SMITH BARNEY PRINCIPAL RETURN FUND
SECURITY AND GROWTH FUND
Prospectus
March 29, 2000
Current shareholders may purchase new shares through the reinvestment of
dividends and distributions. Except for reinvestment of dividends and
distributions, shares of the fund are not currently being offered to investors.
Consequently, the fund's assets may be reduced by market fluctuations, a
redemption of shares and payment of cash dividends and distributions. A
reduction in the fund's net assets may increase the fund's expenses on a per
share basis and make it more difficult for the fund to achieve its investment
objective.
The Securities and Exchange Commission has not approved or disapproved the
fund's
securities or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
Contents
Page
Investments, risks and performance 3
More on the fund's investments 6
Management 7
Reinvestment of dividends 8
Exchanging shares 8
Redeeming shares 9
Other things to know about share transactions 9
Dividends, distributions and taxes 10
Share price 11
Financial highlights 12
You should know:
An investment in the fund is not a bank deposit and is not insured or
guaranteed
by the Federal Deposit Insurance Corporation or any other government agency.
Investments, risks and performance
Investment
objective
(a) Security and Growth Fund (the "fund") invests sufficient amounts in zero
coupon U.S. Treasury securities to provide a return of the shareholder's
original investment (including sales charges) by the fund's maturity
date at August 31, 2005 (the "Maturity Date"). At February 29, 2000,
zero coupon U.S. Treasury securities represented 41.4% of the net assets
of the fund.
(b) The remaining assets of the fund are invested to seek long-term
appreciation of capital.
Principal
investment
strategies
Key investments The fund's assets that are not invested in zero coupon U.S.
Treasury Securities are invested in equity securities of companies the manager
believes have the potential to provide above average capital appreciation.
The manager generally focuses on small and mid-cap companies with market
capitalizations in the $500 million to $3 billion range. The manager seeks
to obtain the benefits of both a diversified and focused portfolio by
investing in a limited number of issuers without any single position
representing a material portion of the fund's assets.
Selection process The manager seeks zero coupon securities that will mature
within one year before the Maturity Date. The manager expects that the
aggregate stated principal amount of the zero coupon securities will be
sufficient to meet the fund's objective of repaying the investor's original
investment. As the fund's zero coupon securities mature, the proceeds will
be invested in short term U.S. government securities.
In selecting individual securities for the actively managed portion of the
fund, the manager seeks to identify companies with excellent long term growth
prospects but which are temporarily out of favor with investors. The manager's
investment process emphasizes limiting downside risk as an important factor
in maintaining favorable risk/reward ratios in the fund.
When analyzing potential investment candidates for the fund, the manager looks
for the following factors:
? New or innovative products, especially those likely to enhance revenues and
earnings in the next 12 months
? High technology companies with substantial operating leverage and future
earning power
? Catalysts such as a change in management, restructuring or other corporate
events designed to reduce costs and increase earnings and cash flow
? Themes or trends likely to persist for a number of years that could benefit
a company and/or industry
? Companies that are industry leaders or have a market niche differentiating
them from other companies
? Strong balance sheets or ones likely to improve in a relatively short
period of time as a result of asset sales or rapid growth of earnings and
cash flow
Maturity
date
On the fund's Maturity Date, the following events will occur:
? The fund's zero coupon investments will have matured
? The fund's remaining assets and liabilities will be liquidated
? The fund's shares will be redeemed
Within seven days after the Maturity Date, proceeds will be distributed to the
shareholders and the fund will be terminated.
Investments, risks and performance (cont'd)
Principal
risks of
investing
in the
fund
While the zero coupon component of the fund is designed to return to
shareholders their initial investment on the Maturity Date, the fund's net
asset value per share can fluctuate substantially prior to the Maturity Date.
If you sell your shares prior to the Maturity Date, you may receive less than
your initial investment in the fund. Due to the nature of the fund's
portfolio, the fund has risks associated with both equity and fixed income
investments. Investors could lose money in the fund or the fund's performance
could fall below other possible investments if:
? The U.S. stock market declines
? The market favors value or large capitalization stocks over growth stocks
or small to medium capitalization stocks
? An adverse event, such as an unfavorable earnings report about a company
in the fund's portfolio, depresses the value of the company's stock
? The manager's judgment about the attractiveness, value or potential
appreciation of a particular company's stock proves to be incorrect
The fund's zero coupon securities are also susceptible to certain risks prior
to maturity, including:
? If interest rates go up, the market value of zero coupon securities will
go down
? Volatile market prices when compared to securities that pay interest
periodically
? Greater sensitivity to changes in interest rates when compared to non-zero
coupon securities having similar maturities and yields
The fund may not be appropriate for investors requiring cash distributions from
the fund to meet tax obligations or current expenses.
Risk return bar chart
This bar chart indicates the risks of investing in the fund by showing changes
in the fund's performance from year to year. Past performance does not
necessarily indicate how the fund will perform in the future. The bar chart
shows
the performance of a share of the fund for each of the past four years. The
performance information in the chart does not reflect sales charges, which
would
reduce your return.
Quarterly returns: Highest: 18.90% in 3rd quarter 1997; Lowest: (7.46)% in
3rd
quarter 1998.
Risk return table
The table below indicates the risk of investing in the fund by comparing the
average annual total return for the periods shown to that of the return of the
Russell 2000 Index and the Lehman Brothers Intermediate Term Government Bond
Index ("Lehman Brothers Index"). The Russell 2000 Index is a broad-based index
that measures the performance of the 2,000 smallest stocks in the U.S. equity
market. The Lehman Brothers Index is a broad-based index of U.S. Treasury and
agency securities. Unlike the fund, the indices are unmanaged and do not incur
expenses. This table assumes imposition of the maximum sales charge,
redemption
of shares at the end of the period, and reinvestment of distributions and
dividends.
Average Annual Total Return
Calendar Years Ended December 31, 1999
1 Year
Since
Incepti
on
Incepti
on Date
Security
and
Growth
Fund
N/A*
9.5%
3/30/95
Russell
2000
N/A*
16.53%
**
Lehman
Brothers
Index
N/A*
6.39%
**
* No sales charge applicable except at time of initial purchase
** Index comparison begins on 3/31/95
Fee table
This table sets forth the fees and expenses you will pay if you invest in the
fund's shares.
Shareholder fees
(fees paid directly from your investment)
Security and
Growth Fund
Maximum sales charge (load) imposed on purchases
(as a % of offering price)*
4.00%
Annual fund operating expenses
(expenses deducted from fund assets)
Management fees
0.50%
Shareholder servicing fees
0.25%
Other expenses
0.17%
Total annual fund operating expenses
0.92%
* No sales charge applies to reinvestment of dividends in additional shares.
Example
This example helps you compare the costs of investing in the fund with the
costs
of investing in other mutual funds. Your actual costs may be higher or lower.
The example assumes:
? You invest $10,000 in the fund for the time periods shown
? You redeem all of your shares at the end of the period
? Your investment has a 5% return each year
? You reinvest all distributions and dividends without a sales
charge
? The fund's operating expenses remain the same
Number of years you own your shares
1 year
3
years
5 years
Maturity
Date*
Security and Growth Fund
$490
$682
$889
$971
*The Maturity Date is August 31, 2005.
More on the fund's investments
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 fund, however, invests only in zero coupon securities
that are direct obligations of the United States Treasury. The discount from
face value at which zero coupon securities are purchased varies depending on
the
time remaining until maturity, prevailing interest rates and the liquidity of
the
security. Because the discount from face value is known at the time of
investment, investors holding zero coupon securities until maturity know the
total amount of their investment return at the time of investment.
Zero coupon securities of the type held by the fund can be sold prior to their
due date in the secondary market at their then prevailing market value which,
depending on prevailing levels of interest rates and the time remaining to
maturity, may be more or less than 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
paying interest periodically and, accordingly, are likely to respond to a
greater
degree to changes in interest rates than do non-zero coupon securities having
similar maturities and yields. As a result, the net asset value of shares of
the
fund may fluctuate over a greater range than shares of other mutual funds that
invest in U.S. government securities having similar maturities and yields but
that make current distributions of interest. The current net asset value of
the
fund attributable to zero coupon securities and other debt instruments held by
the fund generally will vary inversely with changes in prevailing interest
rates.
Each year the fund will be required to accrue an increasing amount of income on
its zero coupon securities utilizing the effective interest method. To
maintain
its tax status as a pass-through entity and also to avoid imposition of excise
taxes, the fund will be required to distribute dividends equal to substantially
all of its net investment income, including the accrued income on its zero
coupon
securities for which it receives no payments in cash prior to their maturity.
Dividends of the fund's net investment income and distributions of its short-
term capital gains will be taxable to shareholders as ordinary income for
Federal
income tax purposes, whether received in cash or reinvested in additional
shares.
However, a shareholder who elects to receive dividends and distributions in
cash, instead of reinvesting these amounts in additional shares of the fund,
may
realize an amount that is less than the entire amount originally invested.
Derivatives and hedging techniques The fund may, but need not, use derivative
contracts, such as futures and options on securities or securities indices, and
options on these futures, to hedge against the economic impact of adverse
changes
in the market value of its securities, because of changes in stock market
prices.
A derivative contract will obligate or entitle the fund to deliver or receive
an asset or cash payment that is based on the change in value of one or more
securities, currencies or indices. Even a small investment in derivative
contracts can have a big impact on the fund's stock market expos
ure. Therefore,
using derivatives can disproportionately increase losses and reduce
opportunities
for gains when stock prices are changing. The fund may not fully benefit from
or may lose money on derivatives if changes in their value do not correspond
accurately to changes in the value of the fund's holdings. The other parties
to
certain derivative contracts present the same types of credit risk as issuers
of
fixed income securities. Derivatives can also make the fund less liquid and
harder to value, especially in declining markets.
Foreign securities The fund may invest up to 10% of its net assets (at the
time
of investment) in foreign securities. Investments in securities of foreign
entities and securities quoted or denominated in foreign currencies involve
special risks. These include possible political and economic instability and
the
possible imposition of exchange controls or other restrictions on investments.
If the fund invests in securities denominated or quoted in currencies other
than
the U.S. dollar, changes in foreign currency exchange rates relative to the
U.S.
dollar will affect the U.S. dollar value of the fund's assets.
Defensive investing The fund may depart from its principal investment
strategies
in response to adverse market, economic or political conditions by taking
temporary defensive positions in all types of money market and short-term debt
securities. If the fund takes a temporary defensive position, it may be unable
to achieve its investment goals.
More information about the fund's investments and portfolio management
techniques, some of which entails risks, is included in the statement of
additional information ("SAI").
