<PAGE>
SEMI-
ANNUAL
REPORT
SMITH BARNEY
PRINCIPAL
RETURN
FUND
ZEROS AND APPRECIATION
SERIES 1998
......................................
MAY 31, 1995
[LOGO] SMITH BARNEY MUTUAL FUNDS
INVESTING FOR YOUR FUTURE.
EVERY DAY.
<PAGE>
PRINCIPAL RETURN FUND
ZEROS AND APPRECIATION SERIES 1998
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 1998. 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
12.54%. The zero-coupon portion of the Fund, maturing in 1998, has served its
purpose of limiting the Fund's volatility over the past several years,
particularly during weak market periods. 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 portfolios 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 continues on toward its 1998 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 1998
--------------------------------------------------------------------------------
PORTFOLIO HIGHLIGHTS (UNAUDITED) MAY 31, 1995
PORTFOLIO ALLOCATION
<TABLE>
DESCRIPTION OF PIE CHARTS IN SHAREHOLDER REPORT
Portfolio Allocation Breakdown
Pie chart depicting the allocation of the Principal Return Fund (Zeros and
Appreciation Series 1998) 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 60.8%
Repurchase Agreement and Net
Other Assets and Liabilities 4.8%
Common Stocks 34.4%
</TABLE>
<TABLE>
TOP TEN COMMON STOCK HOLDINGS
<CAPTION>
Percentage of
Company Net Assets
--------------------------------------------------------------------
<S> <C>
EASTMAN KODAK COMPANY 1.7%
MINNESOTA MINING AND MANUFACTURING COMPANY 1.5%
AT & T CORPORATION 1.3%
DUPONT (E.I.) DENEMOURS & COMPANY 1.1%
MOBIL CORPORATION 1.1%
XEROX CORPORATION 0.9%
AMERICAN INTERNATIONAL GROUP 0.8%
TIME WARNER, INC. 0.8%
AMERICAN HOME PRODUCTS CORPORATION 0.8%
DONNELLEY (RR) & SONS COMPANY 0.8%
</TABLE>
3
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<TABLE>
--------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
----------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS - 34.4%
CONSUMER SERVICES - 6.2%
4,000 American Stores $ 104,500
2,500 Capital Cities ABC, Inc. 241,250
7,500 CBS, Inc. 502,500
13,000 Comcast Corporation, Class A 227,500
12,000 Disney (Walt) Company 667,500
21,000 Donnelley (RR) & Sons Company 766,500
4,000 Fiserv Inc.+ 105,500
5,500 Gannett, Inc. 294,250
2,100 Gaylord Entertainment Company, Class A+ 46,725
800 GC Companies, Inc.+ 27,000
6,000 Harcourt General, Inc. 252,750
10,000 Home Depot, Inc. 416,250
3,000 Nine West Group+ 104,625
3,000 Penney (J.C.), Inc. 141,375
20,000 Savoy Pictures Entertainment+ 165,000
3,500 Scandinavian Broadcasting System S.A.+ 77,000
18,000 Tele-Communications, Inc., Class A+ 380,250
20,000 Time Warner, Inc. 792,500
4,500 Tribune Company 268,313
25,000 Wal-Mart Stores, Inc. 625,000
----------------------------------------------------------------------------------------
6,206,288
----------------------------------------------------------------------------------------
FINANCIAL SERVICES - 4.0%
7,000 American Express Company 249,375
7,000 American International Group, Inc. 796,250
9,000 Bank of New York, Inc. 366,750
5,000 Barnett Banks, Inc. 248,125
10,000 Chemical Banking Corporation 461,250
8,000 Federal National Mortgage Association 744,000
4,000 First Virginia Banks, Inc. 143,500
5,000 Household International 246,875
4,000 Mercury Finance 73,500
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<TABLE>
--------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
6,000 Republic New York Corporation $ 306,750
2,000 Wells Fargo & Company 368,000
---------------------------------------------------------------------------------------
4,004,375
---------------------------------------------------------------------------------------
ENERGY - 3.8%
8,000 Amerada Hess Corporation 406,000
9,000 Amoco Corporation 615,375
3,300 Atlantic Richfield Company 383,212
7,000 Burlington Resources, Inc. 290,500
2,500 Chevron Corporation 122,812
5,000 Enron Corporation 182,500
11,000 Mobil Corporation 1,104,125
5,000 Royal Dutch Petroleum Company 633,750
---------------------------------------------------------------------------------------
3,738,274
---------------------------------------------------------------------------------------
DIVERSIFIED CONGLOMERATES - 3.3%
3,000 Alco Standard Corporation 214,875
28,000 Eastman Kodak Company 1,690,500
24,500 Minnesota Mining and Manufacturing Company 1,466,937
---------------------------------------------------------------------------------------
3,372,312
---------------------------------------------------------------------------------------
HEALTH CARE - 3.0%
6,000 Abbott Laboratories 240,000
