<PAGE>
SMITH BARNEY
PRINCIPAL
SEMI- RETURN
ANNUAL FUND
REPORT
ZEROS AND APPRECIATION
SERIES 1996
..................................
MAY 31, 1995
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1996
DEAR SHAREHOLDER:
The first six months of this fiscal year beginning December 1, 1994 have been
quite good for financial assets, and consequently, for the Smith Barney
Principal Return Fund: Zeros and Appreciation Series 1996. Interest rates have
declined sharply, partially reversing the increases of 1994. Stocks have been
magnificent, reflecting good earnings, lower interest rates, and excessive
pessimism at the beginning of the year. For the six months, the Fund gained
9.05%. Because the zero-coupon U.S. Treasury securities mature within a year,
they did not get much benefit from falling interest rates. Over the past
several years, however, particularly during weak market periods, they have
served their purpose of limiting the Fund's volatility. Performance for the
six-month period was primarily driven by appreciation in the stock portion of
the portfolio.
In addition to the classic growth stocks that form the core of the portfolio,
the Fund has always tried to find investment themes with merit. One strategy
that has worked well for us over the past few years has been to find formerly
great companies that had fallen on harder times but where a catalyst for change
was present. Some of the best performers in the Fund have been the stocks of
those companies undergoing major restructuring, bringing underlying values to
the surface. These include several of our top-ten holdings such as Eastman
Kodak, duPont, Xerox and American Home Products. These companies had all been
great stocks in the past but had lost their luster. In each case, new
management, divestiture, or mergers unlocked long-latent potential.
Other solid performers included unblemished growth companies such as Johnson &
Johnson, Procter & Gamble, Coca Cola, Gillette, Crown Cork and Microsoft. Energy
and financial stocks also performed well. Auto company stocks were
disappointing, but overall, most of the portfolio's stock holdings kicked in to
give performance a good boost.
The stock market started the year shrouded in skepticism. Mid-year has brought a
marked shift in attitudes, with a lot of confidence having been restored. Thus
far, that confidence has not turned to a euphoria, which would be dangerous. The
economy seems to be in a "Goldilocks" phase -- not too hot and not too cold. We
believe that it is comforting to have a mix of zero-coupon U.S. Treasury
securities and stocks as this Fund heads down the home stretch toward its 1996
maturity date.
1
<PAGE>
We hope you feel as good as we do about the Fund's record of consistency and
overall growth, which was our objective when the Fund began.
Sincerely,
/s/ Heath B. McLendon /s/ Harry D. Cohen
Heath B. McLendon Harry D. Cohen
Chairman of the Board Vice President and
Investment Officer
July 28, 1995
2
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
--------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31, 1995
<TABLE>
PORTFOLIO ALLOCATION
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Portfolio Allocation Breakdown
Pie chart depicting the allocation of the Principal Return Fund (Zeros and
Appreciation Series 1996) investment securities held at May 31, 1995 by
Portfolio Allocation classification. The pie is broken in pieces representing
Portfolio Allocation in the following percentages:
<CAPTION>
PORTFOLIO ALLOCATION PERCENTAGE
<S> <C>
U.S. Treasury Notes 62.3%
Commerical Paper and Net Other
Assets and Liabilities 6.7%
Common Stocks 31.0%
</TABLE>
<TABLE>
TOP TEN COMMON STOCK HOLDINGS
<CAPTION>
Percentage of
Company Net Assets
--------------------------------------------------------------------
<S> <C>
EASTMAN KODAK COMPANY 1.6%
MINNESOTA MINING AND MANUFACTURING COMPANY 1.5%
AT & T CORPORATION 1.5%
DUPONT (E.I.) DENEMOURS & COMPANY 1.0%
AMOCO CORPORATION 0.9%
XEROX CORPORATION 0.9%
MOBIL CORPORATION 0.9%
TIME WARNER, INC. 0.9%
AMERICAN HOME PRODUCTS CORPORATION 0.8%
AMERICAN INTERNATIONAL GROUP, INC. 0.8%
</TABLE>
3
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
---------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS - 31.0%
CONSUMER SERVICES - 6.2%
2,500 American Stores Company $ 65,313
2,000 Capital Cities ABC Inc. 193,000
4,500 CBS, Inc. 301,500
9,000 Comcast Corporation, Class A 157,500
6,000 Disney (Walt) Company 333,750
14,000 Donnelly (RR) & Sons Company 511,000
2,500 Fiserv Inc.+ 65,937
3,500 Gannett, Inc. 187,250
2,100 Gaylord Entertainment Company, Class A+ 46,725
600 GC Companies, Inc. + 20,250
3,000 Harcourt General Inc. 126,375
7,000 Home Depot, Inc. 291,375
2,000 Nine West Group Inc.+ 69,750
2,000 Penney (J.C.), Inc. 94,250
