As filed with the Securities and Exchange Commission on March
26, 1997
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.20
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF
1940, as
amended
Amendment No.21[ 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 LLP
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 26, 1997 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, 1996 was filed on January 27,
1997 as accession number 000091155-97-
000040.
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 27, 1997
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 March 27,
1997, 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 OFFENCE.
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 of its assets
primarily in equity securities. There can be no assurance that
the Fund's investment objectives will be achieved.
As with most mutual funds, the 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.
("SBMFM") ...................................
Investment Adviser and
Administrator
PNC Bank, National Association
("PNC")
............................................
.....................
Custodian
First Data Investor Services Group, Inc.
("First Data")
............................................
.................
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
5
Financial Highlights
6
Investment Objectives and Management Policies
10
Management of the Trust
21
Purchase of Shares
22
Redemption of Shares
22
Minimum Account Size
24
Valuation of Shares
25
Exchange Privilege
25
Dividends, Distributions and Taxes
28
The Series' Performance
29
Custodian and Transfer Agent
30
Distributor
30
Additional Information
31
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
1998
Series
2000
Security and
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
0.20%
0.26%
0.24%
Total Fund Operating Expenses
0.95%
1.11%
0.99%
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
$59
$79
$100
$161
Series 2000
$61
$84
$108
$178
Security and Growth Fund
$50
$70
$ 93
$156
* 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 years ended November
30,1996 and 1995, has been audited by KPMG Peat Marwick LLP,
independent auditors, whose reports thereon appear in the Funds'
annual reports dated November 30,1996 and 1995. The information
for the fiscal years ended November 30,1991 through November
30,1994 has been audited by other auditors. The information set
out below should be read in conjunction with the financial
statements and related notes that appear in the Fund's Annual
Report to Shareholders, which is incorporated by reference into
the Statement of Additional Information.
For a Series 1998 share of beneficial interest outstanding
throughout each period
1996
1995
1994
1993
1992
1991 (1)
Net Asset Value, Beginning
of Period
$7.91
$7.75
$9.38
$9.02
$8.40
$7.60
Income (Loss) From
Operations:
Net investment income
Net realized and
unrealized gain (loss)
0.38
0.45
0.36
1.03
0.41
(0.70)
0.38
0.48
0.37
0.68
0.39
0.41
Total Income (Loss) From
operations
0.83
1.39
(0.29)
0.86
1.05
0.80
Less Distributions From:
Net investment income
Net realized gains
(0.78
)
(0.44
)
(0.40)
(0.83)
(0.45)
(0.89)
(0.40)
(0.10)
(0.43)
--
--
--
Total Distributions
(1.22
)
(1.23)
(1.34)
(0.50)
(0.43)
Net Asset Value, End of
Period
$7.52
$7.91
$7.75
$9.38
$9.02
$8.40
Total Return
11.03
%
19.93%
(3.69)%
9.99%
12.86%
10.53%++
Net Assets, End of Period
(000s)
$93,7
93
$98,51
3
$101,38
8
$136,57
6
$166,0
77
$195,956
Ratios to Average Net
Assets:
Expenses
Net investment income
0.95%
4.67
1.05%
4.59
1.01%
4.47
0.97%
4.15
1.01%
4.39
1.05%+
5.04+
Portfolio Turnover Rate
12%
13%
10%
17%
4%
20%
Average Commissions Paid On
Equity Security
Transactions (2)
$0.06
$0.06
--
--
--
--
(1) For the period from January 25, 1991 (commencement of
operations) to November 30, 1991.
(2) As of September 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share.