Management
Manager The fund's investment adviser and administrator (the "manager") is SSB
Citi Fund Management LLC ("SSB Citi")(successor to SSBC Fund Management Inc.),
an affiliate of Salomon Smith Barney Inc. The manager's address is 388
Greenwich
Street, New York, New York 10013. The manager selects the fund's investments
and
oversees its operations. The manager and Salomon Smith Barney are subsidiaries
of Citigroup Inc. Citigroup businesses produce a broad range of financial
services - asset management, banking and consumer finance, credit and charge
cards, insurance, investments, investment banking and trading - and use diverse
channels to make them available to consumer and corporate customers around the
world.
John G. Goode has been responsible for the day-to-day management of the fund's
portfolio since its inception. Mr. Goode is Chairman and Chief Investment
Officer
of Davis Skaggs Investment Management, a division of SSB Citi and a managing
director of Salomon Smith Barney. Mr. Goode has 16 years of experience with
SSB
Citi or its predecessors.
Management fee During the fiscal year ended November 30, 1999, the manager
received a management fee of 0.50% of the fund's average daily net assets.
Transfer agent and shareholder servicing agent Smith Barney Private Trust
Company serves as the fund's transfer agent and shareholder servicing agent
(the
"transfer agent"). Pursuant to a sub-transfer agency and services agreement
with
the transfer agent, PFPC Global Fund Services serves as the fund's sub-transfer
agent (the "sub-transfer agent") to render certain shareholder record keeping
and
accounting services and functions.
Reinvestment of dividends
The fund is currently closed to investors except through reinvestment of
dividends or distributions from the fund. The trustees may, upon 30 days'
notice
to shareholders, reopen the fund if the trustees determine the reopening to be
in the best interests of the fund and its shareholders.
Exchanging shares
Smith
Barney
offers a
distinct
ive
family
of funds
tailored
to help
meet the
varying
needs of
both
large
and
small
investor
s.
Because the fund is not continuously offering shares, an investor who exchanges
shares of the fund will not be able to effect an exchange back into the fund.
You should contact your Salomon Smith Barney Financial Consultant or dealer
representative to exchange into other Smith Barney funds. Be sure to read the
prospectus of the Smith Barney fund you are exchanging into. An exchange is a
taxable transaction. If an investor makes an exchange prior to the Maturity
Date, the investor may receive an amount less than the original investment in
the fund.
? You may exchange shares only for Class A shares of most Smith Barney funds.
? Not all Smith Barney funds may be offered in your state of residence.
Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent.
? You must meet the minimum investment amount for each fund.
? If you hold share certificates, the sub-transfer agent must receive the
certificates endorsed for transfer or with signed stock powers (documents
transferring ownership of certificates) before the exchange is effective.
? The fund may suspend or terminate your exchange privilege if you engage in
an excessive pattern of exchanges.
No
addition
al
sales
charges
Shares acquired in the exchange will not be subject to an initial sales charge
at the time of the exchange.
By
telephon
e
If you do not have a brokerage account, you may be eligible to exchange shares
through the transfer agent. To find out, call the transfer agent. You must
complete an authorization form to authorize telephone transfers. If eligible,
you may make telephone exchanges on any day the New York Stock Exchange is
open.
Call the transfer agent at 1-800-451-2010 between 9:00 a.m. and 4:00 p.m.
(Eastern time).
You can make telephone exchanges only between accounts that have identical
registrations.
By mail
If you do not have a Salomon Smith Barney brokerage account, contact your
dealer
representative or write to the sub-transfer agent at the address on the next
page.
Redeeming shares
Generall
y
Contact your Salomon Smith Barney Financial Consultant or dealer representative
to redeem shares of the fund.
If you hold share certificates, the sub-transfer agent must receive the
certificates endorsed for transfer or with signed stock powers before the
redemption is effective.
If the shares are held by a fiduciary or corporation, other documents may be
required.
Your redemption proceeds will be sent within three business days after your
request is received in good order. However, if you recently purchased your
shares by check, your redemption proceeds will not be sent to you until your
original check clears which may take up to 15 days.
If you have a Salomon Smith Barney brokerage account, your redemption proceeds
will be placed in your account and not reinvested without your specific
instruction. In other cases, unless you direct otherwise, your redemption
proceeds will be paid by check and mailed to your address of record.
By mail
For accounts held directly at the fund, send written requests to the sub-
transfer agent at the following address:
Smith Barney Principal Return Fund
Security and Growth Fund
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
Your written request must provide the following:
? Your account number
? The dollar amount or number of shares to be redeemed
? Signatures of each owner exactly as the account is registered
By
telephon
e
If you do not have a brokerage account, you may be eligible to redeem shares
(except those held in retirement plans) in amounts up to $10,000 per day
through
the transfer agent. You must complete an authorization form to authorize
telephone redemptions. If eligible, you may request redemptions by telephone
on any day the New York Stock Exchange is open. Call the transfer agent at
1-800-451-2010 between 9:00 a.m. and 4:00 p.m. (Eastern time).
Your redemption proceeds can be sent by check to your address of record or by
wire transfer to a bank account designated on your authorization form. You must
submit a new authorization form to change the bank account designated to
receive
wire transfers and you may be asked to provide certain other documents.
Other things to know about share transactions
When you reinvest dividends, exchange or redeem shares, your request must be in
good order. These same requirements would apply if the fund reopened to new
investment purchases. This means you have provided the following information
without which your request will not be processed.
? Name of the fund
? Account number
? Dollar amount or number of shares to be exchanged or redeemed
? Signature of each owner exactly as the account is registered
The transfer agent will try to confirm that any telephone exchange or
redemption
request is genuine by recording calls, asking the caller to provide a personal
identification number for the account, sending you a written confirmation or
requiring other confirmation procedures from time to time.
Signature guarantees. To be in good order, your redemption request must
include
a signature guarantee if you:
? Are redeeming over $10,000 of shares
? Are sending signed share certificates or stock powers to the sub-transfer
agent
? Instruct the sub-transfer agent to mail the check to an address different
from the one on your account
? Changed your account registration
? Want the check paid to someone other than the account owner(s)
? Are transferring the redemption proceeds to an account with a different
registration
You can obtain a signature guarantee from most banks, dealers, brokers, credit
unions and federal savings and loan institutions, but not from a notary public.
The fund has the right to:
? Suspend the offering of shares
? Waive or change minimum and additional investment amounts
? Reject any purchase or exchange order
? Change, revoke or suspend the exchange privilege
? Suspend telephone transactions
? Suspend or postpone redemptions of shares on any day when trading on the
New York Stock Exchange is restricted, or as otherwise permitted by the
Securities and Exchange Commission
? Pay redemptions proceeds by giving you securities. You may pay transaction
costs to dispose of the securities.
Share certificates. The fund does not issue share certificates.
Dividends, distributions and taxes
Dividends The fund generally pays dividends and makes capital gain
distributions, if any, once a year, typically in December. The fund may pay
additional distributions and dividends at other times if necessary for the fund
to avoid a federal tax. Capital gain distributions and dividends are
reinvested
in additional fund shares. You do not pay a sales charge on reinvested
distributions or dividends. Alternatively, you can instruct your Salomon Smith
Barney Financial Consultant, dealer representative or the transfer agent to
have
your distributions and/or dividends paid in cash. You can change your choice
at
any time to be effective as of the next distribution or dividend, except that
any
change given to the transfer agent less than five days before the payment date
will not be effective until the next distribution or dividend is paid. A
shareholder who elects to receive distributions and dividends in cash may
realize
an amount that is greater or less than the entire amount of his or her
investment.
Taxes In general, redeeming shares, exchanging shares and receiving
distributions (whether in cash or additional shares) are all taxable events.
Transaction
Federal tax status
Redemption or exchange of shares
Usually capital gain or loss; long-
term only if shares owned more than
one year
Long-term capital gain
distributions
Long-term capital gain
Short-term capital gain
distributions
Ordinary income
Dividends
Ordinary income
Long-term capital gain distributions are taxable to you as long-term capital
gain
regardless of how long you have owned your shares.
After the end of each year, the fund will provide you with information about
the
distributions and dividends you received and any redemptions of shares during
the
previous year. If you do not provide the fund with your correct taxpayer
identification number and any required certifications, you may be subject to
back-up withholding of 31% of your distributions, dividends, and redemption
proceeds. Because each shareholder's circumstances are different and special
tax
rules may apply, you should consult your tax adviser about your investment in
the
fund.
Share price
You may reinvest dividends, exchange or redeem shares at their net asset value,
next determined after receipt of your request in good order. The fund's net
asset value is the value of its assets minus its liabilities. The fund
calculates its net asset value every day the New York Stock Exchange is open.
The Exchange is closed on certain holidays listed in the SAI. This
calculation
is done when regular trading closes on the Exchange (normally 4:00 p.m.,
Eastern
time).
The fund generally values its portfolio securities based on market prices or
quotations. When reliable market prices or quatations are not readily
available,
the fund may price those securities at fair value. Fair value is determined in
accordance with procedures approved by the fund's board. The fund that uses
fair
value to price securities may value those securities higher or lower than
another
fund using market quotations to price the same securities.
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 maturing in 60 days or less are valued at amortized cost. Under
the
amortized cost method, an asset is valued by constantly amortizing over its
remaining life the difference between the principal amount due at maturity and
the cost of the instrument to the fund.
In order to redeem or exchange shares at that day's price, you must place your
order with your Salomon Smith Barney Financial Consultant or dealer
representative before the New York Stock Exchange closes. If the New York
Stock
Exchange closes early, you must place your order prior to the actual closing
time. Otherwise, you will receive the next business day's price.
Salomon Smith Barney or members of the selling group must transmit all orders
to
exchange or redeem shares to the fund's agent before the agent's close of
business.
Financial highlights
The financial highlights tables are intended to help you understand the
fund's financial performance for the past 5 years (or since inception if less
than 5 years). Total return represents the rate that a shareholder would have
earned (or lost) on the fund share assuming reinvestment of all dividends and
distributions. The information in the following tables has been audited by
KPMG
LLP, independent accountants, whose report, along with the fund's financial
statements, is included in the annual report (available upon request).
For a share of capital stock outstanding throughout each year ended November 30.
