE"), the American Stock Exchange and on the U.S. over-the-
counter market. The study, which divided these 2,500 companies into five
groups on the basis of market capitalization, measured their performance for
the 17-year period from December 31, 1973 to December 31, 1990 and concluded
that the companies with smaller capitalizations had greater total returns
for the period than did larger capitalization companies, although
acknowledging that larger company securities had outperformed smaller
company securities over the past five years.
Additional Investments and Investment Techniques
Although under normal circumstances Series' non-zero coupon security
portfolio will consist primarily of common stocks of companies based in the
United States, each Series may also invest in certain other securities as
described below. When SBMFM believes that a temporary defensive investment
posture is warranted, each Series may invest in corporate and government
bonds and notes and money market instruments, and from time to time may
invest in repurchase agreements and lend its portfolio securities as
discussed below.
Warrants; Convertible Securities. (Series 2000 and Security and Growth
Fund) A warrant is a security that gives the holder the right, but not the
obligation, to subscribe for newly created securities of the issuer or a
related company at a fixed price either at a certain date or during a set
period. A convertible security is a security that may be converted either
at a stated price or rate within a specified period of time into a specified
number of shares of common stock. In investing in convertible securities,
the Series seeks the opportunity, through the conversion feature, to
participate in the capital appreciation of the common stock into which the
securities are convertible.
Foreign Securities. (Series 2000 and Security and Growth Fund) Series
2000 and the Security and Growth Fund may each invest up to 10% of its net
assets in securities of foreign issuers. Investing in foreign securities
involves certain risks, including those resulting from fluctuations in
currency exchange rates, revaluation of currencies, future political or
economic developments and the possible imposition of restrictions or
prohibitions on the repatriation of foreign currencies or other foreign
governmental laws or restrictions, reduced availability of public
information concerning issuers, and, typically, the lack of uniform
accounting, auditing and financial reporting standards or other regulatory
practices and requirements comparable to those applicable to domestic
companies. Moreover, securities of many foreign companies may be less
liquid and their prices more volatile than those of securities of comparable
domestic companies. In addition, with respect to certain foreign countries,
the possibility exists of expropriation, confiscatory taxation and
limitations on the use or removal of funds or other assets of the Series
including the withholding of dividends.
Lending Securities. Each Series is authorized to lend securities it
holds to brokers, dealers and other financial organizations. These loans,
if and when made, may not exceed 33-1/3% of each Series' assets taken at
value. A Series' loans of securities will be collateralized by cash,
letters of credit or U.S government securities that are maintained at all
times in a segregated account with the Trust's custodian in an amount at
least equal to the current market value of the loaned securities. By
lending its portfolio securities, a Series will seek to generate income by
continuing to receive interest on the loaned securities, by investing the
cash collateral in short-term instruments or by obtaining yield in the form
of interest paid by the borrower when U. S. government securities are used
as collateral. The risks in lending portfolio securities, as with other
extensions of secured credit, consist of possible delays in receiving
additional collateral or in the recovery of the securities or possible loss
of rights in the collateral should the borrower fail financially. Loans
will be made to firms deemed by SBMFM to be of good standing and will not be
made unless, in the judgment of SBMFM, the consideration to be earned from
such loans would justify the risk.
Money Market Instruments
Each Series may hold at any time up to 10% of the value of its assets
in cash and money market instruments in order to cover the Series' expenses,
anticipated redemptions, cash payments of dividends and distributions and to
meet settlement requirements for securities. In addition, when SBMFM
believes that, with respect to its equity portfolio, a temporary defensive
investment posture is warranted, a Series may invest without limitation in
cash and money market instruments. To the extent that it holds cash or
invests in money market instruments, a Series will not achieve its
investment objective of long-term appreciation of capital. Money market
instruments in which the Series may invest are: U.S. government securities;
bank obligations (including certificates of deposit, time deposits and
bankers' acceptances of domestic or foreign banks, domestic savings and loan
associations and other banking institutions having total assets in excess of
$500 million); commercial paper rated no lower than A-2 by Standard & Poor's
Corporation or Prime-2 by Moody's Investors Service, Inc. or the equivalent
from another major rating service or, if unrated, of an issuer having an
outstanding, unsecured debt issue then rated within the three highest rating
categories; and repurchase agreements. At no time will a Series' investments
in bank obligations, including time deposits, exceed 25% of its assets. In
addition, a Series will not invest in time deposits maturing in more than
seven days if, as a result, its holdings of those time deposits would exceed
5% of Security and Growth Fund's and Series 1998's net assets and 10% of
Series 2000's net assets.
A Series will invest in an obligation of a foreign bank or foreign
branch of a United States bank only if SBMFM determines that the obligation
presents minimal credit risks. Obligations of foreign banks or foreign
branches of United States banks in which a Series will invest may be traded
in the United States or outside the United States, but will be denominated
in U.S. dollars. These obligations entail risks that are different from
those of investments in obligations of United States banks. These risks
include foreign economic and political developments, foreign governmental
restrictions that may adversely affect payment of principal and interest on
the obligations, foreign exchange controls and foreign withholding or other
taxes on income. Foreign branches of domestic banks are not necessarily
subject to the same or similar regulatory requirements that apply to
domestic banks, such as mandatory reserve requirements, loan limitations and
accounting, auditing and financial recordkeeping requirements. In addition,
less information may be publicly available about a foreign branch of a
domestic bank than about a domestic bank.
U.S. government securities in which a Series may invest include: direct
obligations of the United States Treasury, and obligations issued or
guaranteed by the United States government, its agencies and
instrumentalities, including instruments that are supported by the full
faith and credit of the United States; instruments that are supported by the
right of the issuer to borrow from the United States Treasury; and
instruments that are supported solely by the credit of the instrumentality.
Repurchase Agreements
Each Series may engage in repurchase agreement transactions with
certain banks which are the issuers of instruments acceptable for purchase
by the Fund and with certain dealers on the Federal Reserve Bank of New
York's list of reporting dealers. Under the terms of a typical repurchase
agreement, a Series would acquire an underlying debt obligation for a
relatively short period (usually not more than seven days) subject to an
obligation of the seller to repurchase, and the Series to resell, the
obligation at an agreed price and time, thereby determining the yield during
the Series' holding period. This arrangement results in a fixed rate of
return that is not subject to market fluctuations during the Series' holding
period. The value of the underlying securities will be monitored on an
ongoing basis by SBMFM to ensure that the value is at least equal at all
times to the total amount of the repurchase obligation, including interest.
SBMFM also will review on an ongoing basis the creditworthiness of those
banks and dealers with which the Series may enter into repurchase agreements
to evaluate the potential risks. The Series bear a risk of loss in the
event that the other party to a repurchase agreement defaults on its
obligations and the Series is delayed or prevented from exercising its
rights to dispose of the underlying securities, including the risk of a
possible decline in the value of the underlying securities during the period
in which the Series seeks to assert its rights to them, the risk of
incurring expenses associated with asserting those rights and the risk of
losing all or a part of the income from the agreement. At any one time,
Series 2000's aggregate holdings of repurchase agreements having a duration
of more than five business days and securities lacking readily available
market quotations will not exceed 10% of Series 2000's total assets.
Risk Factors and Other Special Considerations
Zero coupon securities of the type held by each Series can be sold
prior to their due date in the secondary market at their then prevailing
market value which, depending on prevailing levels of interest rates and the
time remaining to maturity, may be more or less than the securities'
"accreted value;" that is, their value based solely on the amount due at
maturity and accretion of interest to date. The market prices of zero coupon
securities are generally more volatile than the market prices of securities
that pay interest periodically and, accordingly, are likely to respond to a
greater degree to changes in interest rates than do non-zero coupon
securities having similar maturities and yields. As a result, the net asset
value of shares of each Series may fluctuate over a greater range than
shares of other mutual funds that invest in U.S. government securities
having similar maturities and yields but that make current distributions of
interest. The current net asset value of each Series attributable to zero
coupon securities and other debt instruments held by each Series generally
will vary inversely with changes in prevailing interest rates.
As a series of an open-end investment company, each Series is required
to redeem its shares upon the request of any shareholder at the net asset
value next determined after receipt of the request. However, because of the
price volatility of zero coupon securities prior to maturity, a shareholder
who redeems shares prior to the Maturity Date may realize an amount that is
greater or less than the purchase price of those shares, including any sales
charge paid. Although shares redeemed prior to the Maturity Date would no
longer be subject to the possible achievement of the Repayment Objective,
the amount originally invested in the shares not redeemed would remain
subject to the possible achievement of the Repayment Objective, provided
dividends and distributions with respect to these shares are reinvested.
Thus, if each Series is successful in achieving the Repayment Objective, the
holder of those remaining shares plus shares acquired through reinvestment
of dividends and distributions thereon ("Remaining Shares") would receive at
the Maturity Date an amount that equals or exceeds the purchase price of
those shares. Nonetheless, the amount received on the Maturity Date in
respect of Remaining Shares, when combined with the amount received in
respect of shares redeemed prior to the Maturity Date, may be more or less
than the aggregate purchase price of all shares purchased in this offering.
Each year the Series will be required to accrue an increasing amount of
income on their zero coupon securities utilizing the effective interest
method. To maintain its tax status as a pass-through entity and also to
avoid imposition of excise taxes, however, each Series will be required to
distribute dividends equal to substantially all of its net investment
income, including the accrued income on its zero coupon securities for which
it receives no payments in cash prior to their maturity. Dividends of each
Series' net investment income and distributions of its short-term capital
gains will be taxable to shareholders as ordinary income for Federal income
tax purposes, whether received in cash or reinvested in additional shares.
See "Dividends, Distributions and Taxes." However, a shareholder who elects
to receive dividends and distributions in cash, instead of reinvesting these
amounts in additional shares of the Series, may realize an amount that is
less or greater than the entire amount originally invested. ACCORDINGLY,
THE SERIES MAY NOT BE APPROPRIATE FOR TAXABLE INVESTORS THAT WOULD REQUIRE
CASH DISTRIBUTIONS FROM THE SERIES IN ORDER TO MEET THEIR CURRENT TAX
OBLIGATIONS RESULTING FROM THEIR INVESTMENT.
Emerging Growth Securities (Series 2000). Securities of the kinds of
companies in which Series 2000 will invest may be subject to significant
price fluctuation and above-average risk. In addition, companies achieving
a high earnings growth rate tend to reinvest their earnings rather than
distribute them. As a result, Series 2000 is not likely to receive
significant dividend income on its portfolio of equity securities; an
investment in Series 2000 should, thus, not be considered as a complete
investment program and may not be appropriate for all investors.
Smaller and Medium Sized Companies. (Series 2000 and Security and Growth
Fund). 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 significant fluctuations in the
price of their shares.
Covered Option Writing (Security and Growth Fund). Security and Growth
Fund may write covered call options with respect to its portfolio securities.
Security and Growth Fund realizes a fee (referred to as a "premium") 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
Security and Growth Fund has the right to purchase from the Security and
Growth Fund the underlying security owned by the Security and Growth Fund at
the agreed-upon price for a specified time period.
Upon the exercise of a call option written by the Security and Growth
Fund, the Security and Growth Fund may suffer a loss equal to the excess of
the security's market value at the time of the option exercise over the
Security and Growth Fund cost of the security, less the premium received for
writing the option.
The Security and Growth Fund will write only covered options with respect
to its portfolio securities. Accordingly, whenever the Security and Growth
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 Security and Growth
Fund will either (a) deposit with its custodian in a segregated account, cash,
Government Securities or other high grade debt obligations having a value at
least equal to the exercise price of the underlying securities or (b) continue
to 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
difference with its custodian in a segregated account).
The Security and Growth 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 Security and Growth Fund would
purchase, prior to the holder's exercise of an option that the Security and
Growth Fund has written, an option of the same series as that on which the
Security and Growth Fund desires to terminate its obligation. The obligation
of the Security and Growth Fund under an option that it has written would be
terminated by a closing purchase transaction, but the Security and Growth Fund
would not be deemed to own an option as a result of the transaction. There
can be no assurances that the Security and Growth 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 Security and Growth
Fund ordinarily will write options only if a secondary market for the options
exists on domestic securities exchanges or in the over-the counter market.
The Security and Growth 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 Security and Growth 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 occur 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 premium paid for the
option plus the related transaction cost.
The Security and Growth 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 that OTC options (and securities underlying
the OTC options) are illiquid securities. Accordingly, the Security and
Growth Fund will treat OTC options as subject to the Security and Growth
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
limitations.
Options on Broad Based-Domestic Stock Indexes (Security and Growth Fund) The
Security and Growth Fund may, for hedging purposes only, write call options
and purchase put options on broad-based domestic stock indexes and enter into
closing transactions 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 closing 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 movements in the stock market generally rather than
price movements in the individual stocks.
The effectiveness of purchasing and writing puts and calls on stock index
options depends to a large extent on the ability of SBMFM to predict the price
movement of the stock index selected. Therefore, whether the Security and
Growth Fund realizes 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. Additionally, because exercise of index options are settled in
cash, a call writer such as the Fund cannot determine the amount of the
settlement obligations in advance and it cannot provide in advance for, or
cover, its potential settlement obligations by acquiring and holding the
underlying securities. When the Security and Growth Fund has written the
call, there is also a risk that the market may decline between the time the
Security and Growth 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 Security and Growth Fund is able to exercise the closing transaction
with respect to the long call position it holds.
Futures Contracts and Options on Futures Contracts. (Securtiy and Growth
Fund) A futures contract provides 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 Security and Growth Fund may enter
into futures contracts to sell securities when SBMFM believes that the value
of the Security and Growth Fund's securities will decrease. An option on a
futures contract, as contrasted with the direct investment in a futures
contract 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
purchaser 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 Security and Growth Fund may enter
into futures contracts to purchase securities when SBMFM anticipates
purchasing the underlying securities and believes that prices will rise before
the purchases will be made. When the Security and Growth 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
Security and Growth Fund's custodian to collateralize the position, thereby
insuring that the use of the contract is unleveraged. The Security and Growth
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.
Other Considerations. In order to generate sufficient cash to meet
distribution requirements and other operational needs and to redeem its
shares on request, the Series may be required to limit reinvestment of
capital on the disposition of its non-zero coupon securities and may be
required to liquidate some or all of its non-zero coupon securities over
time. The Series may be required to effect these liquidations at a time
when it is otherwise disadvantageous to do so. If a Series realizes capital
losses on dispositions of non-zero coupon securities that are not offset by
capital gains on the disposition of other such securities, the Series may be
required to liquidate a disproportionate amount of its zero coupon
securities or borrow money, in an amount not exceeding 33-1/3% of the
Series' total assets, to satisfy the distribution and redemption
requirements described above. The liquidation of zero coupon securities and
the expenses associated with borrowing money in these circumstances could
render the Series unable to meet the Repayment Objective.
Investment Restrictions
The Trust has adopted certain fundamental investment restrictions that
may not be changed without approval of a majority of the Trust's outstanding
voting securities. Included among those fundamental restrictions are the
following:
1. A Series will not purchase securities (other than U.S. government
securities) of any issuer if, as a result of the purchase, more than 5% of
the value of the Series' total assets would be invested in
the securities of the issuer, except that up to 25% of the value of the
Series' total assets may be invested without regard to this 5% limitation.
2. A Series will not purchase more than 10% of the voting securities
of any one issuer, or more than 10% of the securities of any class of any
one issuer, except that this limitation is not applicable to a Series'
investments in U.S. government securities, and up to 25% of a Series' assets
may be invested without regard to these 10% limitations.
3. A Series will not borrow money, except that a Series may borrow
from banks 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 Series'
total assets (including the amount borrowed) valued at market less
liabilities (not including the amount borrowed) at the time the borrowing is
made. Whenever borrowings exceed 5% of the value of the total assets of the
Series, the Series will not make any additional investments.
4. A Series will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
5. A Series will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, except that this
restriction does not apply to investments in U.S. government securities.
Certain other investment restrictions adopted by the Series are
described in the Statement of Additional Information.
Portfolio Transactions and Turnover
Securities transactions on behalf of the Series will be executed by a
number of brokers and dealers, including Smith Barney and certain of its
affiliated brokers, that are selected by SBMFM. The Series may use Smith
Barney or a Smith Barney affiliated broker in connection with a purchase or
sale of securities when SBMFM believes that the charge for the transaction
does not exceed usual and customary levels. In selecting a broker,
including Smith Barney, for a transaction, the primary consideration is
prompt and effective execution of orders at the most favorable prices.