10,500 American Home Products Corporation 773,063
8,500 Bristol-Meyers Squibb 564,188
10,000 Johnson & Johnson 662,500
10,000 Merck & Company, Inc. 471,250
4,000 Warner Lambert Company 331,500
---------------------------------------------------------------------------------------
3,042,501
---------------------------------------------------------------------------------------
CONSUMER NON-DURABLES - 3.0%
4,000 Coca-Cola Company 247,500
5,000 CPC International, Inc. 303,750
11,000 Crown Cork & Seal, Inc.+ 517,000
3,000 Gillette Company 253,125
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<TABLE>
--------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
CONSUMER NON-DURABLES (CONTINUED)
9,000 International Flavors & Fragrances, Inc. $ 443,250
12,000 McDonald's Corporation 454,500
8,000 Newell Company 199,000
8,000 Procter & Gamble Company 575,000
---------------------------------------------------------------------------------------
2,993,125
---------------------------------------------------------------------------------------
CAPITAL GOODS - 2.9%
5,000 Allied-Signal, Inc. 201,875
14,000 AMP Inc. 596,750
4,500 Caterpillar Inc. 271,125
6,000 Emerson Electric Company 412,500
11,000 General Electric Company 638,000
8,000 Ingersoll-Rand Company 298,000
6,000 United Technologies Corporation 455,250
---------------------------------------------------------------------------------------
2,873,500
---------------------------------------------------------------------------------------
TECHNOLOGY - 2.5%
4,000 Intel Corporation 449,000
4,500 International Business Machines Corporation 419,625
4,000 Microsoft Corporation+ 338,750
8,000 Motorola, Inc. 479,000
8,000 Xerox Corporation 907,000
---------------------------------------------------------------------------------------
2,593,375
---------------------------------------------------------------------------------------
BASIC INDUSTRIES - 2.0%
17,000 duPont (E.I.) deNemours & Company 1,153,875
7,500 Hercules, Inc. 393,750
4,500 Mead Corporation 242,438
3,000 Monsanto Company 249,750
---------------------------------------------------------------------------------------
2,039,813
---------------------------------------------------------------------------------------
CONSUMER DURABLES - 1.4%
4,500 Chrysler Corporation 196,313
14,000 Ford Motor Company 409,500
7,000 General Motors Corporation 336,000
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<TABLE>
---------------------------------------------------------------------------------------
PORTFOLIO OF INVESTMENTS (UNAUDITED) (continued) MAY 31, 1995
<CAPTION>
MARKET VALUE
SHARES (NOTE 1)
---------------------------------------------------------------------------------------
<C> <S> <C>
COMMON STOCKS (CONTINUED)
CONSUMER DURABLES (CONTINUED)
6,000 Goodyear Tire & Rubber Company $ 253,500
4,000 Whirlpool Corporation 228,500
---------------------------------------------------------------------------------------
1,423,813
---------------------------------------------------------------------------------------
UTILITIES - 1.3%
26,500 AT & T Corporation 1,344,875
---------------------------------------------------------------------------------------
TRANSPORTATION - 1.0%
5,000 Boeing Company 294,375
5,000 Burlington Northern, Inc. 305,625
7,000 Union Pacific Corporation 387,625
---------------------------------------------------------------------------------------
987,625
---------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (Cost $25,623,557) 34,619,876
---------------------------------------------------------------------------------------
FACE VALUE
---------------------------------------------------------------------------------------
U.S. TREASURY NOTES - 60.8% (COST $57,233,460)
$74,000,000 U.S. Treasury Notes-Strips, Zero Coupon++ due 8/15/98 61,243,872
---------------------------------------------------------------------------------------
REPURCHASE AGREEMENT - 3.9% (COST $3,980,000)
3,980,000 Agreement with Salomon Brothers, 6.125% dated 5/31/95, to
be repurchased at $3,980,677 on 6/01/95, collateralized
by $3,980,000 U.S. Treasury Bond, 8.875% due 2/15/19 3,980,000
---------------------------------------------------------------------------------------
TOTAL INVESTMENTS (COST $86,837,017*) 99.1% 99,843,748
OTHER ASSETS AND LIABILITIES (NET) 0.9 954,725
---------------------------------------------------------------------------------------
NET ASSETS 100.0% $100,798,473
---------------------------------------------------------------------------------------
<FN>
* Aggregate cost for Federal tax purposes.