Security and Growth Fund
1999
1998
1997
1996
1995(1)
Net asset value, beginning of period
$8.73
$10.12
$10.22
$10.68
$9.60
Income (loss) from operations:
Net investment income (loss)
0.36
0.32
0.28
0.33
0.28
Net realized and unrealized
gain (loss)
(0.78)
(1.35)
1.40
0.82
0.94
Total income (loss) from operations
1.14
(1.03)
1.68
1.15
1.22
Less distributions from:
Net investment income
(0.31)
(0.28)
(0.03)
(0.62)
- --
Net realized gains (loss)
- --
(0.08)
(1.75)
(0.99)
(0.14)
Total distributions
(0.31)
(0.36)
(1.78)
(1.61)
(0.14)
Net asset value, end of year
$9.56
$8.73
$10.12
$10.22
$10.68
Total return
13.47%
(10.43)
%
16.42%
11.15%
12.70(2)
Net assets, end of year (000,000)'s
$89
$123
$204
$244
$310
Ratios to average net assets:
Expenses
0.92%
0.94%
0.92%
0.99%
1.02%(3)
Net investment income (loss)
3.23
2.88
2.62
2.88
4.07(3)
Portfolio turnover rate
31%
23%
20%
43%
26%
(1) For the period from March 30, 1995 (commencement of operations) to
November 30, 1995.
(2) Total return is not annualized, as it may not be representative of
the total return for the year.
(3) Annualized.
SALOMON SMITH BARNEY_
a member of citigroup [Symbol]
Security and Growth Fund
Investment portfolio of SMITH BARNEY PRINCIPAL RETURN FUND
ADDITIONAL INFORMATION
Shareholder reports. Annual and semiannual reports to shareholders provide
additional information about the fund's investments. These reports discuss the
market conditions and investment strategies that affected the fund's
performance.
The fund sends only one report to a household if more than one account has the
same address. Contact your Salomon Smith Barney Financial Consultant, dealer
representative or the transfer agent if you do not want this policy to apply to
you.
Statement of additional information. The statement of additional information
provides more detailed information about the fund and is incorporated by
reference into (is legally part of) this prospectus.
You can make inquiries about the fund or obtain shareholder reports or the
statement of additional information (without charge) by contacting your Salomon
Smith Barney Financial Consultant or dealer representative by calling the fund
at 1-800-451-2010 or by writing to the fund at Smith Barney Mutual Funds, 388
Greenwich Street, MF2, New York, New York 10013.
Visit our web site. Our web site is located at www.smithbarney.com
Information about the fund (including the statement of additional information)
can be viewed and copied at the Public Reference Room of the Securities and
Exchange Commission (the "Commission") in Washington, D.C. In addition,
information the operation of the Public Reference Room may be obtained by
calling
the Commission at 1-202-942-8090. Reports and other information about the fund
are available on EDGAR Database on the Commission's internet site at
http://www.sec.gov. Copies of this information may be obtained for a
duplicating
fee by electronic request at the following E-mail address: [email protected],
or by writing the Commission's Public Reference Section, Washington, D.C. 20549-
0102.
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. The fund is not offering to sell its
shares to any person to whom the fund may not lawfully sell its shares.
(Investment Company Act file no. 811-05678)
(FD-01103)(3/00)
Principal Return Fund -1-
March 29, 2000
STATEMENT OF ADDITIONAL INFORMATION
Smith Barney Principal Return Fund
Security and Growth Fund
388 Greenwich Street
New York, New York 10013
(800) 451-2010
This Statement of Additional Information is not a prospectus. It
supplements the information contained in the current Prospectus dated
March 29, 2000, as amended or supplemented from time to time, about the
Security and Growth Fund (the "fund"). The fund is an investment
portfolio of Smith Barney Principal Return Fund (the "Trust"). This
Statement of Additional Information is intended to provide more detailed
information about the fund as well as matters already discussed in the
Prospectus and therefore should be read in conjunction with the
Prospectus.
The Prospectus may be obtained from any Salomon 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.
Shares of the fund are not currently being offered for sale to new
investors. The net asset value per share of the fund prior to the
maturity date can be expected to fluctuate substantially due to changes in
prevailing interest rates that will affect the current value of the fund's
holdings of zero coupon securities, as well as changes in the value of the
fund's other holdings. Because the fund is not currently engaged in a
continuous offering of shares, it is not benefiting from an inflow of new
capital. In addition, because the fund may experience redemptions and
capital losses prior to the maturity date (or in preparation for the
fund's 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 the fund's investment objectives unachievable;
thus the accomplishment of the fund's investment objectives with respect
to remaining shareholders that reinvest dividends and distributions could
depend in part on the investment decisions of other shareholders.
CONTENTS
Trustees and Executive Officers of the Trust 2
Investment Objectives and Management Policies 4
Risk Factors 12
Investment Restrictions 14
Purchase, Redemption and Exchange of Shares 16
Portfolio Turnover 19
Portfolio Transactions 19
Determination of Net Asset Value 21
Taxes 21
Performance Information 26
Investment Management and Other Services 27
Other Information About the Trust 29
Financial Statements 31
TRUSTEES AND EXECUTIVE OFFICERS OF THE TRUST
Overall responsibility for management and supervision of the Trust rests
with the Trust's Board of Trustees. The Trustees approve all significant
agreements between the Trust and the companies that furnish services to
the Trust, including agreements with the Trust's investment manager,
distributor, custodian, transfer agent and sub-transfer agent. The day-
to-day operations of the Trust are delegated to the Trust's investment
manager, SSB Citi Fund Management LLC (the "Manager"), successor to SSBC
Fund Management Inc.
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 and their ages, 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
Partner in the law firm of Paul R. Ades, PLLC; 181 West Main Street, Suite
C, P.O. Box 790, Babylon, New York 11702; Director or Trustee of five
investment companies associated with Citigroup Inc. ("Citigroup"); 59.
HERBERT BARG, TRUSTEE
Private Investor; 273 Montgomery Avenue, Bala Cynwyd, Pennsylvania 19004;
Director or Trustee of 16 investment companies associated with Citigroup;
76.
DWIGHT B. CRANE, TRUSTEE
Professor, Harvard Business School; Soldiers Field Road, Boston,
Massachusetts 02163; Director or Trustee of 24 investment companies
associated with Citigroup; 62.
FRANK HUBBARD, TRUSTEE
Vice President of S & S Industries; Former Corporate Vice President,
Materials Management and Marketing Services of Huls American, Inc.; 80
Centennial Avenue P.O. Box 456, Piscataway; New Jersey 08855-0456;
Director or Trustee of five investment companies associated with
Citigroup; 62.
*HEATH B. MCLENDON, CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE
OFFICER
Managing Director of Salomon Smith Barney Inc. ("Salomon Smith Barney"),
President and Chairman of 71 investment companies associated with
Citigroup, President and Director of the Manager and Travelers Investment
Adviser, Inc. ("TIA")and former Chairman of Smith Barney Strategy Advisors
Inc.; 7 World Trade Center, New York, New York 10048; 66.
JEROME H. MILLER, TRUSTEE
Retired, Former President, Asset Management Group of Shearson Lehman
Brothers; 27 Hemlock Road, Manhassett, New York 11030; Director or Trustee
of five investment companies associated with Citigroup; 61.
KEN MILLER, TRUSTEE
President of Young Stuff Apparel Group, Inc.; 1407 Broadway, 6th Floor,
New York, New York 10018; Director or Trustee of five investment companies
associated with Citigroup; 58.
JOHN G. GOODE, VICE PRESIDENT AND INVESTMENT OFFICER
Managing Director of Salomon Smith Barney, President and Chief Investment
Officer of Davis Skaggs Investment Management, a division of the Manager;
Investment Officer of three investment companies associated with
Citigroup;1 Sansome Street, Suite 3850, San Francisco, California 94104;
55.
LEWIS E. DAIDONE, SENIOR VICE PRESIDENT AND TREASURER
Managing Director of Salomon Smith Barney, Senior Vice President and
Treasurer or Executive Vice President and Treasurer of 61 investment
companies associated with Citigroup; Director and Senior Vice President of
the Manager and TIA; 388 Greenwich Street, New York, New York 10013; 42.
CHRISTINA T. SYDOR, SECRETARY
Managing Director of Salomon Smith Barney; Secretary of 61 investment
companies associated with Citigroup; General Counsel and Secretary of the
Manager and TIA; 388 Greenwich Street, New York, New York 10013; 49.
PAUL A. BROOK, CONTROLLER
Managing Director of Salomon Smith Barney; Controller or Assistant
Treasurer of 43 investment companies affiliated with Citigroup; Prior to
1998, Managing Director of AMT Capital Services Inc.; Prior to 1997,
Partner with Ernst & Young LLP; 388 Greenwich Street, New York, New York
10013; 46.
Each Trustee also serves as a trustee, general partner and/or director of
other mutual funds for which Salomon Smith Barney serves as a distributor.
As of March 23, 2000, Trustees and officers of the fund, as a group,
owned less than 1% of the outstanding shares of beneficial interest of the
fund.
No director, officer or employee of Salomon Smith Barney or any of its
affiliates receives 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 Salomon Smith Barney or any of its affiliates a fee
of $2,000 per annum plus $500 per meeting attended and reimburses them for
travel and out-of-pocket expenses. Travel and out of pocket expenses
totaled $18,574.09 for the calendar year ended December 31, 1999.
The following table shows the compensation paid by the Trust to each
trustee during the Trust's last fiscal year and the total compensation
paid by the Smith Barney Mutual Funds complex for the calendar year ended
December 31, 1999. None of the officers of the Trust received any
compensation from the Trust for such period. The Trust does not pay
retirement benefits to its directors and officers. Officers and
interested directors of the Trust are compensated by Salomon Smith Barney.
Trustee
Aggregate
Compensation
from the
Trust*
Aggregate
Compensation
from the Smith
Barney Mutual
Funds
Number of Funds
for Which Director
Serves Within Fund
Complex
Paul R. Ades
$1,281.00
$56,238.00
5
Herbert Barg
1,281.00
114,288.00
16
Dwight B. Crane
1,156.00
155,363.00
24
Frank G. Hubbard
1,281.00
56,138.00
5
Heath B. McLendon
- ---
- ---
71
Jerome H. Miller
1,156.00
51,613.00
5
Ken Miller
1,031.00
47,188.00
5
*Trustee Emeritus. 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 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 $1,132.00.
INVESTMENT OBJECTIVES AND MANAGEMENT POLICIES
General The Prospectus discusses the investment objectives of the fund
and the policies to be employed to achieve those objectives. The fund is
an open-end, diversified management investment company under the 1940 Act.
Security and Growth Fund seeks (a) to return to each shareholder on
August 31, 2005 (the "Maturity Date") the principal amount of the
shareholder's original investment (including any sales charge paid)
through investment of a portion of its assets in zero coupon securities
("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. There can be
no assurance that the fund's investment objectives will be achieved.
Set forth below is supplemental information concerning certain of the
securities and other instruments in which the fund may invest, the
investment policies and portfolio strategies that the fund may utilize and
certain risks involved with those investments, policies and strategies.