Subject to that primary consideration, dealers may be selected for research,
statistical or other services to enable SBMFM to supplement its own research
and analysis with the views and information of other securities firms.
The Trust cannot accurately predict any Series' portfolio turnover
rate, but anticipates that its annual turnover will not exceed 50%.
MANAGEMENT OF THE TRUST
Board of Trustees
Overall responsibility for management and supervision of the Trust and
the Series rests with the Trust's Board of Trustees. The Trustees approve
all significant agreements between the Trust and the persons or companies
that furnish services to the Trust and the Series, including agreements with
its investment adviser, administrator, custodian and transfer agent. The
day-to-day operations of the Series are delegated to the Series' investment
adviser and administrator. The Statement of Additional Information contains
general background information regarding each of the Trust's Trustees and
the executive officers of each Series.
Investment Adviser--SBMFM
SBMFM, located at 388 Greenwich Street, New York, New York 10013,
serves as the Fund's investment adviser. SBMFM (through its predecessors)
has been in the investment counseling business since 1940. SBMFM renders
investment advice to a wide variety of individual, institutional and
investment company clients and has aggregate assets under management as of
January 31, 1996, in excess of $74 billion.
Subject to the supervision and direction of the Trust's Board of
Trustees, SBMFM manages each Series' portfolio in accordance with the
Series' stated investment objectives and policies, makes investment
decisions for the Series, places orders to purchase and sell securities, and
employs professional portfolio managers and securities analysts who provide
research services to the Series.
Portfolio Management
Harry D. Cohen, Managing Director of SBMFM, has served as Vice
President and Investment Officer of Series 1998 since the Series'
commencement of operations, and manages the day-to-day operations of Series
1998 including making all investment decisions.
Richard Freeman, Managing Director of SBMFM, has served as Vice
President and Investment Officer of Series 2000 since the Series'
commencement of operations, and manages the day-to-day operations of Series
2000, including making all investment decisions.
John G. Goode, President and Chief Executive Officer of Davis Skaggs
Investment Management, a division of SBMFM, serves as Vice President of the
Security and Growth Fund and manages its day-to-day operations, including
making all investment decisions.
Management's discussion and analysis, and additional performance
information regarding each Series during the fiscal year ended November 30,
1995, are included in the Series' Annual Report dated November 30, 1995. A
copy of each Series' Annual Report may be obtained upon request without
charge from a Smith Barney Financial Consultant or by writing or calling the
Fund at the address or phone number listed on page one of this Prospectus.
Administrator--SBMFM
SBMFM also serves as the Trust's administrator and oversees all aspects
of the Trust's administration. For administration services rendered to the
Trust, the Trust pays SBMFM a fee at the annual rate of 0.20% of the value
of the Trust's average daily net assets.
PURCHASE OF SHARES
Shares of the Series are not currently being offered for sale to new
investors, although each Series, upon at least 30 days' notice to
shareholders, may commence a continuous offering if the Board of Trustees
determines it to be in the best interests of that Series and its
shareholders.
REDEMPTION OF SHARES
The Trust is required to redeem shares of a Series tendered to it, as
described below, at a redempiton price equal to their net asset value per
share next determined after receipt of a written request in proper form at
no charge other than any applicable CDSC. Redemption requests received
after the close of regular trading on the NYSE are priced at the net asset
value per share next determined.
The Series normally transmit redemption proceeds for credit to the
shareholder's account at Smith Barney or to a broker that clears securities
transactions through Smith Barney on a fully disclosed basis (an
"Introducing Broker") at no charge within three days after receipt of a
redemption request. Generally, these funds will not be invested for the
shareholder's benefit without specific instruction and Smith Barney will
benefit from the use of temporarily uninvested funds.
A Series' shares may be redeemed in one of the following ways:
Redemption Through Smith Barney
Redemption requests may be made through Smith Barney or an Introducing
Broker. A shareholder desiring to redeem Series shares represented by
certificates must present the certificates to Smith Barney or an Introducing
Broker endorsed for transfer (or accompanied by an endorsed stock power),
signed exactly as the shares are registered.
Redemption By Mail
Shares may be redeemed by submitting a written request for redemption
to:
Smith Barney Principal Return Fund
(specify the Series)
c/o First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, Massachusetts 02205-9134
A written redemption request to the Trust's transfer agent must (a)
state the number of shares to be redeemed, (b) identify the Series from
which the shares are to be redeemed (c) identify the shareholder's account
number and (d) be signed by each registered owner exactly as the shares are
registered. If the shares to be redeemed were issued in certificate form,
the certificates must be endorsed for transfer (or be accompanied by an
endorsed stock power) and must be submitted to the Trust's transfer agent
together with a redemption request. Any signature appearing on a redemption
request, share certificate or stock power must be guaranteed by an eligible
guarantor institution such as a domestic bank, savings and loan institution,
domestic credit union, member bank of the Federal Reserve System or a member
firm of a national securities exchange. The Trust's transfer agent may
require additional supporting documents for redemptions made by
corporations, executors, administrators, trustees or guardians. A redemption
request will not be deemed to be properly received until the Trust's
transfer agent receives all required documents in proper form.
Telephone Redemption and Exchange Program
Shareholders who do not have a Smith Barney brokerage account may be
eligible to redeem and exchange Series shares by telephone. To determine if a
shareholder is entitled to participate in this program, he or she should
contact FDISG at 1-800-451-2010. Once eligibility is confirmed, the
shareholder must complete and return a Telephone/Wire Authorization Form,
along with a signature guarantee that will be provided by FDISG upon request.
Redemptions. Redemption requests of up to $10,000 of the Series' shares
may be made by eligible shareholders by calling FDISG at 1-800-451-2010. Such
requests may be made between 9:00 a.m. and 4:00 p.m. (New York City time) on
any day the NYSE is open. Redemptions of shares (i) by retirement plans or
(ii) for which certificates have been issued are not permitted under this
program.
A shareholder will have the option of having the redemption proceeds
mailed to his/her address of record or wired to a bank account predesignated
by the shareholder. Generally, redemption proceeds will be mailed or wired,
as the case may be, on the next business day following the redemption request.
In order to use the wire procedures, the bank receiving the proceeds must be a
member of the Federal Reserve System or have a correspondent relationship with
a member bank. The Series reserves the right to charge shareholders a nominal
fee for each wire redemption. Such charges, if any, will be assessed against
the shareholder's account from which shares were redeemed. In order to change
the bank account designated to receive redemption proceeds, a shareholder must
complete a new Telephone/Wire Authorization Form and, for the protection of
the shareholder's assets, will be required to provide a signature guarantee
and certain other documentation.
Exchanges. Eligible shareholders may make exchanges by telephone if the
account registration of the shares of the fund being acquired is identical to
the registration of the shares of the fund exchanged. Such exchange requests
may be made by calling FDISG at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(New York City time) on any day on which the NYSE is open.
Additional Information regarding Telephone Redemption and Exchange
Program. Neither the Trust nor its agents will be liable for following
instructions communicated by telephone that are reasonably believed to be
genuine. The Trust and its agents will employ procedures designed to verify
the indentity of caller and legitimacy of instructions (for example, a
shareholder's name and account number will be required and phone calls may be
recorded). The Trust reserves the right to suspend, modify or discontinue the
telephone redemption and exchange program or to impose a charge for this
service at any time following at least seven (7) days' prior notice to
shareholders.
Although shares of the Series may be redeemed as described above, a
shareholder who redeems prior to the Maturity Date may realize an amount that
is less or greater than the entire amount of his or her investment. See
"Investment Objectives and Management Policies."
If the Trust 's Board of Trustees determines that it would be detrimental
to the best interests of remaining shareholders to make a redemption payment
wholly in cash, a Series may pay any portion of a redemption in excess of the
lesser of $250,000 or 1% of the Series' net assets by distribution in kind of
securities from a Series' portfolio in lieu of cash in conformity with SEC
rules. Portfolio securities issued in a redemption in kind will be readily
marketable, although a shareholder that receives a distribution in kind of
securities may incur transaction costs in the disposition of those securities
and could experience a loss on the securities between the time of such
distribution and such disposition.
MINIMUM ACCOUNT SIZE
The Trust reserves the right to involuntarily liquidate any
shareholder's account in a Series if aggregate net asset value of the shares
held in the Series' account is less than $500. (If a shareholder has more
than one account in the Trust, each account must satisfy the minimum account
size.) The Trust, however, will not redeem shares based solely on market
reductions in net asset value. Before the Trust exercises such right,
shareholders will receive written notice and will be permitted 60 days to
bring accounts up to the minimum to avoid automatic redemption.
VALUATION OF SHARES
A Series' net asset value per share is determined as of the close of
regular trading on the NYSE on each day the NYSE is open and is computed by
dividing the value of the Series' net assets by the total number of its
shares outstanding.
Generally, the Series' investments are valued at market value or, in
the absence of a market value, at fair value as determined by or under the
direction of the Trust's Board of Trustees. Securities that are primarily
traded on non-U.S. exchanges are generally valued at the preceding closing
values of the securities on their respective exchanges, except that when an
occurrence subsequent to the time that a non-U.S. security is valued is
likely to have changed the value, then the fair value of those securities
will be determined by consideration of other factors by or under the
direction of the Board of Trustees. A security that is primarily traded on
a U.S. or non-U.S. stock exchange is valued at the last sale price on that
exchange or, if there were no sales during the day, at the current quoted
bid price. In cases in which securities are traded on more than one
exchange, the securities are valued on the exchange designated by or under
the authority of the Board of Trustees as the primary market. Unlisted non-
U.S. securities are valued at the mean between the last available bid and
offer price prior to the time of valuation. U.S. over-the-counter
securities will be valued on the basis of the bid price at the close of
business on each day. Any assets or liabilities initially expressed in
terms of non-U.S. currencies will be converted into U.S. dollar values based
on a formula prescribed by the Trust or, if the information required by the
formula is unavailable, as determined in good faith by the Board of
Trustees. Investments in U.S. government securities (other than short-term
securities) are valued at the quoted bid price in the over-the-counter
market. Short-term investments that mature in 60 days or less are valued at
amortized cost (which involves valuing an investment at its cost initially
and, thereafter, assuming a constant amortization to maturity of any
discount or premium, regardless of the effect of fluctuating interest rates
on the market value of the investment) when the Board of Trustees determines
that amortized cost reflects fair value of the investment. In carrying out
the Board's valuation policies, SBMFM may consult with an independent
pricing service retained by the Trust. Further information regarding the
Series' valuation policies is contained in the Statement of Additional
Information.
EXCHANGE PRIVILEGE
Except as otherwise noted below, shares of the Trust may be exchanged at
the net asset value next determined 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 Trust shares are subject to
minimum investment requirements and to the other requirements of the fund into
which exchanges are made and a sales charge differential may apply.
Fund Name
Growth Funds
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Growth Opportunity Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund, Inc.
Smith Barney Special Equities Fund
Smith Barney Telecommunications Growth Fund
Growth and Income Funds
Smith Barney Convertible Fund
Smith Barney Funds, Inc. --Equity Income Portfolio
Smith Barney Growth and Income Fund
Smith Barney Premium Total Return Fund
Smith Barney Strategic Investors Fund
Smith Barney Utilities Fund
Taxable Fixed-Income Funds
Smith Barney Adjustable Rate Government Income Fund
Smith Barney Diversified Strategic Income Fund
Smith Barney Funds, Inc. -- Income Return Account Portfolio
Smith Barney Funds, Inc. -- Short-Term U.S. Treasury Securities Portfolio
Smith Barney Funds, Inc. -- U.S. Government Securities Portfolio
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Tax-Exempt Funds
Smith Barney Arizona Municipals Fund Inc.
Smith Barney California Municipals Fund Inc
Smith Barney Intermediate Maturity California Municipals Fund
Smith Barney Intermediate Maturity New York Municipals Fund
Smith Barney Managed Municipals Fund Inc.
Smith Barney Massachusetts Municipals Fund
Smith Barney Muni Funds -- Florida Limited Term Portfolio
Smith Barney Muni Funds -- Florida Portfolio
Smith Barney Muni Funds -- Georgia Portfolio
Smith Barney Muni Funds - National Portfolio
Smith Barney Muni Funds -- Limited Term Portfolio
Smith Barney Muni Funds -- New York Portfolio
Smith Barney Muni Funds -- Ohio Portfolio
Smith Barney Muni Funds -- Pennsylvania Portfolio
Smith Barney New Jersey Municipals Fund Inc.
Smith Barney Oregon Municipals Fund
Smith Barney Tax-Exempt Income Fund
International Funds
Smith Barney World Funds, Inc. -- Emerging Markets Portfolio
Smith Barney World Funds, Inc. -- European Portfolio
Smith Barney World Funds, Inc. -- Global Government Bond Portfolio
Smith Barney World Funds, Inc. -- International Balanced Portfolio
Smith Barney World Funds, Inc. -- International Equity Portfolio
Smith Barney World Funds, Inc. -- Pacific Portfolio
Smith Barney Concert Series, Inc.
Smith Barney Concert Series, Inc. -- High Growth Portfolio
Smith Barney Concert Series, Inc. -- Growth Portfolio
Smith Barney Concert Series, Inc. -- Balanced Portfolio
Smith Barney Concert Series, Inc. -- Conservative Portfolio
Smith Barney Concert Series, Inc. -- Income Portfolio
Money Market Funds
Smith Barney Exchange Reserve Fund
Smith Barney Money Funds, Inc. -- Cash Portfolio
Smith Barney Money Funds, Inc. -- Government Portfolio
Smith Barney Money Funds, Inc. -- Retirement Portfolio
Smith Barney Muni Funds -- California Money Market Portfolio
Smith Barney Muni Funds -- New York Money Market Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Exchanges. Class A shares of the Smith Barney Mutual Funds sold without
a sales charge or with a maximum sales charge of less than the maximum charged
by other Smith Barney Mutual Funds will be subject to the appropriate "sales
charge differential" upon the exchange of their shares for Class A shares of a
fund sold with a higher sales charge. The "sales charge differential" is
limited to a percentage rate no greater than the excess of the sales charge
rate applicable to purchases of shares of the mutual fund being acquired in the
exchange over the sales charge rate(s) actually paid on the mutual fund shares
relinquished in the exchange and on any predecessor of those shares. For
purposes of the exchange privilege, shares obtained through automatic
reinvestment of dividends and capital gain distributions, are treated as having
paid the same sales charges applicable to the shares on which the dividends
were paid; however, if no sales charge was imposed upon the initial purchase of
the shares, any shares obtained through automatic reinvestment will be subject
to a sales charge differential upon exchange.
Certain shareholders may be able to exchange shares by telephone. See
"Redemption of Shares - Telephone Redemption and Exchange Program". Exchanges
will be processed at the net asset value next determined, plus any applicable
sales charge differential. Redemption procedures discussed above 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 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 Trust
reserves the right to modify or discontinue exchange privileges upon 60 days'
prior notice to shareholders.
A SHAREHOLDER WHO EXCHANGES SHARES PRIOR TO THE MATURITY DATE MAY REALIZE AN
AMOUNT THAT IS LESS OR GREATER THAN THE ENTIRE AMOUNT OF HIS OR HER
INVESTMENT. SEE "INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES." MOREOVER,
BECAUSE EACH SERIES IS NOT ENGAGING IN A CONTINUOUS OFFERING OF SHARES, A
SHAREHOLDER WHO EXCHANGES HIS OR HER SERIES SHARES WILL NOT BE ABLE TO
EFFECT A FURTHER EXCHANGE BACK INTO THAT SERIES.
DIVIDENDS, DISTRIBUTIONS AND TAXES
Dividends and Distributions
Dividends from net investment income of each Series and distributions
of net realized capital gains of each Series, if any, will be distributed
annually after the close of the fiscal year in which they are earned.
Dividends and distributions will be reinvested automatically for each
shareholder's account at net asset value in additional shares of a Series,
unless the shareholder instructs the Series to pay all dividends and
distributions in cash and to credit the amounts to his or her Smith Barney
brokerage account.
A SHAREHOLDER WHO ELECTS TO RECEIVE DIVIDENDS AND DISTRIBUTIONS IN CASH MAY
REALIZE AN AMOUNT THAT IS GREATER OR LESS THAN THE ENTIRE AMOUNT OF HIS OR
HER INVESTMENT.