+ + 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:
1996
1995
1994
1993
1992
1991(1)
Net Asset Value, Beginning
of Period
$9.28
$8.15
$9.00
$8.16
$7.57
$7.60
Income (Loss) From
Operations:
Net investment income
Net realized and unrealized
gain (loss)
0.30
(0.16)
0.27
1.48
0.27
(0.28)
0.26
0.96
0.26
0.43
0.07
(0.10)
Total Income (Loss) From
operations
0.14
1.75
(0.01)
1.22
0.69
(0.03)
Less Distributions From:
Net investment income
Net realized gains
(0.57)
(0.22)
(0.27)
(0.35)
(0.34)
(0.50)
(0.29)
(0.09)
(0.10)
- --
- --
Total Distributions
(0.79)
(0.62)
(0.84)
(0.38)
(0.10)
- --
Net Asset Value, End of
Period
$8.63
$9.28
$8.15
$9.00
$8.16
$7.57
Total Return
1.55%
22.17%
(0.20)%
15.72%
9.15%
(0.39)%
++
Net Assets End of Period
(000s)
$65,43
2
$76,56
3
$74,751
$96,865
$125,32
7
$157,42
5
Ratios to Average Net
Assets:
Expenses (2)
Net investment income
1.11%
3.15
1.17%
3.12
1.15%
3.27
1.10%
3.12
1.15%
3.31
1.18%+
3.56+
Portfolio Turnover Rate
0%
6%
1 %
0%
0%
2%
Average Commissions Paid On
Equity Security
Transactions(3)
$0.06
$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) As of September 1995, the SEC instituted new guidelines
requiring the disclosure of average commissions per share.
+ + 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:
1996
1995 (1)
Net Asset Value, Beginning of Period
$10.68
$9.60
Income (Loss) From Operations:
Net investment income
Net realized and unrealized gain (loss)
0.33
0.82
0.28
0.94
Total Income (Loss) From Operations
1.15
1.22
Less Distributions From:
Net investment income
Net realized gains
(0.62)
(0.99)
- --
(0.14)
Total Distributions
(1.61)
(0.14)
Net Asset Value, End of Period
$10.22
$10.68
Total Return
11.15%
12.70%++
Net Assets, End of Period (000s)
$244,007
$309,822
Ratios to Average Net Assets:
Expenses
Net investment income
0.99%
2.88
1.02%+
4.07+
Portfolio Turnover Rate
43%
26%
Average Commissions Paid On
Equity Security Transactions
$0.05
$0.06
(1) For the period from March 30, 1995 (commencement of
operations) to November 30, 1995
+ + 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, 1997, zero coupon securities represented
approximately 61%, 58%, 49%, 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 mandatory
redeemed and, within seven days thereafter, the proceeds will be
distributed to shareholders and each Series' thereafter will be
terminated. These arrangements may require the disposition of the
Series' equity securities at a time when it is otherwise
disadvantageous to do so and may involve selling securities at a
substantial loss. The liquidation and termination of each Series
is conditioned on the Trust's receipt of an opinion of its counsel
that all actions have been taken that are necessary to effect
these transactions in accordance with the then current position of
the SEC regarding a change in the nature of the business of a
registered investment company, including (as is required under
current SEC policy) the approval by the holders of a majority of
the Trust's outstanding voting securities, as defined in the 1940
Act. If shareholder approval is solicited but not obtained, the
Board of Trustees would consider and, if necessary, propose for
shareholder approval, such other action as it deems appropriate
and in the best interests of the Trust and its shareholders. The
estimated expenses of liquidation and termination of each Series
will be accrued rateably 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 of 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 changes 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, including preferred stocks and debt
securities convertible into common stocks. 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.
Additional Investments and Investment Techniques
Although under normal circumstances a 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
judgement 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.
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's 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, or equity and debt
securities of any grade provided such securities have been
determined by SBMFM to be liquid and unencumbered pursuant to
guidelines established by the Trustees("eligible segregated
assets") 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.
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.
(Security 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 eligible segregated assets, 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.
lnvestment 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.
lnvestment Advisor 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 counselling 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, 1997, in
excess of $80 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, 1996, are included in the Series' Annual
Report dated November 30, 1996. 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 administrator to Series 1998 and
Series 2000 and oversees all aspects of the Series'
administration. For administration services rendered to each of
the these Series, each Series pays SBMFM a fee at the annual rate
of 0.20% of the value of the Series' 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 Trustees determine 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 redemption price equal to their net asset
value per share next determined after receipt of a written request
in proper form at no charge other than any applicable CDSC.
Redemption requests received after the close of regular trading on
the NYSE are priced at the net asset value per share next
determined.
The Series normally transmit redemption proceeds for credit to the
shareholder's account at Smith Barney a broker that clears
securities transactions through Smith Barney on a fully disclosed
basis (an "Introducing Broker"), or dealer in the selling group at
no charge within three days after receipt of proper tender except
on any days on which the NYSE is closed or as permitted under the
Investment Company Act of 1940, as amended in extraordinary
circumstances. 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.