15,000 Savoy Pictures Entertainment Inc.+ 123,750
3,500 Scandinavian Broadcasting System S.A.+ 77,000
2,000 Sherwin Williams Company 73,500
12,000 TeleCommunications, Inc., Class A+ 253,500
15,000 Time Warner, Inc. 594,375
3,000 Tribune Company 178,875
18,000 Wal-Mart Stores, Inc. 450,000
---------------------------------------------------------------------------------------
4,214,975
---------------------------------------------------------------------------------------
DIVERSIFIED CONGLOMERATES -- 3.3%
2,000 Alco Standard Corporation 143,250
18,000 Eastman Kodak Company 1,086,750
17,000 Minnesota Mining and Manufacturing Company 1,017,875
---------------------------------------------------------------------------------------
2,247,875
---------------------------------------------------------------------------------------
FINANCIAL SERVICES -- 3.2%
5,500 American Express Company 195,938
4,500 American International Group, Inc. 511,875
6,000 Bank of New York, Inc. 244,500
2,000 Barnett Banks, Inc. 99,250
6,000 Chemical Banking Corporation 276,750
4,500 Federal National Mortgage Association 418,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
---------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
3,000 First Virginia Banks, Inc. $ 107,625
3,000 Household International Inc. 148,125
3,000 Mercury Finance Company 55,125
2,000 Republic New York Corporation 102,250
---------------------------------------------------------------------------------------
2,159,938
---------------------------------------------------------------------------------------
ENERGY -- 3.1%
3,000 Amerada Hess Corporation 152,250
9,000 Amoco Corporation 615,375
1,000 Atlantic Richfield Company 116,125
3,000 Baker Hughes Inc. 67,500
1,500 Chevron Corporation 73,687
3,000 Enron Corporation 109,500
6,000 Mobil Corporation 602,250
3,000 Royal Dutch Petroleum Company 380,250
---------------------------------------------------------------------------------------
2,116,937
---------------------------------------------------------------------------------------
HEALTH CARE -- 2.6%
7,500 American Home Products Corporation 552,187
6,000 Bristol-Meyers Squibb 398,250
6,000 Johnson & Johnson 397,500
5,000 Merck & Company, Inc. 235,625
2,000 Warner Lambert Company 165,750
---------------------------------------------------------------------------------------
1,749,312
---------------------------------------------------------------------------------------
CAPITAL GOODS -- 2.6%
3,000 AlliedSignal, Inc. 121,125
11,000 AMP Inc. 468,875
2,000 Caterpillar, Inc. 120,500
3,000 Emerson Electric Company 206,250
7,000 General Electric Company 406,000
5,000 Ingersoll-Rand Company 186,250
3,000 United Technologies Corporation 227,625
---------------------------------------------------------------------------------------
1,736,625
---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
----------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
CONSUMER NON-DURABLES -- 2.4%
1,000 Coca-Cola Company $ 61,875
3,400 CPC International Inc. 206,550
7,000 Crown Cork & Seal, Inc.+ 329,000
3,000 International Flavors & Fragrances Inc. 147,750
2,000 Gillette Company 168,750
8,000 McDonald's Corporation 303,000
6,000 Procter & Gamble Company 431,250
----------------------------------------------------------------------------------------
1,648,175
----------------------------------------------------------------------------------------
TECHNOLOGY -- 2.4%
1,000 Intel Corporation 112,250
3,000 International Business Machines Corporation 279,750
2,000 Microsoft Corporation+ 169,375
7,500 Motorola, Inc. 449,063
5,400 Xerox Corporation 612,225
----------------------------------------------------------------------------------------
1,622,663
----------------------------------------------------------------------------------------
UTILITIES -- 1.5%
20,000 AT&T Corporation 1,015,000
----------------------------------------------------------------------------------------
CONSUMER DURABLES -- 1.5%
2,500 Chrysler Corporation 109,062
10,000 Ford Motor Company 292,500
5,000 General Motors Corporation 240,000
5,000 Goodyear Tire & Rubber Company 211,250
2,500 Whirlpool Corporation 142,813
----------------------------------------------------------------------------------------
995,625
----------------------------------------------------------------------------------------
BASIC INDUSTRIES -- 1.3%
10,000 duPont (E.I.) deNemours & Company 678,750
4,500 Hercules, Inc. 236,250
----------------------------------------------------------------------------------------
915,000
----------------------------------------------------------------------------------------
TRANSPORTATION -- 0.9%
3,000 Boeing Company 176,625
3,000 Burlington Northern, Inc. 183,375
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
