SMITH BARNEY PRINCIPAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information March
30,1998
As
amended June 29, 1998
This Statement of Additional Information supplements the
information contained in the current Prospectus dated March 30, 1998, 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 5
Redemption of Shares 13
Valuation of Shares 13
Exchange Privilege 13
Determination of Performance 14
(See in the Prospectus "The Series Performance")
Taxes 15
(See in the Prospectus "Dividends, Distributions and Taxes")
Distributor 17
Custodian and Transfer Agent (See in the Prospectus "Additional
Information") 17
Organization of the Trust 18
Financial Statements 18
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 or Distributor")
Distributor
Mutual Management Corp. ("MMC" or "Investment Adviser" or
"Administrator" ) formerly Smith Barney Mutual Funds Management Inc.
Investment Adviser and Administrator
PNC Bank National Association ("PNC" or "Custodian")
Custodian
First Data Investor Services Group, Inc.("First Data"
Transfer Agent or "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.
Paul R. Ades, Trustee (Age 57). 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 74). Private investor. His address is 273
Montgomery Avenue,
Bala Cynwyd, Pennsylvania 19004.
Dwight B. Crane (Age 60). 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 62). Vice President, of S & S Industries;
Former Corporate Vice
President, Materials Management and Marketing Services of Huls American,
Inc.
* Heath B. McLendon, Chairman of the Board and Investment Officer (Age 64).
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 60). Retired, Former President, Asset
Management Group of
Shearson Lehman Brothers. His address is 27 Hemlock Road, Manhassett, New
York 11030.
Ken Miller, Trustee (Age 56). President of Young Stuff Apparel Group, Inc.
His address is 1407 Broadway, 6th Floor, New York, New York 10018.
John F. White, Trustee (Emeritus effective February 6, 1998) (Age 80).
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.
Harry D. Cohen, Vice President and Investment Officer (Age 57). President
and Director of Smith Barney Investment Advisors, a division of MMC;
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. Ms address is 388 Greenwich Street, New
York, New York 10013.
Richard A. Freeman, Vice President and Investment Officer (Age 44).
Managing Director of Smith Barney Investment Advisors, a division of MMC;
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 is388 Greenwich Street, New York, New York 10013.
John G. Goode,(Age 52) Managing Director of Smith Barney, President and
Chief Executive Officer of Davis Skaggs Investment Management, a division
of the MMC, serves as Vice President of the Security and Growth Fund and
manages its day-to-day operations, including handling all investment
decisions. Mr. Goode also serves as Vice President and Investment Officer
of two other mutual funds 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 40). Managing
Director of Smith Barney; Director and Senior Vice President of MMC. Mr.
Daidone also serves as Senior Vice President and Treasurer of 42 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 47). Managing Director of Smith Barney;
General Counsel and Secretary of MMC. Ms. Sydor also serves as Secretary
of 42 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
March 10, 1998, 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, 1997, such fees
and expenses for the Trust totaled $66,742.
For the calendar year ended December 31, 1997, the Trustees of the Trust
were paid the following compensation:
Trustee
Aggregate Compensation from
the Fund
Pension or Retirement Benefits Accrued as Part of the Trust Expenses
Aggregate Compensation from the Smith Barney Mutual Funds
Paul R. Ades (7)
$6,200
$0
49,000
Herbert Barg (20)
6,200
0
101,600
Alger B. Chapman (9)+
4,100
0
53,925
Dwight B. Crane (26)
6,100
0
33,850
Frank G. Hubbard (7)
6,200
0
52,000
Heath B. McLendon (42)
...
0
- -
Jerome Miller (2)
6,200
0
12,400
Ken Miller (7)
6,200
0
52,000
John F. White (7)*
6,200
0
52,000
+ Mr. Chapman's compensation reflects his resignation from the
Board of Trustees effective June 20, 1997.
* For 1997 Mr. White deferred $6,200 compensation from the Trust
and from Smith Barney Mutual Funds.
** Upon attainment of age 80 Trustees are required to change to
emeritus status. Trustees Emeritus are entitled to serve in emeritus
status for a maximum of 10 years during which time they are paid 50% of the
annual retainer fee and meeting fees otherwise applicable to the Trust
Trustees together with reasonable out-of-pocket expenses for each meeting
attended. During the Trust's last fiscal year aggregate compensation paid
by the Trust to Trustees emeritus totaled $2,410.