Shares held by Smith Barney as custodian must be redeemed by
submitting a written request to a Smith Barney Financial
Consultant. Shares other than those held by Smith Barney as a
custodian may be redeemed through a investor's Financial
Consultant, 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 must (a) state the number or
dollar amount 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 in excess of $2,000, 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. Written requests of $2,000 or
less do not require a signature guarantee unless more than one
such redemption request is made in any 10-day period or the
redemption proceeds are to be sent to an address other than the
address of record. Unless otherwise directed, redemption proceeds
will be mailed to an investor's address of record. 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 First Data
at 1-800-451-2010. Once eligibility is confirmed, the shareholder
must complete and return a Telephone/Wire Authorization Form,
along with a signature guarantee that will be provided by First
Data upon request.
Redemptions. Redemption requests of up to $10,000 of the
Series' shares may be made by eligible shareholders by calling
First Data at 1-800-451-2010. Such requests may be made between
9:00 a.m. and 5:00 p.m. (New York City time) on any day the NYSE
is open. 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
First Data at 1-800-451-2010 between 9:00 a.m. and 5:00 p.m.
(New York City time) on any day on which the NYSE is open.
Exchange requests received after the close of regular trading on
the NYSE are processed at the net asset value next determined.
Additional Information regarding Telephone Redemption and
Exchange Program. Neither the 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 identity 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
Growth and Income Funds
Concert Social Awareness Fund
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.-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 Portfolio
Smith Barney Muni Funds-Georgia Portfolio
Smith Barney Muni Funds - Limited Term Portfolio
Smith Barney Muni Funds-National Portfolio
Smith Barney Muni Funds-New York 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 Allocation Concert Series, Inc.-Balanced
Portfolio
Smith Barney Allocation Concert Series, Inc.-Conservative
Portfolio
Smith Barney Allocation Concert Series, Inc.-Growth
Portfolio
Smith Barney Allocation Concert Series, Inc.- High Growth
Portfolio
Smith Barney Allocation Concert Series, Inc.-Income
Portfolio
Money Market Funds
Smith Barney Money Funds, Inc.-Cash Portfolio
Smith Barney Money Funds, Inc.-Government Portfolio
Smith Barney Money Funds, Inc.-Retirement Portfolio
Smith Barney Muni Funds-California Money Market Portfolio
Smith Barney Muni Funds-New York Money Market Portfolio
Smith Barney Municipal Money Market Fund, Inc.
Additional Information Regarding the Exchange Privilege.
Although the exchange privilege is an important benefit, excessive
exchange transactions can be detrimental to the Fund's performance
and its shareholders. SBMFM may determine that a pattern of
frequent exchanges is excessive and contrary to the best interests
of the Fund's other shareholders. In this event, the Fund may, as
its discretion, decide to limit additional purchases and/or
exchanges by a shareholder. Upon such a determination, the Fund
will provide notice in writing or by telephone to the shareholder
at least 15 days prior to suspending the exchange privilege and
during the 15 day period the shareholder will be required to (a)
redeem his or her shares in the Fund or (b) remain invested in the
Fund or exchange into any of the funds of the Smith Barney Mutual
Funds ordinarily available, which position the shareholder would
be expected to maintain for a significant period of time. All
relevant factors will be considered in determining what
constitutes an abusive pattern of exchanges.
Certain shareholders may be able to exchange shares by
telephone. See "Redemption of Shares - Telephone Redemption 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 non-deductible 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 intends 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.
First Data 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 are submitted for shareholder vote,
shareholders of each Series will have one vote for each full share
owned and a proportionate, fractional vote for any fractional
share held. Generally shares of the Trust vote by individual
Series on all matters except (a) matters affecting only the
interests of one or more of the Series, in which case only shares
of the affected Series would be entitled to vote or (b) when the
1940 Act requires that shares of the Series be voted in the
aggregate. There normally will be no annual meetings of
shareholders for the purpose of electing Trustees unless and until
such time as less than a majority of the Trustees holding office
have been elected by shareholders. Shareholders of record of no
less than two-thirds of the outstanding shares of the Trust may
remove a Trustee through a declaration in writing or by vote cast
in person or by proxy at a meeting called for that purpose. A
meeting will be called for the purpose of voting on the removal of
a Trustee at the written request of holders of 10% of the Trust's
outstanding shares 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\1997\secdocs\prosp97.doc 29
SMITH BARNEY PRINCIPAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Statement of Additional Information March 27, 1997
This Statement of Additional Information supplements the
information contained in the current Prospectus dated March 29,
1997, 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.("First Data")
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 56). Partner in the law firm of
Murov & Ades. His address is 272 South Wellwood Avenue, P.O.