----------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
TRANSPORTATION (CONTINUED)
4,000 Union Pacific Corporation $ 221,500
----------------------------------------------------------------------------------------
581,500
----------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $15,198,252) 21,003,625
----------------------------------------------------------------------------------------
FACE VALUE
----------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 62.3% (Cost $41,053,033)
$44,000,000 U.S. Treasury Notes-Strips, Zero Coupon++ due 2/15/96 42,242,640
----------------------------------------------------------------------------------------
COMMERCIAL PAPER - 5.8%
554,000 Ford Motor Credit Company,
6.120% due 6/1/95 554,000
3,377,000 General Electric Capital,
6.130% due 6/1/95 3,377,000
----------------------------------------------------------------------------------------
TOTAL COMMERCIAL PAPER (Cost $3,931,000) 3,931,000
----------------------------------------------------------------------------------------
TOTAL INVESTMENTS (Cost $60,182,285*) 99.1% 67,177,265
OTHER ASSETS AND LIABILITIES (NET) 0.9 631,997
----------------------------------------------------------------------------------------
NET ASSETS 100.0% $67,809,262
----------------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 5.930%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
-----------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) MAY 31, 1995
<S> <C> <C>
ASSETS:
Investments, at value (Cost $60,182,285) (Note 1)
See accompanying schedule $67,177,265
Receivable for investment securities sold 906,400
Dividends and interest receivable 90,441
-----------------------------------------------------------------------------------------
TOTAL ASSETS 68,174,106
-----------------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased $212,268
Payable for Fund shares redeemed 87,016
Investment advisory fee payable (Note 2) 17,327
Administration fee payable (Note 2) 11,551
Transfer agent fees payable (Note 2) 6,800
Custodian fees payable (Note 2) 5,000
Due to custodian 83
Accrued expenses and other payables 24,799
-----------------------------------------------------------------------------------------
TOTAL LIABILITIES 364,844
-----------------------------------------------------------------------------------------
NET ASSETS $67,809,262
-----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Undistributed net investment income $ 1,701,123
Accumulated net realized gain on investments sold 3,418,554
Unrealized appreciation of investments 6,994,980
Par value 7,530
Paid-in capital in excess of par value 55,687,075
-----------------------------------------------------------------------------------------
TOTAL NET ASSETS $67,809,262
-----------------------------------------------------------------------------------------
NET ASSET VALUE and redemption price per share
($67,809,262 / 7,529,863 shares of beneficial interest
outstanding) $9.01
-----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
----------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED MAY 31, 1995
<S> <C> <C>
INVESTMENT INCOME:
Interest $1,990,057
Dividends 292,639
----------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 2,282,696
----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $104,388
Administration fee (Note 2) 69,592
Transfer agent fees (Note 2) 41,182
Custodian fees (Note 2) 18,318
Legal and audit fees 16,396
Trustees' fees and expenses (Note 2) 5,110
Other 16,522
----------------------------------------------------------------------------------------
TOTAL EXPENSES 271,508
----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,011,188
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
(NOTES 1 AND 3):
Net realized gain on investments during the period. 2,977,265
Net unrealized appreciation of investments during the
period 1,069,025
----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 4,046,290
----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $6,057,478
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
----------------------------------------------------------------------------------------
STATEMENT OF CHANGES IN NET ASSETS
<CAPTION>
SIX MONTHS
ENDED YEAR
5/31/95 ENDED
(UNAUDITED) 11/30/94
<S> <C> <C>
Net investment income $ 2,011,188 $ 4,249,350
Net realized gain on investments sold
during the period 2,977,265 4,824,846
Net unrealized appreciation/(depreciation) of investments
during the period 1,069,025 (8,924,081)
----------------------------------------------------------------------------------------
Net increase in net assets resulting from operations 6,057,478 150,115
Distributions to shareholders from:
Net investment income (4,356,020) (3,942,821)