Investment Adviser and Administrator - MMC
MMC serves as the Series' investment adviser under the terms of a
written agreement for each Series (the "Advisory Agreements"). MMC is a
wholly owned subsidiary of Salomon 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 24, 1997. 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." MMC pays the salaries of
all officers and employees who are employed by both it and the Trust and
maintains office facilities for the Trust. MMC bears all expenses in
connection with the performance of its services under the Advisory
Agreements.
As compensation for investment advisory services rendered, Series
1998 and Series 2000 pay MMC a fee computed daily and paid monthly at the
annual rate of 0.30% and 0.40%, respectively, of the value of their average
daily net assets. The Security and Growth fund pays MMC a fee of 0.50% of
the value of its average daily net assets for investment management
services rendered.
MMC 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 24, 1997. The services provided by MMC under the Administration
Agreements are described in the Prospectus under "Management of the
Trust." MMC 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, MMC 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, 1997, 1996 and 1995, the
Series paid investment advisory and/or administration fees to MMC as
follows:
Fiscal Year
Series 1998
Series 2000
Security and
Growth Fund*
Ended
Advisory Fee
Admin. Fee
Advisory Fee
Admin. Fee
Advisory Fee
Admin. Fee
1997
$266,201
$177,468
$249,071
$124,536
$1,007,814
N/A
1996
284,126
189,417
278,880
139,440
1,363,022
N/A
1995
298,009
198,673
300,015
150,007
1,074,991
N/A
* 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;
Securities and Exchange Commission (the "SEC") fees and state Blue Sky
qualification fees; charges of custodians; transfer and dividend disbursing
agents 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.
Counsel and Auditors
Willkie Farr & Gallagher serves as counsel to the Trust. Stroock &
Stroock & Lavan LLP 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, 1998.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIIES
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, but, 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 MMC 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 MMC 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, MMC, 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, must be consistent with applicable
regulatory requirements. 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 7 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 8 through 15 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 invest in a manner that would cause it to fail to
be a "diversified company" under the 1940 Act and the rules, regulations
and orders thereunder.
2. A Series will not borrow money, except that (a) a Series may borrow
from banks for temporary for emergency (not leveraging) purposes, including
the meeting of redemption requests which might otherwise require the
untimely disposition of securities and (b) a Series may, to the extent
consistent with its investment policies, enter into reverse repurchase
agreements, forward roll transactions and similar investment strategies and
techniques. To the extent that it engages in transactions described in (a)
and (b), a Series will be limited so that no more than 33-1/3% of the value
of a Series, total assets (including the amount borrowed) valued at the
lesser of cost or market, less liabilities (not including the amount
borrowed) valued at the time the borrowing is made is derived from such
transactions.
3. A Series will not make loans. This restriction does not apply to:
(a) the purchase of debt obligations in which a Series may invest
consistent with its investment objectives and policies; (b) repurchase
agreements; and (c) loans of its portfolio securities, to the fullest
extent permitted under the 1940 Act.
4. A Series will invest no more than 25% of the value of its total
assets in securities the issuers of which conduct their principal business
activities in the same industry. For the purpose of this limitation,
securities of the U.S. government (including its agencies and
instrumentalities) and securities of state or municipal governments and
their political subdivisions are not considered to be issued by members of
any industry.
5. 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.
6. A Series will not purchase or sell real estate, real estate
mortgages, commodities or commodity contracts, but this restriction shall
not prevent the Series from (a) investing in securities of issuers engaged
in the real estate business or the business of investing in real estate
(including interests in limited partnerships owning or otherwise engaging
in the real estate business or the business of investing in real estate)
and securities which are seemed by real estate or interests therein; (b)
holding or selling real estate received in connection with securities it
holds or held; (c) trading in futures contracts and options on futures
contracts (including options on currencies to the extent consistent with
the Series' investment objective and policies); or (d) investing in real
estate investment trust securities.
7. A Series will not issue "Senior Securities" as defined in the 1940
Act and the rules, regulations and orders thereunder, except as permitted
under the 1940 Act and the rules, regulations and orders thereunder.
8. A Series will not sell securities short.
9. A Series will not purchase securities on margin, except that a
Series my obtain any short-term credits necessary for the clearance of
purchases and sales of securities.
10. 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.
11. 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 write covered call options with respect to its portfolio
securities and 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.
12. 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.)
13. A Series will not make investments for the purpose of exercising
control or management of any other issuer.
14. 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.
