SMITH BARNEY PRINCIPAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
March 30, 1998
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 Security and Growth 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.
FD01103
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 30,
1998, 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
MUTUAL MANAGEMENT CORP.
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
Security and Growth 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" or
"Distributor").....................................................
..........
Distributor
Mutual Management Corp. (formerly Smith Barney Mutual Funds
Management Inc.)
("MMC", "Investment Adviser" or "Administrator")
.......................................
Investment Adviser and Administrator
PNC Bank, National Association
("PNC" or "Custodian").........................................
Custodian
First Data Investor Services Group, Inc.
("First Data" or "Transfer
Agent")............................................................
............
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
20
Purchase of Shares
22
Redemption of Shares
22
Minimum Account Size
24
Valuation of Shares
24
Exchange Privilege
25
Dividends, Distributions and Taxes
28
The Series' Performance
29
Custodian and Transfer Agent
30
Distributor
30
Additional Information
30
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%
0.20%
0.17%
Total Fund Operating Expenses
0.95%
1.05%
0.92%
Management fees paid by the Trust include investment
advisory fees paid monthly to MMC 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 and Series 2000 also
pay MMC an administration fee paid monthly at the annual rate of
.20% of the value of each Series' average 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
N/A
N/A
$59
Series 2000
60
$82
N/A
82
Security and Growth Fund
49
68
$89
123
* 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.
** Eight year amount for the Security and Growth Fund.
FINANCIAL HIGHLIGHTS
The following information for each of the fiscal years in the
three year period ended November 30, 1997, has been audited by KPMG
Peat Marwick LLP, independent auditors, whose reports thereon
appear in the Funds' annual report dated November 30, 1997. 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 share of beneficial interest outstanding throughout each year
Series 1998
1997
1996
1995
1994
1993
1992
1991 (1)
Net Asset Value, Beginning of Period
$7.52
$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
0.49
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
0.87
0.83
1.39
(0.29)
0.86
1.05
0.80
Less Distributions From:
Net investment income
Net realized gains
(0.01)
(0.52)
(0.78) (0.44)
(0.40) (0.83)
(0.45) (0.89)
(0.40) (0.10)
(0.43)
--
--
--
Total Distributions
(0.53)
(1.22)
(1.23)
(1.34)
(0.50)
(0.43)
--
Net Asset Value, End of Period
$7.86
$7.52
$7.91
$7.75
$9.38
$9.02
$8.40
Total Return *
11.60%
11.03%
19.93%
(3.69)%
9.99%
12.86%
10.53%++
Net Assets, End of Period (000s)
$86,097
$93,793
$98,513
$101,388
$136,576
$166,077
$195,956
Ratios to Average Net Assets:
Expenses
Net investment income
0.95%
4.66
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
11%
12%
13%
10%
17%
4%
20%
Average Commissions Paid On
Equity Security Transactions (2)
$0.06
$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.
* Total Return does not reflect the deduction of applicable sales
charges.
For a share of beneficial interest outstanding throughout each
year:
Series 2000
1997
1996
1995
1994
1993
1992
1991 (1)
Net Asset Value, Beginning of Period
$8.63
$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)
0.28
0.78
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
1.06
0.14
1.75
(0.01)
1.22
0.69
(0.03)
Less Distributions From:
Net investment income
Net realized gains
- --
(1.23)
(0.57)
(0.22)
(0.27)
(0.35)
(0.34)
(0.50)
(0.29)
(0.09)
(0.10)
- --
- --
- --
Total Distributions
(1.23)
(0.79)
(0.62)
(0.84)
(0.38)
(0.10)
- --
Net Asset Value, End of Period
$8.46
$8.63
$9.28
$8.15
$9.00
$8.16
$7.57
Total Return *
12.28%
1.55%
22.17%
(0.20)%
15.72%
9.15%
(0.39)%++
Net Assets End of Period (millions)
$59
$65
$77
$75
$97
$125
$157
Ratios to Average Net Assets:
Expenses (2)
Net investment income
1.05%
3.15
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%
0%
6%
1 %
0%
0%
2%
Average Commissions Paid On
Equity Security Transactions(3)
$0.06
$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.
* Total return does not reflect the deduction of applicable sales
charges.