+ Non-income producing security.
++ Effective yield is 6.020%.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
7
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<TABLE>
----------------------------------------------------------------------------------------
STATEMENT OF ASSETS AND LIABILITIES (UNAUDITED) MAY 31, 1995
<S> <C> <C>
ASSETS:
Investments, at value (Cost $86,837,017) (Note 1)
See accompanying schedule $ 99,843,748
Cash 124
Receivable for investment securities sold 1,459,997
Dividends and interest receivable 132,207
Unamortized organization costs (Note 5) 15,589
----------------------------------------------------------------------------------------
TOTAL ASSETS 101,451,665
----------------------------------------------------------------------------------------
LIABILITIES:
Payable for investment securities purchased $467,947
Payable for Fund shares redeemed 82,738
Investment advisory fee payable (Note 2) 25,566
Shareholder servicing fee payable (Note 2) 21,305
Administration fee payable (Note 2) 17,044
Transfer agent fees payable (Note 2) 10,000
Custodian fees payable (Note 2) 6,000
Accrued expenses and other payables 22,592
----------------------------------------------------------------------------------------
TOTAL LIABILITIES 653,192
----------------------------------------------------------------------------------------
NET ASSETS $100,798,473
----------------------------------------------------------------------------------------
NET ASSETS CONSIST OF:
Undistributed net investment income $ 2,434,947
Accumulated net realized gain on investments sold 2,625,149
Unrealized appreciation of investments 13,006,731
Par value 12,873
Paid-in capital in excess of par value 82,718,773
----------------------------------------------------------------------------------------
TOTAL NET ASSETS $100,798,473
----------------------------------------------------------------------------------------
NET ASSET VALUE and redemption price per share
($100,798,473 / 12,873,451 shares of beneficial interest
outstanding) $7.83
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<TABLE>
----------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED MAY 31, 1995
<S> <C> <C>
INVESTMENT INCOME:
Interest $ 2,395,873
Dividends 429,801
----------------------------------------------------------------------------------------
TOTAL INVESTMENT INCOME 2,825,674
----------------------------------------------------------------------------------------
EXPENSES:
Investment advisory fee (Note 2) $149,097
Shareholder servicing fee (Note 2) 124,247
Administration fee (Note 2) 99,398
Transfer agent fees (Note 2) 66,803
Custodian fees (Note 2) 21,718
Legal and audit fees 17,396
Amortization of organization costs (Note 5) 11,980
Trustees' fees and expenses (Note 2) 5,110
Other 21,834
----------------------------------------------------------------------------------------
TOTAL EXPENSES 517,583
----------------------------------------------------------------------------------------
NET INVESTMENT INCOME 2,308,091
----------------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS (NOTES 1 AND 3):
Net realized gain on investments sold during the period 2,295,963
Net unrealized appreciation of investments during the period 7,262,382
----------------------------------------------------------------------------------------
NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS 9,558,345
----------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $11,866,436
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<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 $ 2,308,091 $ 5,224,039
Net realized gain on investments sold during the period 2,295,963 5,561,100
Net unrealized appreciation/ (depreciation) of
investments during the period 7,262,382 (14,922,818)
---------------------------------------------------------------------------------------
Net increase/(decrease) in net assets resulting from
operations 11,866,436 (4,137,679)
Distributions to shareholders from:
Net investment income (5,094,684) (6,373,719)
Net realized gain on investments (5,231,913) (12,854,127)
Net decrease in net assets from Fund share transactions
(Note 4) (2,129,800) (11,821,804)
---------------------------------------------------------------------------------------
Net decrease in net assets (589,961) (35,187,329)
NET ASSETS:
Beginning of period 101,388,434 136,575,763
---------------------------------------------------------------------------------------
End of period (including undistributed net investment
income of $2,434,947 and $5,221,540, respectively) $100,798,473 $101,388,434
---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
<TABLE>
--------------------------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
FOR A FUND SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
<CAPTION>
SIX MONTHS
ENDED YEAR YEAR YEAR PERIOD
5/31/95 ENDED ENDED ENDED ENDED
(UNAUDITED) 11/30/94 11/30/93+ 11/30/92+ 11/30/91*
<S> <C> <C> <C> <C> <C>
Net asset value, beginning of period $ 7.75 $ 9.38 $ 9.02 $ 8.40 $ 7.60
--------------------------------------------------------------------------------------------------
Income From Investment Operations:
Net investment income 0.18 0.41 0.38 0.37 0.39
Net realized and unrealized
gain/(loss) on investments 0.69 (0.70) 0.48 0.68 0.41