Taxes
Each Series of the Trust has qualified and intends to continue to
qualify each year as a "regulated investment company" under Subchapter M of
the Internal Revenue Code of 1986 as amended for Federal income tax
purposes. The requirements for qualification may cause a Series to restrict
the extent of its short-term trading. If a Series so qualifies, it will not
be subject to Federal income tax on its net investment income and net
realized capital gains that it distributes to shareholders, so long as it
meets certain distribution requirements. See "Investment Objectives and
Management Policies." In addition, each Series is subject to a
nondeductible excise tax of 4% of the amount by which the Series fails to
distribute specified percentages of its investment income and capital gains.
The Series intend to pay dividends and distributions more frequently than
stated above in order to avoid application of the excise tax, if the
additional distributions are otherwise determined to be in the best
interests of the Series' shareholders. Dividends declared by a Series in
October, November or December of any calendar year and payable to
shareholders of record on a specified date in such a month are deemed to
have been received by each shareholder on December 31 of such calendar year
and to have been paid by a Series not later than such December 31, provided
that such dividend is actually paid by the Series during January of the
following year.
Dividends of each Series' 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. Distributions of long-term capital gains
will be taxable to shareholders as such, whether received in cash or
reinvested, and regardless of how long a shareholder has held shares of the
Series. In general, only dividends that represent the dividends received
from U.S. corporations may, subject to certain limitations, qualify for the
Federal dividends-received deduction for corporate shareholders.
Statements as to the tax status of each shareholder's dividends and
distributions will be mailed annually. These statements will set out the
amount of each Series' dividends eligible for the dividends-received
deduction for corporate shareholders. Furthermore, shareholders will
receive, as appropriate, various written notices after the close of the
Series' taxable year regarding the tax status of certain dividends and
distributions that were paid (or that are treated as having been paid) by
the Series to its shareholders during the preceding taxable year, including
the amount of dividends that represent interest derived from U.S. government
securities.
Shareholders should consult their own tax advisors as to the state and
local tax consequences of investing in a Series and should be aware that
some jurisdictions may not treat income derived from a Series' holdings of
U.S. government securities as exempt from state and local income taxes.
THE SERIES' PERFORMANCE
From time to time, the Trust may advertise each Series' "average annual
total return" over various periods of time. Such total return figures show
the average percentage change in value of an investment in a Series from the
beginning date of the measuring period to the end of the measuring period.
These figures reflect changes in the price of the Series' shares and assume
that any income dividends and/or capital gains distributions made by a
Series during the period were reinvested in shares of the Series. Figures
will be given for the recent one-, and five-year periods, or for the life of
the Series to the extent that it has not been in existence for any such
periods, and may be given for other periods as well, such as on a year-by-
year basis. When considering average annual total return figures for
periods longer than one year, it is important to note that the Series'
average annual total return for any one year in the period might have been
greater or less than the average for the entire period. A Series also may
use "aggregate" total return figures for various periods, representing the
cumulative change in value of an investment in a Series for the specific
period (again reflecting changes in the Series' share prices and assuming
reinvestment of dividends and distributions). Aggregate total return may be
calculated either with or without the effect of the maximum 5.00% sales
charge and may be shown by means of schedules, charts or graphs, and may
indicate subtotals of the various components of total return (i.e., change
in value of initial investment, income dividends and capital gains
distributions).
In reports or other communications to shareholders or in advertising
material, the Trust may compare the Series' performance with the Standard &
Poor's Daily Price Index of 500 Common Stocks, the Russell 2000 Index, the
Dow Jones Industrial Average, the Value-Line Composite Geometric Index or
with that of other mutual funds as listed in the rankings prepared by Lipper
Analytical Services, Inc., with studies prepared by independent
organizations such as Ibbotson Associates or Wilshire Associates
Incorporated, or similar independent services which monitor the performance
of mutual funds or other industry or financial publications such as
Barron's, Business Week, Forbes, Fortune, Institutional Investor, Investors
Daily, Kiplinger's Personal Finance, Money, Morningstar Mutual Fund Values,
The New York Times, The Wall Street Journal, or USA Today. Any given
performance comparison should not be considered as representative of the
Series' performance for any future period. The Statement of Additional
Information contains a description of the methods used to determine total
return. Shareholders may make inquiries regarding the Series, including
total return figures, to their Smith Barney Financial Consultant.
CUSTODIAN AND TRANSFER AGENT
PNC Bank, is located at 17th and Chestnut Streets, Philadelphia. PA
19103, and serves as custodian of the Trust's investments.
FDISG serves as the Trust's transfer agent and is located at Exchange
Place, Boston, Massachusetts, 02109.
DISTRIBUTOR
Distributor and Shareholder Servicing Agent--Smith Barney
Smith Barney, which serves as the Trust's distributor and shareholder
servicing agent for each Series, is located at 388 Greenwich Street, New
York, New York 10013. Smith Barney is a wholly owned subsidiary of Smith
Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary of
Travelers Group Inc. ("Travelers"), a diversified financial services holding
company engaged through its subsidiaries principally in four business
segments: Investment Services, Consumer Finance Services, Life Insurance
Services & Casualty Insurance Services. Pursuant to a Shareholder Services
Plan (the "Plan") adopted with respect to the Series' by vote of a majority
of the Trust's Board of Trustees, including a majority of the Trustees who
are not "interested persons" of the Trust as defined in the 1940 Act and who
have no direct or indirect financial interest in the operation of the Plan
or any agreement relating to it, as well as by the Series' sole shareholder
prior to the Series' initial public offering, Smith Barney, as shareholder
servicing agent, is paid an annual fee by the respective Series. The annual
fee will be calculated at the annual rate of .25% of the value of the
average daily net assets of the respective Series and is used by Smith
Barney to cover payments to Smith Barney Financial Consultants and other
persons who provide support services to shareholders of the Series,
including, but not limited to, office space and equipment, telephone
facilities, responding to routine inquiries regarding the Series and its
operations, processing shareholder transactions, forwarding and collecting
proxy materials, dividend payment elections and providing any other
shareholder services not otherwise provided by the Trust's transfer agent.
The Board of Trustees evaluates the appropriateness of the Plan and its
payment terms on a continuing basis and in doing so considers all relevant
factors, including the nature, extent and quality of services generally
provided to shareholders.
ADDITIONAL INFORMATION
The Trust was organized on October 18, 1988 under the laws of the
Commonwealth of Massachusetts and is an entity commonly known as a
"Massachusetts business trust." The Trust offers shares of beneficial
interest of each Series having a $.001 per share par value. When matters
0are submitted for shareholder vote, shareholders of each Series will have
one vote for each full share owned and a proportionate, fractional vote for
any fractional share held. Generally shares of the Trust vote by individual
Series on all matters except (a) matters affecting only the interests of one
or more of the Series, in which case only shares of the affected Series
would be entitled to vote or (b) when the 1940 Act requires that shares of
the Series be voted in the aggregate. There normally will be no annual
meetings of shareholders for the purpose of electing Trustees unless and
until such time as less than a majority of the Trustees holding office have
been elected by shareholders. Shareholders of record of no less than two-
thirds of the outstanding shares of the Trust may remove a Trustee through a
declaration in writing or by vote cast in person or by proxy at a meeting
called for that purpose. A meeting will be called for the purpose of voting
on the removal of a Trustee at the written request of holders of 10% of the
Trust's outstanding shares and the Trust will assist shareholders in calling
such a meeting as required by the 1940 Act.
The Trust sends its shareholders a semi-annual report and an audited
annual report, each of which includes a listing of the investment securities
held by the Series at the end of the period covered. In an effort to reduce
each Series' printing and mailing costs, each Series plans to consolidate
the mailing of its semi-annual and annual reports by household. This
consolidation means that a household having multiple accounts with the
identical address of record will receive a single copy of each report. In
addition, each Series also plans to consolidate the mailing of its
Prospectus so that a shareholder having multiple accounts will receive a
single Prospectus annually. Any shareholder who does not want this
consolidation to apply to his or her account should contact his or her
Financial Consultant or the Trust's transfer agent. Shareholders may make
inquiries regarding the Trust to any Smith Barney Financial Consultant.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN THE
TRUST'S OFFICIAL SALES LITERATURE IN CONNECTION WITH THE OFFERING OF THE
TRUST'S SHARES, AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
TRUST. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY STATE IN WHICH,
OR TO ANY PERSON TO WHOM, THE OFFER MAY NOT LAWFULLY BE MADE.
g\funds\prtf\1996\secdocs\pros1.doc
SMITH BARNEY PRINCIPAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information
March 29, 1996
This Statement of Additional Information supplements the information
contained in the current Prospectus dated March 29, 1996, as amended or
supplemented from time to time, of the Zeros and Appreciation Series 1998
("Series 1998"), Zeros Plus Emerging Growth Series 2000 ("Series 2000"), and
the Security and Growth Fund (collectively the "Series"), of Smith Barney
Principal Return Fund (the "Trust"), and should be read in conjunction with
that Prospectus. The Prospectus may be obtained from any 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 2
Investment Objectives and Management Policies 6
Redemption of Shares 14
Valuation of Shares 14
Exchange Privilege 14
Determination of Performance 15
(See in the Prospectus "The Series' Performance")
Taxes
16
(See in the Prospectus "Dividends, Distributions and Taxes")
Distributor
18
Custodian and Transfer Agent (See in the Prospectus "Additional Information")
19
Organization of the Trust 19
Financial Statements 20
MANAGEMENT OF THE TRUST
The executive officers of the Trust are employees of certain of the
organizations that provide services to the Series. These organizations are as
follows:
Name Service
Smith Barney Inc.("Smith Barney ") Distributor
Smith Barney Mutual Funds Management Inc. Investment Adviser
and
("SBMFM") Administrator
PNC Bank, National Association
("PNC") Custodian
First Data Investor Services Group, Inc.("FDISG") Transfer Agent
These organizations and the functions that they perform for the Series
are discussed in the Prospectus and in this Statement of Additional
Information.
Trustees and Executive Officers of the Trust
The names of the Trustees and executive officers of the Trust, together
with information as to their principal business occupations for the past five
years, are set forth below. Each Trustee who is an "interested person" of the
Trust, as defined in the Investment Company Act of 1940, as amended (the
"1940 Act"), is indicated by an asterisk.
Trustees
Paul R. Ades, Trustee (Age 55). 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 72). Private investor. His address is 273
Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alger B. Chapman (Age 64). Chairman and Chief Executive Officer of the
Chicago Board of Options Exchange.
Dwight B. Crane (Age 58). Professor, Graduate School of Business
Administration, Harvard University; Business Consultant. His address is
Graduate School of Business Administration, Harvard University, Boston,
Massachusetts 02163
Frank Hubbard, Trustee (Age 60). Vice President, of S & S Industries;
Former Corporate Vice President, Materials Management and Marketing
Services of Huls American, Inc.
Allan R. Johnson, Trustee Emeritus (Age 79). 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
62). Managing Director of Smith Barney, 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 Director of PanAgora Asset
Management, Inc. and PanAgora Asset Management Limited. His address is
388 Greenwich Street, New York, New York 10013.
Jerome Miller, Trustee (Age 58). Retired; Former President, Asset
Management Group of Shearson Lehman Brothers. His address is 27 Hemlock
Road, Manhasset, New York 11030.
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 78). 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 97 Sunset Drive, Apt
402, Sarasota, Florida 34236.
Jessica M. Bibliowicz, President (Age 36). Executive Vice President of
Smith Barney; prior to 1994, Director of Sales and Marketing for
Prudential Mutual Funds; prior to 1990, First Vice President of Asset
Management Division of Shearson Lehman Brothers. Ms. Bibliowicz also
serves as President of 39 other mutual funds of the Smith Barney Mutual
Funds. Her address is 388 Greenwich Street, New York, New York 10013.
Harry D. Cohen, Vice President and Investment Officer (Age 55).
President and Director of Smith Barney Investment Advisors, a division of
SBMFM; Executive Vice President of Smith Barney; prior to July 1993,
President of Asset Management Division of Shearson Lehman Brothers. Mr.
Cohen also serves as Vice President and Investment Officer of 5 other
mutual funds of the Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Richard A. Freeman, Vice President and Investment Officer (Age 42).
Managing Director of Smith Barney Investment Advisors, a division of
SBMFM; prior to July 1993, First Executive Vice President of Shearson
Asset Management; prior to July 1993, Executive Vice President of
Shearson Asset Management. Mr. Freeman also serves as Vice President and
Investment Officer of one other mutual fund of the Smith Barney Mutual
Funds. His address is 388 Greenwich Street, New York, New York 10013.
John G. Goode, President and Chief Executive Officer of Davis Skaggs
Investment Management, a division of the SBMFM, serves as Vice President
of the Security and Growth Fund and manages its day-to-day operations,
including making all investment decisions. Mr Goode also serves as Vice
President and Investment Officer of one other mutual fund of the Smith
Barney Mutual Funds. His address is 1 Sansome St, Suite 3850 San
Francisco, California 94104.
Lewis E. Daidone, Senior Vice President and Treasurer (Age 38). Managing
Director of Smith Barney; Director and Senior Vice President of SBMFM.
Mr. Daidone also serves as Senior Vice President and Treasurer of 41
other mutual funds of the Smith Barney Mutual Funds. His address is 388
Greenwich Street, New York, New York 10013.
Christina T. Sydor, Secretary (Age 45). Managing Director of Smith
Barney; General Counsel and Secretary of SBMFM. Ms. Sydor also serves as
Secretary of 41 other mutual funds of the Smith Barney Mutual Funds. Her
address is 388 Greenwich Street, New York, New York 10013.
Each Trustee also serves as a trustee, general partner and/or director of
other mutual funds for which Smith Barney serves as distributor. As of
February 28, 1996, Trustees and officers of the Series, as a group, owned less
than 1% of the outstanding shares of beneficial interest of each Series.
No director, officer or employee of Smith Barney or any of its 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, 1995, such fees and
expenses for the Trust totaled $30,925.
For the calendar year ended December 31, 1995, the Trustees of the Trust
were paid the following compensation:
Trustee (*)
Aggregate Compensation
from the Fund
Aggregate Compensation
from
the Smith Barney Mutual
Funds
Paul R. Ades (7)
4,100
40,250
Herbert Barg (20)
4,100
81,100
Alger B. Chapman (9)
3,000
66,850
Dwight B. Crane (26)
3,100
119,500
Frank G. Hubbard (7)
3,100
40,250
Allan R. Johnson (7)**
3,350
29,375
Heath B. McLendon (41)
---
---
Jerome Miller (2)
1,975
3,125
Ken Miller (7)
4,100
40,250
John F. White (7)
4,100
40,250
* Indicates number of funds within the Smith Barney Mutual Fund complex for
which each Trustee
serves as Trustee/Director.
** Mr. Johnson retired on January 1, 1996. He is Trustee Emeritus.
Investment Adviser and Administrator - SBMFM
SBMFM serves as the Series' investment adviser under the terms of a
written agreement for each Series (the "Advisory Agreements"). SBMFM is a
wholly owned subsidiary of Smith Barney Holdings Inc. ("Holdings"), which is
in turn a wholly owned subsidiary of Travelers Group Inc. ("Travelers"). The
Advisory Agreements for all Series were last approved by the Board of
Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust or Smith Barney on July 27, 1995. Certain of the
services provided to, and fees paid by, the Series under the Advisory and
Administration Agreements are described in the Prospectus under "Management of
the Trust." SBMFM pays the salaries of all officers and employees who are
employed by both it and the Trust and maintains office facilities for the
Trust. SBMFM bears all expenses in connection with the performance of its
services under the Advisory Agreements.
As compensation for investment advisory services rendered, Series 1998,
Series 2000 and the Security and Growth Fund pay SBMFM a fee computed daily
and paid monthly at the annual rates of 0.30%, 0.40% and 0.50%, respectively,
of the value of their average daily net assets.
SBMFM also serves as the administrator of Series 1998, Series 2000 and
the Security and Growth Fund pursuant to a written agreement for each Series
(the "Administration Agreements"). The Administration Agreements were most
recently approved for all Series by the Board of Trustees, including a
majority of the Trustees who are not "interested persons" of the Series or
Smith Barney, on July 27, 1995. The services provided by SBMFM under the
Administration Agreements are described in the Prospectus under "Management of
the Trust." SBMFM pays the salaries of all officers and employees who are
employed by both it and the Trust, maintains office facilities for the Trust
and bears all expenses in connection with the performance of its services.
Prior to April 21, 1994, Boston Advisors served as the Trust's administrator.