Net realized gain on investments (4,383,556) (12,394,023)
Net decrease in net assets from Fund share transactions
(Note 4) (2,041,070) (2,433,613)
----------------------------------------------------------------------------------------
Net decrease in net assets (4,723,168) (18,620,342)
NET ASSETS:
Beginning of period 72,532,430 91,152,772
----------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $1,701,123 and $4,045,955, respectively) $67,809,262 $72,532,430
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
<TABLE>
------------------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR YEAR YEAR PERIOD
5/31/95 ENDED ENDED ENDED ENDED ENDED ENDED
(UNAUDITED) 11/30/94 11/30/93++ 11/30/92++ 11/30/91 11/30/90++ 11/30/89*
<S> <C> <C> <C> <C> <C> <C> <C>
Net asset value,
beginning of period $ 9.40 $ 11.45 $ 11.75 $ 11.42 $ 10.77 $ 11.38 $ 9.50
------------------------------------------------------------------------------------------------------------
Income from investment
operations:
Net investment income 0.27 0.56 0.53 0.54 0.62 0.55 0.63
Net realized and
unrealized gain/(loss)
on investments 0.48 (0.53) 0.31 0.95 0.84 (0.30) 1.25
------------------------------------------------------------------------------------------------------------
Total from investment
operations 0.75 0.03 0.84 1.49 1.46 0.25 1.88
Less Distributions:
Distributions from net
investment income (0.57) (0.50) (0.72) (0.65) (0.69) (0.63) --
Distributions from net
realized capital gains (0.57) (1.58) (0.42) (0.51) (0.12) (0.23) --
------------------------------------------------------------------------------------------------------------
Total distributions (1.14) (2.08) (1.14) (1.16) (0.81) (0.86) 0.00
------------------------------------------------------------------------------------------------------------
Net asset value, end of
period $ 9.01 $ 9.40 $ 11.45 $ 11.75 $ 11.42 $ 10.77 $ 11.38
------------------------------------------------------------------------------------------------------------
Total return+++ 9.05% 0.10% 7.85% 13.64% 14.56% 2.29% 19.79%
------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (in 000's) $67,809 $72,532 $91,153 $109,011 $115,356 $121,493 $162,867
Ratio of expenses to
average net assets 0.78%** 0.75% 0.77%+ 0.77% 0.81% 0.85% 0.84%**
Ratio of net investment
income to average net
assets 5.78%** 5.27% 4.76% 4.85% 5.26% 5.21% 5.79%**
Portfolio turnover rate 3% 10% 20% 11% 17% 3% 32%
------------------------------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on January 16, 1989.
** Annualized.
+ The operating expense ratio excludes interest expense. The annualized ratio
including interest expense was 0.78%.
++ The per share amounts have been calculated using the monthly average shares
method, which more appropriately presents per share data for this year since use
of the undistributed net investment income method did not accord with results of
operations.
+++ Total return represents aggregate total return for the periods indicated.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
Smith Barney Principal Return Fund (the "Trust") was organized on October 18,
1988 under the laws of the Commonwealth of Massachusetts as a "Massachusetts
business trust." The Trust is a diversified, open-end management investment
company registered with the Securities and Exchange Commission under the
Investment Company Act of 1940, as amended. The Trust consists of four series,
the Zeros and Appreciation Series 1996, which commenced operations on January
16, 1989, the Zeros and Appreciation Series 1998 which commenced operations on
January 25, 1991, the Zeros Plus Emerging Growth Series 2000, which commenced
operations on August 30, 1991, and the Security and Growth Fund which commenced
operations on March 30, 1995. The Zeros and Appreciation Series 1996 (the
"Fund") expects to terminate operations on March 1, 1996. The following is a
summary of significant accounting policies consistently followed by the Fund in
the preparation of its financial statements.
Portfolio valuation: Listed securities traded on a national securities exchange
are valued at the last reported sales price; securities traded in the
over-the-counter market and listed securities for which no sale was reported are
valued at the bid price or, in the absence of a recent bid price, at the bid
equivalent as obtained from one or more of the major market makers in the
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 that mature in 60 days or less are valued at amortized
cost whenever the Board of Trustees determines that amortized cost reflects the
fair value of those investments. Investments in securities for which market
quotations are not available are valued at fair value as determined in good
faith by the Board of Trustees.