For a share of beneficial interest outstanding throughout each
year:
Security and Growth Fund
1997
1996
1995 (1)
Net Asset Value, Beginning of Period
$10.22
$10.68
$9.60
Income (Loss) From Operations:
Net investment income
Net realized and unrealized gain (loss)
0.28
1.40
0.33
0.82
0.28
0.94
Total Income (Loss) From Operations
1.68
1.15
1.22
Less Distributions From:
Net investment income
Net realized gains
(0.03)
(1.75)
(0.62)
(0.99)
- --
(0.14)
Total Distributions
(1.78)
(1.61)
(0.14)
Net Asset Value, End of Period
$10.12
$10.22
$10.68
Total Return *
16.42%
11.15%
12.70%++
Net Assets, End of Period (000s)
$204,358
$244,007
$309,822
Ratios to Average Net Assets:
Expenses
Net investment income
0.92%
2.62
0.99%
2.88
1.02%+
4.07+
Portfolio Turnover Rate
20%
43%
26%
Average Commissions Paid On
Equity Security Transactions
$0.04
$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
* Total Return does not reflect the deduction of applicable
sales charges.
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 MMC 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, 1998, zero coupon securities represented
approximately 62%, 55%, and 52%, 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 securities
(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 MMC deems appropriate. As each
Series' zero coupon securities mature, the proceeds will be
invested in direct obligations of the United States government with
remaining maturities of one year or less and, in any case, maturing
on or prior to the Maturity Date. On the Maturity Date, each
Series' remaining equity investments will be sold and other
investments will mature, the liabilities of each Series will be
discharged or provision made therefor, each Series' shares will be
mandatorily redeemed and, within seven days thereafter, the
proceeds will be distributed to shareholders and each Series'
thereafter will be terminated. These arrangements may require the
disposition of the Series' equity securities at a time when it is
otherwise disadvantageous to do so and may involve selling
securities at a substantial loss. On a continuos basis and as the
maturity date of each Series approaches the Board of Trustees will
consider the intended liquidation and termination of each Series
together with other factors and determine weather liquidation and
termination or such other action as it deems appropriate is 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. MMC 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, MMC 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 MMC believes have above-average
potential for capital growth. In selecting investments on behalf
of the Security and Growth Fund, MMC 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 MMC 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 MMC 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 MMC 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, MMC 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 MMC
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 MMC 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 MMC believes are presented by
the equity securities of small capitalization companies. MMC
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 MMC
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 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 MMC to be of good standing
and will not be made unless, in the judgement of MMC, 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 MMC
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 Rating Group 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 or 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 MMC 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 MMC
to ensure that the value is at least equal at all times to the
total amount of the repurchase obligation, including interest. MMC
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 bears 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 each Series will be required to accrue an
increasing amount of income on its zero coupon securities utilizing
the effective interest method. To maintain its tax status as a
pass-through entity and also to avoid imposition of excise taxes,
however, 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 MMC 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
MMC 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 MMC 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 MMC 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 Special 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.
Further information about the Trust's investment policies,
including a list of those restrictions on its investment activities
that cannot be changed without shareholder approval, appears in the
Statement of Additional Information.
Year 2000. The investment management services provided
to the Trust by MMC and the services provided to shareholders by
Smith Barney, the Trust's Distributor, depend on the smooth
functioning of their computer systems. Many computer software
systems in use today cannot recognize the year 2000, but revert to
1900 or some other date, due to the manner in which dates were
encoded and calculated. That failure could have a negative impact
on the Trust's operations, including the handling of securities
trades, pricing and account services. MMC and Smith Barney have
advised the Trust that they have been reviewing all of their
computer systems and actively working on necessary changes to their
systems to prepare for the year 2000 and expect that their systems
will be compliant before that date. In addition, MMC has been
advised by the Trust's custodian, transfer agent and accounting
service agent that they are also in the process of modifying their
systems with the same goal. There can, however, be no assurance
that MMC, Smith Barney or any other service provider will be
successful, or that interaction with other non-complying computer
systems will not impair Trust services at that time.
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 MMC.
The Series may use Smith Barney or a Smith Barney affiliated broker
in connection with a purchase or sale of securities when MMC
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 MMC 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 Adviser-MMC
MMC, located at 388 Greenwich Street, New York, New York
10013, serves as the Trust's investment adviser. The Adviser
(through its predecessors) has been in the investment counseling
business since 1940. The Adviser renders investment advice to a
wide variety of individual, institutional and investment company
clients and has aggregate assets under management as of January 31,
1998, in excess of $94 billion.
Subject to the supervision and direction of the Trust's
Board of Trustees, the Adviser 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 Smith Barney, 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 Smith Barney, 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, Managing Director of Smith Barney, President
and Chief Executive Officer of Davis Skaggs Investment Management,
a division of MMC, 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, 1997, are included in the Series' Annual
Report dated November 30, 1997. 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 Trust at
the address or phone number listed on page one of this Prospectus.
Administrator-MMC
MMC 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 the Administrator 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
1940 Act 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 uninvited 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 an 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 5128
Westborough, Massachusetts 01581-5128
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 involuntary liquidation.