As compensation for administrative services rendered to Series 1998,
Series 2000 and the Security and Growth Fund, SBMFM receives a fee computed
daily and paid monthly at the annual rate of 0.20% of the value of each
Series' average daily net assets.
For the fiscal years ended November 30, 1995, 1994 and 1993, the Series
paid investment advisory and/or administration fees to SBMFM as follows:
Series 1998*
Series 2000**
Security and Growth
Fund***
Fiscal Year Ended
Fiscal Year Ended
Fiscal Year Ended
1995
1994
1993
1995
1994
1993
1995
Advisory Fee
$298,
009
$350,
773
$461,
542
$300,0
15
$333,22
0
$436,
813
$1,074,991
Administratio
n Fees
$198,
673
$233,
848
$307,
695
$150,0
07
$166,61
0
$218,
406
N/A
* Series 1998 commenced operations on January 25, 1991.
** Series 2000 commenced operations on August 30, 1991.
*** Security and Growth commenced operations on March 30, 1995
The Trust bears expenses incurred in its operation, including taxes,
interest, brokerage fees and commissions, if any; fees of Trustees who are not
officers, directors, shareholders or employees of Smith Barney; SEC fees and
state Blue Sky qualification fees; charges of custodians; transfer and
dividend disbursing agent's fees; certain insurance premiums; outside auditing
and legal expenses; costs of maintenance of corporate existence; investor
services (including allocated telephone and personnel expenses); and costs of
preparation and printing of prospectuses for regulatory purposes and for
distribution to existing shareholders; cost of shareholders' reports and
shareholder meetings and meetings of the officers or Board of Trustees of the
Trust.
SBMFM has agreed that if in any fiscal year the aggregate expenses of a
Series (including fees payable pursuant to the Advisory Agreements, but
excluding interest, taxes, brokerage and extraordinary expenses) exceed the
expense limitation of any state having jurisdiction over the Series, SBMFM
will reduce its fees from the Series by the proportion of the excess expense
equal to the proportion that their respective fees bear to the aggregate of
fees paid by the Series for investment advice and administration, to the
extent required by state law. A fee reduction, if any, will be estimated and
reconciled on a monthly basis. No such fee reductions were required for the
1994, 1993 and 1992 fiscal years.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Trust. Stroock &
Stroock & Lavan serves as counsel to the Trustees who are not "interested
persons" of the Trust.
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York 10154, has
been selected as the Fund's independent auditor to examine and report on the
Fund's financial statements and highlights for the fiscal year ending November
30, 1995.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
The Prospectus discusses the investment objectives of each Series and the
policies to be employed to achieve those objectives. Set forth below is
supplemental information concerning certain of the securities and other
instruments in which the Series may invest, the investment policies and
portfolio strategies that the Series may utilize and certain risks involved
with those investments, policies and strategies.
Zero Coupon Securities
There are currently two basic types of zero coupon securities, those
created by separating the interest and principal components of a previously
issued interest-paying security and those originally issued in the form of a
face value only security paying no interest. Zero coupon securities of the
United States government and certain of its agencies and instrumentalities and
of private corporate issuers are currently available, although the Series will
purchase only those that represent direct obligations of the United States
government.
Zero coupon securities of the United States government that are currently
available are called Separate Trading of Registered Interest and Principal of
Securities ("STRIPS") or Coupon Under Book-Entry Safekeeping ("CUBES"). STRIPS
and CUBES are issued under programs introduced by the United States Treasury
and are direct obligations of the United States government. The United States
government does not issue zero coupon securities directly. The STRIPS program,
which is ongoing, is designed to facilitate the secondary market stripping of
selected treasury notes and bonds into individual interest and principal
components. Under the program, the United States Treasury continues to sell
its notes and bonds through its customary auction process. However, a
purchaser of those notes and bonds who has access to a book-entry account at a
Federal Reserve Bank (the "Federal Reserve") may separate the specified
treasury notes and bonds into individual interest and principal components.
The selected treasury securities may thereafter be maintained in the book-
entry system operated by the Federal Reserve in a manner that permits the
separate trading and ownership of the interest and principal payments. The
Federal Reserve does not charge a fee for this service; however, the book-
entry transfer of interest or principal components is subject to the same fee
schedule generally applicable to the transfer of treasury securities.
Under the program, in order for a book-entry treasury security to be
separated into its component parts, the face amount of the security must be an
amount which, based on the stated interest rate of the security, will produce
a semi-annual interest payment of $1,000 or a multiple of $1,000. Once a book-
entry security has been separated, each interest and principal component may
be maintained and transferred in multiples of $1,000 regardless of the face
value initially required for separation of the resulting amount required for
each interest payment.
CUBES, like STRIPS, are direct obligations of the United States
government. CUBES are coupons that have previously been physically stripped
from treasury notes and bonds, but which were deposited with the Federal
Reserve and are now carried and transferable in book-entry form only. Only
stripped treasury coupons maturing on or after January 15, 1988, that were
stripped prior to January 5, 1987, were eligible for conversion to book-entry
form under the CUBES program. Investment banks may also strip treasury
securities and sell them under proprietary names. These securities may not be
as liquid as STRIPS and CUBES and the Series have no present intention of
investing in these instruments.
STRIPS and CUBES are purchased at a discount from $1,000. Absent a
default by the United States government, a purchaser will receive face value
for each of the STRIPS and CUBES provided that the STRIPS and CUBES are held
to their due date. While STRIPS and CUBES can be purchased on any business
day, they all currently come due on February 15, May 15, August 15 or November
15 in any given year.
Money Market Instruments
As noted in the Prospectus, each Series may hold at any time up to 10% of
the value of its assets in cash and money market instruments. In addition,
when SBMFM believes that opportunities for capital appreciation do not appear
attractive, each Series may, notwithstanding its investment objective, take a
temporary defensive posture with respect to its equity securities and invest
without limitation in cash and money market instruments. Among the money
market instruments in which the Series may invest are obligations of the
United States government and its agencies and instrumentalities ("U.S.
government securities"); certain bank obligations; commercial paper; and
repurchase agreements involving U.S. government securities.
U. S. government securities. U.S. government securities include debt
obligations of varying maturities issued or guaranteed by the United States
government or its agencies or instrumentalities. Direct obligations of the
United States Treasury include a variety of securities that differ in their
interest rates, maturities and dates of issuance.
U.S government securities include not only direct obligations of the
United States Treasury, but also securities issued or guaranteed by the
Federal Housing Administration, Federal Financing Bank, Export-Import Bank of
the United States, Small Business Administration, Government National Mortgage
Association, General Services Administration, Federal Home Loan Banks, Federal
Home Loan Mortgage Corporation, Federal National Mortgage Association,
Maritime Administration, Tennessee Valley Authority, Resolution Trust
Corporation, District of Columbia Armory Board, Student Loan Marketing
Association and various institutions that previously were or currently are
part of the Farm Credit System (which has been undergoing a reorganization
since 1987). Because the United States government is not obligated by law to
provide support to an instrumentality that it sponsors, the Series will invest
in obligations issued by such an instrumentality only if SBMFM determines that
the credit risk with respect to the instrumentality does not make its
securities unsuitable for investment by the Series.
Repurchase Agreements. Each Series may enter into repurchase agreements
with certain banks which are the issuers of instruments acceptable for
purchase by the Fund and with certain dealers on the Federal Reserve Bank of
New York's list of reporting dealers. A repurchase agreement is a contract
under which the buyer of a security simultaneously commits to resell the
security to the seller at an agreed upon price on an agreed upon date. Under
each repurchase agreement, the selling institution will be required to
maintain the value of the securities subject to the repurchase agreement at
not less than their repurchase price. Repurchase agreements could involve
certain risks in the event of default or insolvency of the seller, including
possible delays or restrictions on a Series' ability to dispose of the
underlying securities, the risk of a possible decline in the value of the
underlying securities during the period in which a Series seeks to assert its
rights to them, the risk of incurring expenses associated with asserting these
rights and the risk of losing all or part of the income from the agreement.
In evaluating these potential risks, SBMFM, acting under the supervision of
the Board of Trustees, and on an ongoing basis, monitors (a) the value of the
collateral underlying each repurchase agreement to ensure that the value is at
least equal to the total amount of the purchase obligation, including
interest, and (b) the creditworthiness of the banks and dealers with which the
Series enters into repurchase agreements.
Warrants (Series 2000 and Security and Growth Fund)
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 stock normally have the right to
receive dividends at a fixed rate when and as declared by the issuer's board
of directors, but do not participate in other amounts available for
distribution by the issuing corporation. Dividends on the preferred stock may
be cumulative, and all cumulative dividends usually must be paid prior to
common shareholders receiving any dividends. Preferred stock dividends must
be paid before common stock dividends and, for that reason, preferred stocks
generally entail less risk than common stocks. Upon liquidation, preferred
stocks are entitled to a specified liquidation preference, which is generally
the same as the par or stated value, and are senior in right of payment to
common stock. Preferred stocks are, however, equity securities in the sense
that they do not represent a liability of the issuer and, therefore, do not
offer as great a degree of protection of capital or assurance of continued
income as investments in corporate debt securities. In addition, preferred
stocks are subordinated in right of payment to all debt obligations and
creditors of the issuer, and convertible preferred stocks may be subordinated
to other preferred stock of the same issuer.
Lending Portfolio Securities
Although the Series are authorized to lend their securities to brokers,
dealers and other financial organizations, they will not lend securities to
their distributor, Smith Barney, or its affiliates unless the Series apply for
and receive specific authority to do so from the SEC. These loans, if and
when made, may not exceed 33-1/3% of a Series' assets taken at value. The
Series' loans of securities will be collateralized by cash, letters of credit
or U.S government securities that will be maintained at all times in an amount
at least equal to the current market value of the loaned securities. From time
to time, a Series may pay a part of the interest earned from the investment of
collateral received for securities loaned to: (a) the borrower and/or (b) a
third party that is unaffiliated with that Series and that is acting as a
"finder."
By lending its securities, a Series can increase its income by continuing
to receive interest on the loaned securities as well as by either investing
the cash collateral in short-term instruments or obtaining yield in the form
of interest paid by the borrower when U.S. government securities are used as
collateral. Requirements of the SEC, which may be subject to future
modifications, currently provide that the following conditions must be met
whenever a Series' portfolio securities are loaned: (a) the Series must
receive at least 100% cash collateral or equivalent securities from the
borrower; (b) the borrower must increase such collateral whenever the market
value of the securities rises above the level of such collateral; (c) the
Series must be able to terminate the loan at any time; (d) the Series must
receive reasonable interest on the loan, as well as an amount equal to any
dividends, interest or other distributions on the loaned securities and any
increase in market value; (e) the Series may pay only reasonable custodian
fees in connection with the loan; and (f) voting rights on the loaned
securities may pass to the borrower; however, if a material event adversely
affecting the investment in the loaned securities occurs, the Board of
Trustees must terminate the loan and regain the Series' right to vote the
securities.
Investment Restrictions
The investment restrictions recited in the Prospectus and those numbered
1 through 8 below have been adopted by the Trust as fundamental policies.
Under the 1940 Act, a fundamental policy may not be changed without the vote
of a majority of the outstanding voting securities of the Series, as defined
in the 1940 Act. "Majority" means the lesser of (a) 67% or more of the shares
present at a meeting, if the holders of more than 50% of the outstanding
shares of the Series are present or represented by proxy, or (b) more than 50%
of the outstanding shares. Investment restrictions 9 through 19 may be
changed by vote of a majority of the Board of Trustees at any time.
Under the investment restrictions adopted by the Series:
1. A Series will not purchase securities (other than U. S. government
securities) of any issuer if, as a result of the purchase, more than 5% of the
value of a Series' total assets would be invested in the securities of that
issuer, except that up to 25% of the value of a Series' total assets may be
invested without regard to this 5% limitation.
2. A Series will not purchase more than 10% of the voting securities of
any one issuer, or more than 10% of the securities of any class of any one
issuer, except that this limitation is not applicable to a Series' investments
in U. S. government securities, and up to 25% of a Series' assets may be
invested without regard to these 10% limitations.
3. A Series will not borrow money, except that a Series may borrow from
banks 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 a Series' total
assets (including the amount borrowed) at the time the borrowing is made.
Whenever borrowings exceed 5% of the value of the total assets of a Series, a
Series will not make any additional investments.
4. A Series will not lend money to other persons, except through
purchasing debt obligations, lending portfolio securities and entering into
repurchase agreements.
5. A Series will invest no more than 25% of the value of its total
assets in securities of issuers in any one industry, except that this
restriction does not apply to investments in U. S. government securities.
6. A Series will not underwrite the securities of other issuers, except
insofar as a Series may be deemed to be an underwriter under the Securities
Act of 1933, as amended (the "1933 Act"), in disposing of its portfolio
securities.
7. A Series will not purchase or sell real estate, interests in real
estate limited partnerships or interests in real estate, except that a Series
may purchase and sell securities that are secured by real estate and may
purchase securities issued by companies that invest or deal in real estate.
8. A Series will not purchase or sell commodities or commodities
futures contracts.
9. A Series will not sell securities short.
10. A Series will not purchase securities on margin, except that a
Series may obtain any short-term credits necessary for the clearance of
purchases and sales of securities.
11. A Series will not pledge, hypothecate, mortgage or encumber in any
other way more than 10% of its assets.
12. A Series will not invest in oil, gas, mineral leases or other
mineral exploration or development programs, except that a Series may invest
in the securities of companies that invest in or sponsor those programs.
13. A Series will not invest in securities of other investment companies
registered or required to be registered under the 1940 Act, except as the
securities may be acquired as part of a merger, consolidation, reorganization,
acquisition of assets or an offer of exchange. This restriction does not
apply to investments in closed-end, publicly traded investment companies.
14. A Series will not write or sell put options, call options, straddles
or combinations of those options, except that the Security and Growth 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. A Series will not purchase any security, except U.S. government
securities, if as a result of the purchase, the Series would then have more
than 5% of its total assets invested in securities of companies (including
predecessor companies) that have been in continuous operation for fewer than
three years. (For purposes of this limitation, issuers include predecessors,
sponsors, controlling persons, general partners, guarantors and originators of
underlying assets which may have less than three years of continuous operation
or relevant business experience.)
16. A Series will not make investments for the purpose of exercising
control or management of any other issuer.
17. A Series will not purchase or retain securities of any company, if
to the knowledge of the Trust, any of the Trust's officers or Trustees, or any
officer or director of SBMFM, individually owns more than 0.5% of the
outstanding securities of the company and together they own beneficially more
than 5% of the securities.
18. A Series will not invest in warrants, if as a result, more than 2%
of the value of a Series' net assets would be invested in warrants that are
not listed on a recognized United States stock exchange, or more than 5% of a
Series' net assets would be invested in warrants regardless of whether they
are listed on such an exchange.
19. A Series will not invest in time deposits maturing in more than
seven days, enter into repurchase agreements having a duration of more than
seven days, purchase securities that may not be sold without first being
registered under the 1933 Act, as amended ("restricted securities"), or
purchase instruments lacking readily available market quotations ("illiquid
instruments"), if as a result of the purchase a Series' aggregate holdings of
time deposits maturing in more than seven days, repurchase agreements having a
duration of more than seven days, restricted securities and illiquid
instruments exceed 10% of a Series' net assets.
The Trust may make commitments more restrictive than the restrictions
listed above so as to permit the sale of its shares in certain states. Should
the Trust determine that any commitment is no longer in the best interests of
the Trust and its shareholders, the Trust will revoke the commitment by
terminating the sale of shares in the relevant state. The percentage
limitations set forth above apply at the time of purchase of securities.
Portfolio Turnover
The Series intend not to seek profits through short-term trading of their
securities. Nevertheless, a Series will not consider portfolio turnover rate a
limiting factor in making investment decisions. The Series cannot accurately
predict their portfolio turnover rate, but anticipate that their annual
turnover rates will not exceed 50%. The turnover rates would be 100% if all
of a Series' securities that are included in the computation of turnover were
replaced once during a period of one year. The Series' turnover rate is
calculated by dividing the lesser of purchases or sales of portfolio
securities for the year by the monthly average value of portfolio securities.