Repurchase agreements: The Fund may engage in repurchase agreement
transactions. Under the terms of a typical repurchase agreement, the Fund takes
possession of an underlying debt obligation subject to an obligation of the
seller to repurchase, and the Fund to resell, the obligation at an agreed-upon
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 collateral held
by the Fund is at least equal at all times to the total amount of the repurchase
obligations, including interest. In the event of counterparty default, the Fund
has the right to use the collateral to offset losses incurred. There is
potential loss to the Fund in the event that the Fund is
12
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
delayed or prevented from exercising its rights to dispose of the collateral
securities, including the risk of a possible decline in the value of the
underlying securities during the period while the Fund seeks to assert its
rights. The Fund's investment adviser, acting under the supervision of the Board
of Trustees, reviews the value of the collateral and the creditworthiness of
those banks and dealers with which the Fund enters into repurchase agreements to
evaluate potential risks.
Securities transactions and investment income: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities
transactions are recorded on the identified cost basis. Dividend income is
recorded on the ex-dividend date. Interest income is recorded on the accrual
basis (primarily from accretion of U.S. Treasury Notes).
Dividends and distributions to shareholders: Dividends from net investment
income and distributions of net realized capital gains of the Fund, if any, will
be distributed annually after the close of the fiscal year in which they are
earned. In addition, in order to avoid the application of a 4.00% nondeductible
excise tax on certain undistributed amounts of ordinary income and capital
gains, the Fund may make an additional distribution of any undistributed
ordinary income or capital gains shortly before December 31st of each year, and
expects to pay any other dividends and distributions as are necessary to avoid
the application of this tax. Income distributions and capital gain distributions
are determined in accordance with income tax regulations which may differ from
generally accepted accounting principles. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and differing characterization of distributions
made by the Fund as a whole.
Federal income taxes: It is the Fund's policy to comply with the requirements
of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and to distribute substantially all of its taxable income
to its shareholders. Therefore, no Federal income tax provision is required.
2. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE AND
OTHER TRANSACTIONS
The Trust has entered into an investment advisory agreement (the "Advisory
Agreement") with Smith Barney Mutual Funds Management Inc. (formerly known as
Smith Barney Advisers, Inc.) ("SBMFM"). SBMFM is a wholly owned
13
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
subsidiary of Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly
owned subsidiary of Travelers Group Inc. Under the Advisory Agreement, the Fund
pays a monthly fee at the annual rate of 0.30% of the value of its average daily
net assets.
The Trust has also entered into an administration agreement (the "Administration
Agreement") with SBMFM. Under the Administration Agreement, the Fund pays a
monthly fee at the annual rate of 0.20% of the value of its average daily net
assets.
The Fund and SBMFM have also entered into a sub-administration agreement (the
"Sub-Administration Agreement") with The Boston Company Advisors, Inc. ("Boston
Advisors"), an indirect wholly owned subsidiary of Mellon Bank Corporation
("Mellon"). Under the Sub-Administration Agreement, SBMFM pays Boston Advisors a
portion of its administration fee at a rate agreed upon from time to time
between SBMFM and Boston Advisors.
No officer, director or employee of Smith Barney or any of its affiliates
receives any compensation from the Trust for serving as a Trustee or officer of
the Trust. The Trust pays each Trustee who is not an officer, director or
employee of Smith Barney or any of its affiliates $2,000 per annum plus $500 per
meeting attended and reimburses each Trustee for travel and out-of-pocket
expenses.
Boston Safe Deposit and Trust Company, an indirect wholly owned subsidiary of
Mellon, serves as the Fund's custodian. The Shareholder Services Group, Inc., a
subsidiary of First Data Corporation, serves as the Trust's transfer agent.
3. SECURITIES TRANSACTIONS
Purchases and proceeds from sales of securities, excluding U.S. government
securities and short-term investments, aggregated $2,354,407 and $11,090,590,
respectively, for the six months ended May 31, 1995. There were no purchases of
long-term U.S. government securities for the six months ended May 31, 1995.
Proceeds from sales of long-term U.S. government securities aggregated
$4,716,130 for the six months ended May 31, 1995.
At May 31, 1995, aggregate gross unrealized appreciation for all securities in
which there was an excess of value over tax cost was $7,091,672, and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value was $96,692.