Operation of the fund As of February 29, 2000, zero coupon securities
represented approximately 41% of the fund's net assets, with the balance
of the fund's net assets invested in equity securities and other
securities as described below. The fund's zero coupon securities will
mature within one year before the Maturity Date and their aggregate stated
principal amount is expected to be sufficient to meet the Repayment
Objective; the fund will not receive any payments with respect to a zero
coupon security prior to the maturity of that security. The fund may hold
zero coupon securities in excess of those required to meet the Repayment
Objective to the extent the Manager deems appropriate. As the fund's zero
coupon securities mature, the proceeds will be invested in direct
obligations of the United States government with remaining maturities of
one year or less and, in any case, maturing on or prior to the Maturity
Date. On the Maturity Date, the fund's remaining equity investments will
be sold and other investments will mature, the liabilities of the fund
will be discharged or provision made therefor, the fund's shares will be
mandatorily redeemed and, within seven days thereafter, the proceeds will
be distributed to shareholders and the fund's existence thereafter will be
terminated. These arrangements may require the disposition of the fund's
equity securities at a time when it is otherwise disadvantageous to do so
and may involve selling securities at a substantial loss. On a continuous
basis and as the maturity date of the fund approaches, the Board of
Trustees will consider the intended liquidation and termination of the
fund together with other factors and determine whether 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 the fund will be accrued ratably over the
entire term of the fund and will be charged to income. These expenses are
not expected to affect materially the ordinary annual operating expenses
of the fund and, accordingly, should have no effect on the fund's ability
to meet the Repayment Objective.
The fund 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 fund would
have sufficient zero coupon securities remaining to meet the Repayment
Objective.
Thus, the fund's 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, which represent a variable portion
of the fund's assets depending on the performance of those investments,
the fund's expenses, the level of dividend reinvestment and the level of
redemptions over time. In order to facilitate management of the fund's
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.
FIXED INCOME SECURITIES
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 fund,
however, invests only in zero coupon securities that are direct
obligations of the United States Treasury. The discount from face value
at which zero coupon securities are purchased varies depending on the time
remaining until maturity, prevailing interest rates and the liquidity of
the security. Because the discount from face value is known at the time
of 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.
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 U.S. government and certain of its agencies and
instrumentalities and of private corporate issuers are currently
available, although the fund will purchase only those that represent
direct obligations of the government.
Zero coupon securities of the U.S. 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 U.S. government. The
U.S. 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
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 U.S. 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 fund 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.
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. 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.
U.S. government securities 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 reorganization since 1987).
Because the United States government is not obligated by law to provide
support to an instrumentality it sponsors, the fund will invest in
obligations issued by such an instrumentality only if the Manager
determines that the credit risk with respect to the instrumentality does
not make its securities unsuitable for investment by the fund.
EQUITY SECURITIES
Although the Manager anticipates that the fund's non-zero coupon security
portfolio primarily will be invested in small- to medium-sized companies,
it may also be invested in the equity securities of larger, established
companies the Manager determines present particular opportunities for
capital growth.
Under normal market conditions, the bulk of the fund's non-zero coupon
security portfolio consists of common stocks, but it also may contain
other equity securities, including preferred stocks and debt securities
convertible into common stocks. Preferred securities and convertible
securities will be selected on the basis of their equity characteristics.
Ratings by statistical rating organizations generally will not be a
factor in the selection process.
Common Stocks The fund may invest in common stocks. Common stocks are
shares of a corporation or other entity that entitle the holder to a pro
rata share of the profits of the corporation, after dividend payments to
preferred stockholders. Common stock usually carries with it the right to
vote and frequently an exclusive right to do so.
Warrants 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. 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.
Foreign securities The fund may 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 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 fund including the
withholding of dividends.
INVESTMENT TECHNIQUES
Lending of Portfolio Securities Consistent with applicable regulatory
requirements, the fund has the ability to lend securities from its
portfolio to brokers, dealers and other financial organizations. The fund
may not lend its portfolio securities to Salomon Smith Barney or its
affiliates unless it has applied for and received specific authority from
the Securities and Exchange Commission ("SEC"). Loans of portfolio
securities by the fund will be collateralized by cash, letters of credit
or U.S. government securities which will be maintained at all times in an
amount equal to at least 100% of the current market value (determined by
marking to market daily) of the loaned securities. From time to time, the
fund may return a part of the interest earned from the investment of
collateral received for securities loaned to the borrower and/or a third
party, which is unaffiliated with the fund or with Salomon Smith Barney,
and which is acting as a "finder." In lending its securities, the fund
can increase its income by continuing to receive interest on the loaned
securities as well as by either investing the cash collateral in short-
term instruments or obtaining yield in the form of interest paid by the
borrower when U.S. government securities are used as collateral. The
following conditions must be met whenever the fund's portfolio securities
are loaned: (a) the fund must receive at least 100% cash collateral or
equivalent securities or letters of credit from the borrower; (b) the
borrower must increase such collateral whenever the market value of the
securities rises above the level of such collateral; (c) the fund must be
able to terminate the loan at any time; (d) the fund must receive
reasonable interest on the loan, as well as an amount equal to any
dividends, interest or other distributions on the loaned securities, and
any increase in market value; (e) the fund may pay only reasonable
custodian fees in connection with the loan; and (f) voting rights on the
loaned securities may pass to the borrower; however, if a material event
adversely affecting the investment occurs, the fund's Board of Trustees
must terminate the loan and regain the right to vote the securities. The
risks in lending portfolio securities, as with other extensions of secured
credit, consist of possible delay 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 the Manager to be of good standing and will not be made
unless, in the judgment of the Manager, the consideration to be gained
from such loans would justify the risk.
Temporary defensive investing The fund may hold at any time up to 10% of
the value of its assets in cash and money market instruments in order to
cover the fund's expenses, anticipated redemptions, cash payments of
dividends and distributions and to meet settlement requirements for
securities. In addition, when the Manager believes that, with respect to
its equity portfolio, a temporary defensive investment posture is
warranted, the fund may invest without limitation in cash and money market
instruments. To the extent it holds cash or invests in money market
instruments, the fund will not achieve its investment objective of
long-term appreciation of capital. Money market instruments in which the
fund may invest are: 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 nationally recognized statistical rating organization ("NRSRO")
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 the fund's investments in bank obligations,
including time deposits, exceed 25% of its assets. In addition, the fund
will not invest in time deposits maturing in more than seven days if, as
a result, its holdings of those time deposits would exceed 5% of the
fund's net assets.
The fund will invest in an obligation of a foreign bank or foreign branch
of a United States bank only if the Manager determines that the obligation
presents minimal credit risks. Obligations of foreign banks or foreign
branches of United States banks in which the fund will invest may be
traded in the United States or outside the United States, but will be
denominated in U.S. dollars. These obligations entail risks that are
different from those of investments in obligations of United States banks.
These risks include foreign economic and political developments, foreign
governmental restrictions that may adversely affect payment of principal
and interest on the obligations, foreign exchange controls and foreign
withholding or other taxes on income. Foreign branches of domestic banks
are not necessarily subject to the same or similar regulatory requirements
as 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 the fund 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 The fund 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. 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 the terms of a typical repurchase
agreement, the fund 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 fund to resell, the
obligation at an agreed price and time, thereby determining the yield
during the fund's holding period. This arrangement results in a fixed
rate of return that is not subject to market fluctuations during the
fund's holding period. The value of the underlying securities will be
monitored on an ongoing basis by the Manager to ensure that the value is
at least equal at all times to the total amount of the repurchase
obligation, including interest. The Manager also will review on an
ongoing basis the creditworthiness of those banks and dealers with which
the fund may enter into repurchase agreements to evaluate the potential
risks. The fund bears a risk of loss if the other party to a repurchase
agreement defaults on its obligations and the fund is delayed in or
prevented from exercising its rights to dispose of the underlying
securities, including the risk of a possible decline in the value of the
underlying securities during the period in which the fund seeks to assert
its rights to them, the risk of incurring expenses associated with
asserting those rights and the risk of losing all or a part of the income
from the agreement.
DERIVATIVES
Covered option writing The fund may write covered call options with
respect to its portfolio securities. The fund realizes a fee (referred to
as a "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 fund has the right to purchase from the fund the
underlying security owned by the fund at the agreed-upon price for a
specified time period.
Upon the exercise of a call option written by the fund, the fund may
suffer a loss equal to the excess of the security's market value at the
time of the option exercise over the fund's cost of the security, less the
premium received for writing the option. The fund will write only covered
options with respect to its portfolio securities. Accordingly, whenever
the fund writes a call option on its securities, it will continue to own
or have the present right to acquire the underlying security for as long
as it remains obligated as the writer of the option. To support its
obligation to sell the underlying security if a call option is exercised,
the fund will either (a) segregated cash, or equity and debt securities of
any grade provided such securities have been determined by the Manager to
be liquid and unencumbered pursuant to guidelines established by the
Trustees ("eligible segregated assets") having a value at least equal to
the value of the underlying securities or (b) continue to own an
equivalent number of shares of the security or of calls of the same
"series" (that is, calls on the same underlying security) with exercise
prices equal to or less than those it has written (or, if the exercise
prices of the calls it holds are more than the exercise prices of those it
has written, it will segregate the difference).
The fund may engage in a closing purchase transaction to realize a profit,
to prevent an underlying security from being called or to unfreeze an
underlying security (thereby permitting its sale or the writing of a new
option on the security prior to the outstanding option's expiration). To
effect a closing purchase transaction, the fund would purchase, prior to
the holder's exercise of an option the fund has written, an option of the
same series as that on which the fund desires to terminate its obligation.
The obligation of the fund under an option it has written would be
terminated by a closing purchase transaction, but the fund would not be
deemed to own an option as a result of the transaction. There can be no
assurances that the fund will be able to effect closing purchase
transactions at a time when it wishes to do so. To facilitate closing
purchase transactions, however, the fund ordinarily will write options
only if a secondary market for the options exists on domestic securities
exchanges or in the over-the-counter market.
The fund may also, for hedging purposes, purchase put options on
securities traded on national securities exchanges as well as in the
over-the-counter market. The fund may purchase put options on particular
securities in order to protect against a decline in the market value of
the underlying securities below the exercise price less the premium paid
for the option. Put options on individual securities are intended to
protect against declines in market value which 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 fund may purchase options in the over-the-counter market ("OTC
options") to the same extent 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 fund will treat OTC options as subject to the fund's
limitation on illiquid securities until such time as there is a change in
the SEC's position.
Options on stock indexes The 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 the Manager to predict
the price movement of the stock index selected. Therefore, whether the
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 exercises 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 fund has written the call, there is also
a risk that the market may decline between the time the fund has a call
exercised against it, at a price which is fixed as of the closing level of
the index on the date of exercise, and the time the fund is able to
exercise the closing transaction with respect to the securities it holds.