Securities with remaining maturities of one year or less on the date of
acquisition are excluded from the calculation. For the fiscal years ended
November 30, 1995 and 1994, and the Series' portfolio turnover rates were as
follows:
1995 1994
Series 1998 13% 10%
Series 2000 6% 1%
Security and Growth Fund 26% --
Portfolio Transactions
Decisions to buy and sell securities for the Series are made by SBMFM,
subject to the overall review of the Trust's Board of Trustees. Although
investment decisions for a Series are made independently from those of the
other accounts managed by SBMFM, investments of the type made by a Series also
may be made by those accounts. When a Series and one or more other accounts
managed by SBMFM 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 SBMFM to be equitable to each. In some cases, this
procedure may adversely affect the price paid or received by a Series or the
size of the position obtained or disposed of by the Series.
Transactions on United States stock exchanges involve the payment of
negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. No
stated commission is generally applicable to securities traded in over-the-
counter markets, but the prices of those securities include undisclosed
commissions or mark-ups. Over-the-counter purchases and sales are transacted
directly with principal market makers except in those cases in which better
prices and executions may be obtained elsewhere. The cost of securities
purchased from underwriters includes an underwriting commission or concession,
and the prices at which securities are purchased from and sold to dealers
include a dealer's mark-up or mark-down. U.S. government securities are
generally purchased from underwriters or dealers, although certain newly
issued U.S government securities may be purchased directly from the United
States Treasury or from the issuing agency or instrumentality. The following
table sets forth certain information regarding the Series' payment of
brokerage commissions:
Fiscal Year Ended Series Series
Security and Growth
November 30, 1998 2000 Fund
Total Brokerage Commissions 1993 $82,248 $30,396
1994 $45,657 $ 0
1995 $37,974 $ 5,760
$475,496
Commissions Paid to
Smith Barney and/or 1993 $ 6,510 $ 8,880 $
9,636
Smith Barney Shearson 1994 $ 2,370 $ 2,130 0
1995 420 0
0
% of Total Brokerage
Commissions paid to Smith
Barney 1995 1.1% 0% 0%
% of Total Transactions involving
Commissions paid to Smith
Barney 1995 0% 1.00% 0%
SBMFM seeks the best overall terms available in selecting brokers or
dealers to execute transactions on behalf of the Series. In assessing the
best overall terms available for any transaction, SBMFM 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, SBMFM is
authorized in selecting brokers or dealers to execute a particular transaction
and in evaluating the best overall terms available to consider the brokerage
and research services (as those terms are defined in Section 28(e) of the
Securities Exchange Act of 1934) provided to the Series and/or other accounts
over which SBMFM or its affiliates exercise investment discretion. The fees
under the Series' Advisory Agreements are not reduced by reason of SBMFM
receiving brokerage and research services. The Trust's Board of Trustees will
periodically review the commissions paid by the Series to determine if the
commissions paid over representative periods of time were reasonable in
relation to the benefits inuring to the Series.
In accordance with Section 17(e) of the 1940 Act and Rule 17e-1 under the
1940 Act, the Trust's Board of Trustees has determined that transactions for
the Series may be executed through Smith Barney and other affiliated broker-
dealers if, in the judgment of SBMFM, the use of an affiliated broker-dealer
is likely to result in price and execution at least as favorable as those of
other qualified broker-dealers and if, in the transaction, the affiliated
broker-dealer charges the Series a rate consistent with that charged to
comparable unaffiliated customers in similar transactions. In addition, under
the rules recently adopted by the SEC, Smith Barney may directly execute such
transactions for the Series 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 Series of
the aggregate compensation it earned on such transactions.
REDEMPTION OF SHARES
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the New York Stock Exchange, Inc. (the "NYSE")
is closed (other than for customary weekend and holiday closings), (b) when
trading in markets the Series normally utilizes is restricted, or an emergency
as determined by the SEC exists, so that disposal of the Series' investments
or determination of its net asset value is not reasonably practicable or (c)
for such other periods as the SEC by order may permit for protection of the
Series' shareholders.
VALUATION OF SHARES
The Series' net asset value is calculated on each day, Monday through
Friday, except on days on which the NYSE is closed. The NYSE currently is
scheduled to be closed on New Year's Day, Presidents' Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving and Christmas, and on
the preceding Friday or subsequent Monday when one of these holidays falls on
a Saturday or Sunday. On those days, securities held by the Series may
nevertheless be actively traded, and the value of the Series' shares could be
significantly affected.
EXCHANGE PRIVILEGE
Except as noted below, shareholders of any fund of the Smith Barney
Mutual Funds may exchange all or part of their shares for shares of the same
class of other funds of the Smith Barney Mutual Funds to the extent such
shares are offered for sale in the shareholder's state of residence, on the
basis of relative net asset value per share at the time of exchange as
follows:
A. Class A shares of any fund may be exchanged for Class A shares of
any of the other funds, and the sales charge differential, if any,
will be applied. Class A shares of any fund may be exchanged
without a sales charge for shares of the funds that are offered
without a sales charge. Class A shares of any fund purchased
without a sales charge may be exchanged for shares sold with a sales
charge, and the appropriate sales charge will be applied.
B. Class A shares of any fund acquired by a previous exchange of shares
purchased with a sales charge may be exchanged for Class A shares of
any of the other funds, and the sales charge differential, if any,
will be applied.
A shareholder who has redeemed shares of any of the Series, through the
exchange privilege or otherwise, will not be able to purchase new shares of
any Series'.
The exchange privilege enables shareholders to acquire shares of the same
Class in a fund with different investment objectives when they believe that a
shift between funds is an appropriate investment decision. This privilege is
available to shareholders resident in any state in which the fund shares being
acquired may be legally sold. Prior to any exchange, the investor should
obtain and review a copy of the then current prospectus of each fund into
which an exchange is being made. Prospectuses may be obtained from a Smith
Barney Financial Consultant.
Upon receipt of proper instructions and all necessary supporting
documents, shares submitted for exchange are redeemed at the then-current net
asset value and the proceeds are immediately invested, at a price as described
above, in shares of the fund being acquired with such shares being subject to
any applicable contingent deferred sales charge. Smith Barney reserves the
right to reject any exchange request. The exchange privilege may be modified
or terminated at any time after written notice to shareholders.
DETERMINATION OF PERFORMANCE
From time to time, the Trust may quote a Series' performance in terms of
its total return in reports or other communications to shareholders. The
Series' performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Average Total Return
The Series' "average annual total return" figures are computed according
to a formula prescribed by the SEC. The formula can be expressed as follows:
P(1 + T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV= Ending Redeemable Value of a hypothetical $1,000 investment
made at the beginning of a 1-, 5- or 10-year period at the
end of the 1-, 5- or 10-year period (or fractional portion
thereof), assuming reinvestment of all dividends and
distributions
The Series' average annual total returns were as follows for the periods
indicated:
Per Annum for Period
One Year Five Year from Commencement of
Period Ended Period Ended Operations through
Name of Series 11/30/95 11/30/95
11/30/95
Series 1998 (1) 13.90% N/A 8.80%
Series 2000 (2) 16.06% N/A 9.25%
Security & Growth Fund (3) N/A N/A 8.19%
______________________________
(1) Series 1998 commenced operations on January 25, 1991.
(2) Series 2000 commenced operations on August 30, 1991.
(3) Security & Growth Fund commenced operations on March 30, 1995.
These total return figures assume that the maximum sales charge has been
included in the investment at the time of purchase.
Aggregate Total Return
The Series' aggregate total return figures shown below represent the
cumulative change in the value of an investment in a Series for the specified
period and are computed by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical
$10,000 investment made at the beginning of the
1-, 5- or 10-year period at the end of
the 1-, 5- or 10 year period (or fractional
portion thereof), assuming reinvestment of
all dividends and distributions.
The Series' aggregate total returns were as follows for the periods
indicated:
Name of
Series
One Year
Period
Ended
11/30/95
*
Five
Year
Period
Ended
11/30/95
*
Period From
Commencement
of Operations
through
11/30/95*
One Year
Period
Ended
11/30/95
**
Five
Year
Period
Ended
11/30/95
**
Period From
Commencement
of Operations
through
11/30/94**
Series 1998
(1)
19.93%
N/A
58.47%
13.90%
N/A
50.55%
Series 2000
(2)
22.17%
N/A
53.40%
16.06%
N/A
45.73%
Security &
Growth Fund
(3)
N/A
N/A
12.70%
N/A
8.19%
* Figures do not include the effect of the maximum sales charge.
** Figures include the effect of the maximum sales charge.
(1) Series 1998 commenced operations on January 25, 1991.
(2) Series 2000 commenced operations on August 30, 1991.
(3) Security & Growth Fund commenced operations on March 30, 1995.
A Series' performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the Series' performance for any specified period in the
future. In addition, because performance will fluctuate, it may not provide a
basis for comparing an investment in the Series with certain bank deposits or
other investments that pay a fixed yield for a stated period of time.
Investors comparing the Series' performance with that of other mutual funds
should give consideration to the quality and maturity of the respective
investment companies' portfolio securities.
TAXES
The following is a summary of certain Federal income tax considerations
that may affect the Trust and its shareholders. The summary is not intended
as a substitute for individual tax planning, and investors are urged to
consult their own tax advisors as to the Federal, state and local income tax
consequences of an investment in a Series.
Tax Status of the Trust and its Shareholders
Each of the Series has qualified and intends to continue to qualify each
year as a regulated investment company under the Internal Revenue Code of
1986, as amended (the "Code"). To qualify as a regulated investment company,
the Series must meet certain requirements set forth in the Code. Each Series
is required to earn at least 90% of its gross income from (a) interest, (b)
dividends, (c) payments with respect to securities loans, (d) gains from the
sale or other disposition of stock or securities and (e) other income derived
with respect to the Series' business of investing in stock or securities.
Each Series also must earn less than 30% of its gross income from the sale or
other disposition of stock or securities held for less than three months.
Legislation currently pending before the U.S. Congress would repeal the
requirement that a regulated investment company must derive less than 30% of
its gross income from the sale or other disposition of assets described above
that are held for less than three months. However, it is impossible to
predict whether this legislation will become law and, if it is so enacted,
what form it will eventually take.
Dividends of net investment income and distributions of net realized
short-term capital gains will be taxable to shareholders as ordinary income
for Federal income tax purposes, whether received in cash or reinvested in
additional shares of the Series. Distributions of long-term capital gains
will be taxable to shareholders as long-term gain, whether paid in cash or
reinvested in additional shares, and regardless of the length of time that the
shareholder has held his or her shares of the Series.
Dividends of investment income (but not distributions of capital gain)
from the Series generally will qualify for the Federal dividends-received
deduction for corporate shareholders to the extent that the dividends do not
exceed the aggregate amount of dividends received by the Series from domestic
corporations. If securities held by the Series are considered to be "debt-
financed" (generally, acquired with borrowed funds) or are held by the Series
for less than 46 days (91 days in the case of certain preferred stock), the
portion of the dividends paid by the Series that corresponds to the dividends
paid with respect to the debt-financed securities or securities that have not
been held for the requisite period will not be eligible for the corporate
dividends-received deduction.
Foreign countries may impose withholding and other taxes on dividends and
interest paid to a Series with respect to investments in foreign securities.
Certain foreign countries, however, have entered into tax conventions with the
United States to reduce or eliminate such taxes.
If a Series is the holder of record of any stock on the record date for
any dividends payable with respect to the stock, the dividends are included in
the Series' gross income not as of the date received but as of the later of
(a) the date on which the stock became ex-dividend with respect to the
dividends (that is the date on which a buyer of the stock would not be
entitled to receive the declared, but unpaid, dividends) or (b) the date on
which the Series acquired the stock.
Capital Gains. In general, a shareholder who redeems or exchanges his or
her Series shares will recognize long-term capital gain or loss if the shares
have been held for more than one year, and will recognize short-term capital
gain or loss if the shares have been held for one year or less. If a
shareholder receives a distribution taxable as long-term capital gain with
respect to shares of a Series and redeems or exchanges the shares before he or
she has held them for more than six months, however, any loss on the
redemption or exchange that is less than or equal to the amount of the
distribution will be treated as a long-term capital loss.
Backup Withholding. If a shareholder fails to furnish a correct taxpayer
identification number, fails to report fully dividend or interest income, or
fails to certify that he or she has provided a correct taxpayer identification
number and that he or she is not subject to "backup withholding," then the
shareholder may be subject to a 31% backup withholding tax with respect to (a)
dividends and distributions and (b) the proceeds of any redemptions of a
Series' shares. An individual's taxpayer identification number is his or her
social security number. The backup withholding tax is not an additional tax
and may be credited against a shareholder's regular Federal income tax
liability.
Taxation of the Series' Investments
Zero Coupon Securities. The Series will invest in zero coupon securities
having an original issue discount (that is, the discount represented by the
excess of the stated redemption price at maturity over the issue price). Each
year, the Series will be required to accrue as income a portion of this
original issue discount even though the Series will receive no cash payment of
interest with respect to these securities. In addition, if the Series
acquires a security at a discount that resulted from fluctuations in
prevailing interest rates ("market discount"), the Series may elect to include
in income each year a portion of this market discount.
The Series will be required to distribute substantially all of its income
(including accrued original issue and market discount) in order to qualify for
"pass-through" Federal income tax treatment and also in order to avoid the
imposition of the 4% excise tax described in the Prospectus. Therefore, a
Series may be required in some years to distribute an amount greater than the
total cash income the Series actually receives. In order to make the required
distribution in such a year, a Series may be required to borrow or to
liquidate securities. The amount of actual cash that a Series would have to
distribute, and thus the degree to which securities would need to be
liquidated, would depend upon the number of shareholders who chose not to have
their dividends reinvested. Capital losses resulting from the liquidation of
securities can only be used to offset capital gains and cannot be used to
reduce the Series' ordinary income. These capital losses may be carried
forward for eight years.
Capital Gains Distributions. Gain or loss on the sale of a security by a
Series will generally be long-term capital gain or loss if the Series has held
the security for more than one year. Gain or loss on the sale of a security
held for one year or less will generally be short-term capital gain or loss.
Generally, if a Series acquires a debt security at a discount, any gain on the
sale or redemption of the security will be taxable as ordinary income to the
extent that the gain reflects accrued market discount.
DISTRIBUTOR AND SHAREHOLDER SERVICING AGENT -
SMITH BARNEY
Smith Barney serves as the Series' distributor pursuant to a written
agreement (the "Distribution Agreement") with the Trust. To compensate Smith
Barney for the services it provides as Shareholder Servicing Agent 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 Series
1998 and Series 2000, a fee, accrued daily and paid monthly, calculated at the
annual rate of .25% of the value of the respective Series' average daily net
assets. Under its terms, the Plan continues from year to year, provided that
its continuance is approved annually by vote of the Trust's Board of Trustees,
including a majority of the Trustees who are not interested persons of the
Trust and who have no direct or indirect financial interest in the operation
of the Plan (the "Independent Trustees"). The Plan may not be amended to
increase materially the amount to be spent for the services provided by Smith
Barney without shareholder approval, and all material amendments of the Plan
must be approved by the Trustees in the manner described above. The Plan may
be terminated at any time, without penalty, by vote of a majority of the
Independent Trustees or by a vote of a majority of the outstanding voting
securities (as defined in the 1940 Act) of the relevant Series on not more
than 30 days' written notice to any other party to the Plan. Pursuant to the
Plan, Smith Barney will provide the Board of Trustees periodic reports of
amounts expended under the Plan and the purpose for which such expenditures
were made. For the fiscal year ended November 30, 1995, Smith Barney was paid
$248,341, $187,509 and $121,534 in shareholder servicing fees for Series 1998,
Series 2000 and the Security and Growth Fund respectively. For the fiscal
period from commencement of operations on * through
November 30, 1995, Smith Barney (or its predecessor), accrued $1,830,321,
$1,130,307 and $260,000 in Series 1998, Series 2000 and the Security and
Growth Fund respectively, for shareholder servicing fees.
_____________________
* Series 1998 - January 25, 1991
Series 2000 - August 30, 1991
Security and Growth Fund - March 30, 1995
CUSTODIAN AND TRANSFER AGENT
PNC Bank, is located at 17th and Chestnut Streets, Philadelphia, PA
19103, and serves as the custodian of Trust. The assets of the Trust are held
under bank custodianship in compliance with the 1940 Act.