14
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
<TABLE>
4. SHARES OF BENEFICIAL INTEREST
The Trust may issue an unlimited number of shares of beneficial interest of the
Fund with a par value of $.001 per share. The Fund, the Zeros and Appreciation
Series 1998, the Zeros Plus Emerging Growth Series 2000 and the Security and
Growth Fund each constitutes a sub-trust under the Master Trust Agreement.
Changes in shares of beneficial interest of the Fund were as follows:
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
5/31/95 11/30/94
Shares Amount Shares Amount
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Issued as reinvestment of
dividends 1,032,507 $ 8,569,807 1,680,331 $ 16,113,342
Redeemed (1,221,827) (10,610,877) (1,921,427) (18,546,955)
-------------------------------------------------------------------------------------------
Net decrease (189,320) $ (2,041,070) (241,096) $ (2,433,613)
-------------------------------------------------------------------------------------------
</TABLE>
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 Board of Trustees determines it to be in the best
interests of the Fund and its shareholders.
5. LINE OF CREDIT
The Fund and several affiliated entities participate in a $50 million line of
credit provided by Bank of America under an Amended and Restated Line of Credit
Agreement (the "Agreement") dated April 30, 1992 and renewed effective May 31,
1994, primarily for temporary or emergency purposes, including the meeting of
redemption requests that otherwise might require the untimely disposition of
securities. Under this Agreement the Fund may borrow up to the lesser of $25
million or 25% of its net assets. However, pursuant to the Fund's prospectus the
Fund may borrow up to 33 1/3% of the value of its total assets. Under the terms
of the Agreement, as amended, the Fund and the other affiliated entities are
charged an aggregate commitment fee of $100,000 which is allocated equally among
each of the participants. The Agreement requires, among other provisions, each
participating fund to maintain a ratio of net assets (not including funds
borrowed pursuant to the Agreement) to aggregate amount of indebtedness pursuant
to the Agreement of no less than 5 to 1. During the six months ended May 31,
1995, the Fund had an average outstanding daily balance of $92,308 with interest
rates ranging from 6.3125% to 6.8750%. Interest expense totalled $3,097 for the
six months ended May 31, 1995. At May 31, 1995, the Fund had no outstanding
borrowings under this Agreement.
15
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1996
--------------------------------------------------------------------------------
PARTICIPANTS
DISTRIBUTOR AUDITORS AND COUNSEL
Smith Barney Inc. Coopers & Lybrand LLP
388 Greenwich Street One Post Office Square
New York, New York 10013 Boston, Massachusetts 02109
INVESTMENT ADVISER Willkie Farr & Gallagher
153 East 53rd Street
Smith Barney Mutual Funds New York, New York 10022
Management Inc.
388 Greenwich Street
New York, New York 10013 TRANSFER AGENT
The Shareholder Services Group, Inc.
Exchange Place
ADMINISTRATOR Boston, Massachusetts 02109
Smith Barney Mutual Funds
Management Inc. CUSTODIAN
388 Greenwich Street
New York, New York 10013 Boston Safe Deposit and
Trust Company
One Boston Place
SUB-ADMINISTRATOR Boston, Massachusetts 02108
The Boston Company Advisors, Inc.
One Boston Place
Boston, Massachusetts 02108
16
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PRINCIPAL SMITH BARNEY
RETURN A Member of TravelersGroup [LOGO]
FUND
ZEROS AND APPRECIATION
SERIES 1996
TRUSTEES
Paul R. Ades
Herbert Barg
Alger B. Chapman
Dwight B. Crane
Frank Hubbard
Allan R. Johnson
Heath B. McLendon
Ken Miller
John F. White
SEMI-
OFFICERS ANNUAL
Heath B. McLendon REPORT
Chairman of the Board
Jessica M. Bibliowicz This report is submitted for the
President general information of the
shareholders of Smith Barney
Lewis E. Daidone Principal Return Fund: Zeros
Senior Vice President and Appreciation Series 1996.
and Treasurer It is not a prospectus, circular
or representation intended for
Harry D. Cohen use in the purchase or sale of
Vice President and shares of the Fund or of any
Investment Officer securities mentioned in this
report.
Thomas M. Reynolds
Controller
SMITH BARNEY
Christina T. Sydor MUTUAL FUNDS
Secretary 388 Greenwich Street
New York, New York 10013
[LOGO] Recycled Fund 123
Recyclable FD2225 7/95