Futures contracts and options on futures contracts 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 fund may enter into futures contracts to sell
securities when the Manager believes the value of the 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 obligates the writer to enter
into a futures contract to sell the underlying securities. A put option
gives a purchaser the right to sell and obliges the writer to buy the
underlying contract. The fund may enter into futures contracts to
purchase securities when the Manager anticipates purchasing the underlying
securities and believes prices will rise before the purchases will be
made. When the fund enters into a futures contract to purchase an
underlying security, an amount of eligible segregated assets, equal to the
market value of the contract, will be segregated to collateralize the
position, thereby insuring that the use of the contract is unleveraged.
The fund will not enter into futures contracts for speculation and will
only enter into futures contracts that are traded on a U.S. exchange or
board of trade.
RISK FACTORS
Zero coupon securities Zero coupon securities of the type held by the
fund can be sold prior to their due date in the secondary market at their
then prevailing market value which, depending on prevailing levels of
interest rates and the time remaining to maturity, may be more or less
than 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 the fund 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 the fund attributable to zero coupon
securities and other debt instruments held by the fund generally will vary
inversely with changes in prevailing interest rates.
As a series of an open-end investment company, the fund is required to
redeem its shares upon the request of any shareholder at the net asset
value next determined after receipt of the request. However, because of
the price volatility of zero coupon securities prior to maturity, a
shareholder who redeems shares prior to the Maturity Date may realize an
amount that is greater or less than the 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 shares not
redeemed would remain subject to the possible achievement of the Repayment
Objective, provided dividends and distributions with respect to these
shares are reinvested. Thus, if the fund is successful in achieving the
Repayment Objective, the holder of those remaining shares plus shares
acquired through reinvestment of dividends and distributions thereon
("Remaining Shares") would receive at the Maturity Date an amount that
equals or exceeds the purchase price of those shares. Nonetheless, the
amount received on the Maturity Date in respect of Remaining Shares, when
combined with the amount received in respect of shares redeemed prior to
the Maturity Date, may be more or less than the aggregate purchase price
of all shares purchased.
Each year the fund will be required to accrue an increasing amount of
income on its zero coupon securities utilizing the effective interest
method. To maintain its tax status as a pass-through entity and also to
avoid imposition of income and excise taxes, however, the fund will be
required to distribute dividends equal to substantially all of its net
investment income, including the accrued income on its zero coupon
securities for which it receives no payments in cash prior to their
maturity. Dividends of the fund's net investment income and distributions
of its short-term capital gains will be taxable to shareholders as
ordinary income for Federal income tax purposes, whether received in cash
or reinvested in additional shares. See "Taxes." However, a shareholder
who elects to receive dividends and distributions in cash, instead of
reinvesting these amounts in additional shares of the fund, may realize an
amount that is less or greater than the entire amount originally invested.
Smaller and medium sized companies Securities of smaller and medium sized
companies (companies with a capitalization of less than $1 billion) may be
subject to limited liquidity and more volatility which could result in
significant fluctuations in the price of their shares.
Operational risk In order to generate sufficient cash to meet
distribution requirements and other operational needs and to redeem its
shares on request, the fund 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 fund may be required to effect these liquidations at a time
when it is otherwise disadvantageous to do so. If the fund realizes
capital losses on dispositions of non-zero coupon securities that are not
offset by capital gains on the disposition of other such securities, the
fund 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 fund's 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 fund unable to meet the Repayment Objective.
Derivative instruments In accordance with its investment policies, the
fund may invest in certain derivative instruments which are securities or
contracts that provide for payments based on or "derived" from the
performance of an underlying asset, index or other economic benchmark.
Essentially, a derivative instrument is a financial arrangement or a
contract between two parties. Transactions in derivative instruments can
be, but are not necessarily, riskier than investments in conventional
stocks, bonds and money market instruments. A derivative instrument is
more accurately viewed as a way of reallocating risk among different
parties or substituting one type of risk for another. Every investment by
the fund, including an investment in conventional securities, reflects an
implicit prediction about future changes in the value of that investment.
Every fund investment also involves a risk that the portfolio manager's
expectations will be wrong. Transactions in derivative instruments often
enable the fund to take investment positions that more precisely reflect
the portfolio manager's expectations concerning the future performance of
the various investments available to the fund. Derivative instruments can
be a legitimate and often cost-effective method of accomplishing the same
investment goals as could be achieved through other investment in
conventional securities.
Derivative contracts include options, futures contracts, forward
contracts, forward commitment and when-issued securities transactions,
forward foreign currency exchange contracts and interest rate, mortgage
and currency swaps. The following are the principal risks associated with
derivative instruments.
Leverage and associated price volatility: Leverage causes increased
volatility in the price and magnifies the impact of adverse market
changes, but this risk may be consistent with the investment objective of
even a conservative fund in order to achieve an average portfolio
volatility that is within the expected range for that type of fund.
Liquidity and valuation risk: Many derivative instruments are traded in
institutional markets rather than on an exchange. Nevertheless, many
derivative instruments are actively traded and can be priced with as much
accuracy as conventional securities. Derivative instruments that are
custom designed to meet the specialized investment needs of a relatively
narrow group of institutional investors such as the fund is not readily
marketable and are subject to the fund's restrictions on illiquid
investments.
Futures contracts and related options. The fund may lose the expected
benefit of these futures or options transactions and may incur losses if
the prices of the underlying securities move in an unanticipated manner.
In addition, changes in the value of the fund's futures and options
positions may not prove to be perfectly or even highly correlated with
changes in the value of its portfolio securities. Successful use of
futures and related options is subject to the Manager's ability to predict
correctly movements in the direction of the securities markets generally,
which ability may require different skills and techniques than predicting
changes in the prices of individual securities. Moreover, futures and
options contracts may be closed out only by entering into offsetting
transactions on the exchange where the position was entered into (or a
linked exchange), and, as a result of daily price fluctuation limits,
there can be no assurance the offsetting transaction could be entered into
at an advantageous price at a particular time. Consequently, the fund may
realize a loss on a futures contract or option that is not offset by an
increase in the value of its portfolio securities that are being hedged or
the fund may not be able to close a futures or options position without
incurring a loss in the event of adverse price movements.
INVESTMENT RESTRICTIONS
These investment restrictions have been adopted by the Trust as
fundamental policies. Under the 1940 Act, the fundamental policy may not
be changed without the vote of a majority of the outstanding voting
securities of the fund, as defined in the 1940 Act. "Majority" means the
lesser of (a) 67% or more of the shares present at a meeting, if the
holders of more than 50% of the outstanding shares of the fund are present
or represented by proxy, or (b) more than 50% of the outstanding shares.
Under the investment restrictions adopted by the fund:
1. The fund 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. The fund will not borrow money, except that (a) the fund may borrow
from banks for temporary or emergency (not leveraging) purposes, including
the meeting of redemption requests which might otherwise require the
untimely disposition of securities and (b) the fund 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), the fund will be limited so that no more than 33-1/3% of
the value of the fund's total assets (including the amount borrowed)
valued at the lesser of cost or market, less liabilities (not including
the amount borrowed), is derived from such transactions.
3. The fund will not make loans. This restriction does not apply to:
(a) the purchase of debt obligations in which the fund 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. The fund 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. The fund will not underwrite the securities of other issuers, except
insofar as the fund may be deemed to be an underwriter under the
Securities Act of 1933, as amended (the "1933 Act") in disposing of its
portfolio securities.
6. The fund will not purchase or sell real estate, real estate
mortgages, commodities or commodity contracts, but this restriction shall
not prevent the fund 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 fund's investment objective and policies); or (d) investing in real
estate investment trust securities.
7. The fund 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.
Nonfundamental restrictions The following investment restrictions may be
changed by a vote of a majority of the Board of Trustees at any time.
1. The fund will not sell securities short.
2. The fund will not purchase securities on margin, except that the
fund may obtain any short-term credits necessary for the clearance of
purchases and sales of securities.
3. The fund will not invest in oil, gas, mineral leases or other
mineral exploration or development programs, except that the fund may
invest in the securities of companies that invest in or sponsor those
programs.
4. The fund will not write or sell put options, call options, straddles
or combinations of those options, except that the 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.
5. The fund will not purchase any security, except U.S. government
securities, if as a result of the purchase, the fund would then have more
than 5% of its total assets invested in securities of companies (including
predecessor companies) that have been in continuous operation for fewer
than three years. (For purposes of this limitation, issuers include
predecessors, sponsors, controlling persons, general partners, guarantors
and originators of underlying assets which may have less than three years
of continuous operation or relevant business experience.)
6. The fund will not make investments for the purpose of exercising
control or management of any other issuer.
7. The fund will not invest in warrants, if as a result, more than 2%
of the value of the fund's net assets would be invested in warrants that
are not listed on a recognized United States stock exchange, or more than
5% of the fund's net assets would be invested in warrants regardless of
whether they are listed on such an exchange.
8. The fund will not invest in time deposits maturing in more than
seven days, enter into repurchase agreements having a duration of more
than seven days, or purchase instruments lacking readily available market
quotations ("illiquid instruments"), if as a result of the purchase the
fund's aggregate holdings of illiquid instruments exceed 10% of the fund's
net assets.
The Trust may make commitments more restrictive than the restrictions
listed above so as to permit the sale of its shares in certain states.
Should the Trust determine that any commitment is no longer in the best
interests of the Trust and its shareholders, the Trust will revoke the
commitment by terminating the sale of shares in the relevant state. The
percentage limitations set forth above apply at the time of purchase of
securities.
PURCHASE, REDEMPTION AND EXCHANGE OF SHARES
PURCHASE OF SHARES.
Shares of the fund are not currently being offered for sale to new
investors, although the fund, 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 the fund and its shareholders.
WRITTEN REDEMPTION REQUESTS
The Trust is required to redeem shares of the fund 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.
Redemption requests received after the close of regular trading on the
NYSE are priced at the net asset value per share next determined.
The fund normally transmits redemption proceeds for credit to the
shareholder's account at Salomon Smith Barney, an investment dealer in the
selling group or a broker that clears securities transactions through
Salomon Smith Barney ("Dealer Representative"), 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 Salomon Smith
Barney will benefit from the use of temporarily uninvested funds.
Shares held by Salomon Smith Barney as custodian must be redeemed by
submitting a written request to a Salomon Smith Barney Financial
Consultant. Shares other than those held by Salomon 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
Security and Growth Fund
c/o PFPC Global Fund Services
P.O. Box 9699
Providence, RI 02940-9699
A written redemption request must (a) state the number or dollar amount of
shares to be redeemed, (b) identity the fund 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 sub-transfer
agent together with a redemption request. Any signature appearing on a
redemption request in excess of $10,000, 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 $10,000 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.