FDISG is located at Exchange Place, Boston, Massachusetts 02109, and
serves as the Trust's transfer agent. Under the transfer agency agreement,
FDISG 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,
FDISG receives a monthly fee computed on the basis of the number of
shareholder accounts FDISG 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"). On November 18,
1988, August 27, 1990, July 30, 1993 and October 14, 1994, the Trust changed
its name from SLH Secured Capital Fund to SLH Principal Return Fund, Shearson
Lehman Brothers Principal Return Fund, Smith Barney Shearson Principal Return
Fund and Smith Barney Principal Return Fund, respectively. Under the Trust
Agreement, the Trustees have authority to issue an unlimited number of shares
of beneficial interest with a par value of $.001 per share.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
The Trust has been structured, and will be operated in such a way, so as to
ensure as much as possible, that shareholders will not be liable for
obligations of the Series. The Trust Agreement disclaims shareholder liability
for acts or obligations of the Trust, and requires that notice of the
disclaimer be given in each agreement, obligation or instrument entered into
or executed by the Trust or a Trustee. The Trust Agreement also provides for
indemnification from the Trust's property for all losses and expenses of any
shareholder held personally liable for the obligations of the Trust. Thus, the
risk of a shareholder's incurring financial loss on account of shareholder
liability is limited to circumstances in which the Trust would be unable to
meet its obligations, a possibility that the Trust's management believes is
remote. Upon payment of any liability incurred by the Trust, the shareholder
paying the liability will be entitled to reimbursement from the general assets
of the Trust. The Trustees intend to conduct the operations of the Trust and
each of its series in such a way so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Trust.
FINANCIAL STATEMENTS
The Trust's Annual Reports for the fiscal year ended November 30, 1995
accompany this Statement of Additional Information and are incorporated herein
by reference in its entirety.
g\funds\prtf\1996\secdocs\sai
SMITH BARNEY PRINCIPAL RETURN FUND
PART C
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Reports for the fiscal year ended November 30,
1995 and the reports of
Independent Auditors are incorporated by reference to the Definitive 30b2-1
filed on March 21, 1996 as accession number 91155-96-121.
b) Exhibits
Exhibit No. Description of Exhibit
All references are to the Registrant's registration Statement on Form N-1A
as filed with the Securities Exchange Commission (the "SEC"). (File Nos.
33-25087 and 811-5678).
1 Registrant's Master Trust Agreement and Amendments to the Master
Trust Agreement dated October 18, 1988, November 18, 1988, August 24, 1990,
October 5, 1990, February 26, 1991, May 1, 1991, and July 30, 1993, is
incorporated by reference to the Registrant's Registration Statement filed
with the SEC on January 28, 1994 ("Post-Effective Amendment No. 13").
(b) Amendment to Master Trust Agreement with respect to Security and
Growth Fund is incorporated by reference to the Registrant's Registration
Statement filed with the SEC on March 23, 1995 ("Post-Effective Amendment
No. 16").
2 By-Laws are incorporated by reference to Registrant's Registration
Statement filed with the SEC on October 19, 1988 (the "Registration
Statement").
3 Not Applicable.
4 Not Applicable.
5 Investment Advisory Agreement between the Registrant and Smith Barney
Shearson Asset Management ("Asset Management") relating to Series 1996,
Series 1998 and Series 2000 are incorporated by reference to Post-Effective
Amendment No. 13.
(b) Investment Advisory Agreement and Administration Agreement between
the Registrant and Smith Barney Mutual Funds Management Inc. relating to
Security and Growth Fund is incorporated by reference to Post-Effective
Amendment No. 16.
6 Distribution Agreement between the Registrant and Smith Barney
Shearson Inc. ("Smith Barney Shearson") is incorporated by reference to
Post-Effective Amendment No. 13.
7 Not Applicable.
8 Form of Custodian Agreement is attached hereto.
9 (a)
Administration Agreements dated April 21, 1994 between the
Registrant and Smith Barney Advisers, Inc. relating to Series 2000 is
incorporated by reference to Post-Effective Amendment No.16.
(b) Transfer Agency Agreement between the Registrant and First Data
Investor Services Group formerly known as The Shareholder Services Group, Inc.
dated August 2, 1993 is incorporated by reference to Post-Effective Amendment
No. 13.
(c) Shareholder Services Plan between the Registrant and Smith Barney
Shearson relating to Series 1998 is incorporated by reference to Post-
Effective Amendment No. 13.
(d) Shareholder Services Plan between the Registrant and Smith Barney
Shearson relating to Series 2000 is incorporated by reference to Post-
Effective Amendment No. 13.
(e) Shareholder Services Plan between the Registrant and Smith Barney
relating to Security & Growth Fund is incorporated by reference to Post-
Effective Amendment No. 16
10 Not Applicable
11 Not Applicable.
12 Not Applicable.
13(a) Purchase Agreement relating to Series 1998 Incorporated by reference
to Post-Effective Amendment No. 9.
(b) Form of Purchase Agreement relating to Series 2000 is incorporated
by
reference to Post-Effective Amendment No. 8.
(c) Form of Purchase Agreement relating to Security and Growth
Fund is incorporated by reference to Post-Effective Amendment No. 16.
14 Not Applicable.
15 Not Applicable.
16 Performance Data is incorporated by reference to Post-Effective
Amendment No. 2 filed with the SEC on April 2, 1990.
Item 25. Persons Controlled by or under Common Control with Registrant
None
Item 26. Number of Holders of Securities
(1) (2)
Number of Record Holders by Class
Title of Class as of February 29, 1996
Shares representing
beneficial interests,
par value .001 per share
(i) Security and Growth Fund 27,053,184.385
(ii) Zeros and Appreciation
Series 1998 12,591,586.666
(iii) Zeros Plus Emerging
Equities Series 2000 8,200,765.067
Item 27. Indemnification
The response to this item is incorporated by reference to
Registrant's Pre-Effective Amendment No. 1.
Item 28(a). Business and Other Connections of Investment
Adviser
Investment Adviser - - Smith Barney Mutual Funds Management, Inc.
Smith Barney Mutual Funds Management, Inc. ("SBMFM"), formerly
known as Smith, Barney Advisers, Inc.,) was incorporated in
December 1968 under the laws of the State of Delaware. SBMFM is a
wholly owned subsidiary of Smith Barney Holdings Inc. (formerly
known as Smith Barney Shearson Holdings Inc.), which in turn is a
wholly owned subsidiary of Travelers Group Inc. (formerly known as
Primerica Corporation) ("Travelers"). SBMFM is registered as an
investment adviser under the Investment Advisers Act of 1940 (the
"Advisers Act").
The list required by this Item 28 of officers and directors of
SBMFM, together with information as to any other business,
profession, vocation or employment of a substantial nature engaged
in by such officers and directors during the past two fiscal years,
is incorporated by reference to Schedules A and D of FORM ADV filed
by SBMFM pursuant to the Advisers Act (SEC File No. 801-8314).
Prior to the close of business on July 30, 1993 (the "Closing"),
Shearson Asset Management, a member of the Asset Management Group
of Shearson Lehman Brothers Inc. ("Shearson Lehman Brothers"),
served as the Registrant's investment adviser. On the Closing,
Travelers and Smith Barney Inc. (formerly known as Smith Barney
Shearson Inc.) acquired the domestic retail brokerage and asset
management business of Shearson Lehman Brothers which included the
business of the Registrant's prior investment adviser. Shearson
Lehman Brothers was a wholly owned subsidiary of Shearson Lehman
Brothers Holdings Inc. ("Shearson Holdings"). All of the issued
and outstanding common stock of Shearson Holdings (representing 92%
of the voting stock) was held by American Express Company.
Information as to any past business vocation or employment of a
substantial nature engaged in by officers and directors of Shearson
Asset Management can be located in Schedules A and D of FORM ADV
filed by Shearson Lehman Brothers on behalf of Shearson Asset
Management prior to July 30, 1993. (SEC FILE NO. 801-3701)
Item 29. Principal Underwriters
Smith Barney Inc. ("Smith Barney") also acts as principal underwriter for
Smith Barney Money Funds, Inc.; Smith Barney Muni Funds; Smith Barney Funds,
Inc., Smith Barney Variable Account Funds; Smith Barney Intermediate
Municipal Fund, Inc., Smith Barney Municipal Fund, Inc., High Income
Opportunity Fund Inc., Smith Barney/Travelers Series Fund Inc., Smith Barney
World Funds, Inc., Greenwich Street California Municipal Fund Inc., The
Inefficient Fund, Inc., Smith Barney Adjustable Rate Government Income Fund,
Smith Barney Equity Funds, Smith Barney Income Funds, Smith Barney
Massachusetts Municipals Fund, Zenix Income Fund Inc., Smith Barney Arizona
Municipals Fund Inc., Smith Barney Principal Return Fund, Municipal High
Income Fund Inc., The Trust for TRAK Investments, Smith Barney Series Fund,
Smith Barney Income Trust, Smith Barney Oregon Municipals Fund Inc., Smith
Barney Municipal Money Market Fund, Inc., Smith Barney Aggressive Growth Fund
Inc., Smith Barney Appreciation Fund Inc., Smith Barney California Municipals
Fund Inc., Smith Barney Fundamental Value Fund Inc., Smith Barney Managed
Governments Fund Inc., Smith Barney Managed Municipals Fund Inc., Smith Barney
New York Municipals Fund Inc., Smith Barney New Jersey Municipals Fund Inc.,
Smith Barney Precious Metals and Minerals Fund Inc., Smith Barney Investment
Funds Inc., Smith Barney FMA Trust, The Italy Fund Inc., Smith Barney
Telecommunications Trust, Managed Municipals Portfolio Inc., Managed
Municipals Portfolio II Inc., Smith Barney Florida Municipal Fund, Managed
High Income Portfolio Inc. On June 1, 1994, Smith Barney changed its name
from Smith Barney Shearson Inc. to its current name. The information
required by this Item 29 with respect to each director, officer and partner
of Smith Barney is incorporated by reference to Schedule A of FORM BD filed
by Smith Barney pursuant to the Securities Exchange Act of 1934 (SEC File No.
812-8510).
Item 30. Location of Accountants and Record
(1) Smith Barney Principal Return Fund
388 Greenwich Street
New York, New York 10013
(2) Smith Barney Mutual Funds Management Inc.
388 Greenwich Street
New York, New York 10013
(3) PNC Bank, National Association
17th and Chestnut Streets
Philadelphia, PA 19103
(4) First Data Investor Services Group, Inc.
One Exchange Place
Boston, Massachusetts 02109
Item 31. Management Services
Not Applicable.
Item 32. Undertakings
(a) Registrant undertakes to call a meeting of the shareholders for the
purpose of voting upon the question of removal of trustee or trustees when
requested in writing to do so by the holders of at
least 10% of Registrant's outstanding Shares and, in connection worth such
meeting, to comply with the provisions of Section 16(c) of the Investment
Company Act of 1940, as amended, relating to communications with the
shareholders of certain common-law trusts.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, and the
Investment Company Act of 1940, the Registrant, SMITH BARNEY PRINCIPAL
RETURN FUND, certifies that it meets all of the requirements for
effectiveness of this Registration Statement pursuant to Rule 485(b) under
the Securities Act of 1933, has duly caused this Amendment to the
Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, all in the City of New York, State of New York
on the 1st day of April, 1996.
SMITH BARNEY PRINCIPAL RETURN FUND
By:/s/ Heath B. McLendon *
Heath B. McLendon, Chief Executive Officer
We, the undersigned, hereby severally constitute and appoint Heath B.
McLendon, Christina T. Sydor and Lee D. Augsburger and each of them singly,
our true and lawful attorneys, with full power to them and each of them to
sign for us, and in our hands and in the capacities indicated below, any
and all Amendments to this Registration Statement and to file the same,
with all exhibits thereto, and other documents therewith, with the
Securities and Exchange Commission, granting unto said attorneys, and each
of them, acting alone, full authority and power to do and perform each and
every act and thing requisite or necessary to be done in the premises, as
fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys or any of them may
lawfully do or cause to be done by virtue thereof.
WITNESS our hands on the date set forth below.
Pursuant to the requirements of the Securities Act of 1933, as
amended, this Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Heath B. McLendon* Chairman of the Board
Heath B. McLendon (Chief Executive Officer) 03/29/96
/s/ Lewis E. Daidone Senior Vice President andTreasurer
(Chief Financial and Accounting Officer) 03/29/96
Lewis E. Daidone
/s/ Paul R. Ades* Trustee
03/29/96
Paul R. Ades
Herbert Barg* Trustee
03/29/96
Herbert Barg
/s/ Alger B. Chapman* Trustee 03/29/96
Alger B. Chapman
/s/ Dwight B. Crane* Trustee
03/29/96
Dwight B. Crane
/s/ Frank Hubbard* Trustee 03/29/96
Frank Hubbard
/s/ Jerome Miller* Trustee 03/29/96
Jerome Miller
/s/ Ken Miller* Trustee 03/29/96
Ken Miller
/s/ John F. White* Trustee
03/29/96
John F. White
*Signed by Lee D. Augsburger, their
duly authorized attorney-in-fact, pursuant
to power of attorney dated December 23, 1994
/s/ Lee D. Augsburger
Lee D. Augsburger
funds prtn pea18
FORM OF CUSTODIAN SERVICES AGREEMENT
This Agreement is made as of [ ] by and between
SMITH BARNEY EQUITY FUNDS, a Massachusetts business trust (the "Fund") and PNC
BANK, NATIONAL ASSOCIATION, a national banking association ("PNC Bank").
The Fund is registered as an open-end investment company under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund wishes
to retain PNC Bank to provide custodian services and PNC Bank wishes to
furnish such services, either directly or through an affiliate or affiliates,
as more fully described herein. In consideration of the premises and mutual
covenants herein contained, the parties agree as follows:
1. Definitions.
(a) "Authorized Person". The term "Authorized Person" shall
mean any officer of the Fund and any other person, who is duly authorized by
the Fund's Governing Board, to give Oral and Written Instructions on behalf of
the Fund. Such persons are listed in the Certificate attached hereto as the
Authorized Persons Appendix, as such Appendix may be amended in writing by the
Fund's Governing Board from time to time.
(b) "Book-Entry System". The term "Book-Entry System" means
Federal Reserve Treasury book-entry system for United States and federal
agency securities, its successor or successors, and its nominee or nominees
and any book-entry system maintained by an exchange registered with the SEC
under the 1934 Act.
(c) "CFTC". The term "CFTC" shall mean the Commodities Futures
Trading Commission.
(d) "Governing Board". The term "Governing Board" shall mean the
Fund's Board of Directors if the Fund is a corporation or the Fund's Board of
Trustees if the Fund is a trust, or, where duly authorized, a competent
committee thereof.
(e) "Oral Instructions". The term "Oral Instructions" shall mean
oral instructions received by PNC Bank from an Authorized Person or from a
person reasonably believed by PNC Bank to be an Authorized Person.
(f) "SEC". The term "SEC" shall mean the Securities and Exchange
Commission.
(g) "Securities and Commodities Laws". The term "Securities and
Commodities Laws" shall mean the "1933 Act" which shall mean the Securities
Act of 1933, the "1934 Act" which shall mean the Securities Exchange Act of
1934, the 1940 Act, and the "CEA" which shall mean the Commodities Exchange
Act, as amended.
(h) "Shares". The term "Shares" shall mean the shares of stock
of any series or class of the Fund, or, where appropriate, units of beneficial
interest in a trust where the Fund is organized as a Trust.
(i) "Property". The term "Property" shall mean:
(i) any and all securities and other investment items
which the Fund may from time to time deposit, or cause
to be deposited, with PNC Bank or which PNC Bank may
from time to time hold for the Fund;
(ii) all income in respect of any of such securities or
other investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the
Fund, which are received by PNC Bank from time to time, from
or on behalf of the Fund.
(j) "Written Instructions". The term "Written Instructions"
shall mean written instructions signed by one Authorized Person and received
by PNC Bank. The instructions may be delivered by hand, mail, tested
telegram, cable, telex or facsimile sending device.
2. Appointment. The Fund hereby appoints PNC Bank to provide custodian
services to the Fund, and PNC Bank accepts such appointment and agrees to
furnish such services.
3. Delivery of Documents. The Fund has provided or, where applicable,
will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Governing Board, approving the appointment of PNC Bank or its
affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the Fund's advisory agreement or agreements;
(d) a copy of the Fund's distribution agreement or agreements;
(e) a copy of the Fund's administration agreements if PNC Bank is
not providing the Fund with such services;
(f) copies of any shareholder servicing agreements made in
respect of the Fund; and
(g) certified or authenticated copies of any and all amendments
or supplements to the foregoing.
4. Compliance with Government Rules and Regulations. PNC Bank
undertakes to comply with all applicable requirements of the Securities and
Commodities Laws and any laws, rules and regulations of governmental
authorities having jurisdiction with respect to all duties to be performed by
PNC Bank hereunder. Except as specifically set forth herein, PNC Bank assumes
no responsibility for such compliance by the Fund.