15. 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 100% 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 rates, 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 30,1997 and 1996, the Series' portfolio
turnover rates were as follows:
1997
1996
Series 1998
11%
12%
Series 2000
0
0
Security and Growth Fund
20
43
Portfolio Transactions
Decisions to buy and sell securities for the Series are made by
MMC, 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 MMC, 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 MMC 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 MMC to be equitable to
each. In some cases, this procedure may adversely affect the price paid or
received by a Series or the size of the position obtained or disposed of by
the Series.
Transactions on United States stock exchanges involve the payment
of negotiated brokerage commissions. On exchanges on which commissions are
negotiated, the cost of transactions may vary among different brokers. No
stated commission is generally applicable to securities traded in over-the-
counter markets, but the prices of those securities include undisclosed
commissions or mark-ups. Over-the-counter purchases and sales are
transacted directly with principal market makers except in those cases in
which better prices and executions may be obtained elsewhere. The cost of
securities purchased from underwriters includes an underwriting commission
or concession, and the prices at which securities are purchased from and
sold to dealers include a dealer's mark-up or mark-down. U.S. government
securities are generally purchased from underwriters or dealers, although
certain newly issued U.S. government securities may be purchased directly
from the United States Treasury or from the issuing agency or
instrumentality. The following table sets forth-certain information
regarding the Series' payment of brokerage commissions:
Fiscal Year Ended
Series
Series
Security and
November 30
1998
2000
Growth Fund
Total Brokerage Commissions
1995
37,974
5,760
$475,496
1996
39,223
8,690
303,127
1997
28,011
3,090
128,979
Total Brokerage Commissions Paid to Smith Barney
1995
1996
$420
0
$0
0
$0
3,000
1997
180
0
5,448
% of Total Brokerage Commissions paid to Smith Barney
1995
1996
0%
0
0%
0
0%
0.99
1997
0.6
0
4.22
% of Total Transaction involving Commissions paid to Smith Barney
1995
1996
1997
0%
0
0
1.0%
0
0
0%
0.99
0.66
MMC 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 MMC 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, MMC 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 MMC or its affiliates exercise investment
discretion. The fees under the Series Advisory Agreements are not reduced
by reason of MMC 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-I
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 MMC, 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, Martin Luther King
Jr. 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 Annual 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(l +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
11/30/97
Five Year
Period Ended
11/30/97
Per Annum for Period
from Commencement of
Operations through
11/30/97
Series 1998 (1)
5.96%
8.39%
9.53%
Series 2000 (2)
6.72
8.85
8.45
Security & Growth Fund (3)
11.72
N/A
13.41
(1) Series 1998 commenced operations on January 25, 1991.
(2) Series 2000 commenced operations on August 30, 1991.
(3) Security & Growth Fund commenced operations on March 30, 1995.
These total return figures assume that the maximum sales charge has been
included in the investment at the time of purchase.
Aggregate Total Return
The Series aggregate total return figures shown below represent the
cumulative change in the value of an investment in a Series for the
specified period and are computed by the following formula:
ERV-P
P
Where: P = a hypothetical initial payment of $10,000.
ERV = Ending Redeemable Value of a hypothetical $10,000
investment made at the
beginning of the 1-, 5- or 10-year period at the end of
the 1-, 5- or 10-year period (or
fractional portion thereof), assuming reinvestment of all
dividends and distributions.
The Series' aggregate total returns were as follows for the periods
indicated:
Name of Series
One Year
Period Ended
11/30/97*
Five Year
Period Ended
11/30/97*
Period from Commencement of Operations through 11/30/97*
One Year
Period Ended
11/30/97**
Five Year
Period Ended
11/30/97**
Period from Commencement of Operations through 11/30/97*
Series 1998 (1)
11.60%
57.42%
96.36%
5.96%
49.62%
86.52%
Series 2000 (2)
12.28
60.89
74.92
6.72
52.84
66.17
Security & Growth Fund (3)
16.42
N/A
45.83
11.72
N/A
40.0
* 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 my 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.
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. For individuals, the maximum tax rate for long-term capital gains is
28% (20% if the shares have been held for more than 18 months). 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 Gain Distribution. 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 (and will be eligible for the
20% maximum rate if the Series has held the security for more than 18
months). 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 seemed 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, Series 2000 and Security and
Growth Fund, 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, 1997, Smith Barney was paid $221,835, $155,670 and
$538,907 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.
ORGAN1ZATION 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's law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
The Trust has been structures, 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, 1997
accompany this Statement of Additional Information and are incorporated
herein by reference in its entirety.
22
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