The right of redemption may be suspended or the date of payment postponed
(a) for any period during which the NYSE is closed (other than for
customary weekend and holiday closings), (b) when trading in markets the
fund normally utilizes is restricted, or an emergency as determined by the
SEC exists, so that the disposal of the fund's investments or
determination of its net asset value is not reasonably practicable or (c)
for such other periods as the SEC by order may permit for protection of
the fund's shareholders.
EXCHANGE PRIVILEGE
The exchange privilege enables shareholders to acquire shares of the same
class in the 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 the fund into which an exchange is being made. Prospectuses
may be obtained from a Salomon Smith Barney Financial Consultant. A
shareholder who has redeemed shares of the fund, through the exchange
privilege or otherwise, will not be able to purchase new shares of the
fund.
Upon receipt of proper instructions and all necessary supporting documents
in proper form, 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.
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. Salomon 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. The Trust
reserves the right to modify or discontinue exchange privileges upon 60
days' prior notice to shareholders.
Except as otherwise noted below, shares of the fund may be exchanged at
the net asset value next determined for Class A shares in any of the Smith
Barney Mutual Funds, to the extent shares are offered for sale in the
shareholder's state of residence. Exchanges of fund shares are subject to
minimum investment requirements and to the other requirements of the Smith
Barney fund into which exchanges are made. Shareholders of the fund who
wish to exchange all or a portion of their shares for Class A shares in
any of the Smith Barney funds may do so without imposition of any charge.
Certain shareholders may be able to exchange shares by telephone. See
"Telephone Redemption and Exchange Program."
Additional information regarding the exchange privilege An exchange is a
taxable transaction. Before exchanging shares, investors should read the
current prospectus describing the shares to be acquired.
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. Moreover, because the fund is not engaging in a continuous
offering of shares, a shareholder who exchanges his or her fund shares
will not be able to effect a further exchange back into that fund.
Excessive transactions Although the exchange privilege is an important
benefit, excessive exchange transactions can be detrimental to the fund's
performance and its shareholders. The Manager 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.
TELEPHONE REDEMPTION AND EXCHANGE PROGRAM
General Shareholders who do not have a Salomon Smith Barney brokerage
account may be eligible to redeem and exchange fund shares by telephone.
To determine if a shareholder is entitled to participate in this program,
he or she should contact Smith Barney Private Trust Company (the "transfer
agent") 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 the transfer agent upon
request.
Redemptions Redemption requests of up to $10,000 of the fund's shares may
be made by eligible shareholders by calling the transfer agent at
1-800-451-2010. Such requests may be made between 9:00 a.m. and 4:00 p.m.
(Eastern 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 fund 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 the transfer agent at 1-800-451-2010
between 9:00 a.m. and 4:00 p.m. (Eastern time) on any day on which the
NYSE is open.
Additional information regarding the 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 the 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 change for this service at any time following at least seven (7)
days' prior notice to shareholders.
Redemptions in kind 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, the fund may pay any portion of
a redemption in excess of the lesser of $250,000 or 1% of the fund's net
assets by distribution in kind of securities from the fund's portfolio in
lieu of cash in conformity with SEC rules. Portfolio securities
distributed 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.
PORTFOLIO TURNOVER
General The fund does not intend to seek profits through short-term
trading of its securities. Nevertheless, the fund will not consider
portfolio turnover rate a limiting factor in making investment decisions.
The fund cannot accurately predict its portfolio turnover rates, but
anticipate that its annual turnover rate will not exceed 50%. The
turnover rate would be 100% if all of the fund's securities included in
the computation of turnover were replaced once during a period of one
year. The fund's turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the year by the monthly
average value of portfolio securities. Securities with remaining
maturities of one year or less on the date of acquisition are excluded
from the calculation. For the fiscal years ended November 30, 1999 and
1998, the fund's portfolio turnover rates were as follows:
1999
1998
Security and Growth Fund
31%
23%
PORTFOLIO TRANSACTIONS
Decisions to buy and sell securities for the fund are made by the Manager,
subject to the overall review of the Trust's Board of Trustees. Although
investment decisions for the fund are made independently from those of the
other accounts managed by the Manager, investments of the type made by the
fund also may be made by those accounts. When the fund and one or more
other accounts managed by the Manager are prepared to invest in, or desire
to dispose of, the same security, available investments or opportunities
for sales will be allocated in a manner believed by the Manager to be
equitable to each. In some cases, this procedure may adversely affect the
price paid or received by the fund or the size of the position obtained or
disposed of by the fund.
Transactions on U.S. 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. During the fiscal year 1999, the total amount of
commissionable transactions was $34,933,498 of which $352,403 (1.0%) was
directed to Salomon Smith Barney and $34,581.095 (99.0%) was directed to
other brokers. The following table sets forth certain information
regarding the fund's payment of brokerage commissions:
Fiscal Year
Ended
November 30
Security
and Growth
Fund
Total Brokerage Commissions
1997
1998
1999
$128,979
$118,904
$132,987
Total Brokerage Commissions paid to
Salomon Smith Barney
1997
1998
1999
$5,448
$10,440
$2,100
% of Total Brokerage Commissions paid
to Salomon Smith Barney
1997
1998
1999
4.22%
8.7%
1.6%
% of Total Transaction involving
Commissions paid to Salomon Smith
Barney
1997
1998
1999
0.66%
9.7%
1.0%
The Manager seeks the best overall terms available in selecting brokers or
dealers to execute transactions on behalf of the fund. In assessing the
best overall terms available for any transaction the Manager will consider
factors it deems relevant, including the breadth of the market in the
security, the price of the security, the financial condition and execution
capability of the broker or dealer and the reasonableness of the
commission, if any, for the specific transaction and on a continuing
basis. In addition, the Manager is authorized in selecting brokers or
dealers to execute a particular transaction and in evaluating the best
overall terms available to consider the brokerage and research services
(as those terms are defined in Section 28(e) of the Securities Exchange
Act of 1934) provided to the fund and/or other accounts over which the
Manager or its affiliates exercise investment discretion. The fees under
the fund's advisory agreements are not reduced by reason of the Manager
receiving brokerage and research services. For the fiscal year ended
November 30, 1999, the fund directed brokerage transactions totaling
approximately $9,276 to brokers because of research services provided. The
Trust's Board of Trustees will periodically review the commissions paid by
the fund to determine if the commissions paid over representative periods
of time were reasonable in relation to the benefits inuring to the fund.
In accordance with Section 17(e) of the 1940 Act and Rule 17e-1 under the
1940 Act, the Trust's Board of Trustees has determined that transactions
for the fund may be executed through Salomon Smith Barney and other
affiliated broker-dealers if, in the judgment of the Manager, the use of
an affiliated broker-dealer is likely to result in price and execution at
least as favorable as those of other qualified broker-dealers and if, in
the transaction, the affiliated broker-dealer charges the fund a rate
consistent with that charged to comparable unaffiliated customers in
similar transactions. In addition, under the rules adopted by the SEC,
Salomon Smith Barney may directly execute such transactions for the fund
on the floor of any national securities exchange, provided: (a) the Board
of Trustees has expressly authorized Salomon Smith Barney to effect such
transactions; and (b) Salomon Smith Barney annually advises the fund of
the aggregate compensation it earned on such transactions.
DETERMINATION OF NET ASSET VALUE
When calculated The fund's 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 Christmas falls on a Saturday or Sunday. On those
days, securities held by the fund may nevertheless be actively traded, and
the value of the fund's shares could be significantly affected.
Valuation Generally, the fund's investments are valued at market value
or, in the absence of a market value, at fair value as determined by or
under the direction of the Trust's Board of Trustees. Securities that are
primarily traded on non-U.S. exchanges are 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 the fair value of the investment. In carrying out the
Board's valuation policies, the Manager may consult with an independent
pricing service retained by the Trust.
TAXES
The following is a summary of the material United States federal income
tax considerations regarding the purchase, ownership and disposition of
shares of the fund. Each prospective shareholder is urged to consult his
own tax adviser with respect to the specific federal, state, local and
foreign tax consequences of investing in the fund. The summary is based on
the laws in effect on the date of this Statement of Additional
Information, which are subject to change.
The Fund and Its Investments
The fund intends to qualify to be treated as a regulated investment
company each taxable year under the Internal Revenue Code of 1986, as
amended (the "Code"). To so qualify, the fund must, among other things:
(a) derive at least 90% of its gross income in each taxable year from
dividends, interest, payments with respect to securities, loans and gains
from the sale or other disposition of stock or securities or foreign
currencies, or other income (including, but not limited to, gains from
options, futures or forward contracts) derived with respect to its
business of investing in such stock, securities or currencies; and (b)
diversify its holdings so that, at the end of each quarter of the fund's
taxable year, (i) at least 50% of the market value of the fund's assets is
represented by cash, securities of other regulated investment companies,
United States government securities and other securities, with such other
securities limited, in respect of any one issuer, to an amount not greater
than 5% of the fund's assets and not greater than 10% of the outstanding
voting securities of such issuer and (ii) not more than 25% of the value
of its assets is invested in the securities (other than United States
government securities or securities of other regulated investment
companies) of any one issuer or any two or more issuers that the fund
controls and are determined to be engaged in the same or similar trades or
businesses or related trades or businesses. The fund expects that all of
its foreign currency gains will be directly related to its principal
business of investing in stocks and securities.
As a regulated investment company, the fund will not be subject to United
States federal income tax on its net investment income (i.e., income other
than its net realized long- and short-term capital gains) and its net
realized long- and short-term capital gains, if any, that it distributes
to its shareholders, provided that an amount equal to at least 90% of its
investment company taxable income (i.e., 90% of its taxable income minus
the excess, if any, of its net realized long-term capital gains over its
net realized short-term capital losses (including any capital loss
carryovers), plus or minus certain other adjustments as specified in the
Code) and 90% of its net tax-exempt income for the taxable year is
distributed, but will be subject to tax at regular corporate rates on any
taxable income or gains that it does not distribute.
The Code imposes a 4% nondeductible excise tax on the fund to the extent
the fund does not distribute by the end of any calendar year at least 98%
of its net investment income for that year and 98% of the net amount of
its capital gains (both long-and short-term) for the one-year period
ending, as a general rule, on October 31 of that year. For this purpose,
however, any income or gain retained by the fund that is subject to
corporate income tax will be considered to have been distributed by year-
end. In addition, the minimum amounts that must be distributed in any
year to avoid the excise tax will be increased or decreased to reflect any
underdistribution or overdistribution, as the case may be, from the
previous year. The fund anticipates it will pay such dividends and will
make such distributions as are necessary in order to avoid the application
of this tax.