5. Instructions. Unless otherwise provided in this Agreement, PNC Bank
shall act only upon Oral and Written Instructions. PNC Bank shall be entitled
to rely upon any Oral and Written Instructions it receives from an Authorized
Person (or from a person reasonably believed by PNC Bank to be an Authorized
Person) pursuant to this Agreement. PNC Bank may assume that any Oral or
Written Instructions received hereunder are not in any way inconsistent with
the provisions of organizational documents or this Agreement or of any vote,
resolution or proceeding of the Fund's Governing Board or of the Fund's
shareholders.
The Fund agrees to forward to PNC Bank Written Instructions confirming
Oral Instructions so that PNC Bank receives the Written Instructions by the
close of business on the same day that such Oral Instructions are received.
The fact that such confirming Written Instructions are not received by PNC
Bank shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions.
The Fund further agrees that PNC Bank shall incur no liability to the
Fund in acting upon Oral or Written Instructions provided such instructions
reasonably appear to have been received from an Authorized Person.
6. Right to Receive Advice.
(a) Advice of the Fund. If PNC Bank is in doubt as to any action
it should or should not take, PNC Bank may request directions or advice,
including Oral or Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
questions of law pertaining to any action it should or should not take, PNC
Bank may request advice at its own cost from such counsel of its own choosing
(who may be counsel for the Fund, the Fund's advisor or PNC Bank, at the
option of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between
directions, advice or Oral or Written Instructions PNC Bank receives from the
Fund, and the advice it receives from counsel, PNC Bank shall be entitled to
rely upon and follow the advice of counsel.
(d) Protection of PNC Bank. PNC Bank shall be protected in any
action it takes or does not take in reliance upon directions, advice or Oral
or Written Instructions it receives from the Fund or from counsel and which
PNC Bank believes, in good faith, to be consistent with those directions,
advice or Oral or Written Instructions.
Nothing in this paragraph shall be construed so as to impose an
obligation upon PNC Bank (i) to seek such directions, advice or Oral or
Written Instructions, or (ii) to act in accordance with such directions,
advice or Oral or Written Instructions unless, under the terms of other
provisions of this Agreement, the same is a condition of PNC Bank's properly
taking or not taking such action.
7. Records. The books and records pertaining to the Fund which are in
the possession of PNC Bank, shall be the property of the Fund. Such books and
records shall be prepared and maintained as required by the 1940 Act and other
applicable securities laws, rules and regulations. The Fund, or the Fund's
Authorized Persons, shall have access to such books and records at all time
during PNC Bank's normal business hours. Upon the reasonable request of the
Fund, copies of any such books and records shall be provided by PNC Bank to
the Fund or to an Authorized Person of the Fund, at the Fund's expense.
8. Confidentiality. PNC Bank agrees to keep confidential all records
of the Fund and information relative to the Fund and its shareholders (past,
present and potential), unless the release of such records or information is
otherwise consented to, in writing, by the Fund. The Fund agrees that such
consent shall not be unreasonably withheld and may not be withheld where PNC
Bank may be exposed to civil or criminal contempt proceedings or when required
to divulge. The Fund further agrees that, should PNC Bank be required to
provide such information or records to duly constituted authorities (who may
institute civil or criminal contempt proceedings for failure to comply), PNC
Bank shall not be required to seek the Fund's consent prior to disclosing such
information.
9. Cooperation with Accountants. PNC Bank shall cooperate with the
Fund's independent public accountants and shall take all reasonable action in
the performance of its obligations under this Agreement to ensure that the
necessary information is made available to such accountants for the expression
of their opinion, as required by the Fund.
10. Disaster Recovery. PNC Bank shall enter into and shall maintain in
effect with appropriate parties one or more agreements making reasonable
provision for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the event of equipment
failures, PNC Bank shall, at no additional expense to the Fund, take
reasonable steps to minimize service interruptions but shall have no liability
with respect thereto.
11. Compensation. As compensation for custody services rendered by PNC
Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee or
fees as may be agreed to in writing from time to time by the Fund and PNC
Bank.
12. Indemnification. The Fund agrees to indemnify and hold harmless
PNC Bank and its nominees from all taxes, charges, expenses, assessment,
claims and liabilities (including, without limitation, liabilities arising
under the Securities and Commodities Laws and any state and foreign securities
and blue sky laws, and amendments thereto, and expenses, including (without
limitation) attorneys' fees and disbursements, arising directly or indirectly
from any action which PNC Bank takes or does not take (i) at the request or on
the direction of or in reliance on the advice of the Fund or (ii) upon Oral or
Written Instructions. Neither PNC Bank, nor any of its nominees, shall be
indemnified against any liability to the Fund or to its shareholders (or any
expenses incident to such liability) arising out of PNC Bank's own willful
misfeasance, bad faith, negligence or reckless disregard of its duties and
obligations under this Agreement.
13. Responsibility of PNC Bank. PNC Bank shall be under no duty to
take any action on behalf of the Fund except as specifically set forth herein
or as may be specifically agreed to by PNC Bank, in writing. PNC Bank shall
be obligated to exercise care and diligence in the performance of its duties
hereunder, to act in good faith and to use its best effort, within reasonable
limits, in performing services provided for under this Agreement. PNC Bank
shall be responsible for its own negligent failure to perform its duties under
this Agreement. Notwithstanding the foregoing, PNC Bank shall not be
responsible for losses beyond its control, provided that PNC Bank has acted in
accordance with the standard of care set forth above; and provided further
that PNC Bank shall only be responsible for that portion of losses or damages
suffered by the Fund that are attributable to the negligence of PNC Bank.
Without limiting the generality of the foregoing or of any other
provision of this Agreement, PNC Bank, in connection with its duties under
this Agreement, shall not be under any duty or obligation to inquire into and
shall not be liable for (a) the validity or invalidity or authority or lack
thereof of any Oral or Written Instruction, notice or other instrument which
conforms to the applicable requirements of this Agreement, and which PNC Bank
reasonably believes to be genuine; or (b) delays or errors or loss of data
occurring by reason of circumstances beyond PNC Bank's control, including acts
of civil or military authority, national emergencies, labor difficulties,
fire, flood or catastrophe, acts of God, insurrection, war, riots or failure
of the mails, transportation, communication or power supply.
Notwithstanding anything in this Agreement to the contrary, PNC Bank
shall have no liability to the Fund for any consequential, special or indirect
losses or damages which the Fund may incur or suffer by or as a consequence of
PNC Bank's performance of the services provided hereunder, whether or not the
likelihood of such losses or damages was known by PNC Bank.
14. Description of Services.
(a) Delivery of the Property. The Fund will deliver or arrange
for delivery to PNC Bank, all the property owned by the Fund, including cash
received as a result of the distribution of its Shares, during the period that
is set forth in this Agreement. PNC Bank will not be responsible for such
property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon
Written Instructions, shall open and maintain separate account(s) in the
Fund's name using all cash received from or for the account of the Fund,
subject to the terms of this Agreement. In addition, upon Written
Instructions, PNC Bank shall open separate custodial accounts for each
separate series, class or portfolio of the Fund and shall hold in such
account(s) all cash received from or for the accounts of the Fund specifically
designated to each separate series, class or portfolio. PNC Bank shall make
cash payments from or for the account of the Fund only for:
(i) purchases of securities in the name of the Fund or PNC
Bank or PNC Bank's nominee as provided in
sub-paragraph j and for which PNC Bank has received a
copy of the broker's or dealer's confirmation or
payee's invoice, as appropriate;
(ii) purchase or redemption of Shares of the Fund
delivered to PNC Bank;
(iii) payment of, subject to Written Instructions, interest,
taxes, administration, accounting, distribution, advisory,
management fees or similar expenses which are to be borne by
the Fund;
(iv) payment to, subject to receipt of Written
Instructions, the Fund's transfer agent, as agent for the
shareholders, an amount equal to the amount of dividends and
distributions stated in the Written Instructions to be
distributed in cash by the transfer agent to shareholders,
or, in lieu of paying the Fund's transfer agent, PNC Bank
may arrange for the direct payment of cash dividends and
distributions to shareholders in accordance with procedures
mutually agreed upon from time to time by and among the
Fund, PNC Bank and the Fund's transfer agent;
(v) payments, upon receipt of Written Instructions, in
connection with the conversion, exchange or surrender
of securities owned or subscribed to by the Fund and
held by or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with
respect to securities sold short; payments made to a
sub-custodian pursuant to provisions in sub-paragraph c of
this Paragraph; and
(viii) payments, upon Written Instructions made for other
proper Fund purposes. PNC Bank is hereby authorized to
endorse and collect all checks, drafts or other orders for
the payment of money received as custodian for the account
of the Fund.
(c) Receipt of Securities.
(i) PNC Bank shall hold all securities received by it for
the account of the Fund in a separate account that
physically segregates such securities from those of
any other persons, firms or corporations, except for
securities held in a Book-Entry System. All such
securities shall be held or disposed of only upon
Written Instructions of the Fund pursuant to the
terms of this Agreement. PNC Bank shall have no power
or authority to assign, hypothecate, pledge or
otherwise dispose of any such securities or
investment, except upon the express terms of this
Agreement and upon Written Instructions, accompanied
by a certified resolution of the Fund's Governing
Board, authorizing the transaction. In no case may
any member of the Fund's Governing Board, or any
officer, employee or agent of the Fund withdraw any
securities. At PNC Bank's own expense and for its own
convenience, PNC Bank may enter into sub-custodian
agreements with other banks or trust companies to
perform duties described in this sub-paragraph c.
Such bank or trust company shall have an aggregate
capital, surplus and undivided profits, according to
its last published report, of at least one million
dollars ($1,000,000), if it is a subsidiary or
affiliate of PNC Bank, or at least twenty million
dollars ($20,000,000) if such bank or trust company is
not a subsidiary or affiliate of PNC Bank. In
addition, such bank or trust company must agree to
comply with the relevant provisions of the 1940 Act
and other applicable rules and regulations. PNC Bank
shall remain responsible for the performance of all of
its duties as described in this Agreement and shall
hold the Fund harmless from PNC Bank's own (or any
sub-custodian chosen by PNC Bank under the terms of
this sub-paragraph c) acts or omissions, under the
standards of care provided for herein.
(d) Transactions Requiring Instructions. Upon receipt of Oral or
Written Instructions and not otherwise, PNC Bank, directly or through the use
of the Book-Entry System, shall:
(i) deliver any securities held for the Fund against the
receipt of payment for the sale of such securities;
(ii) execute and deliver to such persons as may be
designated in such Oral or Written Instructions, proxies,
consents, authorizations, and any other instruments whereby
the authority of the Fund as owner of any securities may be
exercised;
(iii) deliver any securities to the issuer thereof, or its
agent, when such securities are called, redeemed, retired or
otherwise become payable; provided that, in any such case,
the cash or other consideration is to be delivered to PNC
Bank;
(iv) deliver any securities held for the Fund against
receipt of other securities or cash issued or paid in
connection with the liquidation, reorganization,
refinancing, tender offer, merger, consolidation or
recapitalization of any corporation, or the exercise of any
conversion privilege;
(v) deliver any securities held for the Fund to any
protective committee, reorganization committee or
other person in connection with the reorganization,
refinancing, merger, consolidation, recapitalization
or sale of assets of any corporation, and receive and
hold under the terms of this Agreement such
certificates of deposit, interim receipts or other
instruments or documents as may be issued to it to
evidence such delivery;
(vi) make such transfer or exchanges of the assets of the
Fund and take such other steps as shall be stated in said
Oral or Written Instructions to be for the purpose of
effectuating a duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of
the Fund;
(vii) release securities belonging to the Fund to any bank
or trust company for the purpose of a pledge or
hypothecation to secure any loan incurred by the Fund;
provided, however, that securities shall be released only
upon payment to PNC Bank of the monies borrowed, except that
in cases where additional collateral is required to secure a
borrowing already made subject to proper prior
authorization, further securities may be released for that
purpose; and repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon
surrender of the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in
connection with any repurchase agreement entered into on
behalf of the Fund, but only on receipt of payment therefor;
and pay out moneys of the Fund in connection with such
repurchase agreements, but only upon the delivery of the
securities;
(ix) release and deliver or exchange securities owned by
the Fund in connection with any conversion of such
securities, pursuant to their terms, into other securities;
(x) release and deliver securities owned by the Fund for
the purpose of redeeming in kind shares of the Fund
upon delivery thereof to PNC Bank; and
(xi) release and deliver or exchange securities owned by
the Fund for other corporate purposes. PNC Bank must also
receive a certified resolution describing the nature of the
corporate purpose and the name and address of the person(s)
to whom delivery shall be made when such action is pursuant
to sub-paragraph d above.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
certified resolutions of the Fund's Governing Board approving, authorizing and
instructing PNC Bank on a continuous and on-going basis, to deposit in the
Book-Entry System all securities belonging to the Fund eligible for deposit
therein and to utilize the Book-Entry System to the extent possible in
connection with settlements of purchases and sales of securities by the Fund,
and deliveries and returns of securities loaned, subject to repurchase
agreements or used as collateral in connection with borrowings. PNC Bank
shall continue to perform such duties until it receives Written or Oral
Instructions authorizing contrary actions(s).
To administer the Book-Entry System properly, the following provisions
shall apply:
(i) With respect to securities of the Fund which are
maintained in the Book-Entry system, established
pursuant to this sub-paragraph e hereof, the records
of PNC Bank shall identify by Book-Entry or otherwise
those securities belonging to the Fund. PNC Bank
shall furnish the Fund a detailed statement of the
Property held for the Fund under this Agreement at
least monthly and from time to time and upon written
request.
(ii) Securities and any cash of the Fund deposited in the
Book-Entry System will at all times be segregated from any
assets and cash controlled by PNC Bank in other than a
fiduciary or custodian capacity but may be commingled with
other assets held in such capacities. PNC Bank and its
sub-custodian, if any, will pay out money only upon receipt
of securities and will deliver securities only upon the
receipt of money.
(iii) All books and records maintained by PNC Bank which
relate to the Fund's participation in the Book-Entry System
will at all times during PNC Bank's regular business hours
be open to the inspection of the Fund's duly authorized
employees or agents, and the Fund will be furnished with all
information in respect of the services rendered to it as it
may require.
(iv) PNC Bank will provide the Fund with copies of any
report obtained by PNC Bank on the system of internal
accounting control of the Book-Entry System promptly after
receipt of such a report by PNC Bank. PNC Bank will also
provide the Fund with such reports on its own system of
internal control as the Fund may reasonably request from
time to time.
(f) Registration of Securities. All Securities held for the Fund
which are issued or issuable only in bearer form, except such securities held
in the Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name of the Fund; PNC
Bank; the Book-Entry System; a sub-custodian; or any duly appointed nominee(s)
of the Fund, PNC Bank, Book-Entry system or sub-custodian. The Fund reserves
the right to instruct PNC Bank as to the method of registration and
safekeeping of the securities of the Fund. The Fund agrees to furnish to PNC
Bank appropriate instruments to enable PNC Bank to hold or deliver in proper
form for transfer, or to register its registered nominee or in the name of the
Book-Entry System, any securities which it may hold for the account of the
Fund and which may from time to time be registered in the name of the Fund.
PNC Bank shall hold all such securities which are not held in the Book-Entry
System in a separate account for the Fund in the name of the Fund physically
segregated at all times from those of any other person or persons.
(g) Voting and Other Action. Neither PNC Bank nor its nominee
shall vote any of the securities held pursuant to this Agreement by or for the
account of the Fund, except in accordance with Written Instructions. PNC
Bank, directly or through the use of the Book-Entry System, shall execute in
blank and promptly deliver all notice, proxies, and proxy soliciting materials
to the registered holder of such securities. If the registered holder is not
the Fund then Written or Oral Instructions must designate the person(s) who
owns such securities.
(h) Transactions Not Requiring Instructions. In the absence of
contrary Written Instructions, PNC Bank is authorized to take the following
actions:
(i) Collection of Income and Other Payments.