--------------------------------------------------------------------------------------------------
Total from investment operations 0.87 (0.29) 0.86 1.05 0.80
Less Distributions:
Distributions from net
investment income (0.39) (0.45) (0.40) (0.43) --
Distributions from net realized
capital gains (0.40) (0.89) (0.10) -- --
--------------------------------------------------------------------------------------------------
Total distributions (0.79) (1.34) (0.50) (0.43) 0.00
--------------------------------------------------------------------------------------------------
Net asset value, end of period $ 7.83 $ 7.75 $ 9.38 $ 9.02 $ 8.40
--------------------------------------------------------------------------------------------------
Total return++ 12.54% (3.69)% 9.99% 12.86% 10.53%
--------------------------------------------------------------------------------------------------
Ratios/Supplemental Data:
Net assets, end of period (in 000's) $100,798 $101,388 $136,576 $166,077 $195,956
Ratio of operating expenses to
average net assets 1.04%** 1.01% 0.97% 1.01% 1.05%**
Ratio of net investment income
to average net assets 4.64%** 4.47% 4.15% 4.39% 5.04%**
Portfolio turnover rate 4% 10% 17% 4% 20%
--------------------------------------------------------------------------------------------------
<FN>
* The Fund commenced operations on January 25, 1991.
** Annualized.
+ 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 1998
--------------------------------------------------------------------------------
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 1998 (the
"Fund") expects to terminate operations on August 31, 1998. 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 delayed or prevented
from exercising its rights to dispose of the collateral securities,
12
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 of the Fund 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 subsidiary of
Smith Barney Holdings Inc. ("Holdings"). Holdings is a wholly owned subsidiary
of Travelers Group Inc. Under the Advisory Agreement, the Fund
13
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
pays a monthly fee at the annual rate of 0.30% of the value of its average daily
net assets.
The Trust has 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.
Smith Barney Inc. ("Smith Barney") serves as shareholder servicing agent and is
paid an annual fee at the rate of 0.25% of the value of the Fund's average daily
net assets for certain activities not provided by the Fund's transfer agent.
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 Fund's transfer agent.
3. SECURITIES TRANSACTIONS
Purchases and proceeds from sales of securities, excluding U.S. government
securities and short-term investments, aggregated $3,656,174 and $9,984,199,
respectively, for the six months ended May 31, 1995. There were no purchases of
U.S. government securities for the six months ended May 31, 1995. Proceeds from
sales of U.S. government securities aggregated $7,131,680 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 $13,114,768, and aggregate
gross unrealized depreciation for all securities in which there was an excess of
tax cost over value was $108,037.
14
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
--------------------------------------------------------------------------------
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 1996, 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 1,447,280 $ 10,130,966 2,338,524 $ 19,030,329
Redeemed (1,659,619) (12,260,766) (3,819,146) (30,852,133)
------------------------------------------------------------------------------------------
Net decrease (212,339) $ (2,129,800) (1,480,622) $(11,821,804)
------------------------------------------------------------------------------------------
</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. ORGANIZATION COSTS
The Fund bears all costs in connection with its organization including the fees
and expenses of registering and qualifying its shares for distribution under
Federal and state securities regulations. All such costs are being amortized on
the straight-line method over a period of five years from the commencement of
operations of the Fund. In the event that any of the initial shares of the Fund
owned by Smith Barney are redeemed during such amortization period, the Fund
will be reimbursed for any unamortized costs in the same proportion as the
number of shares redeemed bears to the number of initial shares outstanding at
the time of redemption.
6. 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
15
<PAGE>
Smith Barney
Principal Return Fund
Zeros and Appreciation Series 1998
--------------------------------------------------------------------------------
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (continued)
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 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 $12,088 with interest
rates ranging from 6.5625% to 6.8750%. Interest expense totalled $414 for the
six months ended May 31, 1995. At May 31, 1995, the Fund had no outstanding
borrowings under this Agreement.
16
<PAGE>
PRINCIPAL SMITH BARNEY
RETURN A Member of TravelersGroup [LOGO]
FUND
ZEROS AND APPRECIATION
SERIES 1998
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 1998.
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 137
Recyclable FD2229 7/95 [LOGO]