If, in any taxable year, the fund fails to qualify as a regulated
investment company under the Code or fails to meet the distribution
requirement, it would be taxed in the same manner as an ordinary
corporation and distributions to its shareholders would not be deductible
by the fund in computing its taxable income. In addition, in the event of
a failure to qualify, the fund's distributions, to the extent derived from
the fund's current or accumulated earnings and profits would constitute
dividends (eligible for the corporate dividends-received deduction) which
are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gains. If the fund fails to
qualify as a regulated investment company in any year, it must pay out its
earnings and profits accumulated in that year in order to qualify again as
a regulated investment company. In addition, if the fund failed to
qualify as a regulated investment company for a period greater than one
taxable year, the fund may be required to recognize any net built-in gains
(the excess of the aggregate gains, including items of income, over
aggregate losses that would have been realized if it had been liquidated)
in order to qualify as a regulated investment company in a subsequent
year.
The fund will invest in zero coupon securities having an original issue
discount (that is, the discount represented by the excess of the stated
redemption price at maturity over the issue price). Each year, the fund
will be required to accrue as income a portion of this original issue
discount even though the fund will receive no cash payment of interest
with respect to these securities. In addition, if the fund acquires a
security after its initial issuance at a discount that resulted from
fluctuations in prevailing interest rates ("market discount"), the fund
may elect to include in income each year a portion of this market
discount.
The fund will be required to distribute substantially all of its income
(including accrued original issue and recognized market discount) in order
to qualify for "pass-through" federal income tax treatment and also in
order to avoid the imposition of 4% excise tax referred to above.
Therefore, the fund may be required in some years to distribute an amount
greater than the total cash income the fund actually receives. In order
to make the required distribution in such a year, the fund may be required
to borrow or to liquidate securities. The amount of cash that the fund
would have to distribute, and thus the degree to which securities would
need to be liquidated or borrowing made would depend upon the number of
shareholders who chose not to have their dividends reinvested.
The fund's transactions in foreign currencies, forward contracts, options
and futures contracts (including options and futures contracts on foreign
currencies) will be subject to special provisions of the Code (including
provisions relating to "hedging transactions" and "straddles") that, among
other things, may affect the character of gains and losses realized by the
fund (i.e., may affect whether gains or losses are ordinary or capital),
accelerate recognition of income to the fund and defer fund losses. These
rules could therefore affect the character, amount and timing of
distributions to shareholders. These provisions also (a) will require the
fund to mark-to-market certain types of the positions in its portfolio
(i.e., treat them as if they were closed out) and (b) may cause the fund
to recognize income without receiving cash with which to pay dividends or
make distributions in amounts necessary to satisfy the distribution
requirements for avoiding income and excise taxes. The fund will monitor
its transactions, will make the appropriate tax elections and will make
the appropriate entries in its books and records when it acquires any
foreign currency, forward contract, option, futures contract or hedged
investment in order to mitigate the effect of these rules and prevent
disqualification of the fund as a regulated investment company.
The fund's investment in Section 1256 contracts, such as regulated futures
contracts, most foward currency contracts traded in the interbank market
and options on most stock indices, are subject to special tax rules. All
section 1256 contracts held by the fund at the end of its taxable year are
required to be marked to their market value, and any unrealized gain or
loss on those positions will be included in the fund's income as if each
position had been sold for its fair market value at the end of the taxable
year. The resulting gain or loss will be combined with any gain or loss
realized by the fund from positions in section 1256 contracts closed
during the taxable year. Provided such positions were held as capital
assets and were not part of a "hedging transaction" nor part of a
"straddle," 60% of the resulting net gain or loss will be treated as long-
term capital gain or loss, and 40% of such net gain or loss will be
treated as short-term capital gain or loss, regardless of the period of
time the positions were actually held by the fund.
Foreign Investments Dividends or other income (including, in some cases,
capital gains) received by the fund from investments in foreign securities
may be subject to withholding and other taxes imposed by foreign
countries. Tax conventions between certain countries and the United
States may reduce or eliminate such taxes in some cases. The fund will
not be eligible to elect to treat any foreign taxes they pay as paid by
its shareholders, who therefore will not be entitled to credits for such
taxes on their own tax returns. Foreign taxes paid by the fund will
reduce the return from the fund's investments.
Passive Foreign Investment Companies If the fund purchases shares in
certain foreign investment entities, called "passive foreign investment
companies" (a "PFIC"), it may be subject to United States federal income
tax on a portion of any "excess distribution" or gain from the disposition
of such shares even if such income is distributed as a taxable dividend by
the fund to its shareholders. Additional charges in the nature of
interest may be imposed on the fund in respect of deferred taxes arising
from such distributions or gains. If the fund were to invest in a PFIC
and elected to treat the PFIC as a "qualified electing fund" under the
Code, in lieu of the foregoing requirements, the fund might be required to
include in income each year a portion of the ordinary earnings and net
capital gains of the qualified electing fund, even if not distributed to
the fund, and such amounts would be subject to the 90% and excise tax
distribution requirements described above. In order to make this
election, the fund would be required to obtain certain annual information
from the passive foreign investment companies in which it invests, which
may be difficult or not possible to obtain.
Recently, legislation was enacted that provides a mark-to-market election
for regulated investment companies effective for taxable years beginning
after December 31, 1997. This election would result in the fund being
treated as if it had sold and repurchased all of the PFIC stock at the end
of each year. In this case, the fund would report gains as ordinary
income and would deduct losses as ordinary losses to the extent of
previously recognized gains. The election, once made, would be effective
for all subsequent taxable years of the fund, unless revoked with the
consent of the IRS. By making the election, the fund could potentially
ameliorate the adverse tax consequences with respect to its ownership of
shares in a PFIC, but in any particular year may be required to recognize
income in excess of the distributions it receives from PFICs and its
proceeds from dispositions of PFIC company stock. The fund may have to
distribute this "phantom" income and gain to satisfy its distribution
requirement and to avoid imposition of the 4% excise tax. The fund will
make the appropriate tax elections, if possible, and take any additional
steps that are necessary to mitigate the effect of these rules.
Taxation of United States Shareholders
Dividends and Distributions Any dividend declared by the fund in October,
November or December of any calendar year and payable to shareholders of
record on a specified date in such a month shall be deemed to have been
received by each shareholder on December 31 of such calendar year and to
have been paid by the fund not later than such December 31, provided such
dividend is actually paid by the fund during January of the following
calendar year. The fund intends to distribute annually to its
shareholders substantially all of its investment company taxable income,
and any net realized long-term capital gains in excess of net realized
short-term capital losses (including any capital loss carryovers). The
fund currently expects to distribute any excess annually to its
shareholders. However, if the fund retains for investment an amount equal
to all or a portion of its net long-term capital gains in excess of its
net short-term capital losses and capital loss carryovers, it will be
subject to a corporate tax (currently at a rate of 35%) on the amount
retained. In that event, the fund will designate such retained amounts as
undistributed capital gains in a notice to its shareholders who (a) will
be required to include in income for United States federal income tax
purposes, as long-term capital gains, their proportionate shares of the
undistributed amount, (b) will be entitled to credit their proportionate
shares of the 35% tax paid by the fund on the undistributed amount against
their United States federal income tax liabilities, if any, and to claim
refunds to the extent their credits exceed their liabilities, if any, and
(c) will be entitled to increase their tax basis, for United States
federal income tax purposes, in their shares by an amount equal to 65% of
the amount of undistributed capital gains included in the shareholder's
income. Organizations or persons not subject to federal income tax on
such capital gains will be entitled to a refund of their pro rata share of
such taxes paid by the fund upon filing appropriate returns or claims for
refund with the Internal Revenue Service (the "IRS").
Dividends of net investment income and distributions of net realized
short-term capital gains are taxable to a United States shareholder as
ordinary income, whether paid in cash or in shares. Distributions of net-
long-term capital gains, if any, that the fund designates as capital gains
dividends are taxable as long-term capital gains, whether paid in cash or
in shares and regardless of how long a shareholder has held shares of the
fund. Dividends and distributions paid by the fund (except for the
portion thereof, if any, attributable to dividends on stock of U.S.
corporations received by the fund) will not qualify for the deduction for
dividends received by corporations. Distributions in excess of the fund's
current and accumulated earnings and profits will, as to each shareholder,
be treated as a tax-free return of capital, to the extent of a
shareholder's basis in his shares of the fund, and as a capital gain
thereafter (if the shareholder holds his shares of the fund as capital
assets).
Shareholders receiving dividends or distributions in the form of
additional shares should be treated for United States federal income tax
purposes as receiving a distribution in the amount equal to the amount of
money the shareholders receiving cash dividends or distributions will
receive, and should have a cost basis in the shares received equal to such
amount.
Investors considering buying shares just prior to a dividend or capital
gain distribution should be aware that, although the price of shares just
purchased at that time may reflect the amount of the forthcoming
distribution, such dividend or distribution may nevertheless be taxable to
them.
If the fund is the holder of record of any stock on the record date for
any dividends payable with respect to such stock, such dividends are
included in the fund's gross income not as of the date received but as of
the later of (a) the date such stock became ex-dividend with respect to
such dividends (i.e., the date on which a buyer of the stock would not be
entitled to receive the declared, but unpaid, dividends) or (b) the date
the fund acquired such stock. Accordingly, in order to satisfy its income
distribution requirements, the fund may be required to pay dividends based
on anticipated earnings, and shareholders may receive dividends in an
earlier year than would otherwise be the case.
Sales of Shares Upon the sale or exchange of his shares, a shareholder
will realize a taxable gain or loss equal to the difference between the
amount realized and his basis in his shares. Such gain or loss will be
treated as capital gain or loss, if the shares are capital assets in the
shareholder's hands, and will be long-term capital gain or loss if the
shares are held for more than one year and short-term capital gain or loss
if the shares are held for one year or less. Any loss realized on a sale
or exchange will be disallowed to the extent the shares disposed of are
replaced, including replacement through the reinvesting of dividends and
capital gains distributions in the fund, within a 61-day period beginning
30 days before and ending 30 days after the disposition of the shares. In
such a case, the basis of the shares acquired will be increased to reflect
the disallowed loss. Any loss realized by a shareholder on the sale of a
fund share held by the shareholder for six months or less will be treated
for United States federal income tax purposes as a long-term capital loss
to the extent of any distributions or deemed distributions of long-term
capital gains received by the shareholder with respect to such share.
Backup Withholding The fund may be required to withhold, for United
States federal income tax purposes, 31% of the dividends and distributions
payable to shareholders who fail to provide the fund with their correct
taxpayer identification number or to make required certifications, or who
have been notified by the IRS that they are subject to backup withholding.
Certain shareholders are exempt from backup withholding. Backup
withholding is not an additional tax and any amount withheld may be
credited against a shareholder's United States federal income tax
liabilities.