(A) collect and receive for the account of the Fund,
all income, dividends, distributions, coupons,
option premiums, other payments and similar
items, included or to be included in the
Property, and, in addition, promptly advise the
Fund of such receipt and credit such income, as
collected, to the Fund's custodian account;
(B) endorse and deposit for collection, in the name
of the Fund, checks, drafts, or other orders for
the payment of money;
(C) receive and hold for the account of the Fund all
securities received as a distribution on the
Fund's portfolio securities as a result of a
stock dividend, share split-up or
reorganization, recapitalization, readjustment
or other rearrangement or distribution of rights
or similar securities issued with respect to any
portfolio securities belonging to the Fund held
by PNC Bank hereunder;
(D) present for payment and collect the amount
payable upon all securities which may mature or
be called, redeemed, or retired, or otherwise
become payable on the date such securities
become payable; and
(E) take any action which may be necessary and
proper in connection with the collection and
receipt of such income and other payments and
the endorsement for collection of checks,
drafts, and other negotiable instruments.
(ii) Miscellaneous Transactions.
(A) PNC Bank is authorized to deliver or cause to be
delivered Property against payment or other
consideration or written receipt therefor in the
following cases:
(1) for examination by a broker or dealer
selling for the account of the Fund in
accordance with street delivery custom;
(2) for the exchange of interim receipts or
temporary securities for definitive
securities; and
(3) for transfer of securities into the name
of the Fund or PNC Bank or nominee of
either, or for exchange of securities for
a different number of bonds,certificates,
or other evidence, representing the same
aggregate face amount or number of units
bearing the same interest rate, maturity
date and call provisions, if any; provided
that, in any such case, the new securities
are to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral or
Written Instructions to the contrary, PNC Bank
shall:
(1) pay all income items held by it which call
for payment upon presentation and hold the
cash received by it upon such payment for
the account of the Fund;
(2) collect interest and cash dividends
received, with notice to the Fund, to the
Fund's account;
(3) hold for the account of the Fund all stock
dividends, rights and similar securities
issued with respect to any securities held
by PNC Bank; and
(4) execute as agent on behalf of the
Fund all necessary ownership certificates
required by the Internal Revenue Code or
the Income Tax Regulations of the United
States Treasury Department or under the
laws of any State now or hereafter in
effect, inserting the Fund's name, on such
certificate as the owner of the securities
covered thereby, to the extent it may
lawfully do so.
(i) Segregated Accounts.
(i) PNC Bank shall upon receipt of Written or Oral
Instructions establish and maintain segregated
account(s) on its records for and on behalf of the
Fund. Such account(s) may be used to transfer cash
and securities, including securities in the Book-Entry
System:
(A) for the purposes of compliance by the Fund with
the procedures required by a securities or
option exchange, providing such procedures
comply with the 1940 Act and any releases of the
SEC relating to the maintenance of segregated
accounts by registered investment companies; and
(B) Upon receipt of Written Instructions, for other
proper corporate purposes.
(ii) PNC Bank may enter into separate custodial agreements
with various futures commission merchants ("FCMs") that the
Fund uses ("FCM Agreement"). Pursuant to an FCM Agreement,
the Fund's margin deposits in any transactions involving
futures contracts and options on futures contracts will be
held by PNC Bank in accounts ("FCM Account") subject to the
disposition by the FCM involved in such contracts and in
accordance with the customer contract between FCM and the
Fund ("FCM Contract"), SEC rules and the rules of the
applicable commodities exchange. Such FCM Agreements shall
only be entered into upon receipt of Written Instructions
from the Fund which state that:
(A) a customer agreement between the FCM and the
Fund has been entered into; and
(B) the Fund is in compliance with all the rules and
regulations of the CFTC. Transfers of initial
margin shall be made into a FCM Account only
upon Written Instructions; transfers of premium
and variation margin may be made into a FCM
Account pursuant to Oral Instructions.
Transfers of funds from a FCM Account to the FCM
for which PNC Bank holds such an account may
only occur upon certification by the FCM to PNC
Bank that pursuant to the FCM Agreement and the
FCM Contract, all conditions precedent to its
right to give PNC Bank such instructions have
been satisfied.
(iii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such share- holders holding Shares
through IRA accounts, in accordance with the Fund's
prospectuses, the Internal Revenue Code (including
regulations), and with such other procedures as are mutually
agreed upon from time to time by and among the Fund, PNC
Bank and the Fund's transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased
securities upon receipt of Oral or Written Instructions from the Fund or its
investment advisor(s) that specify:
(i) the name of the issuer and the title of the
securities, including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased
and accrued interest, if any;
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase; and
(vi) the name of the person from whom or the broker through
whom the purchase was made. PNC Bank shall upon receipt of
securities purchased by or for the Fund pay out of the
moneys held for the account of the Fund the total amount
payable to the person from whom or the broker through whom
the purchase was made, provided that the same conforms to
the total amount payable as set forth in such Oral or
Written Instructions.
(k) Sales of Securities. PNC Bank shall settle sold securities
upon receipt of Oral or Written Instructions from the Fund that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and
accrued interest, if any;
(iii) the date of trade, settlement and sale;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to
whom the sale was made; and
(vii) the location to which the security must be delivered
and delivery deadline, if any. PNC Bank shall deliver the
securities upon receipt of the total amount payable to the
Fund upon such sale, provided that the total amount payable
is the same as was set forth in the Oral or Written
Instructions. Subject to the foregoing, PNC Bank may accept
payment in such form as shall be satisfactory to it, and may
deliver securities and arrange for payment in accordance
with the customs prevailing among dealers in securities.
(l) Reports.
(i) PNC Bank shall furnish the Fund the following reports:
(A) such periodic and special reports as the Fund
may reasonably request;
(B) a monthly statement summarizing all transactions
and entries for the account of the Fund, listing
the portfolio securities belonging to the Fund
with the adjusted average cost of each issue and
the market value at the end of such month, and
stating the cash account of the Fund including
disbursement;
(C) the reports to be furnished to the Fund pursuant
to Rule 17f-4; and
(D) such other information as may be agreed upon
from time to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or conversion or
similar communication received by it as custodian of the
Property. PNC Bank shall be under no other obligation to
inform the Fund as to such actions or events.
(m) Collections. All collections of monies or other property, in
respect, or which are to become part of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the Fund. If
payment is not received by PNC Bank within a reasonable time after proper
demands have been made, PNC Bank shall notify the Fund in writing, including
copies of all demand letters, any written responses, memoranda of all oral
responses and telephonic demands thereto, and await instructions from the
Fund. PNC Bank shall not be obliged to take legal action for collection
unless and until reasonably indemnified to its satisfaction. PNC Bank shall
also notify the Fund as soon as reasonably practicable whenever income due on
securities is not collected in due course.
15. Duration and Termination. This Agreement shall continue until
terminated by the Fund or by PNC Bank on sixty (60) days' prior written notice
to the other party. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders of the Fund
to dissolve or to function without a custodian of its cash, securities or
other property), PNC Bank shall not deliver cash, securities or other property
of the Fund to the Fund. It may deliver them to a bank or trust company of
PNC Bank's choice, having an aggregate capital, surplus and undivided profits,
as shown by its last published report, of not less than twenty million dollars
($20,000,000), as a custodian for the Fund to be held under terms similar to
those of this Agreement. PNC Bank shall not be required to make any such
delivery or payment until full payment shall have been made to PNC Bank of all
of its fees, compensation, costs and expenses. PNC Bank shall have a security
interest in and shall have a right of setoff against Property in the Fund's
possession as security for the payment of such fees, compensation, costs and
expenses.
16. Notices. All notices and other communications, including Written
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at PNC
Bank's address: Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, marked for the attention of the Custodian
Services Department (or its successor) (b) if to the Fund, at the address of
the Fund; or (c) if to neither of the foregoing, at such other address as
shall have been notified to the sender of any such notice or other
communication. If notice is sent by confirming telegram, cable, telex or
facsimile sending device, it shall be deemed to have been given immediately.
If notice is sent by first-class mail, it shall be deemed to have been given
five days after it has been mailed. If notice is sent by messenger, it shall
be deemed to have been given on the day it is delivered.
17. Amendments. This Agreement, or any term hereof, may be changed or
waived only by a written amendment, signed by the party against whom
enforcement of such change or waiver is sought. 18. Delegation. PNC
Bank may assign its rights and delegate its duties hereunder to any
wholly-owned direct or indirect subsidiary of PNC Bank, National Association
or PNC Bank Corp., provided that (i) PNC Bank gives the Fund thirty (30) days
prior written notice; (ii) the delegate agrees with PNC Bank to comply with
all relevant provisions of the 1940 Act; and (iii) PNC Bank and such delegate
promptly provide such information as the Fund may request, and respond to such
questions as the Fund may ask, relative to the assignment, including (without
limitation) the capabilities of the delegate.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. Further Actions. Each party agrees to perform such further acts
and execute such further documents as are necessary to effectuate the purposes
hereof.
21. Miscellaneous. This Agreement embodies the entire agreement and
understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the
parties may embody in one or more separate documents their agreement, if any,
with respect to delegated duties and/or Oral Instructions. The captions in
this Agreement are included for convenience of reference only and in no way
define or delimit any of the provisions hereof or otherwise affect their
construction or effect.
This Agreement shall be deemed to be a contract made in Pennsylvania and
governed by Pennsylvania law, without regard to principles of conflicts of
law. If any provision of this Agreement shall be held or made invalid by a
court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors and
permitted assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their officers designated below on the day and year first above
written.
PNC BANK, NATIONAL ASSOCIATION
By:
Title:
SMITH BARNEY PRINCIPAL RETURN FUND
By:
Title:
23
g:\funds\slep\agreemts\custagre.doc
g:\funds\slep\agreemts\custagre.doc
Independent Auditors' Consent
To the Shareholders and Trustees of
Smith Barney Principal Return Fund:
We consent to the use of our reports dated January 17, 1996 with respect to
the Portfolios listed below of Smith Barney Principal Return Fund
incorporated herein by reference and to the references to our Firm under the
headings "Financial Highlights" in the Prospectus and "Counsel and Auditors"
in the Statement of Additional Information.
Portfolio
Security and Growth Fund
Zeros and Appreciation Series 1998
Zeros Plus Emerging Growth Series 2000
KPMG PEAT MARWICK LLP
New York, New York
March 28, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000841489
<NAME> SMITH BARNEY PRINCIPAL RETURN FUND
<SERIES>
<NUMBER> 3
<NAME> ZEROS PLUS EMERGING GROWTH SERIES 1996
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 59,053,722
<INVESTMENTS-AT-VALUE> 65,064,283
<RECEIVABLES> 130,871
<ASSETS-OTHER> 992
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 65,196,149
<PAYABLE-FOR-SECURITIES> 84,935
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 146,720
<TOTAL-LIABILITIES> 231,655
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 7,464,369
<SHARES-COMMON-PRIOR> 7,719,183
<ACCUMULATED-NII-CURRENT> 4,040,213
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 399,417
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6,010,561
<NET-ASSETS> 64,964,494
<DIVIDEND-INCOME> 520,480
<INTEREST-INCOME> 4,048,947
<OTHER-INCOME> 0
<EXPENSES-NET> 529,214
<NET-INVESTMENT-INCOME> 4,040,213
<REALIZED-GAINS-CURRENT> 5,344,856
<APPREC-INCREASE-CURRENT> 84,606
<NET-CHANGE-FROM-OPS> 9,469,675
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 4,356,018
<DISTRIBUTIONS-OF-GAINS> 9,770,284
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 1,889,987
<SHARES-REINVESTED> 1,653,173
<NET-CHANGE-IN-ASSETS> (7,567,936)
<ACCUMULATED-NII-PRIOR> 4,045,955
<ACCUMULATED-GAINS-PRIOR> 4,824,825
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 203,597
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 67,865,764
<PER-SHARE-NAV-BEGIN> 9.40
<PER-SHARE-NII> 0.53
<PER-SHARE-GAIN-APPREC> 0.67
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (1.90)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 8.70
<EXPENSE-RATIO> 0.71
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000841489
<NAME> SMITH BARNEY PRINCIPAL RETURN FUND
<SERIES>
<NUMBER> 2
<NAME> ZEROS PLUS EMERGING GROWTH SERIES 1998
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 82,788,164
<INVESTMENTS-AT-VALUE> 99,326,664
<RECEIVABLES> 223,801
<ASSETS-OTHER> 4,135
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 99,554,601
<PAYABLE-FOR-SECURITIES> 714,190
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 192,844
<TOTAL-LIABILITIES> 907,034
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 79,411,894
<SHARES-COMMON-STOCK> 671,900
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 4,572,313
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 11,390,084
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 13,538,500
<NET-ASSETS> 98,647,566
<DIVIDEND-INCOME> 819,710
<INTEREST-INCOME> 132,392
<OTHER-INCOME> 4,666,512
<EXPENSES-NET> 1,046,300
<NET-INVESTMENT-INCOME> 4,572,313
<REALIZED-GAINS-CURRENT> 5,828,985
<APPREC-INCREASE-CURRENT> 7,794,151
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 5,217,995
<DISTRIBUTIONS-OF-GAINS> 10,268,770
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> 20,766,127
<SHARES-REINVESTED> 15,181,620
<NET-CHANGE-IN-ASSETS> (2,875,823)
<ACCUMULATED-NII-PRIOR> 5,221,540
<ACCUMULATED-GAINS-PRIOR> 5,561,099
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 102,573
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,046,300
<AVERAGE-NET-ASSETS> 99,591,551
<PER-SHARE-NAV-BEGIN> 7.75
<PER-SHARE-NII> 0.36
<PER-SHARE-GAIN-APPREC> 1.03
<PER-SHARE-DIVIDEND> (0.40)
<PER-SHARE-DISTRIBUTIONS> (0.83)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 7.91
<EXPENSE-RATIO> 1.05
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000841489
<NAME> SMITH BARNEY PRINCIPAL RETURN FUND
<SERIES>
<NUMBER> 1
<NAME> ZEROS PLUS EMERGING GROWTH SERIES 2000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 59,380,720
<INVESTMENTS-AT-VALUE> 77,221,849
<RECEIVABLES> 345,716
<ASSETS-OTHER> 19,331
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 77,586,896
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,023,717
<TOTAL-LIABILITIES> 1,023,717
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 1,505,929
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 2,341,528
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 675,928
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,841,129
<NET-ASSETS> 76,563,179
<DIVIDEND-INCOME> 27,510
<INTEREST-INCOME> 3,188,030
<OTHER-INCOME> 0
<EXPENSES-NET> 874,012
<NET-INVESTMENT-INCOME> 2,341,528
<REALIZED-GAINS-CURRENT> 4,894,552
<APPREC-INCREASE-CURRENT> 7,803,978
<NET-CHANGE-FROM-OPS> 15,040,058
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 2,464,055
<DISTRIBUTIONS-OF-GAINS> 2,759,709
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 0
<NUMBER-OF-SHARES-REDEEMED> (1,512,438)
<SHARES-REINVESTED> 596,734
<NET-CHANGE-IN-ASSETS> 1,812,066
<ACCUMULATED-NII-PRIOR> 2,248,449
<ACCUMULATED-GAINS-PRIOR> (1,458,915)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 300,015
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 74,984,000
<PER-SHARE-NAV-BEGIN> 8.15
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> 1.48
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> (0.62)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.28
<EXPENSE-RATIO> 1.17
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000841489
<NAME> SMITH BARNEY PRINCIPAL RETURN FUND
<SERIES>
<NUMBER> 4
<NAME> SECURITY AND GROWTH FUND
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-END> NOV-30-1995
<INVESTMENTS-AT-COST> 283,930,885
<INVESTMENTS-AT-VALUE> 309,997,541
<RECEIVABLES> 1,171,748
<ASSETS-OTHER> 61,246
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 311,231,233
<PAYABLE-FOR-SECURITIES> 343,750
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,065,366
<TOTAL-LIABILITIES> 1,409,116
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 8,785,204
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 3,357,336
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 26,066,656
<NET-ASSETS> 309,822,116
<DIVIDEND-INCOME> 256,460
<INTEREST-INCOME> 10,731,545
<OTHER-INCOME> 0
<EXPENSES-NET> 2,202,801
<NET-INVESTMENT-INCOME> 8,875,204
<REALIZED-GAINS-CURRENT> 3,357,336
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 38,209,196
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 312,703,308
<NUMBER-OF-SHARES-REDEEMED> (41,018,083)
<SHARES-REINVESTED> 3,873,501
<NET-CHANGE-IN-ASSETS> 275,558,726
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,945,806)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 309,822,116
<PER-SHARE-NAV-BEGIN> 9.60
<PER-SHARE-NII> 0.354
<PER-SHARE-GAIN-APPREC> 0.137
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.68
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