Box 504, Lindenhurst, New York 11757.
Herbert Barg, Trustee (Age 73). Private investor. His address
is 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004.
Alger B. Chapman (Age 65). Chairman and Chief Executive Officer
of the Chicago Board of Options Exchange.
Dwight B. Crane (Age 59). Professor, Graduate School of
Business Administration, Harvard University; Business
Consultant. His address is Harvard Business School, Soldiers
Field, Morgan Hall #371, Boston, Massachusetts 02163
Frank Hubbard, Trustee (Age 61). 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 80). Retired; Former
Chairman, Retail Division of BATUS, Inc., and Chairman and Chief
Executive Officer of Saks Fifth Avenue, Inc. His address is 2
Sutton Place South, New York, New York 10022
* Heath B. McLendon, Chairman of the Board and Investment
Officer (Age 63). 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, His address is 388 Greenwich Street, New York, New
York 10013
Jerome Miller, Trustee (Age 59). Retired, Former President,
Asset Management Group of Shearson Lehman Brothers. His address
is 27 Hemlock Road, Manhassett, New York 11030.
Ken Miller, Trustee (Age 55). President of Young Stuff Apparel
Group, Inc. His address is 1407 Broadway, 6th Floor, New York,
New York 10018.
John F. White, Trustee (Age 79). President Emeritus of The
Cooper Union for the Advancement of Science and Art, Special
Assistant to the President of the Aspen Institute. His address
is 97 Sunset Drive, Apt 402, Sarasota, Florida 34236
Jessica M. Bibliowicz, President (Age 37). 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 56).
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
43). 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 two 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 39).
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 46). 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, 1997, 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, 1996, such fees
and expenses for the Trust totaled $28,362.19
For the calendar year ended December 31, 1996, 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)
3,363.91
52,475
Herbert Barg (20)
3,363.91
105,175
Alger B. Chapman (9)
3,363.91
76,775
Dwight B. Crane (26)
3,363.91
140,375
Frank G. Hubbard (7)
3,363.91
52,475
Allan R. Johnson
(7)***
1,450.91
33,125
Heath B. McLendon (41)
- - - -
- - - -
Jerome Miller (2)
3,363.91
13,000
Ken Miller (7)*
3,363.91
49,475
John F. White (7)**
3,363.91
52,375
* For 1996, $812.50 and $12,125.00 of
compensation from the Fund and the Smith
Barney Mutual Funds, respectively, was
deferred.
** For 1996, $2,988.91 and $48,375.00 of compensation from the
Fund and the
Smith Barney Mutual Funds, respectively, was deferred.
*** 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 25,
l996. 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, and
Series 2000 pursuant to a written agreement for each Series (the
"Administration Agreements"). The Administration Agreements were
most recently approved for each 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 25, 1996. 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.
As compensation for administrative services rendered to
Series 1998 and Series 2000 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, 1996, 1995 and 1994,
the Series paid investment advisory and/or administration fees to
SBMFM as follows:
Series 1998*
Fiscal Year Ended
Series 2000**
Fiscal Year Ended
Security and
Growth Fund***
Fiscal Year Ended
1996
1995
1994
1996
1995
1994
1996
1995
Advisory
Fee
$284,12
6
$298,00
9
$350,77
3
$278,88
0
$300,015
$333,2
20
1,363,022
$1,074,991
Admin.
Fees
$189,41
7
$198,67
3
$233,84
8
$139,44
0
$150,007
$166,6
10
N/A
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 1996, 1995 and 1994 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, 1997.
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, or purchase instruments lacking
readily available market quotations ("illiquid instruments"), if
as a result of the purchase a Series' aggregate holdings of
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 30,1996 and 1995, the Series' portfolio
turnover rates were as follows:
1996
1995
Series 1998
12%
13%
Series 2000
0%
6%
Security and Growth Fund
43%
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
November 30
Series
1998
Series
2000
Security and
Growth Fund
Total Brokerage
Commissions
1994
$45,657
$0
N/A
1995
$37,974
$5,760
$475,496
1996
$39,223
$8,690
$303,127
Commissions Paid to
Smith Barney and/or
1994
$2,370
$2,130
N/A
Smith Barney Shearson
1995
$420
$0
$0
1996
$0
$0
$3,000
% of Total Brokerage
Commissions paid to
Smith Barney
1995
1996
1.1%
0%
0%
0%
0%
0.99%
% of Total Transactions
involving Commissions
paid to Smith Barney
1995
0%
1.00%
0%
1996
0%
0%
0.99%
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.