Notices Shareholders will be notified annually by the fund as to the
United States federal income tax status of the dividends, distributions
and deemed distributions attributable to undistributed capital gains
(discussed above in "Dividends and Distributions") made by the fund to its
shareholders. Furthermore, shareholders will also receive, if
appropriate, various written notices after the close of the fund's taxable
year regarding the United States federal income tax status of certain
dividends, distributions and deemed distributions that were paid (or that
are treated as having been paid) by the fund to its shareholders during
the preceding taxable year.
Other Taxation
Distributions also may be subject to additional state, local and foreign
taxes depending on each shareholder's particular situation.
The foregoing is only a summary of certain material tax consequences
affecting the fund and its shareholders. Shareholders are advised to
consult their own tax advisers with respect to the particular tax
consequences to them of an investment in the fund.
PERFORMANCE INFORMATION
From time to time, the Trust may quote the fund's performance in terms of
its total return in reports or other communications to shareholders. The
fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Average annual total return The fund's "average annual total return"
figures are computed according to a formula prescribed by the SEC. The
formula can be expressed as follows:
P(1 +T)n = ERV
Where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = Ending Redeemable Value of a hypothetical $1,000 investment made at
the beginning of a 1-, 5- or 10-year period at the end of the 1-, 5-
, or 10-year period (or fractional portion thereof), assuming
reinvestment of all dividends and distributions
The fund's average annual total returns were as follows for the periods
indicated:
Name of Fund
One Year
Period Ended
11/30/99
Per Annum for
Period
from
Commencement
of
Operations
through
11/30/99**
One Year
Period Ended
11/30/99***
Per Annum for
Period
from
Commencement
of
Operations
through
11/30/99***
Security and Growth
Fund (1)
N/A*
7.84%
13.47%
8.78%
(1) Security and Growth Fund commenced operations on March 30, 1995.
* No sales charge applicable since only reinvestments were permitted
**This total return figure assumes that the maximum sales charge has been
included in the investment at the time of purchase.
***These total return figures assume that no sales charges have been
included in the investment at the time of purchase.
Aggregate total return The fund's aggregate total return figures shown
below represent the cumulative change in the value of an investment in the
fund 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 fund's aggregate total returns were as follows for the periods
indicated:
Name of
Fund
One
Year
Period
Ended
11/30/9
9*
Period from
Commencement
of
Operations
through
11/30/99*
One Year
Period
Ended
11/30/99
Period from
Commencement
of
Operations
through
11/30/99**
Security
and
Growth
Fund(1)
13.47%
48.22%
N/A(2)
42.29%
(1) Security and Growth Fund commenced operations on March 30, 1995.
(2) No sales charge applicable since only reinvestments were permitted.
* Figures do not include the effect of the maximum sales charge.
** Figure includes the effect of the maximum sales charge.
The fund's performance will vary from time to time depending upon market
conditions, the composition of its portfolio and its operating expenses.
Consequently, any given performance quotation should not be considered
representative of the fund's performance for any specified period in the
future. In addition, because performance will fluctuate, it may not
provide a basis for comparing an investment in the fund with certain bank
deposits or other investments that pay a fixed yield for a stated period
of time. Investors comparing the fund's performance with that of other
mutual funds should give consideration to the quality and maturity of the
respective investment companies' portfolio securities.
INVESTMENT MANAGEMENT AND OTHER SERVICES
Investment adviser The Manager, at 388 Greenwich Street, New York, New
York 10013, serves as the fund's investment adviser under the terms of a
written agreement for the fund (the "Advisory Agreement"). The Manager is
a wholly owned subsidiary of Salomon Smith Barney Holdings Inc.
("Holdings"), which is in turn a wholly owned subsidiary of Citigroup.
The Advisory Agreement for the fund was last approved by the Board of
Trustees, including a majority of the Trustees who are not "interested
persons" of the Trust or Salomon Smith Barney on July 22, 1999. The
Manager pays the salaries of all officers and employees who are employed
by both it and the Trust and maintains office facilities for the Trust.
The Manager bears all expenses in connection with the performance of its
services under the Advisory Agreement.
As compensation for investment advisory services rendered the fund pays
the Manager a fee of 0.50% of the value of its average daily net assets
for investment management services rendered.
For the fiscal years ended November 30, 1999, 1998 and 1997, the fund paid
investment advisory and/or administration fees to the Manager as follows:
Fiscal
Year
Security and Growth Fund
Ended
Advisory Fee
1999
$505,103
1998
$807,501
1997
$1,007,814
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 Salomon Smith
Barney; SEC fees and state Blue Sky qualification fees; charges of
custodians; transfer and dividend disbursing agents fees; certain
insurance premiums; outside auditing and legal expenses; costs of
maintenance of corporate existence; investor services (including allocated
telephone and personnel expenses); and costs of preparation and printing
of prospectuses for regulatory purposes and for distribution to existing
shareholders; cost of shareholders' reports and shareholder meetings and
meetings of the officers or Board of Trustees of the Trust.
Code of Ethics Pursuant to Rule 17j-1 of the 1940 Act, the fund, the
Manager and the Distributor have adopted codes of ethics that permit
personnel to invest in securities for their own accounts, including
securities that may be purchased or held by the funds. All personnel must
place the interests of clients first and avoid activities, interests and
relationships that might interfere with the duty to make decisions in the
best interests of the clients. All personal securities transactions by
employees must adhere to the requirements of the codes and must be
conducted in such a manner as to avoid any actual or potential conflict of
interest, the appearance of such a conflict, or the abuse of an employee's
position of trust and responsibility.
A copy of the fund's code of ethics is on file with the Commission.
Distributor CFBDS, Inc. serves as the fund's distributor pursuant to a
written agreement dated October 8, 1998 (the "Distribution Agreement")
with the Trust. To compensate Salomon 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 Salomon Smith Barney, with respect to the fund, a
fee, accrued daily and paid monthly, calculated at the annual rate of .25%
of the value of the fund's average daily net assets. Under its terms, the
Plan continues from year to year, provided 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 CFBDS
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 fund. Pursuant to the
Plan, Salomon 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. Prior to the merger of Travelers Group, Inc. and
Citicorp, Inc. on October 8, 1998, Salomon Smith Barney served as the
Fund's distributor. For the fiscal year ended November 30, 1999, Salomon
Smith Barney was paid $252,552 in distribution fees by the fund.
For the fiscal year ended November 30, 1999, Salomon Smith Barney incurred
the following distribution expenses for the fund:
Fund Name
Salomon
Smith
Barney
Financial
Consultan
ts
Advertisi
ng
Support
Service
s
Total
Security and
Growth Fund
$118,200
$14,172
$81,985
$214,357
Custodian PNC Bank National Association is located at 17th and Chestnut
Streets, Philadelphia, PA 19103 and serves as the custodian of the Trust.
Transfer agent and sub-transfer agent Smith Barney Private Trust Company,
located at 388 Greenwich Street, New York, NY 10013 serves as the Transfer
Agent and shareholder services agent of the fund. PFPC Global Fund
Services, located at P.O. Box 9699 Providence, RI 02940-9699 serves as the
fund's sub-transfer agent to render certain shareholder record keeping and
accounting services functions.
Independent auditors KPMG LLP, 757 Third Avenue, New York, New York
10022, has been selected as the Trust's independent auditor to examine and
report on the fund's financial statements for the fiscal year ending
November 30, 2000.
OTHER INFORMATION ABOUT THE TRUST
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 October 14, 1994, the Trust changed its name
from Smith Barney Shearson Principal Return Fund to Smith Barney Principal
Return Fund. Under the Trust Agreement, the Trustees have authority to
issue an unlimited number of shares of beneficial interest with a par
value of $.001 per share.
Massachusetts law provides that shareholders could, under certain
circumstances, be held personally liable for the obligations of the Trust.
The Trust has been structured, and will be operated in such a way, so as
to ensure as much as possible, that shareholders will not be liable for
obligations of the fund. The Trust Agreement disclaims shareholder
liability for acts or obligations of the Trust, and requires that notice
of the disclaimer be given in each agreement, obligation or instrument
entered into or executed by the Trust or a Trustee. The Trust Agreement
also provides for indemnification from the Trust's property for all losses
and expenses of any shareholder held personally liable for the obligations
of the Trust. Thus, the risk of a shareholder's incurring financial loss
on account of shareholder liability is limited to circumstances in which
the Trust would be unable to meet its obligations, a possibility that the
Trust's management believes is remote. Upon payment of any liability
incurred by the Trust, the shareholder paying the liability will be
entitled to reimbursement from the general assets of the Trust. The
Trustees intend to conduct the operations of the Trust and each of its
series in such a way so as to avoid, as far as possible, ultimate
liability of the shareholders for liabilities of the Trust.
Minimum account size The Trust reserves the right to voluntarily
liquidate any shareholder's account in the fund if aggregate net asset
value of the shares held in the fund's 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 this right, shareholders will receive written notice and
will be permitted 60 days to bring accounts up to the minimum to avoid
involuntary liquidation.
Voting rights When matters are submitted for shareholder vote,
shareholders of the fund will have one vote for each full share owned and
a proportionate, fractional vote for any fractional share held. 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.
Annual and semi-annual reports The Trust sends its shareholders a
semi-annual report and an audited annual report, each of which includes a
listing of the investment securities held by the fund at the end of the
period covered. In an effort to reduce the fund's printing and mailing
costs, the fund consolidates 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 PFPC.
Styles of fund management In an industry where the average portfolio
manager has seven years of experience (source: ICI, 1998), the portfolio
managers of Smith Barney Mutual Funds average 21 years in the industry and
15 years with the firm.
Smith Barney Mutual Funds offers more than 60 mutual funds. We understand
that many investors prefer an active role in allocating the mix of funds
in their portfolio, while others want the asset allocation decisions to be
made by experienced managers.
That's why we offer four "styles" of fund management that can be tailored
to suit each investor's unique financial goals.
Style Pure Series
Our Style Pure Series funds stay fully invested within their asset class
and investment style, enabling investors to make asset allocation
decisions in conjunction with their Salomon Smith Barney Financial
Consultant.
Classic Investor Series
Our Classic Investor Series funds offer a range of equity and fixed income
strategies that seek to capture opportunities across asset classes and
investment styles using disciplined investment approaches.
The Concert Allocation Series
As a fund of funds, investors can select a Concert Portfolio that may help
their investment needs. As needs change, investors can easily choose
another long-term, diversified investment from our Concert family.
Special Discipline Series
Our Special Discipline Series funds are designed for investors who are
looking beyond more traditional market categories: from natural resources
to a roster of state-specific municipal funds.
FINANCIAL STATEMENTS
The fund's Annual Report for the fiscal year ended November 30, 1999,
Commission accession number 91155-00-000105, accompany this Statement of
Additional Information and are incorporated herein by reference in its
entirety.
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