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, MMC 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 a Series 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 Series shares are subject to minimum
investment requirements and to the other requirements of the fund
into which exchanges are made.
Fund Name
Growth Funds
Concert Peachtree Growth Fund
Smith Barney Aggressive Growth Fund Inc.
Smith Barney Appreciation Fund Inc.
Smith Barney Fundamental Value Fund Inc.
Smith Barney Large Capitalization Growth Fund
Smith Barney Managed Growth Fund
Smith Barney Natural Resources Fund Inc.
Smith Barney Small Cap Blend Fund, Inc.
Smith Barney Special Equities Fund
Growth and Income Funds
Concert Social Awareness Fund
Smith Barney Convertible Fund
Smith Barney Funds, Inc.- Large Cap Value Fund
Smith Barney Large Cap Blend Fund
Smith Barney Premium Total Return 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 Fund
Smith Barney Funds, Inc.-U.S. Government Securities Fund
Smith Barney Government Securities Fund
Smith Barney High Income Fund
Smith Barney Investment Grade Bond Fund
Smith Barney Managed Governments Fund Inc.
Smith Barney Total Return Bond Fund
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 Municipal High Income 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
Global-International Funds
Smith Barney Hansberger Global Small Cap Value Fund
Smith Barney Hansberger Global Value Fund
Smith Barney World Funds, Inc.-Emerging Markets Portfolio
Smith Barney World Funds, Inc.-European Portfolio
Smith Barney World Funds, Inc.-Global Government Bond
Portfolio
Smith Barney World Funds, Inc.-International Balanced
Portfolio
Smith Barney World Funds, Inc.-International Equity Portfolio
Smith Barney World Funds. Inc.-Pacific Portfolio
Smith Barney Concert Allocation Series, Inc.
Smith Barney Concert Allocation Series Inc.-Balanced
Portfolio
Smith Barney Concert Allocation Series Inc.-Conservative
Portfolio
Smith Barney Concert Allocation Series Inc.-Global Portfolio
Smith Barney Concert Allocation Series Inc.-Growth Portfolio
Smith Barney Concert Allocation Series Inc.-High Growth
Portfolio
Smith Barney Concert Allocation 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.
Shareholders of a Series who wish to exchange all or a
portion of their shares for Class A shares in any of the
funds identified above may do so without imposition of any
charge.
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. MMC 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, in 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. 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. 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'
total return and "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 serves as the custodian of the Trust's investments
and is located at 17th and Chestnut Streets, Philadelphia. PA
19103.
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 Salomon 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, including Asset Management,
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. Any
shareholder who does not want this consolidation to apply to his or
her account should contact his or her Financial Consultant or First
Data.
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.
u:\funds\prtf\1998\secdocs\98pros 21
SMITH BARNEY PRINCIPAL RETURN FUND
388 Greenwich Street
New York, New York 10013
(800) 451-2010
Statement of Additional Information March 30, 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 6
Redemption of Shares
14
Valuation of Shares
14
Exchange Privilege
14
Determination of Performance 15
(See in the Prospectus "The Series' Performance")
Taxes 17
(See in the Prospectus "Dividends,
Distributions and Taxes")
17
Distributor
19
Custodian and Transfer Agent
(See in the Prospectus "Additional Information") 19
Organization of the Trust
20
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 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" or "Transfer
Agent")
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.
Allan R. Johnson, Trustee Emeritus (Age 81). 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 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. His 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 is 388 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 making 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
133,850
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 $52,000 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, l997. 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 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.
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 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, 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,
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 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 18 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 secured 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 may 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 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.
12. 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.
13. 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.)
14. A Series will not make investments for the purpose of
exercising control or management of any other issuer.
15. 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.
16. 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.
17. A Series will not pledge, hypothecate, mortgage or encumber in any
other way more than 10% of its assets.
18. A Series will not purchase or retain securities of any company,
if to the knowledge of the Trust's officers or Trustees,
or any officer or director of MMC, individually owns more than 0.5%
of the outstanding securities
of the company and together they own beneficially more than 5% of the
securities.
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 November 30
Series
1998
Series
2000
Security and 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
Commissions Paid to Smith Barney
1995
420
$0
$0
Smith Barney
1996
0
0
3,000
1997
180
0
5,448
% of Total Brokerage Commissions paid to Smith Barney
1995
1996
1997
1.1%
0
0.6
0%
0
0
0%
0.99
4.22
% of Total Transactions involving Commissions paid to Smith Barney
1995
0%
1.00%
0%
1996
1997
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-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 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(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
11/30/97
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 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 11/30/97*
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%
86.54%
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
40.00%
* 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.
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 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
(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 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,
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.
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's 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, 1997 accompany this Statement of Additional
Information and are incorporated herein by reference in its
entirety.