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:
Name of Series
One Year
Period Ended
11/30/96
Five Year
Period Ended
11/30/96
Per Annum for
Period
from Commencement
of
Operations through
11/30/96
Series 1998 (1)
5.43%
8.63%
9.18%
Series 2000 (2)
(3.54)%
8.24%
7.74 %
Security &
Growth Fund (3)
6.66%
N/A
11.43%
(1) Series 1998 commenced operations on January 25, 1991.
(2) Series 2000 commenced operations on August 30, 1991.
(3) Security and 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
11/30/96*
Five Year
Period
Ended
11/30/96*
Period
From
Commenceme
nt of
Operations
through
11/30/96*
One Year
Period
Ended
11/30/96*
*
Five Year
Period
Ended
11/30/96*
*
Period
From
Commencem
ent of
Operation
s through
11/30/96*
*
Series
1998 (1)
11.03%
59.20%
75.95%
5.43%
51.27%
67.16%
Series
2000 (2)
1.55%
56.40%
55.78%
(3.54)%
48.55%
48.00%
Security
& Growth
Fund (3)
11.55%
N/A
25.26%
6.66%
N/A
20.25%
* 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.
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, 1996, Smith Barney
was paid $236,771, $174,300 and $681,511 in shareholder servicing
fees for Series 1998, Series 2000 and the Security and Growth Fund
respectively.
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.
First Data is located at Exchange Place, Boston,
Massachusetts 02109, and serves as the Trust's transfer agent.
Under the transfer agency agreement, First Data 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, First Data receives a monthly
fee computed on the basis of the number of shareholder accounts
First Data 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, 1996 accompany this Statement of Additional
Information and are incorporated herein by reference in its
entirety.
g:\funds\prtf\1997\secdocs\1997sai.doc 20
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, 1996 and the reports of
Independent Auditors are incorporated by reference to the
Definitive 30b2-1 filed on February 7, 1997 as
accession number 91155-97-076.
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.
17 Financial Data Schedule filed herewith.
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 28, 1997
(i) Security and Growth Fund 22,870.00
(ii) Zeros and Appreciation
Series 1998 9,068.00
(iii) Zeros Plus Emerging
Equities Series 2000 6,684.00
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)
03/26/97
/s/ Lewis E. Daidone Senior Vice President
andTreasurer
(Chief Financial and Accounting
Officer) 03/29/96
Lewis E. Daidone
/s/ Paul R. Ades* Trustee
03/26/97
Paul R. Ades
Herbert Barg* Trustee
03/26/97
Herbert Barg
/s/ Alger B. Chapman* Trustee
03/26/97
Alger B. Chapman
/s/ Dwight B. Crane* Trustee
03/26/97
Dwight B. Crane
/s/ Frank Hubbard* Trustee
03/26/97
Frank Hubbard
Trustee
03/26/97
Jerome Miller
/s/ Ken Miller* Trustee
03/26/97
Ken Miller
/s/ John F. White* Trustee
03/26/97
John F. White
*Signed by Heath B. McLendon, their
duly authorized attorney-in-fact, pursuant
to power of attorney dated December 23, 1994
/s/ Heath B. McLendon
Heath B. McLendon
funds prtn pea18
Independent Auditors Consent
To the Shareholders and Board of Trustees of
Smith Barney Principal Return Fund:
We consent to the use of our report, as listed below, with respect to the
Funds Smith Barney Principal Return Fund incorporated herein by reference and to
the references to our Firm under the heading Financial Highlights" in the
Prospectus and Counsel and Auditors" in the Statement of Additional
Information.
Fund Date of Independent Auditors Report
Security and Growth Fund January 13, 1997
Zeros Plus Emerging Growth Series 2000 January 13, 1997
Zeros Plus Emerging Growth Series 1998 January 13, 1997
KPMG Peat Marwick LLP
New York, New York
March 26, 1997
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